**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,
                2007**




**OR**




**o**
            **TRANSITIONAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****o**
            **SHELL
                COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE
                ACT OF 1934****Date
                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)




**No.
      10 Building**


**BUT
      Software Park**


**No.
      1 Disheng North Street**


**BDA,
      Yizhuang District**


**Beijing
      100176, People’s Republic of China**


**86-10-51650988**


(Address
      of principal executive offices)




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




Ordinary
      Shares, par value $0.0756 per share




**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:** 2,924,702
      Ordinary Shares




**Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.**   Yes o   No 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 o  No
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
x No 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:**




U.S.
                GAAP x
            International
                Financial Reporting Standards as issued by the
              International
                Accounting Standards Board o
            Other
                o




**Indicate
      by check mark which financial statement item the registrant has elected to
      follow.**


Item
      17 o  Item
      18
x




**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 o    No
x











**TABLE
      OF CONTENTS**


SPECIAL
                  CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
              1Item
                  1.
              Identity
                  of Directors, Senior Management and Advisers
              1Item
                  2.
              Offer
                  Statistics and Expected Timetable
              1Item
                  3.
              Key
                  Information
              2Item
                  4.
              Information
                  on the Company
              15Item
                  4A.
              Unresolved
                  Staff Comments
              47Item
                  5.
              Operating
                  and Financial Review and Prospects
              47Item
                  6.
              Directors,
                  Senior Management and Employees
              66Item
                  7.
              Major
                  Shareholder and Related Party Transactions
              73Item
                  8.
              Financial
                  Information
              74Item
                  9.
              The
                  Offer and Listing
              74Item
                  10.
              Additional
                  Information
              75Item
                  11.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              84Item
                  12.
              Description
                  of Securities Other than Equity Securities
              85Item
                  13.
              Defaults,
                  Dividend Arrearages and Delinquencies
              85Item
                  14.
              Material
                  Modifications to the Rights of Securities Holders and Use of
                  Proceeds
              85Item
                  15.
              Controls
                  and Procedures
              85Item
                  15T.
              Controls
                  and Procedures
              85Item
                  16.
              [Reserved]
              87Item
                  16A.
              Audit
                  Committee Financial Expert
              87Item
                  16B.
              Code
                  of Ethics
              87Item
                  16C.
              Principal
                  Accountant Fees and Services
              87Item
                  16D.
              Exemptions
                  from the Listing Standards for Audit Committees
              88Item
                  16E.
              Purchases
                  of Equity Securities by the Issuer and Affiliated
                  Purchasers
              88Item
                  17.
              Financial
                  Statements
              88Item
                  18.
              Financial
                  Statements
              88Item
                  19
              Exhibits
              88Signatures
              S-1




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.




**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.
      and our wholly-owned subsidiary, eFuture (Beijing) Royalstone Information
      Technology Inc. (formerly known as “eFuture (Beijing) Tornado Information
      Technology Inc.”)




**Item
              1.**
            **Identity
                of Directors, Senior Management and
                Advisers**




Not
      applicable.




**Item
              2.**
            **Offer
                Statistics and Expected
                Timetable**




Not
      applicable.




1




**Item
              3.**
            **Key
                Information**




**A.**  **Selected
      Financial Data**




**RMB**
            
            **USD****For the Year**
              **Ended****For the Year Ended December 31,**
            
            **December 31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2007**
            
            **2007****(Unaudited)**Total
                Revenues
            
            ¥
            28,453,099
            
            ¥
            34,703,297
            
            ¥
            39,244,001
            
            ¥
            47,843,530
            
            ¥
            84,070,361
            
            $
            11,525,013Profit (Loss)
                From Operations
            
            
            (1,165,482
            )
            
            5,197,762
            
            
            5,843,028
            
            
            7,976,967
            
            
            6,942,516
            
            
            951,734Earnings (Loss)
                Per Ordinary Share
            
            
            (1.26
            )
            
            5.64
            
            
            4.73
            
            
            4.72
            
            
            2.58
            
            
            0.35Net
                Income (Loss)
            
            
            (1,529,859
            )
            
            4,525,190
            
            
            5,470,263
            
            
            8,104,726
            
            
            (27,480,747
            )
            
            (3,767,273
            )Basic
                Earnings (Loss) Per Share
            
            
            (1.66
            )
            
            4.91
            
            
            4.43
            
            
            4.80
            
            
            (10.23
            )
            
            (1.40
            )Diluted
                Earnings (Loss) Per Share
            
            
            (1.66
            )
            
            2.90
            
            
            3.50
            
            
            4.43
            
            
            (10.23
            )
            
            (1.40
            )





**RMB**
            
            **USD****As of December 31,**
            
            **As of December**
              **31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2007**
            
            **2007****(Unaudited)**Total
                Assets
            
            ¥
            34,746,298
            
            ¥
            25,893,808
            
            ¥
            31,657,674
            
            ¥
            83,025,047
            
            ¥
            208,313,747
            
            
            28,557,254Total
                Current Liabilities
            
            
            (35,705,675
            )
            
            (21,981,899
            )
            
            (19,565,356
            )
            
            (18,476,058
            )
            
            (60,484,349
            )
            
            (8,291,661
            )Long-term
                Liabilities
            
            
            (30,583,993
            )
            
            (30,583,993
            )
            
            —
            
            
            —
            
            
            (22,154,431
            )
            
            (3,037,100
            )Net
                Assets
            
            
            (31,543,370
            )
            
            (26,672,084
            )
            
            12,092,318
            
            
            64,548,989
            
            
            64,548,989
            
            
            8,271,163Ordinary
                Shares
            
            
            576,817
            
            
            576,817
            
            
            938,550
            
            
            1,647,781
            
            
            1,811,589
            
            
            248,347Dividends
                Declared Per Share
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -





*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.




2




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 RMB7.2946 to
      US$1.00, the noon buying rate in effect as of December 31, 2007. 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.




**Noon
                Buying Rate****Period**
            
            **Period-End**
            
            **Average (1)**
            
            **Low**
            
            **High****(RMB
                per US Dollar)**20032003
            
            
            8.2767
            
            
            8.2772
            
            
            8.2800
            
            
            8.276520042004
            
            
            8.2765
            
            
            8.2768
            
            
            8.2771
            
            
            8.276520052005
            
            
            8.0702
            
            
            8.1940
            
            
            8.0702
            
            
            8.27652006
            
            
            7.8041
            
            
            7.9723
            
            
            7.8041
            
            
            8.07022007
            
            
            7.2946
            
            
            7.6072
            
            
            7.2946
            
            
            7.8127December
            
            
            7.2946
            
            
            7.3682
            
            
            7.2946
            
            
            7.41202008January
            
            
            7.1818
            
            
            7.2405
            
            
            7.1818
            
            
            7.2946February
            
            
            7.1115
            
            
            7.1644
            
            
            7.1100
            
            
            7.1973March
            
            
            7.0120
            
            
            7.0722
            
            
            7.0105
            
            
            7.1110April
            
            
            6.9870
            
            
            6.9997
            
            
            6.9840
            
            
            7.0185May
            
            
            6.9400
            
            
            6.9725
            
            
            6.9377
            
            
            7.0000June
                (through June 27)
            
            
            6.8618
            
            
            6.9013
            
            
            6.8618
            
            
            6.9633





*(1)*
            *Averages
                are calculated using the average of month-end rates of the relevant
                period. Monthly averages and partial monthly 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.*




3




***Our
        customers are Chinese companies engaged in retail, distribution and logistics
        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 the license of software products
      and
      related services to the Chinese retail, distribution and logistics industries,
      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 impact that severe acute respiratory syndrome, or SARS,
      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, distribution and
      logistics 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.





***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 accumulative deficit of
      RMB44,898,716 as of December 31, 2007. As of December 31, 2007, our
      shareholders’ equity was RMB125,674,968. 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 RMB27,480,747 in the
      fiscal year ended December 31, 2007.





***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
      2007,
      our service fee income increased by 301% in comparison to 2006, 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.





4




***We
      are heavily dependent upon the services of technical and managerial personnel
      who develop and implement our supply chain management 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 supply chain management software
      is
      substantially dependent upon our ability to locate, hire and train qualified
      personnel. As supply chain management 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 supply chain management 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, the annual
      growth 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 $11,500,000. 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.




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




We
      derive
      all of our revenues from the license and implementation of eight 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 supply chain management 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.





5




***The
      market for supply chain management 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
      supply chain management 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 supply chain management has only recently been adopted
      by Chinese businesses. As a result, our position in the Chinese supply chain
      management software industry could be eroded rapidly by the speed with which
      Chinese businesses continue to adopt Western business practices and
      technological advancements that we do not embrace. 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.





6




***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;
                and


·
            Tony
                Zhao, our Chief Strategy 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 supply chain management 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 supply chain management software, which may afford only limited
      protection. Although the Chinese government has issued us 16 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 not been the subject of an intellectual property claim
      since our formation.





7




***Our
      supply chain management 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 a net loss of RMB27,480,747 in the fiscal
      year ended December 31, 2007. 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
      subsidiary.





***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 11.4% in 2007, the fastest pace in 11
                years


·
            in
                the last decade, the number of supermarkets in China increased from
                zero
                to more than 60,000;






8




·
            retail
                sales in China increased 10.2% in
                2004;


·
            industrial
                growth in China increased 16.7% in
                2004;


·
            enterprise
                software revenues for all industry participants generated from Chinese
                wholesale and retail customers increased 32.5% from $22.52 million
                in 2002
                to $27.16 million in 2003; and


·
            enterprise
                software revenues for all industry participants generated from Chinese
                manufacturing customers increased 15.9% from $140.3 million in 2002
                to
                $162.5 million in 2003.





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.





***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 raise in our contemplated initial public offering, if
      any.
      We cannot assure you that we will not be a PFIC for any taxable
      year.





9




***Any
      recurrence of severe acute respiratory syndrome, or SARS, pandemic avian
      influenza or another widespread public health problem, could adversely affect
      the Chinese economy as a whole and our ability to profitably develop and install
      our software products.***




A
      renewed
      outbreak of SARS, pandemic avian influenza or another widespread public health
      problem in China, where all of our revenues are derived, and in Beijing, where
      our operations are headquartered, could have a negative effect on our
      operations. Our operations may be affected by a number of health-related
      factors, including the foregoing:





·
            quarantines
                or closures of some or our offices which would severely disrupt our
                operations;


·
            the
                sickness or death of our key officers and employees;
                and


·
            a
                general slowdown in the Chinese economy.




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 subsidiary’s
      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.




10




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 are not currently required to seek and obtain
      governmental approval to complete the offering contemplated hereby. The PRC
      government, however, could alter its interpretations of the regulation at any
      time. To the extent the PRC government alters its current practice of remaining
      silent regarding overseas listings of PRC businesses like ours, we may be
      required to seek additional government approval to complete this offering,
      and
      we cannot guarantee that we would obtain such approval.




11




***eFuture
      Beijing is 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,
      our subsidiary. As a result of our holding company structure, we rely entirely
      on the dividends payments from eFuture Beijing. However, PRC regulations
      currently permit payment of dividends only out of accumulated profits, as
      determined in accordance with PRC accounting standards and regulations. eFuture
      Beijing 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 eFuture Beijing incurs debt
      on its own in the future, the instruments governing the debt may restrict its
      ability to pay dividends or make other payments. If we or our subsidiary 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.





***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
      subsidiary. Shortages in the availability of foreign currency may restrict
      the
      ability of our PRC subsidiary 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
      is
      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 subsidiary 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.





12




***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.





***If
      PRC law were to phase out the preferential tax benefits currently being extended
      to foreign invested enterprises and “new or high-technology enterprises” located
      in a high technology zone, we would have to pay more taxes, which could have
      a
      material and adverse effect on our financial condition and results of
      operations.***




Under
      PRC
      laws and regulations, a foreign invested enterprise may enjoy preferential
      tax
      benefits if it is registered in a high-technology zone and also qualifies as
      a
“new or high-technology enterprise”. As a foreign invested enterprise as well as
      a certified “new or high-technology enterprise” located in a high-technology
      zone in Beijing, we are entitled to a three-year exemption from enterprise
      income tax beginning from our first year of operation, a 7.5% enterprise income
      tax rate for another three years followed by a 15% tax rate so long as we
      continue to qualify as a “new or high-technology enterprise.” 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” and technology consulting services, 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.


13




***China’s
      legal system embodies uncertainties that could adversely affect our ability
      to
      engage in the development and integration of the supply chain management
      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.





14




***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
      (2004 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**





*eFuture
      (Beijing) Royalstone Information Technology Inc.*





eFuture
      (Beijing) Tornado Information Technology Inc. (“eFuture Tornado”) was
      established as a domestic Chinese company in April 2000 with total share capital
      of RMB500,000, of which Hainan Future Computer Company Limited (“Hainan Future”)
      contributed RMB400,000 (80%) and Dafu Zou contributed 100,000 (20%). In July
      2000, Mr. Zou transferred his shares to Johnson Li, our Vice President for
      RMB100,000. In July 2000, eFuture Tornado was reorganized and its capital was
      increased to RMB5,000,000. In connection with the recapitalization, Hainan
      Future increased its investment in eFuture Tornado to RMB4,000,000, and Mr.
      Li
      increased his investment to RMB1,000,000. Since its inception in January 2000,
      eFuture Tornado has developed and integrated software for China’s supply chain
      front market.





15




On
      Feb
      27, 2007, eFuture Tornado’s capital was increased to RMB17,805,680 or
      $2,300,000; and on August 28, 2007 eFuture Tornado was renamed “eFuture
      (Beijing) Royalstone Information Technology Inc.” (together with eFuture
      Tornado, “eFuture Beijing”).





*eFuture
      Information Technology Inc.*




We
      were
      established as an offshore company incorporated in the Cayman Islands on
      November 2, 2000. At the time of our formation, Adam Yan, our Chairman and
      Chief
      Executive Officer, purchased 20,000 ordinary shares for $0.01 per share, which
      represented the par value of the shares at the time. On April 25, 2001, we
      issued 4,016,610 Series A preferred shares in a private placement of preferred
      securities to two venture capital firms for a price of $0.6224 per share. Such
      price resulted from an arm’s length negotiation with such investors. In
      addition, on that date, we also issued an aggregate of 6,945,000 ordinary shares
      to our executive officers at a price equal to $0.01 per share, which represented
      the par value of the shares at the time. The price and amount of the ordinary
      shares that we issued to our executive officers resulted from an arm’s length
      negotiation with our venture investors. The securities and share prices
      referenced in this paragraph do not reflect our 1-for-7.560678 reverse stock
      split effected as of June 16, 2005.




*Our
      Holding Company Structure*




In
      March
      2001, Hainan Future and Mr. Li transferred all shares in eFuture Beijing to
      us
      for an aggregate of RMB5,000,000. Pursuant to an approval from the Beijing
      Municipal Government, eFuture Beijing became a wholly foreign owned enterprise
      with an operating period of 20 years. We were created by eFuture Beijing and
      its
      shareholders as a holding company in an effort to maintain intellectual property
      within China while creating a corporate structure that could more easily access
      foreign capital. eFuture Beijing has previously and will continue to conduct
      all
      of our software development operations.





*Hainan
      Future Computer Company Limited*




Hainan
      Future was established as a domestic Chinese company in April 1997 with
      registered capital of RMB1,500,000. At the time of its formation, Hainan Future
      was owned by Mr. Yan (75%) and Qicheng Yang, our Chief Technology Officer (25%).
      Hainan Future developed a software program with particular use in the Chinese
      supply chain management industry. In an effort to create a company that would
      qualify for preferential tax treatments associated with businesses in the
      high-technology industry, Hainan Future agreed to sell its software program
      and
      all related rights to eFuture Beijing in 2000 for RMB5,160,000. In connection
      with this transaction, Hainan Future agreed to provide eFuture technical support
      and development services related to the program for one year. On May 24, 2001,
      the PRC National Copyright Bureau issued eFuture Beijing a certificate approving
      the transfer of the software and granting eFuture Beijing the sole right to
      exploit the copyright. eFuture Beijing named the acquired software “eFuture ONE
      POS-ERP.”





Following
      the sale of its software to eFuture Beijing in 2000, Hainan Future’s operations
      were limited to the completion of existing contracts and the collection of
      existing accounts receivable. Consequently, its operations reduced dramatically.
      In May 2005, Mr. Yan transferred all of his shares in Hainan Future to Xuejun
      Zhang for ¥ 225,000
      and Mr. Yang transferred all of his shares in Hainan Future to Ling Zhang for ¥ 75,000.
      Xuejun Zhang serves as the manager of our administration department. Ling Zhang
      serves as an employee in our accounting and finance department. While not
      executive officers, these individuals are senior employees who actively
      participate in our day-to-day operations. Noting the limited number of employees
      in our company, they may possess the potential to influence our executive
      officers, and, thereby, our business and its operations.





16





While
      these transactions were not among independent parties and, arguably, not at
      arm’s length as a result of the employer-employee relationship between the
      parties, the parties to the transaction actively negotiated the purchase price
      of the shares sold. At the time of the transaction, Hainan Future was
      essentially dormant. The aggregate consideration paid by Messrs. Zhang of ¥300,000
      was equal to the book value of Hainan Future’s assets at the time of the
      transaction as determined by the then shareholders of Hainan Future in good
      faith. The parties to the transactions did not consider alternative payment
      structures.




As
      of
      December 31, 2001, we had advanced ¥3,195,956 to Hainan Future. The balance
      arose as the result of payments to suppliers on behalf of Hainan Future, cash
      advances to Hainan Future, Hainan Future’s collection of cash receipts from our
      customers, and the sale of an investment in a company to Hainan Future, less
      the
      collection of cash receipts from Hainan Future’s customers, less Hainan Future’s
      payments to suppliers on our behalf, less the cost of software purchased from
      Hainan Future and less the purchase of two real estate parcels from Hainan
      Future. The value of the real estate parcels and the services we provided to
      Hainan Future was determined in good faith by our executive officers and our
      Board of Directors. Hainan Future has had no operations or employees since
      December 31, 2001. As a result, we made payments to, provided services to and
      collected cash receipts from Hainan Future’s customers during the years ended
      December 31, 2003, 2004 and 2005. Those transactions along with the resulting
      balances receivable from Hainan Future were as follows:


**U.S. Dollars****For the Year Ended****For the Years Ended December 31,**
              
              **December 31,****2003**
              
              **2004**
              
              **2005**
              
              **2005**
                **(Unaudited)**Balance at Beginning of Period
              
              ¥
              4,297,387
              
              ¥
              4,018,687
              
              ¥
              2,673,294
              
              **$**
              **331,255**Payments
                  of (refunds from) Hainan suppliers
              
              
              23,500
              
              
              155,307
              
              
              (146,699
              )
              
              (18,178
              )Services
                  provided to Hainan
              
              
              1,000,000
              
              
              —
              
              
              —
              
              
              —Offset
                  receivable from Hainan against payable to Hainan
              
              
              —
              
              
              —
              
              
              (2,526,595
              )
              
              (313,077
              )Collection
                  of cash receipts from Hainan’s customers
              
              
              (744,800
              )
              
              (1,500,700
              )
              
              —
              
              
              —**Balance
                  at End of Period**
              
              ¥
              4,018,687
              
              ¥
              2,673,294
              
              ¥
              —
              
              $
              —




We
      owed
      Mr. Li and Hainan Future ¥1,000,000 and ¥4,000,000, respectively, for the
      acquisition of the Company’s equity interest in eFuture Beijing. The balances
      due were unsecured, had no fixed terms of repayment and were considered due
      on
      demand. On August 12, 2005, we paid Hainan Future ¥575,722 towards the amount
      due to Hainan Future. On September 25, 2005, Hainan Future acquired Mr. Li’s
      receivable from our company on terms negotiated by Mr. Li and shareholders
      of
      Hainan Future. The value of the receivable was based upon the book value of
      the
      receivable as reflected on the financial records of Hainan Future, which were
      maintained in good faith by the shareholders of Hainan Future. On November
      18,
      2005, we entered into an agreement with Hainan Future whereby ¥1,897,683 of the
      payable to Hainan Future was forgiven by Hainan Future and the remaining balance
      payable to Hainan Future of ¥2,526,595 was offset against the receivable from
      Hainan Future of the same amount. This transaction was approved by our Board
      of
      Directors and the Board of Directors of Hainan Future. We recognized this
      forgiveness of debt from this related party as a contribution to capital.




17




**B.**  **Business
      Overview**




*General*




We
      are a
      leading provider of front-end supply chain management (“SCM”) software and
      services in China. We provide integrated software and service solutions to
      manufacturers, distributors, wholesalers, logistics companies and retailers
      in
      China’s front-end supply chain market, especially in the retail and consumer
      goods industries.




Our
      mission is to give our clients a sustained competitive advantage by
      strengthening and enhancing the foundation of the supply chain.




We
      currently serve more than 1,000 Chinese and international clients, including
      Fortune 500 companies, over 650 retailers and over 250 distributors operating
      in
      China. We are also one of IBM’s premier business partners in Asia Pacific and
      are a strategic partner with Oracle, Microsoft, JDA, Motorola and Samsung
      Network China. The company has 20 branch offices across China.









Our
      solutions are specifically designed to optimize demand processes from finished
      goods to customer checkout, and to address supply chain management, business
      processes, decision support, inventory optimization, collaborative planning
      and
      forecasting requirements. Our software solutions business is enhanced and
      supported by our consulting services and ongoing maintenance on existing
      software installations.





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 process management to
      sophisticated business analysis tools.





Our
      business-to-business (“B2B”) solutions leverage our company’s relationships with
      China’s retailers and suppliers to offer innovative Web-based platforms. Our
      99114.com and Jindian.com.cn websites connect suppliers and retailers, enabling
      China’s local and overseas suppliers to enter into retail stores across the
      country. Our company’s www.bfuture.com.cn website serves as a SaaS platform that
      streamlines supply chain management operations by allowing retailers and
      suppliers to exchange business information, arrange payment online and access
      purchase orders, returns, payment status, inventory levels and sales data
      analysis.





18




*Market
      Background*




In
      the
      past, China’s supply chain infrastructure served to restrain economic
      development and limit the performance of local and foreign companies. Compared
      with western countries, China has traditionally been hampered by poor
      infrastructure, a disorganized distribution system, local protectionism,
      difficulties with cash flow and accounts receivable, and an antiquated legal
      system at national, regional and local levels. As the Chinese economy matures,
      with the assistance of enterprise software systems, we believe that these
      disparities will decrease. At the present time, however, we believe that the
      following statistics accurately reflect the infancy of the Chinese supply chain
      industry:





·
            In
                2000, logistics and transportation costs represented approximately
                20% of
                the Chinese gross domestic product (“GDP”) compared with 10% in the United
                States and 14% in Japan. Interestingly, by September 2001, China’s total
                logistics and transportation costs reduced to 16.7% of China’s GDP.


·
            The
                working capital turnover ratio in China ranges from 1.2 for manufacturing
                state-owned enterprises to 2.3 for commercial state-owned enterprises.
                In
                the United States, the average is between 15 and 20.


·
            An
                average of 90% of a Chinese manufacturer’s time is spent on logistics,
                with just 10% on manufacturing.


·
            Many
                commodities in China cost 40% to 50% more to transport than they
                would in
                the United States.


·
            Transportation
                and warehousing costs in China equal 30% to 40% of the total cost
                of goods
                sold.


·
            Logistics
                inefficiency and lag time in receiving market information resulted
                in more
                than U.S. $480 billion worth of goods being stockpiled by year-end
                2000,
                which was equivalent to 45% of China’s GDP.





In
      recent
      years, the Chinese government has committed significant effort to modernizing
      China’s logistics and transportation infrastructure. In particular, China’s
      accession to the World Trade Organization in 2001 emphasized the liberalization
      and modernization of China’s economic system. Under China’s WTO agreement, the
      country will progressively remove the restrictions that prevent foreign
      companies from participating in the logistics and transportation sectors. We
      also expect China’s WTO status to stimulate China’s growth by opening its
      economy to competition and encouraging collaboration between local and foreign
      companies.




Participants
      in China’s supply chain 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. Despite the fact that 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 supply chain management.





19




*China’s
      Economic Development*




China’s
      population of approximately 1.3 billion people is expected to grow by roughly
      15 million people per year. The country’s gross national product has grown
      at a rate of approximately 9 percent for more than 25 years, making it the
      fastest growing major economy in recorded history. In the same 25 year period,
      China has moved more than 300 million people out of poverty and quadrupled
      the average Chinese person’s income. The tremendous potential for this market is
      noted by the fact that 400 of the world’s largest 500 companies are investing in
      China.




These
      development factors have produced a burgeoning consumer goods market, as the
      spending power and aspirations of consumers rise. In response, industries are
      consolidating and modern 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.





In
      2007,
      total retail sales of consumer goods reached RMB8.9 trillion, a growth of 16.8%
      which was 3.1 percentage points higher than the 2006 growth rate (RMB901.5
      billion for December, up 20.2%). Of this total, the retail sales of consumer
      goods in cities stood at RMB6 trillion, up 17.2% and 2.9 percentage points
      over
      2006 while the retail sales at and below county level reached RMB2.9 trillion,
      up 15.8%, or 3.2 percentage points higher. In terms of different sectors, the
      growth of wholesale and retail sectors was 16.7%, and the growth of the lodging
      and catering industry was 19.4%. The sales by wholesale and retail businesses
      above the designated size in the following sectors enjoyed over 20% growth:
      petroleum and petroleum products; automobiles; construction and decorating
      materials; communication equipment; furniture; household electric appliances
      and
      audio-video equipment; clothing, shoes, hats and textiles, cosmetics, and sports
      and recreation articles.


20




Growth
      trend of Chinese GDP in most recent 5 years





EFUTURE
              ***GDP
                is growing rapidly***


Total
      Retail Sales of Consumer Goods in China


(amounts
      in RMB Billions)




EFUTURE
              ***Retail
                  spending***
                ***in
                  China is increasing from***
                ***a
                  low base***





*Growth
      Drivers*




We
      believe the following factors, among others, have contributed to our growth
      and
      the growth of our customers in the retail industry:




·
            Double-digit
                annual GDP growth;


·
            Increasing
                disposable income;


·
            Highly
                fragmented market; and


·
            Double-digit
                annual growth of retail sales of consumer
                goods.





We
      seek
      to build on our leading market share of approximately 8% by focusing on the
      retail industry consumer goods market as China increases expenditures on retail
      services and software. According to the International Data
      Corporation:





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


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





21




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





*eFuture
      Solutions*




Upon
      the
      formation of eFuture Beijing in 2000, we began to develop our software products.
      Prior to the creation of our holding company structure in March 2001, we
      developed and released our first two software products:





·
            *eFuture
                ONE SCM/CRM,*a
                visual supply chain management and customer relationship management
                solution, which was released on December 19, 2000;
                and


·
            *eFuture
                ESCM/e-Market Place*,**an
                e-supply chain management and marketplace solution, which was released
                on
                December 19, 2000.**




We
      released a third program, eFuture ONE POS-ERP, a multi-format retail enterprise
      resources planning tool that we purchased from Hainan Future Computer Company
      Limited on July 31, 2000. In order to smoothly operate the Company and to
      apply for preferential tax treatments so as to solve the Company’s problem of
      lacking software, on February 20, 2000, eFuture Beijing executed an
      agreement with Hainan Future, in which eFuture Beijing purchased from Hainan
      Future the copyright and the relevant intangible assets of one set of computer
      software (POS-ERP), which was independently developed by Hainan Future with
      the
      registration number of 2000SR1016, at a total price of RMB5,160,000 in which
      one
      year of customized development and technical support were included. As provided
      in this Agreement, eFuture Beijing was entitled to sell and develop new products
      based on the software at its own discretion. The PRC National Copyright Bureau
      issued a Certificate on May 24, 2001 proving the filing of the
      aforementioned transfer of the computer software, according to this certificate,
      as of April 11, 2001, eFuture Beijing would have the right to use, the
      licensing right and the right to get paid for the computer software within
      the
      time limit regulated by law. Through eFuture Beijing we developed our remaining
      software products following the creation of our holding company
      structure.





Our
      solutions integrate industry know-how with predictive information technologies,
      and the best practices of leading Chinese companies 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 solution.
      Our primary software solutions consist of three independently deployable groups
      of software products: Foundation Solutions, Collaborative Solutions, and
      Intelligent Solutions.





22




*Our
      Foundation Solutions are used to meet client needs for services such as retail
      management, POS, vendor payment and control and loyalty card management. Our
      clients use various of our Foundation Solutions, depending on the type of
      customer and needs:*




**Type of Customer**
            
            **eFuture ONE Solution**Manufacturer
            
            eFuture
                ONE Visual DRP (Visual Distribution Resources Planning
                Solution)
              Released
                June 25, 2002.Distributor
            
            eFuture
                ONE DMS (Distributor Management System Solution)
              Released
                September 25, 2002.Retailer
            
            eFuture
                ONE POS-ERP (Multi-Format Retail Enterprise Resources
                Planning
              Solution)
              Released
                January 31, 2000.
              
              eFuture
                ONE eWalkman R2005 (Mobile POS-ERP solution )
              Released
                December 25, 2005.Logistics/Distributor
            
            eFuture
                ONE LRP (Logistics Resources Planning Solution)
              Released
                January 5, 2003.





*Our
      Collaborative Solutions are used to meet client needs for services such as
      visual supply chain management and visual process management systems. Our
      clients use various of our Foundation Solutions, depending on the type of
      customer and needs:*






**Type of Customer**
            
            **eFuture ONE Solution**Manufacturer
            
            eFuture
                ONE CRM/VMI/CPFR Solution (Vendor Management
              Inventory/Collaborative
                Planning, Forecasting and Replenishment Solutions)
              Released
                November 8, 2001.Retailer
            
            eFuture
                ONE SCM/SRM/CRM (Visual Supply Chain Management, Supplier
              Relationship
                Management and Customer Relationship Management Solutions)
              Released
                December 19, 2000.Third
                Party ASP
              Operator
            
            eFuture
                ONE ESCM/e-Market Place (e-Supply Chain Management and e
              -Marketplace
                Solutions)
              Released
                December 19, 2000.





23




*Our
      Intelligent Solutions such are used to meet client needs for services such
      as
      business intelligence, brand analysis, supplier relationship management and
      customer relationship management systems:*




**Type
                of Customer**
            
            **eFuture
                ONE Solution**Retailer
            
            eFuture
                ONE BI/CM/Cleve (Business Intelligent, Category Management and Market
                Analysis Solution)
              Released
                October 5, 2001.





*Description
      of Software Solutions*


Our
      software solutions include:




·
            *eFuture
                ONE Visual-DRP.*A
                web-based product designed to meet the distribution and network management
                needs of manufacturers. Based on IBM Websphere middleware, this program
                employs a 3-layer structure and combines advanced management models
                with
                up-to-date information technology methods to establish independent
                distribution channels with operations expanding to nationwide retail
                terminals. Customers who would benefit from this solution include
                large
                manufacturers of clothing, household appliances, automobiles, and
                tobacco.


·
            *eFuture
                ONE DMS*.
                A
                mini-enterprise resource planning application utilized by wholesalers
                and
                distributors, especially in the consumer goods industry. The essential
                functions of this program permit wholesalers and distributors to
                integrate
                their core business processes, such as procurement management, inventory
                management, sales order management and financial management. We offer
                several versions of this software to support different segments of
                wholesalers and distributors in terms of size, complexity of operation
                and
                information technology literacy.


·
            *eFuture
                ONE POS-ERP*.
                A
                software solution designed to meet the demands of retailers for goods
                flow, order flow, information flow and cash flow management, including
                merchandise operations management, merchandise planning and optimization,
                integrated store operations, financial management and logistics management
                from headquarters to regional headquarters to regional distribution
                centers to multi-format chain stores. This program is suitable for
                the
                operation of many retail formats, such as department stores, malls,
                supermarkets, hypermarkets, convenience stores, grocery stores, and
                specialty stores.


·
            *eFuture
                ONE LRP*.
                An application utilized by distributors or logistics companies to
                enable
                such companies to improve warehouse management, transportation management,
                and logistics management. The program can organize labor concentrations
                and warehouse organization. The program can integrate with other
                enterprise systems, material handling equipment and mobile technology.


·
            *eFuture
                ONE SCM.*A
                product designed for synergistic distribution designed to promote
                collaborative business between retailers and their suppliers. Developed
                with IBM Websphere application software, this program gives support
                to
                upstream enterprises to participate in retailing enterprises’ vendor
                managed inventory processes and provides online analyses via the
                Internet.
                It enables retailers and suppliers to share consistent and accurate
                information such as promotion, sales and inventory data. Retailers
                and
                suppliers use this information to identify sales forecast exceptions,
                prevent out-of-stocks and reduce inventories. It also can help suppliers
                to verify their bills and confirm replenishment orders. Blue SCM
                Collaborative Products has developed an enhanced version of our SCM
                program to include a process by which our customers may synchronize
                planning, execution, tracking and evaluation of the Chinese supply
                chain
                through the use of real-time visibility of suppliers, distribution
                hubs
                and retailers in a given network.






24




·
            *eFuture
                ONE CPFR/VMI.*A
                program that provides customers with collaborative planning, forecasting
                and replenishment features. This solution collects, manages and analyzes
                supply and demand chain data to enable rapid response to changes
                in market
                conditions. It employs industry standards to accelerate the execution
                of
                the order flow and improve the accuracy of planning. VMI solution
                enables
                manufacturers and suppliers to coordinate their customers’ inventory in
                real-time through the use of SKU (stock keeping units)
                management.


·
            *eFuture
                ONE CRM.*A
                system tool mining and analyzing customer data for retailing operations.
                It helps retailers to identify, acquire, activate, serve and retain
                the
                most profitable customers. It can also help retailers find, promote
                and
                expand potential customers.


·
            *eFuture
                ONE SRM*.
                A comprehensive approach to managing an enterprise’s interactions with the
                organizations that supply the goods and services it uses. The goal
                of
                supplier relationship management (“SRM”) is to streamline and make more
                effective the processes between retailers and their suppliers. The
                use of
                SRM software can lead to increased supply chain visibility, lower
                production costs and a higher quality, but less expensive end
                product.


·
            *eFuture
                ONE BI.*A
                program designed for intelligent distribution. This solution turns
                data
                about retail customers, merchandise and operations into knowledge
                that
                provides greater insight into performance and empowers retailers
                to make
                more informed decisions, gain a competitive advantage, strengthen
                customer
                and vendor loyalty, and improve profitability.


·
            *eFuture
                ONE eWalkman.*An
                all-in-one portable payment system which can place a full screen
                of easily
                viewed information at both the operator and customer locations. Using
                wireless connectivity, mobile POS allows retailers to bring the store
                to
                the customer and greatly decrease check-out times, helping retailers
                decrease operating costs and boost their competitive position by
                getting
                closer to their customers at every point of interaction, while increasing
                inventory turnover and employee
                productively.





*Benefits
      of Our Products*




The
      benefits of our products include:





·
            Broad
                set of solutions for the Chinese supply chain in retail and FMCG
                industries;


·
            Efficient
                Consumer Response (“ECR”) - enhanced decision making and responsiveness to
                consumer demands;


·
            Highly
                scalable software solutions; and


·
            Improved
                inventory management.





*Research
      and Development*





*VPM
      Product* .
      In
      2007, our VPM solution was developed based on IBM China Research Lab’s advanced
      Service Oriented Architecture (“SOA”) ideologies and new technologies including
      BPEL process, sales logics, and operations rules. Users are only required to
      create a general layout and the whole process framework will be clearly
      presented, which enables developers to focus on the details of operations and
      process and increases the development efficiency. We are currently preparing
      to
      roll out our VPM solution in China’s FMCG and retail industries.





25




We
      believe this solution can help our clients to become more efficient,
      process-driven enterprises. With its quality control model, real-time
      visualization of every transaction process, and vivid workflow tracking and
      illustration, VPM enables business nodes to connect and every department to
      be
      monitored and managed as a whole. We believe this system has improved our
      transaction efficiency, lowered our work errors, standardized our business
      operation procedures and provided a roadmap for our processes.





*Our
      Store Operation System (“SOS”) and Customer Service System
      (“CSS”)* .
      Our SOS
      solution improved and optimized our store operation, including supply chain,
      marketing & sales, inventory management, category structure and inventory
      turnover. Our CSS solution has enabled us to integrate prepaid card and
      membership cards issued separately in Southern and Eastern China into a
      cross-region central customer service system.





*Mobile
      POS.* In
      2007,
      we developed POS solutions and services based on Samsung Networks’ line of
      mobile POS equipment and devices. We expect that this partnership will result
      in
      a widespread rollout of mobile POS systems for retailers in China. Using the
      mobile POS solution developed by Samsung Networks and eFuture, consumers in
      retail stores can check out with a POS device anywhere in the store without
      having to wait in checkout lines at the cashier. Using wireless connectivity,
      we
      expect mobile POS to decrease customer lines and operating costs, while
      increasing inventory turnover and employee productivity. This mobile POS
      solution has replaced previous fixed POS terminals in many major department
      stores in Korea.





*POS-ERP
      Product* .
      In
      2007, we started 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.





26





*CRM/SRM
      Products.* We
      are
      developing enhanced CRM and SRM solutions.





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









*Software
      Upgrades*




Depending
      upon the customer and the type of software program, we develop software upgrades
      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.





*Maintenance
      Services*




Following
      the installation of our software solutions, clients will typically require
      ongoing maintenance support to ensure the efficient operation of their system.
      These services are designed to assist our customer with integration issues
      and
      to answer questions that may arise. These services include:





·
            database
                operation maintenance, space management, data migration and database
                tune-ups;


·
            system
                servicing, device management, system updating and version
                control;






27




·
            application
                servicing, debugging, real-time servicing, and application of interfaces
                with other business systems;


·
            24
                hour call center services; and


·
            training
                in ongoing system operation.





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.




**Regular Maintenance**
            
            **Silver Maintenance**
            
            **Gold Maintenance**Hotline
                Service
            
            Standard
            
            Standard
            
            StandardProgram
                Debugging
            
            Standard
            
            Standard
            
            StandardRemote
                Servicing
            
            Standard
            
            Standard
            
            StandardCall
                Center Service
            
            Standard
            
            Standard
            
            StandardInspection
                Service
            
            Yearly
            
            Quarterly
            
            MonthlyEmergency
                Response
            
            24-36 Hours
            
            12-18 Hours
            
            4-8 HoursSystem
                Upgrades
            
            2
                Years
            
            Yearly
            
            Semi-AnnuallyFieldwork
                Service
            
            No
            
            No
            
            Yes




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.





28




*Project
      Management Services*





As
      we
      assist customers in planning and executing their projects, we provide a variety
      of services throughout the process. We typically provide the following services
      at different stages in the management of a project:











*Consulting
      Services*




Our
      consulting services group 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.




These
      services include the design and planning of business systems focused on:





·
            profit
                enhancement;


·
            supply
                chain management enhancements;


·
            information
                technology planning;


·
            system
                back-ups; and


·
            network
                security.





To
      date,
      our consulting services have been utilized solely in connection with our ongoing
      relationships with our software licensees. We expect, however, to offer
      stand-alone consulting services unrelated to our software products in the
      future. For example, we expect to enter into consulting arrangements pursuant
      to
      which we will be engaged to optimize business processes of customers that may
      utilize software developed by our competitors.





29




Service
      fee income revenues increased 301% to RMB26.5 million or $3.6 million in 2007
      compared to 2006 and represented 32% and 14% of total revenues, respectively
      in
      these periods. We believe our large annual recurring maintenance revenue base
      provides significant stability and enhances our ability to maintain profitable
      operations.





*Benefits
      of our Solutions*




*Our
      software offers a broad set of solutions for the Chinese supply chain.* Our
      software solutions offer our customers a broad and functional set of
      demand-driven solutions designed to optimize their operations. Integration
      costs
      often represent a significant expenditure for our customers. We offer
      integration tools and services that reduce the overall effort necessary to
      deploy our solutions. We also believe that our solution suite encourages
      customers to adopt our solutions as an internal standard for business
      applications, allowing them to simplify their relationships with technology
      partners while reducing the overhead of managing multiple versions of products
      from disparate providers.




*Our
      software offers enhanced decision making and responsiveness to consumer demands.* Our
      solutions help customers better understand and fulfill consumer demands while
      improving operational efficiency. Our products enable vast amounts of consumer,
      sales and inventory data to be rapidly collected, organized, distributed and
      analyzed. Our customers can explore “what if” merchandising plans, track and
      analyze performance, business results and trends, monitor strategic plans,
      quickly implement operational strategies based upon sophisticated fact-based
      optimization techniques and adjust to changes in consumer purchasing patterns.




*Our
      software is highly scalable.* We
      have
      designed our software to be demand-driven with the goal of reducing our
      customers’ risk of making large investments in software that fails to expand
      with the customers’ businesses.




*Our
      software offers improved inventory management.* Our
      solutions enable customers to continuously monitor and reduce inventory levels,
      achieve higher gross margins, improve their inventory turnover rates and more
      effectively manage their order and distribution processes. We provide our
      clients with tools for vendor analysis, stock status monitoring, sales capture
      and analysis, merchandise allocation and replenishment, purchase order
      management and distribution center management.




*We
      focus our business on the entire Chinese supply chain market that ranges from
      distribution to logistics to retail operations.* Our
      eFuture ONE product series is a one-stop solution to address a litany of
      operational and strategic complexities that market participants must master
      in
      order to effectively and efficiently operate in the Chinese economy.




Our
      solutions integrate industry know-how with predictive information technologies,
      consulting services and the best practices of leading Chinese companies 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 solution. Our primary software solutions consist of three
      independently deployable groups of products: Foundation Solutions, Collaborative
      Solutions, and Intelligent Solutions.





30


*Our
      Growth Strategy*




We
      have
      the following three growth strategies:





·
            Organic
                Growth for Core Businesses;


·
            Best-of-Breed
                for Seeding Business; and


·
            Merger
                and Acquisition Strategies





*Organic
      growth for core business*





Based
      on
      China’s growth opportunities for the next three years, we will constantly
      solidify our market position and expand our market share through organic growth
      in the front supply chain market, particularly in the retail and FMCG
      markets.





*Operational
      Excellence, Increased Earnings Power*





·
            stabilize
                the Company;


·
            reduce
                infrastructure;


·
            create
                efficiencies in R&D
                investments;


·
            ample
                operating leverage remains;


·
            balance
                our cash flow; and


·
            improve
                employee productivity and reduce operating
                expenses.





*Increasing
      Market Share*





·
            accelerate
                growth through greater involvement in customers’
                operations;


·
            substantial
                opportunities for cross-selling;
                and


·
            leverage
                IBM, Motorola, Oracle and JDA through shared marketing
                efforts.





*Expand
      into New Markets*





·
            more
                initial sales coverage from SMB and Global account
                markets;


·
            leverage
                existing products into new industries, such as electronics, high-tech,
                automotive, apparel and footwear, drugstore
                etc.


·
            add
                new products/services for our current industries and installed
                customers.





*Best-of-seed
      for seeding business*





We
      will
      take the lead in outsourcing, international business and SaaS service through
      business model innovation.





*Outsourcing*





·
            Software
                outsourcing in today’s market requires careful consideration of the risks
                involved. The key to successful outsourcing for projects lies in
                the
                selection of an experienced and technically qualified offshore IT
                Services provider.






31




·
            We
                are ready to provide high quality software outsourcing services,
                and have
                already delivered our services to global customers, such as
                P&G.





*International
      business*





·
            In
                the world’s top 100 retail companies and specialty companies, the current
                economic climate of decreased consumer confidence and increased
                competition puts even greater emphasis on retailers to do more for
                less.
                42% of retailers surveyed, like Wal-mart, Home Depot and Lowe’s are
                considering outsourcing to enable business growth.


·
            We
                will provide the services to help those companies to reach their
                goals in
                China.


·
            We
                have delivered our services and solutions to P&G, B&Q, GUCCI,
                Changan-FORD, Jusco, Harbour house, Parkson, China
                Petroleum-BP,Kimberly-Clark and
                Unilever.





*SaaS
      like* *www.salesforce.com*





·
            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.


·
            We
                will focus on using this method to deliver software to small and
                medium
                size businesses in China, especially in B2B SCM Web, B2C Web, SMS
                marketing Web, Mini store, Specialty store as well as Chinese
                customers,


·
            This
                is a huge market in China, and we believe we will do well with this
                business model.





We
      co-developed the SaaS of B2B (eFuture’s blue supply chain management solution)
      service with IBM Research Lab and IBM Global service team in October of
      2007.





We
      controlled 51% of the ownership in Beijing Fuji Biaoshang Information Technology
      Inc. by variable interest entity (“VIE”) in December of 2007. In April of 2008,
      we launched this product as our www.bfuture.com.cn website,
      and Wangfujing Department Store Group, one of the largest department stores
      in
      China, became the first to use the online supply chain management platform.
      Since the launch of the website, we have brought over 1,000 suppliers to the
      platform, allowing them to exchange business information, arrange payment online
      and access purchase orders, returns, payment status, inventory levels and sales
      data analysis. In the future, we plan to bundle our enterprise resource planning
      platform into the www.bfuture.com.cn website as well. We are very excited about
      our first SaaS products and the synergies we see with our current software
      clients.





We
      placed
      our focus in 2007 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.





Our
      goal
      is to help our customers execute their business strategies by providing them
      with overall, one-stop software solutions and service to enhance their
      effectiveness, improve customer relationships, prevent out-of-stock scenarios
      and reduce their total costs in the Chinese supply chain. In pursuing this
      goal,
      we intend to maintain and expand our status as a leading provider of fully
      scalable software solutions. Key elements of our strategy include:




32




We
      will
      increase our market share. We believe that as the Chinese economy continues
      to
      develop, Chinese companies will compete with international businesses at an
      increasing rate. Consequently, Chinese businesses will need to streamline their
      operations in order to maximize their competitive position. In order to increase
      our overall market share, we will focus on increasing the amount of business
      we
      do with the following customers:





Manufacturers .
      While
      we currently license our software solutions to some of the largest companies
      in
      China, we intend to focus a large part of our marketing efforts in this
      sector.





Distributors .
      We
      currently work with distributors in more than 140 different cities in China.
      Through our continued growth and development, we expect to license our software
      solutions to distributors in more than 200 cities within the next several
      years.





We
      will
      increase our emphasis on sales to small and medium-sized businesses. When the
      Chinese retail, logistics and distribution industries were in their infancy,
      only larger businesses were initially in a position to recognize and effectively
      implement our software solutions into their business operations. Over the last
      few years, however, as the marketplace continued to mature and competition
      among
      retailers, logistics companies and distributors has heightened, we have
      recognized that an increasing number of Chinese small and medium-sized
      businesses in these industries have begun to utilize our software solutions.
      We
      believe that the small and medium-sized businesses in our marketplace offer
      our
      company a significant opportunity because:





·
            these
                businesses have not previously adopted any supply chain management
                software solutions and our competition may not possess the ability
                to
                effectively market to these
                businesses;


·
            these
                businesses are more likely to purchase our less expensive software
                solutions on a more frequent basis, and we expect revenues from these
                more
                frequent purchases to stabilize our cash flow which may be less
                predictable if based solely upon the license of our more expensive
                (and
                less licensed) software solutions;
                and


·
            we
                expect to receive more timely payment for our software solutions
                from
                these businesses as they do not generally possess the economic power
                of
                larger businesses that may force us to be more flexible on payment
                terms.





National
      Chain Retailers .
      We
      currently license our products to national chain retailers throughout more
      than
      80 Chinese cities. We expect to license additional products to additional
      customers in more than 150 cities within the next several years. We are now
      allocating a significant portion of the proceeds of our initial public offering
      to the expansion of our sales team such that our sales efforts will extend
      to up
      to 50 major Chinese cities and up to 300 regional cities throughout
      China.





We
      will
      provide services that generate high customer satisfaction levels. Chinese
      companies in our market are strongly influenced by formal and informal
      references. We believe that we have the opportunity to expand market share
      by
      attaining high levels of customer satisfaction with our current customers,
      thereby fostering strong customer references to support sales
      activities.





We
      will
      provide a tangible, measurable return on investment. ** By
      leveraging our success with our existing clients and a renewed focus on
      small-to-medium size businesses in China, we believe that we are uniquely
      positioned to become the preferred application and technology architecture
      provider for software solutions for the Chinese supply chain. We believe that
      our strong performance and reputation can be leveraged to develop a leading
      technology and best in business standard.




33




We
      will
      anticipate a rise in the need for Chinese supply chain management
      services. ** We
      anticipate that an expanding market and increasing customer demand will position
      the Chinese supply chain as a competitive differentiator. Since the Chinese
      government and industry now recognize the impact of China’s supply chain
      performance gap, *status
      quo* performance will no longer be acceptable to consumers. As we continue to firmly
      establish our company in the supply chain management arena, we stand to benefit
      as demand for our services increases.





We
      utilize a significant portion of the proceeds of our first public offering
      to
      enhance our existing software while also developing new ECR, VMI and retailing
      payment systems.





*Merger
      and Acquisition (“M&A”) Strategies*





We
      will
      utilize M&A strategies to achieve the following goals:





·
            Diversify
                product offerings;


·
            Expand
                regional coverage;


·
            Expand
                into the SMB market; and


·
            Develop
                new relationships with domestic and international
                retailers.





We
      will
      not miss any opportunity to acquire companies which can increase our
      shareholders’ value and we will focus on the following types of
      acquisitions:





·
            Small
                fill-in acquisitions (Focus on products and territory coverage in
                frontsupply
                chain market)


·
            Larger
                mergers and acquisitions - sizeable recurring revenue streams (Focus
                on
                products and territory coverage in frontsupply
                chain market)





During
      2007, four 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 supply chain
      management software to streamline operations and maximize our clients’
competitive advantages.





·
            In
                January 2007, we acquired****Nanjing****Tangcheng
                Network Technology Development Corporation, a leading regional independent
                software vendor focusing on East China’s retail market. We expect that
                this acquisition will allow us to respond quickly to meet regional
                market
                demands, improve customer service and expand our market share in
                Eastern
                China.


·
            In
                August 2007, we acquired****Crownhead
                and its subsidiary Guangzhou Royalstone.****With
                a senior operating team and extensive relationships, most notably
                in the
                supermarket sector of Southern China’s retail and FMCG industries, we
                expect that this acquisition will increase our market share among
                China’s
                top 100 domestic retailers and leading international retail companies.





Since
      August 2007, the combined business, which we renamed “eFuture Royalstone
      Information Technology Inc.”, has been integrated according to plan. Under the
      leadership of Mr. Deliang Tong, Crownhead’s former chairman and Chief Executive
      Officer, we have focused our consolidation efforts in three areas: integrating
      back office systems, product portfolios and retaining key personal. We believe
      that with synergies from combined networks, products and leading R&D teams,
      we will be able to increase our market share across China and attract more
      global accounts.




34




These
      two
      transactions bolstered our fourth quarter and full year 2007 financial
      performance. In fact, in aggregate, Crownhead and its subsidiary Guangzhou
      Royalstone represented $3.5 million or 29.6% of our total revenues from August
      2007 through the end of the fourth quarter of 2007 which included $2.9 million
      of software and service revenue, or 30.5% of total software and service
      revenues.





We
      also
      made acquisitions that expanded our innovative offerings around our core
      business, specifically, SaaS, B2B, and Business to Consumer (“B2C”) platforms.
      These acquisitions include the following:





·
            In
                May 2007, we acquired a 20% 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.


·
            In
                November 2007, we acquired****a
                majority stake in Beijing Fuji Biaoshang Information Technology Inc.
                by
                VIE, a company that provides SaaS, such as a B2B supply chain management
                platform between suppliers and retailers and a B2C, Web-based store
                for
                retailers.





In
      the
      second quarter of 2008, we will also launch a new website - with the goal of
      helping retailers search for suppliers and to help regional suppliers enter
      into
      national retail stores. These acquisitions are expected to significantly
      increase our market share and enhance the services we offer to our clients
      and
      we are optimistic about their future potential.





We
      have
      two Strategic Acquisitions planned for 2008:





·
            Proadvancer
                Systems Inc. - A leading provider of logistics software and services
                in
                China and Asia. This acquisition is intended to expand our logistics
                products and services offerings to form a total front-end supply
                chain
                management solution.


·
            Beijing
                Wangku Hutong Information Technology - We have increased our equity
                interest in this company to 51%.




We
      intend
      to enter 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, developing new business opportunities
      through our SaaS model and explore additional strategic
      acquisitions.





*Customers*




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





We
      now
      provide software products and services to more than 1,000 clients, including
      over 770 retailers and over 200 distributors and Fortune 500 companies that
      do
      business in China including Procter & Gamble, Unilever, Johnson &
Johnson, Kimberly-Clark, the Chang’an Motors and Ford Motors joint venture,
      B&Q-Kingfisher China, GUCCI China, Jusco Guangzhou China, PARKSON China,
      SOGO China and Mickey’s Space stores (Disney franchises). Leading local
      companies include China Resources Vangard, Belle, Lianhua, Suning, Wuhan
      Zhongbai, Wushang Group, Bubugao, Yonghui and China Duty-Free
      Stores.




35




Currently,
      our software solutions are utilized:





·
            in
                all provinces in China except Taiwan, Hong Kong and
                Macau;


·
            in
                more than 200 cities;


·
            by
                more than 1,000 clients, including over 770 retailers who use over
                790,000
                suppliers, over 200 distributors, and several
                manufacturers;


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


·
            by
                over 10 foreign-owned enterprises;


·
            by
                more than 10,500 multi-format
                stores;


·
            by
                over 30 of the top 100 retailers and 23 of the 60 largest retailers
                in
                China;


·
            at
                more than 2,000 distribution nodes;
                and


·
            at
                more than 65,000 retailing
                points-of-sale.





Our
      manufacturing customers include:





·
            Procter
                & Gamble China


·
            Johnson
                & Johnson China


·
            Kimberly-Clark
                China


·
            Unilever
                China


·
            L’Oreal
                China


·
            Chongqing
                Chang’an Ford Group, Chinese joint
                venture


·
            Haier
                Group, one of China’s leading household appliance
                manufacturers


·
            Changhong
                Group, one of China’s leading household appliance
                manufacturers





Our
      retailing customers include many of the largest retailers in China
      including:





·
            Gucci
                China


·
            B&Q
                China


·
            Jusco
                China


·
            China
                Resources Vangard


·
            BELLE


·
            Harber
                House China


·
            BONJOUR


·
            Shanghai
                Lianhua


·
            Robinson
                Mall China


·
            Jordan
                Mall China


·
            Super
                Brand Mall, one of the largest malls in
                Shanghai


·
            Parkson
                China Group, the largest department store chain in China, owned by
                Lion
                group in Malaysia


·
            China
                Duty-free Group


·
            Tianjin
                Tianshi Group






36




·
            Suning
                Appliance, China’s second largest electronics
                chain


·
            Beijing
                Jingkelong Stores, Inc., a large chain of supermarkets and convenience
                stores


·
            Beijing
                Wangfujing Department Store (Group) Inc., the first large, state-operated
                department store in Chinese history


·
            Beijing
                the Orienthome Group, one of the largest Chinese home improvement
                stores


·
            Beijing
                AYAYA group, the Chinese girls’ adornment store
                chain


·
            Beijing
                SOGO, a Beijing department store owned by SOGO
                Group


·
            Beijing
                New Yansha Lufthansa Group


·
            Beijing
                Urban and Rural trade center Co.,
                Ltd.


·
            Beijing
                Huaguan Supermarket


·
            Hunan
                Bubugao Group


·
            Fujian
                Yonghui Group


·
            Xian
                Aijia Group


·
            Shandong
                Yinzuo Holdings Ltd., the first large department store and supermarket
                chain in Shandong province


·
            Shandong
                Jiajiayue Supermarket Group


·
            Changchun
                Zuozhan Dept. Store Group, the first large department store in Jiling
                province


·
            Zhejiang
                Huaji Shijie Group


·
            Shanghai
                Hongmaolantu Group


·
            Shijiazhuang
                Beiren Group, the first large department store and supermarket chain
                in
                Hebei province


·
            Tianjin
                the Homeway Group, the first large hypermarket and home improvement
                chain
                in middle China, acquired by Home
                Depot


·
            Chongqin
                Dept. Store Group, the first large department store and supermarket
                chain
                in western China


·
            Wuhan
                Wushang Group Co., Ltd., the first large department store and hypermarket
                chain in middle China


·
            Wuhan
                Zhongbai Group, Co., Ltd., the second large supermarket and hypermarket
                chain in middle China


·
            Wuhan
                Zhongshang Group, the third large department store and hypermarket
                chain
                in middle China


·
            Wuhan
                Plaza Shopping Center, a joint venture between Wuhan Wushang Group
                and
                Hong Kong Chinachem Group


·
            Shanghai
                Gujin Underwear Store Co. Ltd.


·
            Guangzhou
                Friendship Dept. Store Group


·
            Guangzhou
                Department Store Group


·
            Hangzhou
                Jiefang Department Store Group


·
            Shenzhen
                Tongluowan Group, the largest shopping malls in many Chinese
                cities


·
            Shenzhen
                Suibao Dept. Store Group


·
            Shangyang
                Shangye Cheng


·
            Zhejiang
                Huajishijie Group, one of the largest cell phone chain
                stores





Our
      distribution and logistics customers include over 200 customers:





·
            Yoshinoya
                D&C Co., Ltd., a Japanese fast food
                chain


·
            China
                Resources Vangard Inc., one of the top 4 retailers in
                China






37




·
            Beijing
                Jingkelong Group, one of the largest FMCG distributor and supermarket
                chains in China


·
            Changan
                Minsheng Logistics Inc., the outsourcing service for Changan-Ford
                Automobile Co., Ford Motor Company’s Chinese joint
                venture


·
            Jiuzhoutong
                Group, one of the largest drug distributors and store chains in
                China


·
            COFCO
                is a leading grain, oils and foodstuffs import and export group in
                China
                and one of its largest food manufacturers. The company has been successful
                in real estate, hotel business and financial services. Fortune magazine
                lists it as one of the world’s top 500
                enterprises.


·
            Beijing
                Yishang Meijie Co. Ltd.


·
            Beijing
                Jiazhixing Co. Ltd.





*Headcount*





We
      operate in 20 offices across China:





·
            Headquartered
                in Beijing


·
            Main
                R&D centers in Guangzhou and
                Wuhan


·
            Regional
                service centers in Shanghai, Guangzhou and
                Wuhan





We
      are
      committed to R&D and customer service:





·
            Over
                650 employees


·
            300
                R&D and customization engineers


·
            250
                consultants and service personnel


·
            100
                sales and marketing staff





**January
                1, 2008**
            
            **January
                1, 2007**Total
            
            
            588
            
            
            298Mid
                and high level Manager
            
            
            47
            
            
            37Sales
            
            
            94
            
            
            48R&D
                and Customization
            
            
            300
            
            
            105Service
            
            
            250
            
            
            92Pre-sales
            
            
            12Back-office
            
            
            35
            
            
            16




*Full
      Year 2007 Operational Highlights*





·
            Sales
                contracts in 2007 increased 135% to RMB129.3 million from 2006. Total
                new
                orders increased 147% to 892 from 361 in
                2006.


·
            eFuture
                acquired Nanjing Tangcheng Network Technology Development Corporation
                in
                January 2007, a leading regional independent software vendor focusing
                on
                Eastern China’s retail market.


·
            eFuture
                acquired a 20% ownership interest in Beijing Wangku Hutong Information
                Technology Co., Ltd. by VIE in May 2007, allowing eFuture to offer
                a
                leading B2B platform that connects retailers and small to medium-sized
                suppliers.


·
            eFuture
                acquired Crownhead and its subsidiary Guangzhou Royalstone in August
                2007,
                significantly improving eFuture’s market share among China’s top 100
                retailers and international retail
                accounts.






38




·
            eFuture
                acquired a majority stake in Beijing Fuji Biaoshang Information Technology
                Inc. by VIE in November 2007, a company that provides a SaaS and
                B2B
                supply chain management platform website (www.bfuture.com.cn)
                to connect suppliers and retailers and a B2C platform for
                retailers.


·
            We
                had new market penetration in addition to maintaining our competitive
                position and expanding our market share through organic growth in
                the
                front chain market, particularly in the retail and FMCG markets.
                We are
                leveraging our existing client base (over 600 retailers and over 250
                distributors) into new areas such as B2B service between these
                retailers and their suppliers and we are exploring new
                media businesses based on our consumer
                community.


·
            Ernst
                & Young was hired as eFuture’s SOX Implementation Consultant from 2007
                to 2008


·
            We
                expanded our sales force in key geographic markets and continue to
                attract
                marquee global accounts in China including B&Q-Kingfisher, Unilever,
                Johnson & Johnson, Jusco, GUCCI, and Aeon. We are now supplying
                superior solutions to over 1,000 clients, which represents a 100%
                increase
                over our 500 clients in 2006.


·
            Also,
                in May 2007, through our installment acquisition of Beijing Wangku
                Hutong
                Information Technology Co., Ltd. we now offer a leading B2B platform
                to
                our clients, connecting retailers and numerous small and medium-sized
                suppliers, which not only enables eFuture to deploy a SaaS service
                based
                on the retail yellow pages but also further enhances our innovative
                business development in the B2B portal sector between suppliers and
                retailers. We expect to continue our selective acquisition strategy
                to
                enhance our market share and business performance. The website
                www.jindian.com.cn, will help retailers find suppliers and help regional
                suppliers to enter into national
                stores.


·
            We
                further developed our partnerships with international industry leaders
                in
                order to supply superior solutions to our clients. In January, IBM
                recognized eFuture with its best retail solution partner in the Asia
                Pacific award. We also became a partner with JDA with a new cooperation
                model of “Global Solution, Local Service.” At the same time, we are VAR
                partners with Oracle, Microsoft, Samsung, Motorola and are continuing
                to
                develop leading software systems through our joint efforts.





*Our
      Strengths*




Our
      strengths include:





·  *Ability
      to leverage current engagements* .
      Since
      our inception, we have developed an impressive litany of clients. By providing
      our solutions on a cost efficient basis and following through with outstanding
      client support, we believe we have the ability to generate additional projects
      from our existing client base.





·  *Ability
      to leverage our knowledge of Chinese business culture.* Many
      of
      our competitors are based outside of China. As our operating subsidiary is
      based
      in Beijing, we believe we are in a strong position to emphasize Chinese culture
      and business knowledge to obtain new customers. We believe that many Chinese
      businesses would prefer to hire a Chinese company to assist in their business
      operations if a Chinese company exists with the ability to fulfill their needs
      on a timely and cost-efficient basis.





·  *Ability
      to leverage our marketing activities with other businesses.* Our
      ability and willingness to co-market with larger organizations allows us to
      obtain access to business opportunities that may not otherwise be available
      to
      companies of our size. From time to time, we have entered into joint marketing
      arrangements with other computer and software companies. Pursuant to these
      arrangements, we are able to offer our solutions as part of a multi-faceted
      supply chain management arrangement with larger and more prestigious
      companies.




39




·  As
      of the
      date of this end year reporting, we have entered into the following agreements
      with larger organizations to obtain business opportunities:





·
            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.





·
            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.





·
            In
                2007, IBM awarded us its Solution Developer Partnership Award - Asian
                Pacific Region. We have partnered with IBM for seven years to provide
                customer management systems and integrated retail supply chain software
                systems throughout China. The award was presented to us by Steve
                Ladwig,
                General Manager of IBM Global Retail Store Solutions, at the IBM
                Retail
                Chain Solution Conference, held in the city of Sanya, Hainan in February
                2007. The conference highlighted IBM’s involvement in global retail chain
                management. Mr. Ladwig emphasized that strengthening relationships
                with
                key local partners was one focus of IBM’s strategic efforts in 2007.





·
            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.





·
            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.





·
            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.





·  *Experienced,
      successful executive management team.* Our
      executive management team has significant experience and success in the supply
      chain management industry. They will be able to draw on their knowledge of
      the
      industry, their sales and marketing experience and their relationships in the
      industry.





·  *Ability
      to leverage China’s Cost Structure.* As
      one of
      the leading Chinese companies in the field, we believe that we possess an
      inherent advantage over foreign participants in our industry. Specifically,
      as a
      Chinese company, we believe we can operate our business on a much more cost
      effective basis. These costs savings are reflected in lower costs to our
      customers for comparable work.




40




*Competition
      in the Supply Chain Management Software Industry*





*Market
      share.* In ** 2007,
      total IT expenditures in China’s retail industry were RMB4.3 billion (RMB1
      billion in software & services). Estimated total IT expenditures in China’s
      retail industry in 2010 are projected to be RMB8.5 billion ( RMB2.5 billion
      in
      software and services), a compound annual growth rate of 25.5% *.* Our
      market share in the software and service of retail industry, increased from
      5.5%
      to 8.3%.





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:





·
            cultural
                differences;


·
            feature
                and functionality;


·
            product
                reputation;


·
            quality
                of reference accounts;


·
            vendor
                viability;


·
            retail
                and demand chain industry
                expertise;


·
            total
                solution cost;


·
            technology
                platform; and


·
            quality
                of customer support.





In
      2007,
      total revenues for software and maintenance for the Chinese enterprise
      application software market were approximately $6 billion. During that year,
      we
      generated approximately $11.5 million in comparable revenues. As such, while
      we
      effectively compete in our market, our competitors occupy a substantial
      position.





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. This consolidation
      trend is evidenced by SAP AG’s announcement on February 28, 2005 of a cash
      tender offer to purchase all of Retek, Inc.’s outstanding shares, which was
      followed on March 8, 2005 by a competing cash tender offer from Oracle
      Corporation to purchase all of Retek, Inc.’s outstanding shares. Pursuant to its
      tender offer, Oracle acquired Retek in April 2005. It is difficult to estimate
      what effect this acquisition will have on our competitive environment. We cannot
      guarantee that we will be able to compete successfully against our current
      or
      future competitors in the supply chain management software industry, or that
      competition will not have a material adverse effect on our business, operating
      results and financial condition.




41




*Competitive
      Environment*





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





*Tier
      1 Market* .
      Global
      accounts and top 10 retailers operating in China, Global rivals, such as SAP,
      Oracle, JDA and Retalix are very active and aggressive. Our strategy is “global
      solution and local service” by colloaborating with competitors, such as JDA
      (global retail solution provider) we help them to roll out solutions in China.
      Oracle has acquired many software companies in retail, such as Retek,
      Commerce360, and ProfitLogic. NEC China closed an acquisition of a local
      rival.





*Tier
      2 Market* .
      Top 100
      retailers and top 100 regional retailers in China. We are continually very
      competitive in this market. We plan to increase our earning power by continuing
      to streamline the infrastructure, increase our efficiency in R&D investment,
      and improve employee productivity, while reducing our operating expenses.





*Tier
      3 Market and Others.* Rivals
      are local - over 150 Independent Software Vendors (“ISV”) companies delivering
      solutions to small to medium clients, which 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 an ecosystem
      and speed up our industry integration through M&A. Our goal is to increase
      our market share to between 25% and 30% in the next 5 years.





*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 supply chain management software 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
      Retek/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.





*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.




42




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 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.





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.




43




Although
      there are differences in intellectual property rights between the United States
      and China, of most significance 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, or 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.




*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.




44




*Recently
      Enacted Accounting Standards*




In
      September 2006, the Financial Accounting Standards Board issued FASB Statement
      No. 157, Fair Value Measurements (or SFAS 157), which defines fair value,
      establishes a framework for measuring fair value under generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      SFAS 157 applies to other accounting pronouncements that require or permit
      fair
      value measurements. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007. However, on February 12, 2008, the FASB issued FSP FAS 157-2
      which delays 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 a recurring basis (at least annually).
      This
      FSP partially defers the effective date of Statement 157 to fiscal years
      beginning after November 15, 2008, and interim periods within those fiscal
      years
      for items within the scope of this FSP. Effective for 2008, we will adopt SFAS
      157 except as it applies to those nonfinancial assets and nonfinancial
      liabilities as noted in FSP FAS 157-2. We are currently evaluating the potential
      impact on our financial statements, if any, upon adoption of this
      standard.





In
      December 2007, the Financial Accounting Standards Board issued FASB Statement
      No. 160,


*Noncontrolling
      Interests in Consolidated Financial Statements — an amendment of ARB No. 51* (“SFAS
      160”). SFAS 160 amends ARB No. 51 to establish accounting and reporting
      standards for the non-controlling interest in a subsidiary and for the
      deconsolidation of a subsidiary. This Statement is effective for fiscal years
      and interim periods within those fiscal years, beginning on or after December
      15, 2008. We believe there will be no material impact on our financial
      statements upon adoption of this standard.





In
      December 2007, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin 110 *(“SAB
      110”)* .
      SAB 110
      states that the staff will continue to accept, under certain circumstances,
      the
      use of the simplified method for estimating the expected term of “plain vanilla”
share options in accordance with SFAS 123(R) beyond December 31, 2007. We
      believe there will be no material impact on its financial statements upon
      adoption of this standard.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ,
      (“SFAS No. 159”). SFAS No. 159 expands opportunities to use
      fair value measurement in financial reporting and permits entities to choose
      to
      measure many financial instruments and certain other items at fair value.
      SFAS No. 159 is effective beginning the first fiscal years that begins
      after November 15, 2007. We do not currently intend to expand the use of
      fair value measurements in our financial reporting.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (“SFAS No. 141(R)”), which replaces SFAS No. 141, “Business
      Combinations.” SFAS No. 141(R) retains the underlying concepts of SFAS No. 141
      that require all business combinations to be accounted for at fair value under
      the acquisition method of accounting, however, SFAS No. 141 (R) significantly
      changes certain aspects of the prior guidance including: (i) acquisition-related
      costs, except for those costs incurred to issue debt or equity securities,
      will
      no longer be capitalized and must be expensed in the period incurred; (ii)
      non-controlling interests will be valued at fair value at the acquisition date;
      (iii) in-process research and development will be recorded at fair value as
      an
      indefinite-lived intangible asset at the acquisition date; (iv) restructuring
      costs associated with a business combination will no longer be capitalized
      and
      must be expensed subsequent to the acquisition date; and (v) changes in the
      deferred tax asset valuation allowances and income tax uncertainties after
      the
      acquisition date will no longer be recorded as an adjustment of goodwill, rather
      such changes will be recognized through income tax expense or directly in
      contributed capital. SFAS 141(R) is effective for all business combinations
      having an acquisition date on or after the beginning of the first annual period
      subsequent to December 15, 2008, with the exception of the accounting for
      valuation allowances on deferred taxes and acquired tax contingencies. SFAS
      141(R) amends SFAS 109 such that adjustments made to valuation allowances on
      deferred taxes and acquired tax contingencies associated with acquisitions
      that
      closed prior to the effective date of SFAS 141(R) would also apply to provisions
      of SFAS 141(R). We are currently evaluating the effects that SFAS 141(R) may
      have on our financial statements.





45




**C.**
            **Organizational
                structure**




A s
      of the
      date of this Annual Report, our ownership structure is as follows:




EFUTURE




**D.**
            **Property,
                plants and equipment**




*Facilities*




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




**Office**
            
            **Address**
            
            **Rental
                Term**
            
            **Space**Beijing
            
            #10
                Building
              BUT
                Software Park
              No.
                1 Disheng North Street, BDA
              Yizhang
                District
            
            Expires
                December 31, 2008
            
            544.93
                sq. metersShanghai
            
            Floor
                19E,F,G
              Shentong
                Information Plaza
              55
                West Road of Huaihai Street
              Xu
                Jiahu District
            
            Expires
                March 19, 2010
            
            757.47
                sq. meters




46




Nanjing
            
            Floor
                3,49 Jiangsu Software Park,169 Road of Longpan zhong street,
              Nanjing,Jiangsu
                province
            
            Expires
                January 1, 2009
            
            283
                sq. metersShijiazhuang
            
            R2108,Floor
                21
              Changan
                Plaza
              289
                East Road of Zhongshan Street
              Shijiazhuang,
                Hebei province
            
            Expires
                January 1, 2009
            
            400
                sq. metersGuangzhou
            
            Rear
                Building
              Huicheng
                Plaza
              130
                Zhongshan Street
              Guangzhou,
                Hebei province
            
            Expires
                March 5, 2010
            
            1730
                sq. metersWuhan
            
            Floors
                2 and 3
              Office
                Building of Machine Bureau
              Fujiapo,
                Wuchang District
              Wuhan,
                Hubei Province
            
            Expires
                September 19, 2008
            
            846
                sq. meters





Our
      new
      headquarters facility is located in a high-technology park developed on the
      outskirts of Beijing. This development has resulted from the Chinese
      government’s decision to centralize high-technology companies in a currently
      under-utilized area of Beijing. Our new facility will offer benefits in the
      form
      of reduced rents and access to technologically advanced facilities. We believe
      that these facilities are adequate to meet our needs.




**Item
              4A.**
            **Unresolved
                Staff Comments**




Not
      applicable.




**Item
              5.**
            **Operating
                and Financial Review and
                Prospects**




*The
      following discussion and analysis should be read in conjunction with our audited
      historical consolidated financial statements and our unaudited pro forma
      condensed 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 U.S.
      GAAP. Our unaudited pro forma financial information has been derived from our
      audited historical consolidated financial statements.*





**A.** **Operating
      Results**





*Overview*


We
      believe that we are one of the leading businesses engaged in developing and
      selling enterprise resource planning 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 companies in China. In addition, we provide related system integration
      services. System integration services involve system design and system
      implementation through the application of the software as well as ongoing
      technical supporting services.




47




Our
      business started in 2000 when we purchased our eFuture ONE POS-ERP software
      from
      Hainan Future Computer Company Limited (“Hainan Future”). Following its
      formation in 1997, Hainan Future developed this software program that possessed
      particular use in the Chinese supply chain management industry. In an effort
      to
      create a new company that would qualify for preferential tax treatment
      associated with businesses in the high-technology industry, we agreed to
      purchase this program and all related rights from Hainan Future in 2000 for
      RMB5,160,000. In connection with this transaction, Hainan Future agreed to
      provide us with technical support and development services related to the
      program for one year. On May 24, 2001, the PRC National Copyright Bureau issued
      eFuture (Beijing) Tornado Information Technology Inc., our wholly-owned
      subsidiary (“eFuture Beijing”) a certificate approving the transfer of the
      software and granting eFuture Beijing the sole right to exploit the copyright.





Since
      the
      acquisition of this program, we have continued to develop our core software
      to
      meet the needs of a wide range of customers, and today we have expanded to
      the
      small business market which is growing. We expect our revenues to continue
      to be
      cyclical during each year with a greater amount of revenues recognized in the
      last half of the year. This can cause a need for future borrowing from financial
      institutions. In the past, we have been able to borrow funds at reasonable
      interest rates and expect that we will be able to do so in the future. However,
      there is a possibility that funds may not be available and that unavailability
      could cause us significant difficulty in funding operations in the
      future.





Should
      there be a significant decline in the business climate in China, we would not
      be
      able to sustain our operations, and we would have to reduce operations and
      cut
      expenses to be able to continue in business. This could have a negative impact
      upon our financial position and results of operations. Such an event would
      probably have a significant effect on our ability to collect our trade
      receivables and would cause us to recognize an increase in bad debt allowances
      related to such receivables. We currently do not anticipate such a decline
      based
      on current trends in China.





Customers
      who license our software generally purchase maintenance contracts, typically
      covering renewable annual periods. In addition, customers may purchase
      consulting services, which are customarily billed at a fixed daily rate plus
      out-of-pocket expenses. Contract development services, including new product
      development services, are typically performed for a fixed fee. Our revenue
      growth has resulted from a combination of increased market penetration and
      expanding product offerings. Our investments in research and development and
      alliances have helped us bring new software solutions to market. Our investments
      have produced a suite of decision support solutions. To support our growth
      during these periods, we have also continued to invest in internal
      infrastructure by hiring employees throughout various departments of the
      organization. It is possible that in the future we may have difficulty in hiring
      qualified employees to fulfill our needs, but at the present time, it appears
      that there is an abundance of qualified individuals available to support our
      needs.




48




*Critical
      Accounting Policies and Estimates*





*Revenue
      Recognition*





We
      recognize revenues based on the following principles:





We
      generate revenue from the sale of software, related hardware, maintenance and
      support contracts, and professional consulting, training and contract
      development 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. Revenue from the
      sale
      of software licenses and technical advisory services under these agreements
      will
      be recognized as the services are performed over the contract period.





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





·
            we
                have persuasive evidence of an
                arrangement;


·
            delivery
                has occurred;


·
            the
                sales price is fixed or determinable; and


·
            collectability
                is reasonably assured.





We
      do not
      consider delivery to occur until products have been shipped or services have
      been provided to the client, risk of loss has transferred to the client and
      client acceptance has been obtained, client acceptance provisions have lapsed,
      or we have objective evidence that the criteria specified in client acceptance
      provisions have been satisfied. We do not consider the sales price to be fixed
      or determinable until 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 fulfilled
      the needs of our customers. Should other products or services be introduced
      in
      the market that compete with our products and services, our future customers
      may
      chose those products and services instead of ours and affect our ability to
      generate revenues. We are confident that our constant development of our
      software products will maintain us as a leader in our market.





For
      software sales, we recognize 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. Revenues from 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 a fee schedule we use for providing our
      regular level of maintenance on a stand alone basis. Maintenance revenue is
      included in the income statement under services and is recognized over the
      term
      of the agreement. We will recognize revenue upon the completion of the project
      and the inception of the license term. Revenues applicable to multiple-element
      fee arrangements are bifurcated 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.




49




We
      generally 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 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.





Since
      our
      sales are based on customer acceptance of our software and services, we have
      experienced success in demonstrating the value of our products in the past,
      and
      our customers have accepted our software and services, we do not anticipate
      difficulty in gaining acceptance of our products in the future. However, it
      is
      impossible to know how future customers might react if other products are
      introduced that compete with our products and services. Accordingly, our
      estimate of acceptance of our software and services has a reasonably high
      likelihood of change.





We
      do not
      enter into contracts with customers unless collection of the contract amount
      is
      reasonably assured. We re-evaluate the customer’s ability and intent to pay at
      the date of completion and acceptance of our products and base this assessment
      on a number of factors including deposits collected prior to completion of
      installation of our products, the customer’s acceptance of our products and
      services and their commitment at that date to pay the remaining balance under
      the contract. Our assessment resulted in the conclusion that collection of
      the
      amounts due under the sales arrangements was reasonably assured at the time
      of
      the contracts and at the dates the contracts were completed, although,
      subsequent to completion and revenue recognition, there were significant bad
      debts associated with uncollectible accounts receivable. The bad debts, as
      explained below, were caused by reasons other than the probability of collection
      at the date of contract completion.





*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
      20% to 30% of the contract price 30 to 60 days after acceptance and 5% to 10%
      of
      the contract price up to one year after acceptance. We have not been able to
      consistently enforce the credit terms provided to all of our customers. Although
      we thoroughly evaluate a customer’s credit standing at the date we enter into a
      contract, there have been situations where the creditworthiness of customers
      has
      declined before we have collected the entire contract price, which has resulted
      in the write off of bad debts. We recognize that the passage of time and changes
      in customers’ financial condition have caused deterioration of the
      collectability of past due accounts receivable.





During
      2003 and 2004, bad debts increased mainly due to changes in the financial
      condition of customers prior to the due dates of the receivables, which caused
      us not to be able to consistently enforce the credit terms for collection of
      accounts receivable during and after those periods. During this time period
      our
      management team made little effort related to collection of accounts receivable
      because sales were increasing dramatically and cash flows were good. Our
      compensation policies contributed to our lack of effort related to collections
      as employees were motivated to pay more attention to new orders. In addition,
      there are a large number of national holidays in China during the first half
      of
      the year. Since most of our customers are in the retail trade, our customers
      typically hold on to cash longer during the first half of the year and use
      the
      cash for internal purposes instead of making timely payments to vendors under
      the granted credit terms. This cycle tends to increase the aging of accounts
      receivable during the first half of the year. During the first half of 2005,
      our
      efforts were focused on our products, on generating new sales and on obtaining
      financing, which resulted in less effort directed towards collecting accounts
      receivable. As a result, the aging of our accounts receivable increased
      significantly during the six months ended June 30, 2005. We realized that a
      stronger effort was needed on collection activities and our lack of focus on
      collections caused collectability of past due receivables to come into question
      and resulted in significant bad debts during that period.




50




Since
      September 2004, we have been focusing our sales efforts more on small to
      medium-sized customers rather than on larger, key customers, in order to broaden
      coverage nationally and to decrease fluctuations in cash flows from customers.
      These changes have improved collection of accounts receivable because we
      typically do not grant smaller customers long credit terms like we have granted
      to larger customers. In 2006, we saw an improved collection of accounts
      receivable and less bad debts.





We
      have
      developed standardized, turnkey products and standardized implementation
      processes for small to medium sized customers which are intended to decrease
      costs and save time for us and for customers during implementation of our
      software products. A significant portion of our bad debts have been from our
      larger, key customers. Our management has modified our method of serving our
      larger customers to use a three-month implementation cycle for determining
      and
      fulfilling the customer’s needs. We believe this effort will shorten the time
      required to complete contracts with these customers, obtain their acceptance
      of
      our products and enable us to collect payments from these key customers more
      consistently.





We
      have
      provided additional training for our sales personnel and our implementation
      team
      to help them focus on the relationship between the need to identify customers’
software requirements while meeting our cash flow requirements and collecting
      accounts receivable under the credit terms provided to the customers. Beginning
      in 2006, we provided our key sales and implementation personnel with a
      compensation bonus plan that is based upon cash collections from their
      respective customers.





These
      measures have been implemented so we will be able to consistently enforce the
      credit terms provided to our customers. However, there is no assurance that
      these efforts will be successful. If we are unable to enforce our credit terms
      in the future or if other identified changes to our sales and collection efforts
      are not successful, our cash flows from operating activities and our cash
      balance will decrease and the results of our operations will decline.





We
      have
      provided for doubtful accounts based on the aging of accounts receivable, with
      higher allowance percentages for older receivables. The factors used to compute
      our estimate of bad debts are based on historical experience and have been
      modified based upon general economic conditions. The estimate of the allowance
      is reasonably likely to change in the future. Since the allowance for doubtful
      accounts is based on matters that are highly uncertain, the allowance is highly
      sensitive to changes in the economy in China, our clients’ acceptance of and
      satisfaction with our software and services, and the terms granted to clients
      to
      pay for the products and services. Each of these factors could have a material
      effect upon the estimated allowance for doubtful accounts, although we are
      not
      aware of the specific sensitivity of the allowance to any of these factors.
      As
      an example, if the aging of accounts receivable increases to be over one year,
      the allowance for doubtful accounts would likely increase by 70% to 100% of
      accounts receivable and there would be significant write offs of accounts
      receivable older than one year. The actual collectability of our accounts
      receivable, however, could differ from our current estimates, and that
      difference could adversely affect our financial position, results of operation
      or liquidity in the future.




51




*Stock-Based
      Compensation*





Through
      December 31, 2005, we have 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”). We
      did not recognize any compensation cost during the years ended December 31,
      2005
      or 2006 from stock-based compensation.





In
      2007,
      the Company granted 131,675 share options to its employees and directors. The
      Company recognizes the relevant share-based compensation expenses over the
      requisite service period.





We
      may
      use stock based compensation more extensively in the future to reward our
      employees and encourage loyalty to help our company grow. This could increase
      expenses related to stock-based compensation in the future.





*Property
      and Equipment*





We
      depreciate property and equipment on a straight-line basis over their estimated
      useful lives, which range from ten years for motor vehicles and five 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. Should any
      of
      these changes in the estimated lives of property and equipment occur, their
      remaining carrying value of ¥2,065,040 at December 31, 2007 could be depreciated
      completely in one year.




*Intangible
      Assets*





We
      charge
      all of our development costs to research and development 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.





We
      amortize the cost of intangible assets over the shorter of four years or the
      estimated period of realization of revenue from the related software. 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.




52




*Cost
      of Revenue*





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.





*Valuation
      of Long-Lived Assets*





We
      review
      the carrying values of our long-lived assets for impairment whenever events
      or
      changes in circumstances indicate that they may not be recoverable. When such
      an
      event occurs, we project undiscounted cash flows to be generated from the use
      of
      the asset and its eventual disposition over the remaining life of the asset.
      If
      projections indicate that the carrying value of the long-lived asset will not
      be
      recovered, we reduce the carrying value of the long-lived asset by the estimated
      excess of the carrying value over the projected discounted cash flows. In the
      past, we have not had to make significant adjustments to the carrying values
      of
      our long-lived assets, and we do not anticipate a need to do so in the future.
      However, circumstances could cause us to have to reduce the value of our
      capitalized software at a more rapid rate 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
      by a material amount. The amount of possible change is discussed above under *Property
      and Equipment* and *Intangible
      Assets* .





*Significant
      Trends and Developments in Our Business*





*Annual
      Guidance for 2008.* The
      following summarizes our annual guidance for 2008 and includes ranges for total
      revenues that we believe are realistic and achievable:




Guidance for 2008Low End
            
            High EndTotal
                Revenues(in US$)
            
            $19 million
            
            $20 millionGrowth
                Rate over 2007
            
            
            65
            %
            
            74
            %





We
      currently have deferred contracts with unrecognized revenues of approximately
      US$10.2 million. Based upon our robust organic growth, development of innovative
      business models and selective strategic acquisitions, we expect 2008 total
      revenues to be in the range of approximately US$19 to $20 million, representing
      annual growth of 65 to 74% over 2007. This forecast is a current and preliminary
      view and is subject to change.





It
      is
      normal for our business to experience quarterly fluctuations and as result,
      we
      do not plan to provide quarter-to-quarter guidance during 2008. We remain
      focused on delivering year-over-year growth and will only revise our annual
      guidance, as necessary during the course of the year.





We
      believe we are currently able to offer a one-stop breadth and depth of
      vertically focused solutions to the front-end supply chain market.




53




In
      April
      2008 we acquired Proadvancer Systems Inc. (“Proadvancer”), a leading provider of
      logistics software and services in Mainland China and Asia. Proadvancer has
      40
      employees. The transaction is expected to grow our 2008 earnings per share.
      The
      acquisition has provided cross-selling opportunities for Proadvancer’s advanced
      optimization logistics solutions in our existing retail customer base and
      enabled us to significantly expand our presence with manufacturers, wholesalers
      and distributors.





We
      will
      continue to actively look for strategic acquisition opportunities in
      2008.  We have substantially completed the integration of the sales,
      customer support, consulting services and administrative functions from these
      acquisitions and have made significant progress in our plans for the integration
      of our combined solution suite and operating platform. As a result, we believe
      we are now ready to undertake another acquisition and are actively looking
      for
      strategic acquisition opportunities in 2008.




*Summary
      of 2007 Results*





During
      the year, we saw record full-year revenue of approximately RMB84.1 million,
      delivering top-line growth of over 76% year over year and exceeding revenue
      guidance. EBITDA increased 103% year-over-year to RMB21.1 million.





Our
      pe rformance
      in the fourth quarter of 2007 represents
      strong operational and acquisition growth in software and software related
      service revenues. A well-balanced contribution from all regions of China and solid performances
      from
      our traditional and focus industries of retail and consumer goods also
      contributed to the results .





*Full
      Year 2007 Financial Results Highlights*





·
            2007
                total revenues were RMB84.1 million, an increase from RMB47.8 million
                of
                76% over 2006


·
            2007
                service fee income was RMB26.5 million, an increase from RMB6.6 million
                of
                301% over 2006


·
            2007
                gross profit was RMB38.1 million, an increase from RMB25.0 million
                of 52%
                over 2006


·
            2007
                gross margin was 45%, compared to 52% in 2006


·
            2007
                EBITDA was RMB21.1 million, an increase from RMB11.0 of 92% over
                2006


·
            2007
                net loss was RMB27.5 million, a decrease from net income RMB8.1 million
                of
                439% over 2006


·
            2007
                adjusted net income (non-GAAP) was RMB18.1 million, an increase of
                67%
                over 2006.


·
            Diluted
                losses per share were RMB10.23; non-GAAP adjusted diluted earnings
                per
                share were RMB6.74.




The
        net
        loss in 2007 was primarily due to one-time conversion expenses related to
        a
        US$10 million convertible note completed in October 2007.




EBITDA
        is
        not a measure of financial performance under GAAP. The EBITDA figure as
        calculated by us is net income before depreciation and amortization, interest
        expense (net of interest income), income tax expense, share-based compensation,
        income on investment, foreign currency exchange loss, and minority interest
        in
        earnings.
 
 Reconciliation
        of reported net income to EBITDA
 (in
                    millions of RMB)Reported
                    2007 net income
                
                
                (27.48
                )Adjustment:Depreciation
                    expense
                
                
                0.50Amortization
                    of acquired technology
                
                
                8.23Amortization
                    of software costs
                
                
                2.89Share-based
                    compensation
                
                
                2.66Interest
                    expense, net of interest income
                
                
                35.24Income
                    on investment
                
                
                (0.99
                )Foreign
                    currency exchange loss
                
                
                0.20Minority
                    interest in earnings
                
                
                (0.03
                )Income
                    tax expense
                
                
                -2007
                    EBITDA
                
                
                21.22


54




We
        define
        adjusted net income (non-GAAP) as net income before depreciation and
        amortization, income tax expense, share-based compensation and interest
        expense-amortization of debt discount.
 
 Reconciliation
        of reported net income to adjusted net income
  (in millions of RMB)Reported
                  2007 net income
              
              (27.48)Adjustment:Depreciation
                  expense
              
              
              0.50Amortization
                  of acquired technology
              
              
              8.23Amortization
                  of software costs
              
              
              2.89Share-based
                  compensation
              
              
              2.66Interest
                  expense-amortization of debt discount
              
              
              31.32Income
                  tax expense
              
              
              -Adjusted
                  2007 net income
              
              
              18.12


We
      delivered robust top-line growth and executed according to plan in 2007. During
      the year, we continued to grow organically while
      making strategic acquisitions that provide us with innovative new products that
      complement our core competencies. We believe our recently added SaaS, B2B and
      B2C business models and rapidly growing customer base give us a unique
      competitive advantage to further leverage our leading market position in China’s
      front-end supply chain management industry.





*Revenues*





The
      following tables summarize the changes in the various components of revenues
      for
      the years ended December 31, 2007 and 2006.


**RMB****FY 2006**
              
              **Percentage of**
                **Revenues**
              
              **FY 2007**
              
              **Percentage of**
                **Revenues**
              
              **Change**
              
              **% Change****Revenues**Software
                  sales
              
              
              29,832,720
              
              
              62.4
              %
              
              41,360,165
              
              
              49.2
              %
              
              11,527,445
              
              
              38.6
              %Hardware
                  sales
              
              
              11,403,473
              
              
              23.8
              %
              
              16,198,402
              
              
              19.3
              %
              
              4,794,929
              
              
              42.0
              %Service
                  fee income
              
              
              6,607,337
              
              
              13.8
              %
              
              26,511,794
              
              
              31.5
              %
              
              19,904,457
              
              
              301.2
              %**Total
                  Revenues**
              
              
              47,843,530
              
              
              100.0
              %
              
              84,070,361
              
              
              100.0
              %
              
              36,226,831
              
              
              75.7
              %





Software
      sales **** and
      total
      revenues increased 38.6% and 75.7%, respectively, in 2007 compared to 2006.




We
      believe our competitive position remains strong, and we continue to maintain
      consistent competitive win rates in our markets. Software sales to new customers
      increased RMB8.9 million or 102% in 2007 compared to 2006. In addition, software
      sales to new customers, as a percentage of total software sales, increased
      to
      35% in 2007 from 21% in 2006. We continue to have strong back selling
      opportunities with our install-base customers where sales increased 23% in
      2007
      compared to 2006.




Software
      sales performance during 2007 continued to reflect the positive impact of the
      organizational changes that were made to six Strategy Business Areas (“SBA”)
      teams during the second half of 2007. These changes significantly increased
      our
      business development efforts and improved the sales force execution and sales
      performance in every SBA. We have a solid pipeline of sales opportunities in
      the
      grocery, department stores, specialty stores, FMCG, key accounts and small and
      medium business software deals. The retail software sector is our largest sector
      and, as a result, we believe the software sales performance in the retail
      industry will continue to be a key driver of our overall success.




We
      continue to experience large fluctuations in quarterly software sales
      performance in China.


Typically
      the first six months of every year are weak for Chinese retail followed by
      a
      significant increase in strength over the remaining six months.





·
            First
                half of the year has been weak in previous years and was again weak
                in
                2008.


·
            We
                still see increasing retail sales and expenditures on front-end supply
                chain management software and systems.






55




·
            2008
                Revenue Guidance is in the range of US$19-20 million, 65-74% year
                over
                year.





Although
      the retailing sector is generally strongest in the second half of the year,
      we
      believe we will continue to show strong revenue and market share growth in
      the
      seasonally weak first half. We plan to maintain our competitive position and
      expand market share through organic growth in the front chain market,
      particularly in the retail and FMCG markets. Although the retailing sector
      is
      generally strongest in the second half of the year we continued to show strong
      revenue and market share growth in the seasonally weak first half.





*Service
      fee income revenues* increased 301.2% to RMB 26.5 million
      in 2007 compared to 2006 and represented 31.5% and 13.8% of total revenues,
      respectively in these periods. We believe our large annual recurring maintenance
      revenue base provides significant stability and enhances our ability to maintain
      profitable operations.





*Research
      and development* decreased RMB90,296 or 17% to RMB436,923 in 2007 compared to 2006. The
      decrease is due primarily to a decrease in average headcount in the R&D
      department, which resulted in a decrease in salaries and related benefits.




*General
      and administrative expense* increased RMB11.7 million or 160% to RMB18.9 million in 2007 compared
      to 2006. The increase is due primarily to a 27% increase in average headcount
      in
      this department, which resulted in a RMB3.2 million increase in salaries
      and related benefits, a RMB2.5 million increase in stock-based compensation
      and a RMB1.1 million increase in legal and accounting costs as a result of
      four
      acquisitions and the compliance costs incurred to implement internal control
      systems required by the 2002 Sarbanes-Oxley Act.





*Selling
      and distribution expenses* increased RMB2.5 million or 27% to RMB11.8 million in 2007 compared to
      2006. The increase is due primarily to an increase in average headcount in
      this
      department, and an increase in sales commissions due to the 52% increase in
      software license sales and a RMB58,291 increase in stock-based compensation
      due
      to our improved operating performance. As of December 31, 2007 we had
      87 employees in the sales and marketing function, compared to 58 at
      December 31, 2006, including quota carrying sales associates and related
      sales management. We plan for modest increases in our overall investment in
      sales and marketing in 2008.





*The
      provision for doubtful accounts* **** increased
      RMB2.6 million to RMB4.7 million in 2007 compared to 2006 primarily due to
      worsened collection efforts and the higher level of revenues recorded in 2007
      compared to 2006 as well as a number of other factors including the percentage
      of total revenues that comes from software license sales which typically have
      installment payment terms, seasonality, shifts in customer buying patterns
      or
      industry mix of our customers, the timing of annual maintenance renewals,
      lengthened contractual payment terms in response to competitive pressures,
      the
      underlying mix of products and services, and the geographic concentration of
      revenues.





*Our
      financial position is solid and we are generating positive cash flow from
      operations.* **** Cash
      balances at December 31, 2007 and 2006 were RMB67.2 million and
      RMB61.5 million, respectively. We generated RMB18.4 million in cash
      flow from operations in 2007 compared to RMB12.6 million in 2006.




We
      expect
      cash flow from operations to be positive in 2008. We also believe our cash
      position is sufficient to meet our operating needs for the foreseeable
      future.




56




*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. Dollars****For the****Year Ended****For the Years
                  Ended December 31,**
              
              **December 31,****2005**
              
              **2006**
              
              **2007**
              
              **2007****(Unaudited)****Revenues**Software
                  sales
              
              ¥
              25,177,810
              
              ¥
              29,832,720
              
              ¥
              41,360,165
              
              $
              5,669,970Hardware
                  sales
              
              
              10,241,749
              
              
              11,403,473
              
              
              16,198,402
              
              
              2,220,602Service
                  fee income
              
              
              3,824,442
              
              
              6,607,337
              
              
              26,511,794
              
              
              3,634,441**Total
                  Revenues**
              
              
              39,244,001
              
              
              47,843,530
              
              
              84,070,361
              
              
              11,525,013**Cost
                  of revenues**Cost
                  of software
              
              
              7,815,315
              
              
              7,665,866
              
              
              15,412,948
              
              
              2,112,926Cost
                  of hardware
              
              
              8,681,619
              
              
              10,548,649
              
              
              12,587,418
              
              
              1,725,580Cost
                  of service fee income
              
              
              901,973
              
              
              1,887,676
              
              
              6,857,161
              
              
              940,032Amortization
                  of acquired technology
              
              
              -
              
              
              -
              
              
              8,231,375
              
              
              1,128,420Amortization
                  of software costs
              
              
              2,305,835
              
              
              2,727,198
              
              
              2,889,118
              
              
              396,063**Total
                  Cost of Revenue**
              
              
              19,704,742
              
              
              22,829,389
              
              
              45,978,020
              
              
              6,303,021**Gross
                  Profit**
              
              
              19,539,259
              
              
              25,014,141
              
              
              38,092,341
              
              
              5,221,992**Operating
                  Expenses**Research
                  and development
              
              
              93,814
              
              
              527,219
              
              
              436,923
              
              
              59,897General
                  and administrative
              
              
              7,811,742
              
              
              7,298,980
              
              
              18,957,385
              
              
              2,598,824Selling
                  and distribution expenses
              
              
              5,790,675
              
              
              9,210,975
              
              
              11,755,517
              
              
              1,611,537**Total
                  Operating Expenses**
              
              
              13,696,231
              
              
              17,037,174
              
              
              31,149,825
              
              
              4,270,258**Profit
                  from operations**
              
              
              5,843,028
              
              
              7,976,967
              
              
              6,942,516
              
              
              951,734**Interest
                  income**
              
              
              110,268
              
              
              141,230
              
              
              3,533,326
              
              
              484,376**Interest
                  expense**
              
              
              (483,033
              )
              
              (13,471
              )
              
              (841,277
              )
              
              (115,329
              )**Interest
                  expense- amortization of discount on notes
                  payable**
              
              
              -
              
              
              -
              
              
              (31,320,836
              )
              
              (4,293,702
              )**Interest
                  expense- amortization of deferred loan costs**
              
              
              -
              
              
              -
              
              
              (6,610,234
              )
              
              (906,182
              )**Income
                  on investments**
              
              
              -
              
              
              -
              
              
              985,085
              
              
              135,043**Foreign
                  currency exchange loss**
              
              
              -
              
              
              -
              
              
              (201,847
              )
              
              (27,671
              )**Minority
                  interest in loss of consolidated subsidiary**
              
              
              -
              
              
              -
              
              
              32,520
              
              
              4,458**Net
                  Income (loss)**
              
              ¥
              5,470,263
              
              ¥
              8,104,726
              
              ¥
              (27,480,747
              )
              $
              (3,767,273
              )**Earnings
                  (loss) per ordinary share**Basic
              
              ¥
              4.43
              
              ¥
              4.80
              
              ¥
              (10.23
              )
              $
              (1.40
              )Diluted
              
              ¥
              3.50
              
              ¥
              4.43
              
              ¥
              (10.23
              )
              $
              (1.40
              )




57




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 2007 and 2006.


**RMB****FY 2006**
              
              **Percentage**
                **of FY 2006**
                **Revenues**
              
              **FY 2007**
              
              **Percentage**
                **of FY 2007**
                **Revenues**
              
              **Change**
                **FY 2006 v FY**
                **2007**
              
              **% Change****Revenues**Software
                  sales
              
              
              29,832,720
              
              
              62.4
              %
              
              41,360,165
              
              
              49.2
              %
              
              11,527,445
              
              
              38.6
              %Hardware
                  sales
              
              
              11,403,473
              
              
              23.8
              %
              
              16,198,402
              
              
              19.3
              %
              
              4,794,929
              
              
              42.0
              %Service
                  fee income
              
              
              6,607,337
              
              
              13.8
              %
              
              26,511,794
              
              
              31.5
              %
              
              19,904,457
              
              
              301.2
              %**Total
                  Revenues**
              
              
              47,843,530
              
              
              100.0
              %
              
              84,070,361
              
              
              100.0
              %
              
              36,226,831
              
              
              75.7
              %**Cost
                  of Revenues**Cost
                  of software
              
              
              7,665,866
              
              
              16.0
              %
              
              15,412,948
              
              
              18.3
              %
              
              7,747,082
              
              
              101.1
              %Cost
                  of hardware
              
              
              10,548,649
              
              
              22.0
              %
              
              12,587,418
              
              
              15.0
              %
              
              2,038,769
              
              
              19.3
              %Cost
                  of service fee income
              
              
              1,887,676
              
              
              3.9
              %
              
              6,857,161
              
              
              8.2
              %
              
              4,969,485
              
              
              263.3
              %Amortization
                  of acquired technology
              
              
              0
              
              
              0.0
              %
              
              8,231,375
              
              
              9.8
              %
              
              8,231,375
              
              
              N/AAmortization
                  of software costs
              
              
              2,727,198
              
              
              5.7
              %
              
              2,891,118
              
              
              3.4
              %
              
              161,920
              
              
              5.9
              %**Total
                  Cost of Revenue**
              
              
              22,829,389
              
              
              47.7
              %
              
              45,978,020
              
              
              54.7
              %
              
              23,148,631
              
              
              101.4
              %**Gross
                  Profit**
              
              
              25,014,141
              
              
              52.3
              %
              
              38,092,341
              
              
              45.3
              %
              
              13,078,200
              
              
              52.3
              %**Operating
                  Expenses**Research
                  and development
              
              
              527,219
              
              
              1.1
              %
              
              436,923
              
              
              0.5
              %
              
              (90,296
              )
              
              (17.1
              )%General
                  and administrative
              
              
              7,298,980
              
              
              15.3
              %
              
              18,957,385
              
              
              22.5
              %
              
              11,658,405
              
              
              159.7
              %Selling
                  and distribution expenses
              
              
              9,210,975
              
              
              19.3
              %
              
              11,755,517
              
              
              14.0
              %
              
              2,544,542
              
              
              27.6
              %**Total
                  Operating Expenses**
              
              
              17,037,174
              
              
              35.6
              %
              
              31,149,825
              
              
              37.1
              %
              
              14,112,651
              
              
              82.8
              %**Profit
                  from operations**
              
              
              7,976,967
              
              
              16.7
              %
              
              6,942,516
              
              
              8.3
              %
              
              (1,034,451
              )
              
              (13.0
              )%**Interest
                  income**
              
              
              141,230
              
              
              0.3
              %
              
              3,533,326
              
              
              4.2
              %
              
              3,392,096
              
              
              2,401.8
              %**Interest
                  expense**
              
              
              (13,471
              )
              
              -
              
              
              (841,277
              )
              
              (1.0
              )%
              
              (827,806
              )
              
              6,145.2
              %**Amortization
                  of discount on notes payable**
              
              
              -
              
              
              -
              
              
              (31,320,836
              )
              
              (37.3
              )%
              
              (31,320,836
              )
              
              N/A**Amortization
                  of loan costs**
              
              
              -
              
              
              -
              
              
              (6,610,234
              )
              
              (7.9
              )%
              
              (6,610,234
              )
              
              N/A**Income
                  (loss) on investments**
              
              
              -
              
              
              -
              
              
              985,085
              
              
              1.2
              %
              
              985,085
              
              
              N/A**Foreign
                  exchange loss**
              
              
              -
              
              
              -
              
              
              (201,847
              )
              
              (0.2
              )%
              
              (201,847
              )
              
              N/A**Minority
                  interest in loss of consolidated subsidiary**
              
              
              -
              
              
              -
              
              
              32,520
              
              
              0.0
              %
              
              32,520
              
              
              N/A**Net
                  Income(loss)**
              
              
              8,104,726
              
              
              16.9
              %
              
              (27,480,747
              )
              
              (32.7
              )%
              
              (35,585,473
              )
              
              (439.1
              )%**Earnings
                  (loss) per ordinary share**Basic
              
              
              4.80
              
              
              
              
              
              (10.23
              )
              
              
              
              
              (15.02
              )
              
              (313.2
              )%Diluted
              
              
              4.43
              
              
              
              
              
              (10.23
              )
              
              
              
              
              (14.65
              )
              
              (331.1
              )%
  58




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:


**RMB****FY 2006**
              
              **Gross Margin**
                **for FY 2006**
              
              **FY 2007**
              
              **Gross**
                **Margin for**
                **FY 2007****Revenues**Software
                  sales
              
              
              29,832,720
              
              
              
              
              
              41,360,165Hardware
                  sales
              
              
              11,403,473
              
              
              
              
              
              16,198,402Service
                  fee income
              
              
              6,607,337
              
              
              
              
              
              26,511,794**Total
                  Revenues**
              
              
              47,843,530
              
              
              
              
              
              84,070,361**Cost
                  of Revenues**Cost
                  of software
              
              
              7,665,866
              
              
              74.3
              %
              
              15,412,948
              
              
              62.7
              %Cost
                  of hardware
              
              
              10,548,649
              
              
              7.5
              %
              
              12,587,418
              
              
              22.3
              %Cost
                  of service fee income
              
              
              1,887,676
              
              
              71.4
              %
              
              6,857,161
              
              
              74.1
              %Amortization
                  of acquired technology
              
              
              0
              
              
              
              
              
              8,231,375Amortization
                  of software costs
              
              
              2,727,198
              
              
              
              
              
              2,891,118**Total
                  Cost of Revenue**
              
              
              22,829,389
              
              
              
              
              
              45,978,020**Gross
                  Profit**
              
              
              25,014,141
              
              
              52.3
              %
              
              38,090,341
              
              
              45.3
              %





*Year
      Ended December 31, 2007 Compared to Year Ended December 31,
      2006*





*The
      operating results for 2007 only include the impact of Royalstone from the date
      of acquisition (i.e., August 1, 2007) through December 31,
      2007.*





*Revenue*




Total
      revenue .
      Total
      revenue is comprised of software sales, hardware sales and service fee revenue.
      Total revenue increased 76% from RMB47.8 million in 2006 to RMB84.1 million
      in
      2007.




Software
      sales .
      Our
      software sales increased 39% from RMB29.8 million in 2006 to RMB41.4 million
      in
      2007. This increase is 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 number of small and medium-sized
      businesses in China has grown dramatically, and we expect to see this trend
      continue in future fiscal periods. In addition, we also believe that as such
      businesses mature their need for our products and services will correspondingly
      increase. These customers are essential to the growth and development of our
      company. We expect to witness more intensive competition in the Chinese retail
      market in the near future.





Sales
      contracts in 2007 increased 135% to RMB129.3 million from 2006. Total new orders
      in 2007 increased 147% to 892 from 361 in 2006.





Software
      sales from acquisitions were 23% of the total software sales:





A.
      In
      January 2007, we acquired Nanjing Tangcheng Network Technology Development
      Corporation, a leading regional independent software vendor focusing on Eastern
      China’s retail market.




B.
      In May
      2007, we acquired a 20% ownership interest in Beijing Wangku Hutong Information
      Technology Co., Ltd., allowing us to offer a leading B2B platform that connects
      retailers and small to medium-sized suppliers.




59




C.
      In
      August 2007, we acquired Crownhead and its subsidiary Guangzhou Royalstone,
      significantly improving our market share among China’s top 100 retailers and
      international retail accounts.





D.
      In
      November 2007, we acquired a majority stake in Beijing Fuji Biaoshang
      Information Technology Inc., a company that provides SaaS and B2B supply chain
      management platform to connect suppliers and retailers and a B2C platform for
      retailers.




E.
      We
      have penetrated new markets in addition to maintaining our competitive position
      and expanding our market share through organic growth in the front chain market,
      particularly in the retail and FMCG markets. We are also leveraging our existing
      client base (over 770 retailers and over 200 distributors) into new
      areas such as B2B service between these retailers and their suppliers
      and exploring new media business based on the consumer
      community.




Hardware
      sales .
      Our
      hardware sales increased 42% from RMB11.4 million in 2006 to RMB16.2 million
      in
      2007. 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 don’t believe that we are in a business position 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 occurred in 2007, when several customers required the purchase of new
      hardware for integration into their software products. As a result, we
      experienced an increase in hardware sales in comparison to 2006. 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 for 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.





Service
      fee income .
      Our
      service fee income increased 301% from RMB6.6 million in 2006 to RMB26.5 million
      in 2007. This increase is primarily attributable to the following factors:





A.
      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;




B.
      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; and





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





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





60




*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 essentially
      increased 101.1% from RMB7.7 million in 2006 to RMB15.4 million in 2007. This
      increase resulted from our expanded sales force in key geographic markets.
      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 clients, which represents a 100% increase
      over our 500 clients in 2006. 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 26% for 2006 and 37% for
      2007. This increase was primarily attributable to the fact that in 2007, we
      sold
      more software products and third party royalties. We expect that as we continue
      to develop and license newer products and have more sales on software for which
      we pay royalties, cost of software as a percentage of software sales will likely
      increase.




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. This increase
      resulted directly from the increase in hardware sales we experienced in 2007.
      As
      a percentage of hardware sales, cost of hardware was 93% in 2006 and 78% in
      2007. This decrease was primarily attributable to our selective high margin
      deal
      in hardware sales.





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 263% from RMB1.9 million for 2006 to RMB6.9 million for
      2007. The 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.





Amortization
      of acquired technology .
      The
      amortization of acquired software technology in 2007 resulted from amortization
      of software technology acquired in the four acquisitions.





Amortization
      of software costs .
      Intangible assets represent 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. The increase is due to the increase
      of software products being amortized at December 31, 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 decreased 17.1% from RMB527,219 in 2006 to RMB436,923
      in
      2007. The decrease in these expenses was primarily attributable to the fact
      that
      in 2007 we focused our attention on upgrading software products to meet the
      evolving complexities of our customers’ businesses. We did not focus on research
      and development in 2006. Rather, we opted to gain market acceptance of our
      software products that were developed in previous fiscal periods. Research
      and
      development represented 1.1% of total revenue for 2006 and 0.52% of total
      revenue for 2007.





61





General
      and administrative .
      General
      and administrative expenses consist primarily of costs from our finance and
      human resources organizations; third party legal and other professional services
      fees; and an allocation of our facilities costs and depreciation expenses.
      General and administrative expenses increased 160% from RMB7.3 million in 2006
      to RMB19.0 million in 2007. The 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.





General
      and administrative expenses were 15% of total revenue for 2006 and 22% of total
      revenue for 2007. 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 organization: sales bonuses; costs of our marketing
      programs, including public relations, advertising, trade shows, and collateral
      sales bonuses; and an allocation of our facilities and depreciation expenses.
      Selling and distribution expenses increased 27.6% from RMB9.2 million in 2006
      to
      RMB11.8 million in 2007. The increase in selling and distribution expenses
      was
      due to additional labor costs associated with the expansion of our sales force.
      During this time period we added 26 employees to our sales department. 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% of total revenue for 2006 and 14% of total
      revenue for 2007. This decrease in selling and distribution expenses as a
      percentage of revenue 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.





*Other
      Expenses*





Interest
      Income .
      Our
      interest income represents the interest accrued as a result of bank deposits.
      Our interest income increased 24 times from RMB141,230 in 2006 to RMB3.5 million
      in 2007. The increase is primarily due to interest earned in 2007 on the
      proceeds of our initial public offering.





Interest
      Expense .
      Our
      interest expense increased dramatically from RMB13,471 in 2006 to RMB38.8
      million in 2007. This increase primarily resulted from the interest on the
      Convertible Notes issued to institutional investors on March 13,
      2007.




62


*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.


**B.**  **Liquidity
        and Capital Resources**
  The
        working capital balances at December 31, 2007 and December 31, 2006 were
        RMB50.7 million and RMB56.4 million, respectively.
  We
        expect
        cash flow from operations to be positive in 2008. We also believe our cash
        position is sufficient to meet our operating needs for the foreseeable
        future.
 
 *Operating
        activities* provided
        cash of RMB18.5 million in 2007 compared to RMB12.6 million in 2006.
        The principle sources of our cash flow from operations are net income adjusted
        for depreciation, software amortization, the amortization of discounts on
        notes
        payable, the amortization of deferred loan costs and compensation expenses
        for
        directors and employees.
 
 *Investing
        activities* used
        cash
        of RMB68.3 million in 2007 and RMB3.6 million in 2006. The primary use of
        cash
        in investing activities in 2007 included RMB53.2 million in payment of direct
        costs related to the Royalstone and other acquisitions and RMB1.5 million
        in capital expenditures.
  *Financing
        activities* provided
        cash of RMB58.1 million in 2007 and RMB44.3 million in 2006. Financing
        activities in 2007 included RMB69.1 million of proceeds from the convertible
        notes completed in March, the proceeds from the warrants issued to the
        underwriter in the IPO and the RMB12.0 million payment of the make-whole
        obligation on the convertible notes. Financing activities in 2006 included
        proceeds of RMB47.1million from the IPO and the repayment of RMB2.8 million
        the
        short-term loans.
  We
        believe our cash and cash equivalents and net cash provided from operations
        will
        provide adequate liquidity to meet our normal operating requirements for
        the
        foreseeable future. A major component of our positive cash flow is the
        collection of accounts receivable and the generation of cash earnings.
 
 63
  *Indebtedness*
  On
        March 13, 2007, we entered into and closed a Securities Purchase Agreement
        with three funds associated with two institutional investors (the “PIPE
        Investors”), pursuant to which we issued and the PIPE Investors purchased
        $10,000,000 of our convertible notes (the “Convertible Notes”), 184,077
        Series A Warrants (the “Series A Warrants”) and 230,097 Series B
        Warrants (the “Series B Warrants”). The Series A and Series B Warrants were
        issued in proportion to the amount of Convertible Notes purchased by each
        PIPE
        Investor. In addition, our placement agent, Westminster Securities Corp.
        (“WSC”)
        and certain of its employees received, in the aggregate, 73,291 Placement
        Agent
        Warrants (the “Placement Agent Warrants” and, together with the Series A and
        Series B Warrants, the “PIPE Warrants”) with terms substantially similar to
        those issued to the PIPE Investors.
 
 Other
        than as discussed in this section, there has not been any material change
        in our
        indebtedness, commitments and contingent liabilities since December 31, 2006.


**C.**  **Research
        and Development, Patents and Licenses, etc.**
 
 We
        charge
        all of our development costs to research and development 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
 
 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
        decreased 17.1% from RMB0.5 million in 2006 to RMB0.4million in 2007. The
        decrease in these expenses was primarily attributable to the fact that in
        2007
        we focused our attention on upgrading software products to meet the evolving
        complexities of our customers’ businesses. We did not focus on research and
        development in 2006. Rather, we opted to gain market acceptance of our software
        products that were developed in previous fiscal periods. Research and
        development represented 1.1% of total revenue for 2006 and 0.5% of total
        revenue
        for 2007.
 
 **D.**  **Trend
        Information**
 
 In
        the
        first quarter of 2008, our new sales contracts increased 102% to RMB18 million
        from RMB8.8 million in the first quarter of 2007. Total new orders increased
        350% to 117 order from 26 in the first quarter of 2007.
 
 Service
        sales contracts increased 663% to RMB8.6 from RMB1.1 million in the first
        quarter of 2007. It is our policy to provide free maintenance for our products
        in the first year of operation. After the first year, we start to charge
        maintenance and support fees. This allows us to expand partnerships with
        existing customers by delivering more value.
 
 64
  During
        the first quarter of 2008, we placed a strong emphasis on integrating our
        acquisitions completed in 2007 into a single platform and smoothly incorporating
        new cultures into our company. This organic growth strategy has translated
        into
        a 10% increase in gross margins, if we exclude amortization of the acquired
        technology.
 
 Specifically,
        we have been working to strengthen our back-office resource integration in
        order
        to reduce headcount.
 
 We
        are
        working to improve our processes to decrease software implementation costs.
        At
        the same time, we are condensing multiple versions of similar software into
        full-featured, single versions, which we believe will reduce our R&D costs
        in the long-term.
 
 During
        the first quarter of 2008, we also organized our software business into six
        vertical strategic business areas. These areas will focus on delivering software
        that is optimized for the specific needs of specific market segments. The
        new
        areas are: Department Store and Shopping Mall, Grocery and Supermarket,
        Specialty Retail, Fast-Moving Consumer Goods, Small-to-Medium Business and
        Key
        Accounts.
 
 We
        are
        excited about our business to business services, including www.bfuture.com.cn
        and www.jindian.com.cn that will go to market in 2008 to increase value for
        retailers and their suppliers, and we expect our B2B service business to
        contribute an increasing amount to our full-year 2008 revenue.
 
 During
        the quarter, we completed the co-development of our B2B SaaS platform with
        IBM
        China Research Lab and IBM Global service team, which we began in October,
        2007.
        In April, we launched this product as our www.bfuture.com.cn website, and
        Wangfujing Department Store Group, one of the largest department stores in
        China, became the first to use the online supply chain management platform.
        Since the launch of the website, we have brought over 1,000 suppliers to
        the
        platform, allowing them to exchange business information, arrange payment
        online
        and access purchase orders, returns, payment status, inventory levels and
        sales
        data analysis. In the future, we plan to bundle our enterprise resource planning
        platform into the bfuture.com.cn website as well. We are very excited about
        our
        first SaaS products and the synergies we see with our current software clients.
        While our SaaS model did not contribute to first quarter earnings, we believe
        that our SaaS products may contribute as much as $1.2 million to our full-year
        2008 revenue.
 
 In
        April
        2008, we launched our www.jindian.com.cn website in conjunction with Wangku.
        China Jindian is a B2B website for small to medium-size suppliers and retailers.
        The goal of the website is to help local suppliers enter into stores across
        China by giving them a platform to connect to retailers nationwide. We will
        complete the 100-day public pilot test of the website in August, but in the
        meantime, we are gathering valuable information on the specific requirements
        of
        both suppliers and retailers that we expect will help us maximize the value
        of
        the user experience for the final website.
 
 Also
        in
        April 2008, we acquired Proadvancer Systems, a leading logistics company
        operating in China and Asia. The acquisition has already brought us two
        significant contracts to retrofit Chaopi Trading Company’s distribution center
        and provide logistics software licenses and digital picking equipment to
        WuShang
        BulkSale Chain Company. The acquisition has given us a powerful logistics
        offering, and we expect Proadvancer, which is now called eFuture Logistical
        Business Unit, to be accretive in the third quarter. Additionally, we plan
        to
        have completed the major integration of our acquisition of Proadvancer Systems
        by August and expect the rest of our integration will proceed smoothly and
        provide valuable, long-term synergies.
 
 65
  In
        May
        2008, we completed the acquisition of a 51% stake in Wangku, a leading
        e-commerce company in China with a focus on the retail and fast-moving consumer
        goods industries. We expect Wangku to contribute about 15% to 20% to our
        full-year 2008 revenue.
 
 As
        we
        push forward in 2008, we plan to leverage our extensive relationships throughout
        China’s retail industry to begin offering B2C software-as-a-service, while
        continuing the rollout of new software solutions and pushing the development
        and
        adoption of our B2B SaaS platform. In the third quarter, we plan to deploy
        a B2C
        solution that will allow our clients to launch their own e-commerce websites.
 **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. In addition, we have not entered
          into
          any derivative contracts that are indexed to our own shares and classified
          as
          shareholders’ equity, or that are not reflected in our financial statements.
          Furthermore, we do not have any retained or contingent interest in assets
          transferred to an unconsolidated entity that serves as credit, liquidity
          or
          market risk support to such entity. 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.
 
 **F.**  **Tabular
          Disclosure of Contractual Obligations**
 
 The
          following table sets forth our contractual obligations as of December 31,
          2007:
 
 **Payments
                    Due By Period****Total**
                
                **Less
                    than**
                  **1
                    Year**
                
                **1-3
                    Years**
                
                **3-5
                    Years**
                
                **More
                    than**
                  **5
                    Years**Convertible
                      Notes, Net of Debt Discount
                
                ¥
                10,419,491
                
                
                -
                
                
                -
                
                ¥
                10,419,491
                
                
                -Capital
                    (Finance) Lease ObligationsOperating
                    Lease Obligations
                
                ¥
                2,700,559
                
                ¥
                2,337,662
                
                ¥
                362,897
                
                
                -
                
                
                -Purchase
                    Obligations
                
                ¥
                26,115,895
                
                ¥
                19,698,925
                
                ¥
                6,416,970
                
                
                -
                
                
                -Make-Whole
                    Obligation
                
                ¥
                10,454,198
                
                ¥
                1,164,116
                
                ¥
                6,397,605
                
                ¥
                2,892,477
                
                
                -Total
                
                ¥
                49,327,246
                
                ¥
                9,918,748
                
                ¥
                19,698,925
                
                ¥
                19,709,573
                
                
                -
  **Item
          6.**   **Directors,
          Senior Management and Employees** ****
  **A.**
                **Directors
                    and Senior Management**
  66
 The
          following table sets forth our executive officers and directors, their
          ages and
          the positions held by them as of June 27, 2008:
 
 **Name**
                
                **Age**
                
                **Position**Adam
                    Yan (1)(8)
                
                40
                
                Chairman,
                    Chief Executive Officer, Director and FounderDeliang
                    Tong (1)
                
                43
                
                Chief
                    Operating OfficerQicheng
                    Yang (1)
                
                42
                
                Chief
                    Technology Officer and FounderHongjun
                    Zou (1)
                
                40
                
                Chief
                    Innovation Officer and FounderPing
                    Yu (1)(7)
                
                38
                
                Chief
                    Financial Officer and DirectorTony
                    Zhao (1)
                
                43
                
                Vice
                    President and Chief Strategy OfficerMing
                    Zhu (2)(9)
                
                49
                
                DirectorDong
                    Cheng, Ph.D. (1)(3)(4)(5)(9)
                
                40
                
                DirectorJohn
                    Dai (1)(4)(5)(8)
                
                45
                
                DirectorDennis
                    O. Laing(3)(5)(6)(7)
                
                62
                
                DirectorBrian
                    Lin (1)(3)(4)(9)
                
                43
                
                Director
 
 (1)
                The
                    individual’s business address is c/o eFuture Information Technology Inc.,
                    No. 10 Building, BUT Software Park, No. 1 Disheng NorthStreet,
                    BDA, Yizhuang District, Beijing, People’s Republic of China
                    100176.
 (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 2008.
 (9)
                Class
                    I director whose term expires in 2009.
 
 *Adam
          Yan.* Mr.
          Yan ** is
          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 been nominated to serve as our chief operating officer beginning
          on
          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.
 
 67
  *Hongjun
          Zou.* Mr.
          Zou
          is our 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. Ping Yu is our Company’s Chief Financial Officer and is a United
            States-educated Certified Public Accountant. She received a bachelor’s degree
            from Hubei University and a master’s degree in Business Administration from
            Rutgers University. From 1993 to 2001, Ms. Yu served various positions in
            different corporations, including service as a Senior Accountant of Longchamp
            Sales Corp. (August 1993 - June 1996), a Senior Analyst of Citi Industrial
            Bank
            (July 1996 - September 1999), and Chief Officer of the Accounting Department
            of
            Walkalone Real Estate Co. (October 1999 - April 2001). In 2001, Ms. Yu
            received her master’s degree and began work as an auditor for Golf &
Wrobleski in New York (September 2002 - February 2004). In 2004, on returning
            to
            China, Ms. Yu served as manager of the internal auditing section of
            Dongfeng Nissan (February 2004 - June 2005), where she was responsible
            for
            internal control and risk management tasks. Before being employed by
            eFuture,
            Ms. Yu served as a specialist in Beijing Smartdot Technologies, Inc. (July
            2005 - December 2006), providing consultation to companies listed in
            the United
            States on meeting the requirements of the Sarbanes-Oxley Act as well
            as helping
            companies implement the COSO-Enterprise Risk Management-Integrated framework.
 
 *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 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.
 
 *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.
 
 68
 *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 business and 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 was initially appointed to the Board of
              Directors to fill a vacancy left by the resignation of Mr. L. McCarthy
              Downs III
              upon the termination of appointment rights held by Anderson & Strudwick
              Incorporated received in connection with its service as underwriter
              in our
              initial public offering. 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.
  69
 **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,
                2007.
  **Summary
                  Compensation Table**
  **Annual
                            Compensation for Year Ended December 31, 2007****Ordinary****Shares****Underlying**
                        
                        **Other
                            Annual**
                        
                        **All
                            Other****Name**
                        
                        **Salary**
                        
                        **Bonus**
                        
                        **Options**
                        
                        **Compensation**
                        
                        **Compensation**Adam
                            Yan
                        
                        ¥
                        250,972.80
                        
                        $
                        56,087.72
                        
                        
                        3,875
                        
                        
                        —
                        
                        
                        —Chairman,
                            Chief Executive Officer and DirectorDeliang
                            Tong(1)
                        
                        ¥
                        —
                        
                        
                        —
                        
                        
                        —Qicheng
                            Yang
                        
                        ¥
                        251,520.00
                        
                        ¥
                        82,756.33
                        
                        
                        4,000
                        
                        
                        —
                        
                        
                        —Chief
                            Technology OfficerHongjun
                            Zou
                        
                        ¥
                        246,120.00
                        
                        ¥
                        37,961.92
                        
                        
                        4,000
                        
                        
                        —
                        
                        
                        —Chief
                            Innovation OfficerPing
                            Yu
                        
                        ¥
                        228,000.00
                        
                        
                        —
                        
                        
                        10,000
                        
                        
                        —
                        
                        
                        —Chief
                            Financial Officer and DirectorTony
                            Zhao(2)
                        
                        ¥
                        —
                        
                        
                        —
                        
                        
                        —Ming
                            Zhu
                        
                        ¥
                        43,767.60
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —DirectorDong
                            Cheng, Ph.D.
                        
                        ¥
                        43,767.60
                        
                        
                        —
                        
                        
                        12,000
                        
                        
                        —
                        
                        
                        —DirectorJohn
                            Dai
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —DirectorDennis
                            O. Laing
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —DirectorBrian
                            Lin
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —Tong
                            Wenhua(3)
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —Wang
                            Chaoyong(4)
                        
                        ¥
                        44,020.55
                        
                        
                        —
                        
                        
                        12,000
                        
                        
                        —
                        
                        
                        —
  (1)
                        Mr.Tong
                            has been nominated to serve as Chief Operating Officer
                            in 2008 but did not
                            receive any compensation in 2007 for service as a member
                            of senior
                            management.
 (2)
                        Dr.
                            Zhao has been nominated to serve as Vice President and
                            Chief Strategy
                            Officer in 2008 but did not receive any compensation
                            in 2007 for service
                            as a member of senior management.
 (3)
                        Mr.
                            Tong served as a director for part of
                            2007.
 (4)
                        Mr.
                            Wang served as a director for part of
                            2007.
  **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.
  70
  *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.
 
 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 2008 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.
 
 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 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.
  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.
  71
 **D.**  **Employees**
  As
                of
                December 31, 2007, we had 588 employees, all of whom were based in
                China. Of the
                total, five were in management, 118 **** were
                in
                technical support, 110 were in research and development, 89 were
                engaged in
                sales and marketing, and 14 were in financial affairs and administration.
                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, 2006 and 2005, we had 331 and 284 employees,
                respectively.
  **E.**  **Share
                ownership**
  The
                following table sets forth information with respect to beneficial
                ownership of
                our ordinary shares and options as of June 27, 2008, 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 2,995,552 shares outstanding as of June 27, 2008. These
                shareholders
                do not possess voting rights that differ from our other
                shareholders.
 
 **Amount
                          of****Beneficial**
                      
                      **Percentage****Ownership
                          (1)**
                      
                      **Ownership
                          (2)**Adam
                          Yan (3)
                      
                      
                      387,275
                      
                      
                      12.9
                      %Deliang
                          Tong
                      
                      
                      35,544
                      
                      
                      *Qicheng
                          Yang (4)
                      
                      
                      115,709
                      
                      
                      3.9
                      %Hongjun
                          Zou (5)
                      
                      
                      216,622
                      
                      
                      7.2
                      %Johnson
                          Li (6)
                      
                      
                      188,455
                      
                      
                      6.3
                      %Tony
                          Zhao
                      
                      
                      —
                      
                      
                      *Ping
                          Yu (7)
                      
                      
                      2,000
                      
                      
                      *Dennis
                          O. Laing
                      
                      
                      —
                      
                      
                      *Ming
                          Zhu
                      
                      
                      —
                      
                      
                      *Dong
                          Cheng, Ph.D. (7)
                      
                      
                      2,400
                      
                      
                      *Dennis
                          O. Laing
                      
                      
                      —
                      
                      
                      *Brian
                          Lin
                      
                      
                      —
                      
                      
                      *All
                          directors and executive officers as a group (12 people)
                          (8)
                      
                      
                      948,005
                      
                      
                      30.9
                      %
 
 *
                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
                          options held by such person.
 (3)
                      Includes
                          currently exercisable options to purchase 3,847 ordinary
                          shares.
 (4)
                      Includes
                          currently exercisable options to purchase 3,577 ordinary
                          shares.
 (5)
                      Includes
                          currently exercisable options to purchase 3,379 ordinary
                          shares.
 (6)
                      Includes
                          currently exercisable options to purchase 13,180 ordinary
                          shares.
 (7)
                      Represents
                          currently exercisable options to purchase ordinary
                          shares.
 (8)
                      Includes
                          currently exercisable options to purchase 28,383 ordinary
                          shares.
  72
 **Stock
              Option Plan and Grants**
 
 For
              the
              year ended December 31, 2007, the Company granted 131,675 share options
              to its
              employees and directors. The Company recognizes the relevant share-based
              compensation expenses over the requisite service  period.
  **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 June 27, 2008, 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 2,995,552 shares outstanding as of June 27, 2008. These
              shareholders
              do not possess voting rights that differ from our other
              shareholders.
 
 **Amount of****Beneficial**
                    
                    **Percentage****Ownership
                        (1)**
                    
                    **Ownership
                        (2)**Adam
                        Yan (3)
                    
                    
                    387,275
                    
                    
                    12.9
                    %Hongjun
                        Zou (4)
                    
                    
                    216,622
                    
                    
                    7.2
                    %Johnson
                        Li (5)
                    
                    
                    188,455
                    
                    
                    6.3
                    %Capital
                        Ventures International
                    
                    
                    207,086
                    
                    
                    6.9
                    %Hudson
                        Bay Fund, LP
                    
                    
                    194,489
                    
                    
                    6.5
                    %Hudson
                        Bay Overseas Fund Ltd.
                    
                    
                    237,772
                    
                    
                    7.9
                    %James
                        H. Wallace Jr.
                    
                    
                    166,000
                    
                    
                    5.5
                    %
  
 (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 3,847 ordinary
                        shares.
 (4)
                    Includes
                        currently exercisable options to purchase 3,379 ordinary
                        shares.
 (5)
                    Includes
                        currently exercisable options to purchase 13,180 ordinary
                        shares.




**B.**  **Related
        party transactions**
 
 The
        Company did not enter into any related party transactions in the fiscal year
        ended December 31, 2007.
  **C.**  **Interests
        of experts and counsel**
  Not
        applicable.
  73
  **Item
        8.** **Financial
        Information**
  See
        information provided in response to Item 18 below.
  **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
                
                Low2006
                
                
                49.9
                
                
                6.75Fourth
                    Quarter 2006
                
                
                49.9
                
                
                6.752007
                
                
                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
                    (through June 27, 2008)
                
                
                19.44
                
                
                10.79First
                    Quarter 2008
                
                
                19.44
                
                
                10.79Second
                    Quarter 2008
                
                
                18.43
                
                
                10.88January
                    2008
                
                
                19.44
                
                
                10.79February
                    2008
                
                
                13.34
                
                
                12.52March
                    2008
                
                
                14.67
                
                
                11.55April
                    2008
                
                
                17.74
                
                
                13.35May
                    2008
                
                
                18.43
                
                
                15.21June
                    2008 (through June 27, 2008)
                
                
                17.47
                
                
                10.88
  **B.**  **Plan
        of distribution**
  Not
        applicable.
  **C.**  **Markets**
  Our
        ordinary shares are listed on the NASDAQ Capital Market under the symbol
        “EFUT.”
  74
 **D.**  **Selling
          shareholders**
  Not
          applicable.
  **A.**
                **Dilution**
  Not
          applicable.
  **F.**  **Expenses
          of the issue**
  Not
          applicable.
  **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.
 ·
                Securities
                    Purchase Agreement dated as of March 13, 2007 by and among the
                    Company,
                    Capital Ventures International, Hudson Bay Fund, LP and Hudson
                    Bay
                    Overseas Fund, Ltd.
   ·
                In
                    January 2007, we acquired****Nanjing****Tangcheng
                    Network Technology Development Corporation, a leading regional
                    independent
                    software vendor focusing on East China’s retail market. We expect that
                    this acquisition will allow us to respond quickly to meet regional
                    market
                    demands, improve customer service and expand our market share
                    in Eastern
                    China.
   ·
                In
                    August 2007, we acquired****Crownhead
                    and its subsidiary Guangzhou Royalstone.****With
                    a senior operating team and extensive relationships, most notably
                    in the
                    supermarket sector of Southern China’s retail and FMCG industries, we
                    expect that this acquisition will increase our market share among
                    China’s
                    top 100 domestic retailers and leading international retail companies.
  75
  **D.**  **Exchange
          controls**
  *Foreign
          Currency Exchange* . ******
  The
          principal regulations governing foreign currency exchange in China are
          the
          Foreign Exchange Administration Regulations (1996), as amended, 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).
  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.
  76
  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.
   We
          believe that, based on our understanding of the current PRC laws and
          regulations:
  ·
                CSRC
                    currently has not issued any definitive rule or interpretation
                    concerning
                    whether offerings like ours under this prospectus are subject
                    to this new
                    procedure; and
 ·
                In
                    spite of the above, given that we have completed our restructuring
                    and
                    established an offshore holding structure before September 8, 2006,
                    the effective date of the new regulation, and given that this
                    regulation
                    is not retroactive, it does not require that an application be
                    submitted
                    to CSRC for its approval of the listing and trading of our ordinary
                    shares
                    on the NASDAQ Capital Market, unless we are clearly required
                    to do so by
                    future CSRC rules or
                    interpretations.
 
 **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.
  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
   77
  ·
                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;
   78
  ·
                an
                    estate the income of which is subject to U.S. federal income
                    taxation
                    regardless of its source; or
 ·
                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 your 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:
  79
  ·
                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:
 ·
                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.
  80
  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 U.S. 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.
  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.
  81
  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.


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.
  82
  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 payor, 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.gov* ** that
        contains reports, proxy statements and other information regarding registrants
        that file electronically with the SEC.


**I.**
              **Subsidiary
                  Information**
  Not
        applicable.
  83
  **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. If the Renminbi depreciates against the U.S. dollar, the value
        of our
        Renminbi revenues and assets as expressed in U.S. dollars in our financial
        statements will decline. 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 1.8%, 1.5% and 4.8% in 2005, 2006 and
        2007, 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*
  Under
        the
        current law of the Cayman Islands, we are not subject to tax on income or
        capital gain. However, our revenues are primarily derived from our Chinese
        subsidiaries. Chinese foreign invested enterprises are generally subject
        to a
        30.0% federal (state) enterprise income tax, and a 3.0% local enterprise
        income
        tax. However, eFuture Beijing has been certified by the Chinese government
        as a
        High Technology Enterprise. This certification entitled eFuture Beijing to
        be
        exempt from federal enterprise tax from 2000 through 2002, to pay a federal
        enterprise tax of 7.5% from 2003 through 2005, to pay a federal enterprise
        tax
        thereafter of 15% and to be exempt from local income taxes, all for so long
        as
        eFuture Beijing maintains its High Technology Enterprise certification and
        for
        so long as it remains located in a State Standard High Enterprise Zone. In
        addition, eFuture Beijing is allowed a deduction for operating loss carry
        forwards for up to five years because it has foreign invested capital.
 On
          March
          16, 2007, the National People’s Congress of China passed the new Enterprise
          Income Tax Law, (“EIT Law”), and on December 6, 2007, the State Council of China
          issued the Implementation Regulations for the EIT Law which took effect
          on
          January 1, 2008. The EIT Law and Implementation Regulations Rules impose a
          unified EIT of 25.0% on all domestic-invested enterprises and Foreign Invested
          Entities, or FIEs, unless they qualify under certain limited
          exceptions.  Therefore,
          nearly all FIEs are subject to the new tax rate alongside other domestic
          businesses rather than benefiting from the old FIE tax laws, and its associated
          preferential tax treatments, beginning January 1, 2008.
 
 Despite
          these pending changes, the EIT Law gives existing FIEs a five-year grandfather
          period during which they can continue to enjoy their existing preferential
          tax
          treatments. The discontinuation of any such special or preferential tax
          treatment or other incentives would have an adverse affect on the Company’s
          business, fiscal condition and current operations in China.
  84
 Our
          software and system integration services revenues are also subject to a
          value-added tax at the rate of 17.0%.
  **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, 2007. 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*
 
 The
        Management conducted its evaluation of disclosure controls and procedures
        under
        the supervision of our Chief Executive Officer and our Chief Financial Officer.
        Management assessed the effectiveness of our internal control over financial
        reporting as of December 31, 2007. 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 as
        of
        December 31, 2007, our disclosure controls and procedures were not effective,
        due to the existence of internal control deficiencies discussed
        below:
 
 85
  Inadequate
        U.S. GAAP expertise - The current staff in the accounting department is
        relatively new and inexperienced in working with U.S. GAAP requirements,
        and
        needs substantial training so as to meet with the higher demands of being
        a U.S.
        public company. The accounting skills and understanding necessary to fulfill
        the
        requirements of U.S. GAAP-based reporting, including the skills of subsidiary
        financial statements consolidation, are currently inadequate .
 
 *Remediation
        Initiative*
 
 We
        have
        recently been seeking a U.S. GAAP experienced chief accountant to replace
        the
        current staff, and we intend to strengthen the accounting capabilities in
        several key areas including persons with experience in U.S. GAAP consolidation
        requirements and SEC financial reporting requirements. In addition, we plan
        to
        allocate additional resources to train our existing accounting
        staff.
 
 Management
        assessed the effectiveness of our internal control over financial reporting
        as
        of December 31, 2007. 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 as of December 31, 2007, the company
        has the following deficiencies:
 
 ·
              An
                  insufficient complement of internal personnel with a
                  level of accounting knowledge, experience and
                  training in the application of U.S. GAAP commensurate with our
                  financial requirements.
 ·
              Lack
                  of internal information system management function. The Company
                  has not
                  set up a qualified mechanism to perform the information system
                  management
                  properly.
 
 We
        are in
        the process of hiring and training of personnel with knowledge, experience
        and
        training in the application of U.S.  GAAP commensurate with our
        financial reporting requirements; and
 
 We
        are in
        the progress of building up the mechanism to meet the function, we have set
        up
        the information system management department and named the manager of this
        department, and several related internal policies and procedures on information
        system management have been published and circulated across the company
        recently. We will hire more professional personnel working on the subject
        when
        there is further demand.
 
 Despite
        of the deficiencies reported above, the Company’s management believes that
        consolidated financial statements included in this report fairly present
        in all
        material respects the Company’s financial condition, results of operations and
        cash flows for the periods presented and that this report does not contain
        any
        untrue statement of a material fact or omit to state a material fact necessary
        to make the statements made, in light of the circumstances under which such
        statements were made, not misleading with respect to the period covered by
        this
        report.
 
 86
  *Changes
        in Internal Controls over Financial Reporting*
 
 Other
        than the remediation measures described above, during the year ended December 31,
        2007 ,
        there
        was no change in our internal controls over financial reporting that has
        materially affected, or that is 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 also determined that each
        member of the Audit Committee is “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 officers. 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.
 No.
        10
        Building
 BUT
        Software Park
 No.
        1
        Disheng North Street
 BDA,
        Yizhuang District
 Beijing
        100176, People’s Republic of China
 Attention:
        Secretary
  **Item
        16C.**  **Principal
        Accountant Fees and Services**
  *Audit
        Fees*
  We
        paid
        Hansen, Barnett & Maxwell’s fees in the aggregate amounts of $100,000 and
        $60,000 for the annual audit of our financial statements for fiscal years
        2007
        and 2006, respectively.
  87




*Audit
      Related Fees*




We
      paid
      Hansen, Barnett & Maxwell $15,000 and $20,000 for audit-related services for
      fiscal years 2007 and 2006, 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.




*Tax
      Fees*




We
      did
      not pay Hansen, Barnett & Maxwell any fees for tax services for fiscal years
      2007 and 2006, 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.




**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)




88





4.2
            Registration
                Rights Agreement, dated March 13, 2007 by and among the Company,
                CVI, HBF
                and HBOF4.3
            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)99.1
            Schedule
                II – Valuation and Qualifying Accounts
                (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.




89




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 28th day of June,
      2008.





**EFUTURE
                INFORMATION TECHNOLOGY INC.**By:
            /s/
                Adam YanName:
            Adam
                YanTitle:
            Chairman
                and Chief Executive OfficerDate:June
              28, 2008




S-1





**EFUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**





**INDEX
      TO FINANCIAL STATEMENTS**





**Page**Report
                of Independent Registered Public Accounting Firm
            F-3Consolidated
                Balance Sheets as of December 31, 2006 and 2007
            F-4Consolidated
                Statements of Operations for the Years Ended December 31, 2005, 2006
                and
                2007
            F-6Consolidated
                  Statements of Stockholders’ Equity (Deficit) for the Years Ended December
                  31, 2005, 2006 and 2007
            F-7Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2005, 2006
                and
                2007
            F-8Notes
                to Consolidated Financial Statements
            F-10




S-2





**HANSEN,
                BARNETT & MAXWELL, P.C.**A
                Professional CorporationCERTIFIED
                PUBLIC ACCOUNTANTS
            
            **Registered
                with the Public Company**5
                Triad Center, Suite 750
            
            **Accounting
                Oversight Board**Salt
                Lake City, UT 84180-1128Phone:
                (801) 532-2200Fax:
                (801) 532-7944www.hbmcpas.com




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and the Shareholders


eFuture
      Information Technology Inc.





We
      have
      audited the accompanying consolidated balance sheets of eFuture Information
      Technology Inc. and subsidiaries as of December 31, 2006 and 2007, and the
      related consolidated statements of operations, stockholders’ equity (deficit),
      and cash flows for each of the three years in the period ended December 31,
      2007
      presented in Chinese Yuan (Renminbi). 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 audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      consolidated 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 audits 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 consolidated financial statements. An audit also includes
      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
      Technology Inc. and subsidiaries as of December 31, 2007 and 2006 and the
      results of their operations and their cash flows for each of the three years
      in
      the period ended December 31, 2007 presented in Chinese Yuan (Renminbi), in
      conformity with accounting principles generally accepted in the United States
      of
      America.





**HANSEN,
      BARNETT & MAXWELL, P.C.**





Salt
      Lake
      City, Utah


June
      24,
      2008


F-3





**EFUTURE
      INFORMATION TECHNOLOGY INC. AND **SUBSIDIARIES****


**CONSOLIDATED
      BALANCE SHEETS**





**Chinese Yuan (Renminbi)**
            
            **U.S. Dollars****December 31,**
            
            **December 31,****2006**
            
            **2007**
            
            **2007****(Unaudited)****ASSETS****Current
                assets**Cash
                and cash equivalents
            
            ¥
            61,464,737
            
            ¥
            67,227,348
            
            $
            9,216,043Trade
                receivables, less allowance for doubtful accounts of ¥2,109,910 and
                ¥4,695,898 ($643,750), respectively
            
            
            4,452,959
            
            
            16,409,333
            
            
            2,249,518Refundable
                value added tax
            
            
            2,470,941
            
            
            3,691,035
            
            
            505,996Deposits
            
            
            44,943
            
            
            156,695
            
            
            21,481Advances
                to employees
            
            
            1,198,601
            
            
            3,576,947
            
            
            490,355Advances
                to suppliers
            
            
            443,030
            
            
            657,724
            
            
            90,166Notes
                receivable - related party
            
            
            -
            
            
            3,000,000
            
            
            411,263Other
                receivables
            
            
            171,120
            
            
            576,965
            
            
            79,095Prepaid
                expenses
            
            
            534,755
            
            
            862,653
            
            
            118,259Inventory
            
            
            4,121,136
            
            
            5,749,951
            
            
            788,248**Total
                current assets**
            
            
            74,902,222
            
            
            101,908,651
            
            
            13,970,424**Non-current
                assets**Long-term
                investments
            
            
            -
            
            
            5,460,301
            
            
            748,540Deferred
                loan costs
            
            
            -
            
            
            4,847,633
            
            
            664,551Property
                and equipment, net of accumulated depreciation of ¥4,690,856 and
                ¥5,191,489 ($711,689), respectively
            
            
            1,014,581
            
            
            2,065,040
            
            
            283,092Intangible
                assets, net of accumulated amortization of ¥8,678,751 and ¥19,799,245
                ($2,714,233), respectively
            
            
            7,108,244
            
            
            47,217,193
            
            
            6,472,896Goodwill
            
            
            -
            
            
            46,814,929
            
            
            6,417,751**Total
                non-current assets**
            
            
            8,122,825
            
            
            106,405,096
            
            
            14,586,830**Total
                assets**
            
            ¥
            83,025,047
            
            ¥
            208,313,747
            
            $
            28,557,254





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. Dollars****December 31,**
              
              **December 31,****2006**
              
              **2007**
              
              **2007****(Unaudited)****LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****Current
                  liabilities**Trade
                  accounts payable
              
              ¥
              1,230,782
              
              ¥
              3,845,873
              
              $
              527,222Other
                  payable
              
              
              -
              
              
              844,753
              
              
              115,805Accrued
                  expenses
              
              
              3,941,618
              
              
              3,395,790
              
              
              465,521Accrued
                  interest
              
              
              -
              
              
              278,420
              
              
              38,168Taxes
                  payable
              
              
              5,182,615
              
              
              8,976,305
              
              
              1,230,541Advances
                  from customers
              
              
              8,121,043
              
              
              13,025,978
              
              
              1,785,701Royalstone
                  acquisition obligation, current portion
              
              
              -
              
              
              16,398,925
              
              
              2,248,091Health
                  Filed acquisition obligation
              
              
              -
              
              
              3,300,000
              
              
              452,389Make-whole
                  obligation, current portion
              
              
              -
              
              
              1,164,116
              
              
              159,586**Total
                  current liabilities**
              
              
              18,476,058
              
              
              51,230,160
              
              
              7,023,024**Long-term
                  liabilities**Royalstone
                  acquisition obligation, net of current portion
              
              
              -
              
              
              6,416,970
              
              
              879,688Make-whole
                  obligation, net of current portion
              
              
              -
              
              
              9,290,082
              
              
              1,273,55612%
                  ¥36,473,000 ($5,000,000) convertible note payable, net of ¥26,053,509
                  ($3,571,616) of unamortized discount based on an imputed interest
                  rate of
                  28.9%
              
              
              -
              
              
              10,419,491
              
              
              1,428,384Deferred
                  Tax
              
              
              -
              
              
              5,282,076
              
              
              724,108**Total
                  long-term liabilities**
              
              
              -
              
              
              31,408,619
              
              
              4,305,736**Shareholders’
                  equity**Ordinary
                  shares, $0.0756 U.S. dollars par value; 6,613,756 sharesauthorized;
                  2,633,500 shares and 2,924,702 shares outstanding,
                  respectively
              
              
              1,647,781
              
              
              1,811,589
              
              
              248,347Additional
                  paid-in capital
              
              
              77,726,236
              
              
              165,678,075
              
              
              22,712,428Statutory
                  reserves
              
              
              3,084,020
              
              
              3,084,020
              
              
              422,781Accumulated
                  foreign currency translation adjustment
              
              
              (491,079
              )
              
              -
              
              
              -Accumulated
                  deficit
              
              
              (17,417,969
              )
              
              (44,898,716
              )
              
              (6,155,062
              )**Total
                  shareholders’ equity**
              
              
              64,548,989
              
              
              125,674,968
              
              
              17,228,494**Total
                  liabilities and shareholders’ equity**
              
              ¥
              83,025,047
              
              ¥
              208,313,747
              
              $
              28,557,254





See
      the
      accompanying notes to consolidated financial statements.


F-5





**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND** **SUBSIDIARIES**


**CONSOLIDATED
      INCOME STATEMENTS**





**Chinese Yuan (Renminbi)**
            
            **U.S. Dollars****For the****Year Ended****For the Years Ended December 31,**
            
            **December 31,****2005**
            
            **2006**
            
            **2007**
            
            **2007****(Unaudited)****Revenues**Software
                sales
            
            ¥
            25,177,810
            
            ¥
            29,832,720
            
            ¥
            41,360,165
            
            $
            5,669,970Hardware
                sales
            
            
            10,241,749
            
            
            11,403,473
            
            
            16,198,402
            
            
            2,220,602Service
                fee income
            
            
            3,824,442
            
            
            6,607,337
            
            
            26,511,794
            
            
            3,634,441**Total
                Revenues**
            
            
            39,244,001
            
            
            47,843,530
            
            
            84,070,361
            
            
            11,525,013**Cost
                of revenues**Cost
                of software
            
            
            7,815,315
            
            
            7,665,866
            
            
            15,412,948
            
            
            2,112,926Cost
                of hardware
            
            
            8,681,619
            
            
            10,548,649
            
            
            12,587,418
            
            
            1,725,580Cost
                of service fee income
            
            
            901,973
            
            
            1,887,676
            
            
            6,857,161
            
            
            940,032Amortization
                of acquired technology
            
            
            -
            
            
            -
            
            
            8,231,375
            
            
            1,128,420Amortization
                of software costs
            
            
            2,305,835
            
            
            2,727,198
            
            
            2,889,118
            
            
            396,063**Total
                Cost of Revenue**
            
            
            19,704,742
            
            
            22,829,389
            
            
            45,978,020
            
            
            6,303,021**Gross
                Profit**
            
            
            19,539,259
            
            
            25,014,141
            
            
            38,092,341
            
            
            5,221,992**Operating
                Expenses**Research
                and development
            
            
            93,814
            
            
            527,219
            
            
            436,923
            
            
            59,897General
                and administrative
            
            
            7,811,742
            
            
            7,298,980
            
            
            18,957,385
            
            
            2,598,824Selling
                and distribution expenses
            
            
            5,790,675
            
            
            9,210,975
            
            
            11,755,517
            
            
            1,611,537**Total
                Operating Expenses**
            
            
            13,696,231
            
            
            17,037,174
            
            
            31,149,825
            
            
            4,270,258**Profit
                from operations**
            
            
            5,843,028
            
            
            7,976,967
            
            
            6,942,516
            
            
            951,734**Interest
                income**
            
            
            110,268
            
            
            141,230
            
            
            3,533,326
            
            
            484,376**Interest
                expense**
            
            
            (483,033
            )
            
            (13,471
            )
            
            (841,277
            )
            
            (115,329
            )**Interest
                expense- amortization of discount on notes
                payable**
            
            
            -
            
            
            -
            
            
            (31,320,836
            )
            
            (4,293,702
            )**Interest
                expense- amortization of deferred loan costs**
            
            
            -
            
            
            -
            
            
            (6,610,234
            )
            
            (906,182
            )**Income
                on investments**
            
            
            -
            
            
            -
            
            
            985,085
            
            
            135,043**Foreign
                currency exchange loss**
            
            
            -
            
            
            -
            
            
            (201,847
            )
            
            (27,671
            )**Minority
                interest in loss of consolidated subsidiary**
            
            
            -
            
            
            -
            
            
            32,520
            
            
            4,458**Net
                Income (loss)**
            
            ¥
            5,470,263
            
            ¥
            8,104,726
            
            ¥
            (27,480,747
            )
            $
            (3,767,273
            )**Earnings
                (loss) per ordinary share**Basic
            
            ¥
            4.43
            
            ¥
            4.80
            
            ¥
            (10.23
            )
            $
            (1.40
            )Diluted
            
            ¥
            3.50
            
            ¥
            4.43
            
            ¥
            (10.23
            )
            $
            (1.40
            )





See
      the
      accompanying notes to consolidated financial statements.


F-6





**E-FUTURE
        INFORMATION TECHNOLOGY INC. AND** **SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**


**Chinese
                  Yuan (Renminbi)****Additional**
              
              
              
              
              
              **Accumulated Other****Ordinary Shares**
              
              **Paid-in**
              
              **Statutory**
              
              **Subscriptions**
              
              **Comprehensive**
              
              **Accumulated****Shares**
              
              **Amount**
              
              **Capital**
              
              **Reserves**
              
              **Receivable**
              
              **Loss**
              
              **Deficit**
              
              **Total**Balance as of December 31, 2004
              
              
              921,875
              
              ¥
              576,817
              
              ¥
              1,235,759
              
              ¥
              2,263,481
              
              ¥
              (575,722
              )
              ¥
              -
              
              ¥
              (30,172,419
              )
              ¥
              (26,672,084
              )Conversion of Series A preferred stock
              
              
              578,125
              
              
              361,733
              
              
              30,222,260
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              30,583,993Contributed
                  interest
              
              
              -
              
              
              -
              
              
              236,742
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              236,742Forgiveness
                  of debt by majority shareholder
              
              
              -
              
              
              -
              
              
              1,897,682
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,897,682Payment
                  of subscription receivable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              575,722
              
              
              -
              
              
              -
              
              
              575,722Transfer
                  to statutory reserves
              
              
              -
              
              
              -
              
              
              -
              
              
              820,539
              
              
              -
              
              
              -
              
              
              (820,539
              )
              
              -Net
                  income for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5,470,263
              
              
              5,470,263Balance
                  as of December 31, 2005
              
              
              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
              )
              
              64,548,989Issuance
                  of warrants in connection with convertible notes
              
              
              
              
              
              
              
              
              26,460,829
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              26,460,829Beneficial
                  conversion feature of convertible notes
              
              
              
              
              
              
              
              
              11,874,760
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,874,760Conversion
                  of convertible notes
              
              
              200,080
              
              
              113,445
              
              
              37,386,555
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              37,500,000Issuance
                  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
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (27,480,747
              )
              
              (27,480,747
              )Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              491,079
              
              
              -
              
              
              491,079Balance
                  as of December 31,2007
              
              
              2,924,702
              
              ¥
              1,811,589
              
              ¥
              165,678,075
              
              ¥
              3,084,020
              
              ¥
              -
              
              ¥
              -
              
              ¥
              (44,898,716
              )
              ¥
              125,674,968




**U.S.
                  Dollars**
                **(Unaudited)****Additional**
              
              
              
              
              
              **Accumulated Other****Ordinary Shares**
              
              **Paid-in**
              
              **Statutory**
              
              **Subscriptions**
              
              **Comprehensive**
              
              **Accumulated****Shares**
              
              **Amount**
              
              **Capital**
              
              **Reserves**
              
              **Receivable**
              
              **Loss**
              
              **Deficit**
              
              **Total**Balance as
                  of December 31, 2006
              
              
              2,633,500
              
              $
              225,891
              
              $
              10,655,312
              
              $
              422,781
              
              $
              -
              
              $
              (67,321
              )
              $
              (2,387,789
              )
              $
              8,848,874Issuance
                  of warrants in connection with convertible notes
              
              
              
              
              
              
              
              
              3,627,454
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,627,454Beneficial
                  conversion feature of convertible notes
              
              
              
              
              
              
              
              
              1,627,884
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,627,884Conversion
                  of convertible notes
              
              
              200,080
              
              
              15,552
              
              
              5,125,237
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5,140,789Issuance
                  of ordinary shares in Royalstone acquisition
              
              
              71,122
              
              
              5,377
              
              
              1,167,540
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,172,917Warrants
                  exercised
              
              
              20,000
              
              
              1,527
              
              
              143,922
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              145,449Issuance
                  of options to employees
              
              
              -
              
              
              -
              
              
              365,079
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              365,079Net
                  loss for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,767,273
              )
              
              (3,767,273
              )Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              67,321
              
              
              -
              
              
              67,321Balance
                  as of December 31, 2007
              
              
              2,924,702
              
              $
              248,347
              
              $
              22,712,428
              
              $
              422,781
              
              $
              -
              
              $
              -
              
              $
              (6,155,062
              )
              $
              17,228,494




See
      the
      accompanying notes to consolidated financial statements.




F-7




**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**Chinese
                    Yuan (Renminbi)**
                
                **U.S.
                    Dollars****For
                    the****Year
                    Ended****For
                    the Years Ended December 31,**
                
                **December
                    31,****2005**
                
                **2006**
                
                **2007**
                
                **2007****(Unaudited)****Cash
                    flows from operating activities:**Net
                    income (loss)
                
                ¥
                5,470,263
                
                ¥
                8,104,726
                
                ¥
                (27,480,747
                )
                $
                (3,767,273
                )Adjustments
                    to reconcile net income (loss) to net cash provided by (used
                    in) operating
                    activities:Depreciation
                
                
                574,954
                
                
                679,876
                
                
                500,633
                
                
                68,631Amortization
                    of intangible assets
                
                
                2,305,835
                
                
                2,727,198
                
                
                11,120,493
                
                
                1,524,483Amortization
                    of discount on notes payable
                
                
                -
                
                
                -
                
                
                31,320,836
                
                
                4,293,702Amortization
                    of deferred loan costs
                
                
                -
                
                
                -
                
                
                6,610,234
                
                
                906,182Investment
                    income
                
                
                -
                
                
                -
                
                
                (985,085
                )
                
                (135,043
                )Loss
                    on disposition of property and equipment
                
                
                8,759
                
                
                -
                
                
                -
                
                
                -Interest
                    on notes payable contributed by shareholders
                
                
                236,742
                
                
                -
                
                
                -
                
                
                -Compensation
                    expense for options issued to employees
                
                
                -
                
                
                -
                
                
                2,663,105
                
                
                365,079Foreign
                    exchange loss
                
                
                -
                
                
                -
                
                
                93,622
                
                
                12,834Minority
                    interest
                
                
                -
                
                
                -
                
                
                (32,520
                )
                
                (4,458
                )Change
                    in assets and liabilities:
                
                
                
                
                
                
                
                
                
                
                
                -Accounts
                    receivable
                
                
                126,677
                
                
                (664,562
                )
                
                (10,352,076
                )
                
                (1,419,142
                )Refundable
                    value added tax
                
                
                119,659
                
                
                72,593
                
                
                (1,220,094
                )
                
                (167,260
                )Deposits
                
                
                5,976
                
                
                466,458
                
                
                (111,752
                )
                
                (15,320
                )Advances
                    to employees
                
                
                84,682
                
                
                (162,781
                )
                
                (2,378,346
                )
                
                (326,042
                )Advances
                    to suppliers
                
                
                240,220
                
                
                (334,840
                )
                
                (214,694
                )
                
                (29,432
                )Other
                    receivables
                
                
                54,001
                
                
                60,552
                
                
                537,784
                
                
                73,724Prepaid
                    expenses
                
                
                (474,112
                )
                
                (66,189
                )
                
                (291,548
                )
                
                (39,968
                )Inventories
                
                
                (711,057
                )
                
                25,277
                
                
                265,645
                
                
                36,417Trade
                    payables
                
                
                1,252,205
                
                
                208,096
                
                
                1,827,696
                
                
                250,555Other
                    payables
                
                
                -
                
                
                -
                
                
                (1,013,731
                )
                
                (138,970
                )Accrued
                    expenses
                
                
                (1,811,714
                )
                
                (101,711
                )
                
                340,012
                
                
                46,611Accrued
                    interest
                
                
                -
                
                
                -
                
                
                278,420
                
                
                38,168Taxes
                    payable
                
                
                358,033
                
                
                (482,309
                )
                
                2,437,452
                
                
                334,145Advances
                    from customers
                
                
                (15,108
                )
                
                2,116,454
                
                
                4,575,302
                
                
                627,218**Net
                    cash provided by operating activities**
                
                
                7,826,015
                
                
                12,648,838
                
                
                18,490,641
                
                
                2,534,841**Cash
                    flows from investing activities:**Purchases
                    of property and equipment
                
                
                (545,155
                )
                
                (537,340
                )
                
                (527,743
                )
                
                (72,347
                )Payments
                    for intangible assets
                
                
                (3,081,257
                )
                
                (3,818,597
                )
                
                (7,151,309
                )
                
                (980,357
                )Long-term
                    investments
                
                
                -
                
                
                -
                
                
                (4,475,216
                )
                
                (613,497
                )Acquisition
                    of business
                
                
                -
                
                
                -
                
                
                (53,188,175
                )
                
                (7,291,445
                )Loan
                    to Guarantor
                
                
                (800,000
                )
                
                800,000
                
                
                -
                
                
                -Amounts
                    due to a related party
                
                
                (575,722
                )
                
                -
                
                
                -
                
                
                -Amounts
                    due from a related party
                
                
                146,699
                
                
                -
                
                
                (3,000,000
                )
                
                (411,263
                )**Net
                    cash used in investing activities**
                
                
                (4,855,435
                )
                
                (3,555,937
                )
                
                (68,342,443
                )
                
                (9,368,909
                )




See
      the
      accompanying notes to consolidated financial statements.




F-8


**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (CONTINUED)**





**Chinese
                Yuan (Renminbi)**
            
            **U.S.
                Dollars****For
                the****Year
                Ended****For
                the Years Ended December 31,**
            
            **December
                31,****2005**
            
            **2006**
            
            **2007**
            
            **2007****(Unaudited)****Cash
                flows from financing activities:**Payment
                of deferred offering costs
            
            
            (2,009,360
            )
            
            -
            
            
            -
            
            
            -Issuance
                of ordinary shares for cash,net of offering costs paid
            
            
            -
            
            
            47,128,495
            
            
            -
            
            
            -Proceeds
                from exercise of warrants
            
            
            -
            
            
            -
            
            
            1,060,992
            
            
            145,449Issuance
                of convertible notes
            
            
            -
            
            
            -
            
            
            69,079,430
            
            
            9,469,941Payment
                of make-whole obligation
            
            
            -
            
            
            -
            
            
            (11,988,170
            )
            
            (1,643,431
            )Proceeds
                from short-term loans
            
            
            2,800,000
            
            
            -
            
            
            -
            
            
            -Repayment
                of short-term loans
            
            
            -
            
            
            (2,800,000
            )
            
            -
            
            
            -Proceeds
                received from loans to shareholders
            
            
            53,973
            
            
            -
            
            
            -
            
            
            -Proceeds
                from subscription receivable
            
            
            575,722
            
            
            -
            
            
            -
            
            
            -**Net
                cash provided by financing activities**
            
            
            1,420,335
            
            
            44,328,495
            
            
            58,152,252
            
            
            7,971,959**Effect
                of exchange rate changes on cash**
            
            
            -
            
            
            (791,476
            )
            
            (2,537,839
            )
            
            (347,908
            )**Net
                increase in cash**
            
            
            4,390,915
            
            
            52,629,920
            
            
            5,762,611
            
            
            789,983**Cash
                and cash equivalents at beginning of year**
            
            
            4,443,902
            
            
            8,834,817
            
            
            61,464,737
            
            
            8,426,060**Cash
                and cash equivalents at end of year**
            
            ¥
            8,834,817
            
            ¥
            61,464,737
            
            ¥
            67,227,348
            
            $
            9,216,043**Supplemental
                cash flow information**Interest
                paid
            
            ¥
            186,412
            
            ¥
            66,593
            
            ¥
            510,282
            
            $
            69,953**Non-cash
                Investing and Financing Activities**Offset
                of Hainan Future Company payable
            
            ¥
            2,526,595
            
            
            -
            
            
            -
            
            
            -Forgiveness
                of debt recognized as contribution
            
            ¥
            1,897,682
            
            
            -
            
            
            -
            
            
            -Conversion
                of series A convertible preferred stock
            
            ¥
            30,222,260
            
            
            -
            
            
            -
            
            
            -Acquiring
                assets by assuming payment obligation
            
            
            -
            
            
            -
            
            ¥
            26,115,896
            
            $
            3,580,168Conversion
                of convertible notes
            
            
            -
            
            
            -
            
            ¥
            36,473,000
            
            $
            5,000,000Issuance
                of common stock for acquisition
            
            
            -
            
            
            -
            
            ¥
            8,555,961
            
            $
            1,172,917





See
      the
      accompanying notes to consolidated financial statements.




F-9


**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





**NOTE
      1. ORGANIZATION AND NATURE OF OPERATIONS**





***Organization*** –eFuture
      Information Technology, Inc. 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”).





***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; accordingly, segment
      information is not required to be provided.





**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, 2007 have been translated into United States dollars solely for
      the
      convenience of the reader, are not in accordance with accounting principles
      generally accepted in the United States of America and are unaudited. Solely
      for
      this purpose, the consolidated financial statements have been translated into
      U.S. dollars at the rate of ¥7.2946 = US$1.00, the approximate exchange rate
      prevailing on December 31, 2007. 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 entity, Fuji
      Biaoshang Information Technology Inc., from the
      respective dates of its acquisition. All
      significant inter-company balances and transactions have been eliminated in
      consolidation.





The
      Company adopted the provisions of Financial Accounting Standards Board
      Interpretation No. 46R,


“ *Consolidation
      of Variable Interest Entities* ”
(“FIN
      46R”). Pursuant to FIN 46R, Fuji
      Biaoshang Information Technology Inc (“Biaoshang”) is variable interest entity of the Company and the Company is the
      primary beneficiary of the variable interest entity. Accordingly, the variable
      interest entity has 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.


F-10





**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





***Business
      Condition*** **-** The
      Company generated revenue and gross profit for each period presented in the
      consolidated statements of operations. Due to losses in current and prior years,
      the Company has an accumulated deficit of ¥44,898,716 ($6,155,062) at December
      31, 2007. Net loss for the year ended December 31, 2007 was ¥27,480,747
      ($3,767,273). Net cash provided by operating activities was ¥7,826,015,
¥12,648,838, and ¥18,490,641 ($2,534,841) for the years ended December 31, 2005,
      2006 and 2007, respectively. Should the Company be unable to sustain profitable
      operations in future years, the Company may have to seek additional capital
      through debt financing or from the issuance of its ordinary stock.





***Fair
      Values of Financial Instruments*** —
The
      carrying amounts reported in the consolidated balance sheets for trade
      receivables, other receivables, advances to suppliers, accounts payable, accrued
      liabilities and advances from customers 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, demand deposits and short term
      debt investments with original maturities of no more than three
      months.





***Trade
      and Other receivables*** –
      Trade and receivables are carried at original invoiced amounts less a provision
      for doubtful accounts. Provision is made against accounts with balance
      outstanding for longer than 90 days. Other receivables consists of small
      miscellaneous items arising from transactions with non-trade customers.





***Inventory***  ***and
      Work in Progress***– 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 nor recognized as revenue.





***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.





***Valuation
      of Long-lived Assets*** - The
      carrying values of the Company's long-lived assets are reviewed for impairment
      annually or whenever events or changes in circumstances indicate that they
      may
      not be recoverable. When such an event occurs, the Company projects the
      undiscounted cash flows to be generated from the use of the asset and its
      eventual disposition over the remaining life of the asset. If projections
      indicate that the carrying value of the long-lived asset will not be recovered,
      the carrying value of the long-lived asset is reduced by the estimated excess
      of
      the carrying value over the projected discounted cash flows.





***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 has
      been established when a detail program design has been completed, or the
      completion of a working model. 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.





***Goodwill*** - Goodwill
      represents the excess of the purchase price over the fair value of the
      identifiable assets and liabilities acquired as a result of the Company’s
      acquisitions of interests in its subsidiaries and variable interest
      entities.





The
      Company tests goodwill for impairment at the reporting unit level (operating
      segment) on an annual basis as of December 31 or more frequently if an event
      occurs or circumstances change that could more likely than not reduce the fair
      value of the goodwill below its carrying amount. The impairment of goodwill
      is
      determined by the Company estimating the fair value based upon the present
      value
      of future cash flows. In estimating the future cash flows, the Company has
      taken
      into consideration the overall and industry economic conditions and trends,
      market risk of the Company and historical information.


F-11





**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





***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) collectibility 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
      post
      contract maintenance and technical support.





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 generally 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.





Services





The
      Company provides services for 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 generally
      are short term. Revenue is recognized on the completed contract method when
      delivery and acceptance is determined by a completion report signed by the
      customer.





Work
      in
      process as shown on the balance sheet represents the cost of work performed
      towards providing such services that has not been completed as of the balance
      sheet date.





The
      Company offers telephone and minimal on-site support to its customers on a
      stand
      alone basis. Revenue from maintenance and technical support is recognized over
      the period of the agreement.





Advances
      from customers represent deposits received as of period end. They include
      amounts related to projects that had yet to be completed.





Deferred
      revenue represents unearned amounts billed to customers related to post-contract
      maintenance agreements.


F-12





**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





***Cost
      of Revenues***– Costs
      associated with contracts are deferred and recognized either as inventory or
      work in progress 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 is
      included in the cost of revenue.





***Advertising
      Costs*** -
      Advertising costs are expensed when incurred. Total advertising expense was
      ¥905,012, ¥280,891, and ¥430,757($59,052) for the years ended December 31, 2005,
      2006 and 2007, respectively.





***Income
      taxes*** –
      Income taxes are provided based upon the liability method of accounting pursuant
      to SFAS No. 109, *Accounting
      for Income Taxes.* Under
      this approach, deferred income taxes are recorded to reflect the tax
      consequences on future years of differences between the tax basis of assets
      and
      liabilities and their financial reporting amounts at each year-end. 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.




***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.




In
      2007,
      the Company issued $10,000,000 senior convertible notes, which are convertible
      into maximum 526,316 ordinary shares ordinary shares at a floor conversion
      price
      of $19.00. In connection with the issuance, the Company issued Series A warrants
      to purchase 184,077 ordinary shares and Series B warrants to purchase 230,097
      ordinary shares to the investors of the convertible notes as well as placement
      agent warrant to purchase 73,291 ordinary shares. In January and September
      2007,
      the Company granted employee stock options to purchase 65,875 ordinary shares
      and 65,800 ordinary shares, respectively. All the potentially dilutive
      securities above are not considered in the calculation of the diluted earnings
      per share, because the effects of them are all anti-dilutive.




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,
      2005, 2006 and 2007:


F-13


**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**


**Chinese
                  Yuan (Renminbi)**
              
              **U.S.
                  Dollars****For
                  the****Year
                  Ended****For
                  the Years Ended December 31,**
              
              **December
                  31,****2005**
              
              **2006**
              
              **2007**
              
              **2007****(Unaudited)**Net
                  income (loss)
              
              ¥
              5,470,263
              
              ¥
              8,104,726
              
              ¥
              (27,480,747
              )
              $
              (3,767,273
              )Basic
                  weighted-average ordinary shares outstanding
              
              
              1,235,488
              
              
              1,689,434
              
              
              2,687,380
              
              
              2,687,380Effect
                  of dilutive securities:Series
                  A convertible preferred stock
              
              
              264,512
              
              
              -
              
              
              -
              
              
              -Stock
                  options and warrants
              
              
              62,499
              
              
              141,824
              
              
              -
              
              
              -Convertible
                  Notes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Diluted
                  weighted-average ordinary shares outstanding
              
              
              1,562,499
              
              
              1,831,258
              
              
              2,687,380
              
              
              2,687,380Basic
                  earnings (loss) per share
              
              ¥
              4.43
              
              ¥
              4.80
              
              ¥
              (10.23
              )
              $
              (1.40
              )Diluted
                  earnings (loss) per share
              
              ¥
              3.50
              
              ¥
              4.43
              
              ¥
              (10.23
              )
              $
              (1.40
              )




***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).





For
      options granted subsequent to the adoption date of SFAS 123R on January 1,
      2006,
      the fair value of each stock option grant will be estimated on the date of
      grant
      using the Black-Scholes option pricing model. The Company had no stock option
      grants during the years ended December 31, 2005, or 2006. As of December 31,
      2005 and 2006 there were 62,499 of options outstanding that had not been
      exercised. As of December 31, 2007 there were 194,174 stock options outstanding
      that had not been exercised.





Under
      SFAS 123(R), the Company applied the Black-Scholes valuation model in
      determining the fair value of options granted to employees and directors. For
      the year ended December 31, 2007, the Company granted 131,675 shares options
      to
      its employees and directors. The Company recognizes the relevant share-based
      compensation expenses over the requisite service period.





***Recently
      Enacted Accounting Standards*** - In
      September 2006, the Financial Accounting Standards Board issued FASB Statement
      No. 157, Fair Value Measurements (or SFAS 157), which defines fair value,
      establishes a framework for measuring fair value under generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      SFAS157 applies to other accounting pronouncements that require or permit fair
      value measurements. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007. However, on February 12, 2008, the FASB issued FSP FAS 157-2
      which would delay 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 a recurring basis (at least annually).
      This
      FSP partially defers the effective date of Statement 157 to fiscal years
      beginning after November 15, 2008, and interim periods within those fiscal
      years
      for items within the scope of this FSP. Effective for 2008, we will adopt SFAS
      157 except as it applies to those nonfinancial assets and nonfinancial
      liabilities as noted in FSP FAS 157-2. The Company is currently evaluating
      the
      potential impact on its financial statements, if any, upon adoption of this
      standard.


F-14





**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





In
      June
      2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3,
      “Accounting for Nonrefundable Advance Payments for Goods or Services to be Used
      in Future Research and Development Activities”, (“EITF 07-3”) which is effective
      for fiscal years beginning after December 15, 2007. EITF 07-3 requires that
      nonrefundable advance payments for future research and development activities
      be
      deferred and capitalized. Such amounts will be recognized as an expense as
      the
      goods are delivered or the related services are performed. EITF 07-3 is not
      expected to have a material impact on our results of operations or financial
      position.





In
      December 2007, the Financial Accounting Standards Board issued FASB Statement
      No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R provides
      additional guidance on improving the relevance, representational faithfulness,
      and comparability of the financial information that a reporting entity provides
      in its financial reports about a business combination and its effects. This
      Statement applies prospectively to business combinations for which the
      acquisition date is on or after the beginning of the first annual reporting
      period beginning on or after December 15, 2008. The Company believes there
      will
      be no material impact on its financial statements upon adoption of this
      standard.





In
      December 2007, the Financial Accounting Standards Board issued FASB Statement
      No. 160, *Noncontrolling Interests in Consolidated Financial Statements — an amendment of
      ARB No. 51* (“SFAS
      160”). SFAS 160 amends ARB No. 51 to establish accounting and reporting
      standards for the noncontrolling interest in a subsidiary and for the
      deconsolidation of a subsidiary. This Statement is effective for fiscal years
      and interim periods within those fiscal years, beginning on or after December
      15, 2008. The Company believes there will be no material impact on its financial
      statements upon adoption of this standard. In December 2007, the Securities
      and
      Exchange Commission (SEC) issued Staff Accounting Bulletin 110 *(“SAB 110”)* .
      SAB 110
      states that the staff will continue to accept, under certain circumstances,
      the
      use of the simplified method for estimating the expected term of “plain vanilla”
share options in accordance with SFAS 123(R) beyond December 31, 2007. The
      Company believes there will be no material impact on its financial statements
      upon adoption of this standard.





***Business
      Segments***– The
      Company operates in one industry which includes the sale of computer software,
      hardware and services solely to customers in China; therefore, no business
      segment information has been presented.





**NOTE
      3. ACCOUNTS RECEIVABLE**





Accounts
      receivable consisted of the following:





**Chinese
                Yuan (Renminbi)**
            
            **U.S
                Dollars****December
                31,**
            
            **December
                31,****2006**
            
            **2007**
            
            **2007****(Unaudited)**Trade
                accounts receivable
            
            ¥
            6,562,869
            
            ¥
            21,105,231
            
            $
            2,893,268Allowance
                for doubtful accounts
            
            
            (2,109,910
            )
            
            (4,695,898
            )
            
            (643,750
            )Trade
                accounts receivable, net
            
            ¥
            4,452,959
            
            ¥
            16,409,333
            
            $
            2,249,518




F-15






**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





**NOTE
      4. INVENTORY**





Inventory
      consisted of the following at December 31, 2006 and 2007:


**Chinese Yuan (Renminbi)**
              
              **U.S. Dollars****December 31,**
              
              **December 31,****2006**
              
              **2007**
              
              **2007****(Unaudited)**Work
                  in process
              
              ¥
              4,038,375
              
              ¥
              5,658,249
              
              $
              775,676Other
                  inventory
              
              
              82,761
              
              
              91,702
              
              
              12,572Total
                  inventory
              
              ¥
              4,121,136
              
              ¥
              5,749,951
              
              $
              788,248





**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
            
            
            10
                YearsSoftware
            
            
            5
                YearsCommunication
                equipment
            
            
            5
                YearsOffice
                  equipment
            
            
            5
                YearsLeasehold
                  improvements - shorter of
            
            
            3 Years or Lease Term




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. Depreciation
      expense was ¥574,954, ¥679,876 and ¥500,633 ($68,631) for the years ended
      December 31, 2005, 2006, and 2007, respectively. Property and equipment
      consisted of the following at December 31, 2006 and 2007:


**Chinese Yuan (Renminbi)**
              
              **U.S. Dollars****December 31,**
              
              **December 31,****2006**
              
              **2007**
              
              **2007****(Unaudited)**Motor
                  vehicles
              
              ¥
              290,000
              
              ¥
              352,113
              
              $
              48,270Leasehold
                  improvements
              
              
              433,394
              
              
              433,394
              
              
              59,413Office
                  equipment
              
              
              4,266,615
              
              
              5,602,699
              
              
              768,061Communication
                  equipment
              
              
              161,344
              
              
              232,974
              
              
              31,938Software
              
              
              554,084
              
              
              635,349
              
              
              87,099Total
              
              
              5,705,437
              
              
              7,256,529
              
              
              994,781Less:
                  Accumulated depreciation
              
              
              (4,690,856
              )
              
              (5,191,489
              )
              
              (711,689
              )Property
                  and equipment, net
              
              ¥
              1,014,581
              
              ¥
              2,065,040
              
              $
              283,092
  F-16




**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**




**NOTE
        6. INTERNALLY GENERATED SOFTWARE**
 
 Intangible
        assets consist of the cost of computer software acquired, which is included
        in
        property and equipment, and the cost of computer software internally developed
        by the Company. The components of intangible assets at December 31, 2006
        and
        2007:


**Chinese Yuan (Renminbi)**
            
            **U.S. Dollars****December 31,**
            
            **December 31,****2006**
            
            **2007**
            
            **2007****(Unaudited)**Internally
                generated software
            
            ¥
            15,786,995
            
            ¥
            21,736,616
            
            $
            2,979,823Purchased
                software
            
            
            -
            
            
            45,279,822
            
            $
            6,207,306Less:
                Accumulated amortization
            
            
            (8,678,751
            )
            
            (19,799,245
            )
            
            (2,714,233
            )Intangible
                assets, net
            
            ¥
            7,108,244
            
            ¥
            47,217,193
            
            $
            6,472,896





All
      intangible assets have a useful life of and are amortized over 4.0 years.
      Amortization expense for the years ended December 31, 2005, 2006 and 2007 was
      ¥2,305,835, ¥2,727,198, ¥11,120,493 ($1,524,483), respectively. Estimated
      aggregate amortization expense as of December 31, 2007 for the succeeding five
      years ending December 31, is as follows:


**Chinese****Yuan****(Renminbi)**
              
              **U.S.
                  Dollars****(Unaudited)**2008
              
              ¥
              13,554,571
              
              $
              1,858,1652009
              
              
              11,392,895
              
              
              1,561,8262010
              
              
              10,306,837
              
              
              1,412,9412011
              
              
              8,652,473
              
              
              1,186,1482012
              
              
              688,334
              
              
              94,362Thereafter
              
              
              2,622,083
              
              
              359,455




Research
      and development costs for the years ended December 31, 2005, 2006 and 2007
      were
¥93,814, ¥527,219 and ¥436,923 ($59,897), respectively.





**NOTE
      7. 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.





***Series
      A Convertible Preferred Stock*** - At
      December 31, 2004, there were 4,016,610 shares of Series A convertible preferred
      stock outstanding. Holders of the Series A convertible preferred stock had
      the
      same voting rights as holders of ordinary stock. Series A convertible preferred
      stock holders are entitled to the number of votes equal to the number of
      ordinary shares into which such shares of Series A convertible preferred could
      be converted at the date of record. If no record date exists then the conversion
      price on the date the vote occurs is used for the calculation. The conversion
      rate as recalculated based on the terms defined in the Articles of Association
      at December 31, 2005, including the subsequent reverse stock split, was one
      share of Series A preferred stock to 0.1439335 shares of ordinary stock, or
      578,125 shares.





At
      any
      time starting April 20, 2006, any majority holder of Series A convertible
      preferred stock had the right to require the Company to redeem the Series A
      convertible preferred stock at a redemption price of ¥7.61 ($0.94) per share
      plus all declared but unpaid dividends. From the date of issuance in 2001,
      the
      redemption amount was ¥30,583,993 ($3,789,744). As a result, the Series A
      convertible preferred stock was mandatorily redeemable and was classified as
      a
      long-term liability upon adopting SFAS No. 150 during 2003. In accordance with
      EITF D-98, the Company recorded the carrying amount of the redeemable Series
      A
      preferred stock at its fair value when it was issued on April 20, 2001. The
      fair
      value was determined based upon its redemption value that date and resulted
      in a
      charge to accumulated deficit of ¥9,894,407 ($1,226,042) during 2001. There were
      no changes in the redemption value since the date of issuance.




F-17


**E-FUTURE
        INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **(Information
        in United States Dollars, as of December 31, 2007, is
        Unaudited)**
 Holders
        of Series A preferred stock were entitled to receive non-cumulative dividends
        of
¥0.25 ($0.03) per share per annum only if declared by the Board of Directors.
        No
        dividends were declared.


Upon
      the
      close of an underwritten public offering, at a public price which represents
      a
      valuation of the share capital of the Company of at least ¥662,120,000
      ($82,045,000) and with the gross proceeds to the Company of at least
¥165,530,000 ($20,511,000), the shares of Series A convertible stock would
      automatically be converted into shares of ordinary stock based upon the
      conversion method described in the Articles of Association. These shares could
      also have been converted at any time by written consent of the majority of
      shareholders. In the event of liquidation, the holders were entitled to a
      ratable liquidating distribution of up to ¥5.13 ($0.64) per share and any
      dividends declared but unpaid.


On
        June
        16, 2005, all 4,016,610 shares of Series A preferred stock were converted
        into
        578,125 shares of ordinary stock.
 
 ***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 were converted
        into
        200,080 ordinary shares at a conversion price of $24.99 per share; the Company
        recorded ¥37,386,555 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.
 
 ***Subscriptions
        Receivable*** –
        Reflected as a reduction to stockholders’ deficit is ¥575,722 ($71,339) due from
        stockholders related to 921,875 shares of outstanding ordinary stock that
        were
        issued to the founding shareholders in November 2000 and April 2001. The
        shareholders made cash payments during September 2005 of ¥575,722 which paid the
        subscriptions receivable in full.
 
 ***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
        and
        2007. As of December 31, 2007, 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. The fair value of options granted during
        2002, as estimated on the date of grant using the Black-Scholes option pricing
        model, was ¥2,314,208 ($286,760), which was determined using the following
        assumptions:
 
 Expected
                  dividend yield
              
              
              -Risk-free
                  interest rate
              
              
              1.72
              %Expected
                  volatility
              
              
              122
              %Expected
                  life
              
              
              10
                  yearsWeighted
                  average fair value per share
              
              ¥
              37
 
 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. The aggregate
        fair value of the two sets of the employee stock options was ¥17,310,595,
        computed by using the following assumptions:
  F-18
  **E-FUTURE
        INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **(Information
        in United States Dollars, as of December 31, 2007, is
        Unaudited)**
 
 Set One
              
              Set TwoGrant
                  date
              
              
              January 31, 2007
              
              
              September 17, 2007Expected
                  dividend yield
              
              
              0%
              
              
              0%Risk-free
                  interest rate
              
              
              4.82%
              
              
              4.32%Expected
                  volatility
              
              
              75%
              
              
              75%Expected
                  life
              
              
              6.5
                  years
              
              
              6.5
                  years
 
 The
        value
        of the options will be recognized over a period of five years. In 2007, the
        Company recognized ¥2,663,105 of employee stock option expense and recorded the
        same amount of additional paid-in capital accordingly. None of these options
        had
        been exercised by December 31, 2007. The options were not considered in the
        calculation of diluted earnings per share, because its effect was anti-dilutive.
 
 **NOTE
        8. ACQUISITIONS**
 
 *(a)* *Tangcheng*
 
 On
        January 1, 2007, the Company completed the acquisition of Nanjing Tangcheng
        Network Technology Development Co. Ltd.(“Tangcheng”) for consideration of ¥ 3,300,000
        in cash. The main purpose of the acquisition is to enable the Company to
        grow in
        East China and acquire Tangcheng’s 50 customers. The purchase price was
        determined based on arms’ length negotiations between the Company and Tangcheng.
        The acquisition had been accounted for as a purchase business combination
        and
        the results of operations of Tangcheng after the acquisition date have been
        included in the Company’s consolidated financial statements in accordance with
        SFAS 94. The intangible assets acquired were amortized over four years. The
        allocation of the purchase price is as follows:
  Intangible
                  assets
              
              ¥
              2,562,981Accounts
                  receivable
              
              
              737,019Total
              
              ¥
              3,300,000
  *(b)* *Crownhead
            and Royalstone*
 On
        July
        31, 2007, the Company completed the acquisition of Crownhead Holdings Ltd.
        (“Crownhead”) and its subsidiary, Royalstone System Integrated Co.,
        Ltd.(“Royalstone”), a leading retail software and service provider in China, for
        an aggregate of ¥ 58,285,976
        in cash and ¥ 21,389,902
        in the Company’s ordinary shares contingent upon Crownhead meeting certain
        earnings targets during the 17 month period from August 1, 2007 to
        December 31, 2008. The purchase price was determined in arms’ length
        negotiations between eFture and Crownhead.
 
 The
        acquisition had been accounted for as a purchase business combination and
        the
        results of operations of the acquired company after the acquisition date
        have
        been included in the Company’s consolidated financial statements. The allocation
        of the purchase price is as follows:
 
 Tangible
                  assets acquired
              
              ¥
              4,673,101Identifiable
                  intangible assets
              
              
              41,120,000Goodwill
              
              
              41,238,397Liabilities
                  assumed
              
              
              (2,073,553
              )Deferred
                  taxes
              
              
              (5,282,076
              )Total
              
              ¥
              79,675,869
 
 The
        excess of purchase price over tangible and identifiable intangible assets
        (mainly trade name, software technologies, non-compete agreements and customer
        relationship) acquired and liabilities assumed were recorded as goodwill.
        The
        acquired identifiable intangible assets were valued by various approaches,
        including income approach, market approach and replacement cost approach,
        as
        appropriate. Identifiable intangible assets were amortized over a weighted
        average period of four years.
  F-19
  **E-FUTURE
        INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **(Information
        in United States Dollars, as of December 31, 2007, is
        Unaudited)**
 
 The
        outstanding payment obligation from this acquisition was recorded as Royalstone
        acquisition obligation in the balance sheets. As of December 31, 2007, the
        Royalstone acquisition obligation contained current portion of ¥ 16,398,925
        and long-term portion of ¥ 6,416,970. At the end of March, 2008, the Company made another payment of
        ¥9,981,955 in cash and ¥6,416,970 in the Company’s ordinary shares; Royalstone
        acquisition obligation was reduced to a balance of ¥ 6,416,970.
 
 *(c)* *Healthfield*
 On
        August
        10, 2007, the Company completed its acquisition of Healthfield
        Limited(“Healthfield”). The purchase price was determined in arms’ length
        negotiations between eFture and Healthfield, and would be paid in two payments.
        The first payment of ¥ 2,700,000
        was made by cash in 2007. The amount of second payment will be determined
        by
        2007 operation result of the acquired company and was not paid as of December
        31, 2007. The Company accrued a ¥ 3,300,000
        liability for this contingent payment, which represents the maximum possible
        payment. Also, the second payment would consist of 64% of cash and 36% of
        ordinary shares of the Company, which were not considered in the calculation
        of
        Earnings per Share because the effect was anti-dilutive. The acquisition
        had
        been accounted for as a purchase business combination and the results of
        operations of Healthfield after the acquisition date have been included in
        the
        Company’s consolidated financial statements. The intangible asset acquired will
        be amortized over a period of four years. The allocation of the purchase
        price
        is as follows:
 
 Intangible
                  assets
              
              ¥
              429,000Goodwill
              
              
              5,571,000Total
              
              ¥
              6,000,000
  **NOTE
        9.** **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.
 
 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,
        2007,
        the aggregate amount of these loans was ¥4,000,000.
 
 The
        following is a summary of the variable interest entities of the Company,
        Biaoshang, as a 51% owned variable interest entity, had been consolidated
        under
        FIN 46R , Wangku, as a 20% owned variable interest entity, 20% of the net
        income
        had added in the company’s income statement:
 
 a) Biaoshang
 Fuji
        Biaoshang Information Technology, Inc. (“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 the PRC on
        behalf of the Company. The registered capital of Biaoshang is ¥1,000,000.




F-20




**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





In
      October, 2007, Peter Jiang purchased 100% equity interest in Biaoshang from
      two
      employees of the Company at a nominal price of ¥ 2. Then
      Peter Jiang sold 51% of the equity interest to Tingchao Zhao at a price of ¥1,000,000.
      Tingchao Zhao, an employee of the Company, was granted a loan by the Company
      to
      complete this purchase. Also, Tingchao Zhao pledged all the equity interest
      to
      the Company and gave all his voting rights in Biaoshang to the Company as well.
      Through a set of the contractual agreements with Tingchao Zhao, the Company
      controls Biaoshang as its variable interest entity. After the above
      transactions, the Company held
      51%
      of equity interest in Biaoshang through Tingchao Zhao, while Peter Jiang held
      the remaining 49%.





Before
      the acquisition, Biaoshang had net assets of ¥ 66,368.
      From January to October, 2007, Biaoshang accrued ¥ 3,698
      of
      general and administrative expenses and had no other operating activities.
      After
      the acquisition, Peter Jiang started working at Biaoshang. The purpose of this
      acquisition was to acquire Peter Jiang’s customer relationship and contacts as
      well as software owned by him. Therefore, the Company allocated 97% the purchase
      price to intangible assets acquired from Peter Jiang and allocated the remaining
      3% to the net assets of Biaoshang on the acquisition date. The acquired
      intangible assets were recorded in Biaoshang’s book as the Company’s
      contribution and will be amortized over a period of four years. After the
      acquisition, Biaoshang realized a net loss of ¥253,099 in 2007, which was
      consolidated into the Company’s statements of operations after the minority
      interest of ¥32,520.





Pursuant
      to the equity interest transfer agreement between Peter Jiang and Tingchao
      Zhao,
      the Company will have Biaoshang’s 2008 financial statements audited. If the
      audited net income is equal to or less than ¥ 300,000,
      Peter Jiang will return ¥ 400,000
      to the Company through Tingchao Zhao; if the audited net income is greater
      than ¥ 300,000,
      the Company will make additional payment for the purchase,





Additional
      Payment= Audited Net Income*3.33- ¥ 1,000,000





The
      additional payment will not exceed ¥ 3,000,000.





b)
      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 new registered capital
      of
      Wangku is ¥ 4,000,000.
      The Company accounts for Wangku as a long-term investment under equity method.
      From June to December 2007, Wangku realized a net income of ¥5,812,118, and the
      Company recognized investment income ¥1,158,216 in its 2007 statements of
      operations. On
      May
      14, 2008, the company completed the acquisition of additional 31% stake in
      Wangku for ¥3,400,000 in cash and ¥3,400,000 in the
      Company’s ordinary shares .





***(b)
      Other long-term investment***


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.





**NOTE
      10. RELATED PARTY TRANSACTIONS**





On
      August
      3, 2007, the Company made an 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 is due on August 2,
      2008.





**NOTE
      11. INCOME TAXES**





To
      date,
      the Company has not been subject to any income taxes in the United States or
      the
      Cayman Islands. Enterprises with foreign investment and foreign enterprises
      doing business in the People’s Republic of China (PRC) are generally subject to
      federal (state) enterprise income tax 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 will be taxed at a 15% federal rate for taxable income
      generated after 2001 and will be exempt from local tax. In addition, eFuture
      Beijing is located in the Beijing Zhongguanchun High Technology Development
      Zone. Therefore, it was exempt from 50% of the federal tax during 2003 through
      2005. Since eFuture Beijing has foreign invested capital, it is allowed a
      deduction for operating loss carry forwards for up to five years.




F-21




**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





On
      March
      16, 2007, the National People’s Congress of China passed the new Enterprise
      Income Tax Law, (“EIT Law”), and on December 6, 2007, the State Council of China
      issued the Implementation Regulations for the EIT Law which took effect on
      January 1, 2008. The EIT Law and Implementation Regulations Rules impose a
      unified EIT of 25.0% on all domestic-invested enterprises and Foreign Invested
      Entities, or FIEs, unless they qualify under certain limited
      exceptions.  Therefore,
      nearly all FIEs are subject to the new tax rate alongside other domestic
      businesses rather than benefiting from the old FIE tax laws, and its associated
      preferential tax treatments, beginning January 1, 2008.





Despite
      these pending changes, the EIT Law gives existing FIEs a five-year grandfather
      period during which they can continue to enjoy their existing preferential
      tax
      treatments. The discontinuation of any such special or preferential tax
      treatment or other incentives would have an adverse affect on the Company’s
      business, fiscal condition and current operations in China.


**Chinese Yuan (Renminbi)**
              
              **U.S. Dollars****For the**
                **Year Ended****For the Years Ended December 31,**
              
              **December 31,****2005**
              
              **2006**
              
              **2007**
              
              **2007****(Unaudited)**PRC
              
              ¥
              5,707,988
              
              ¥
              8,396,431
              
              ¥
              19,505,557
              
              $
              2,673,971Cayman
                  Islands
              
              
              (237,725
              )
              
              (291,705
              )
              
              (46,986,304
              )
              
              (6,441,244
              )Net
                  income
              
              ¥
              5,470,263
              
              ¥
              8,104,726
              
              ¥
              (27,480,747
              )
              $
              (3,767,273
              )





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


**Chinese Yuan (Renminbi)**
                
                **U.S. Dollars****For the
                    Year Ended****For the Years Ended December 31,**
                
                **December 31,******2005**
                
                **2006**
                
                **2007**
                
                **2007****(Unaudited)**Current
                    tax before benefit of operatingloss
                    carry forwards
                
                ¥
                1,020,641
                
                ¥
                1,332,590
                
                ¥
                2,761,443
                
                $
                378,560Benefit
                    of operating loss carry forwards
                
                
                (1,020,641
                )
                
                (1,332,590
                )
                
                (2,761,443
                )
                
                (378,560
                )Total
                    provision for income taxes
                
                ¥
                -
                
                ¥
                -
                
                ¥
                -
                
                ¥
                -
  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:
  F-22
  **E-FUTURE
        INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **(Information
        in United States Dollars, as of December 31, 2007, is
        Unaudited)**




**Chinese Yuan (Renminbi)**
              
              **U.S. Dollars****For the**
                **Year Ended****For the Years Ended December 31,**
              
              **December 31,****2005**
              
              **2006**
              
              **2007**
              
              **2007****(Unaudited)**Income
                  tax computed atfederal
                  statutory tax rate (30%)
              
              ¥
              1,641,079
              
              ¥
              2,431,418
              
              ¥
              (8,244,223
              )
              $
              (1,130,181
              )Non-deductible
                  expenses
              
              
              71,318
              
              
              56,720
              
              
              14,095,891
              
              
              1,932,373Effect
                  of lower actual tax rates
              
              
              (856,198
              )
              
              (1,244,069
              )
              
              (2,925,834
              )
              
              (401,096
              )Valuation
                  allowance
              
              
              (856,199
              )
              
              (1,244,069
              )
              
              (2,925,834
              )
              
              (401,096
              )Total
                  income tax
              
              ¥
              -
              
              ¥
              -
              
              ¥
              -
              
              ¥
              -
 
 The
        components of the deferred income tax asset were as follows:
 
 **Chinese Yuan (Renminbi)**
              
              **U.S. Dollars****December 31,**
              
              **December 31,****2006**
              
              **2007**
              
              **2007****(Unaudited)**Net
                  operating loss carry forwards
              
              ¥
              1,038,193
              
              ¥
              86,325
              
              $
              11,834Bad
                  debt allowance and write offs
              
              
              515,056
              
              
              752,462
              
              
              103,153Valuation
                  allowance
              
              
              (1,553,249
              )
              
              (838,787
              )
              
              (114,987
              )**Net
                  Deferred Tax Asset**
              
              ¥
              -
              
              ¥
              -
              
              ¥
              -
 
 At
        December 31, 2005, the Company had operating loss carry forwards that will
        expire, if unused, as follows:
 
 **Expire****December 31:**2008
              
              
              690,598¥
              690,598
 
 **NOTE
        12. CONVERTIBLE NOTES PAYABLE**
 
 On
        March 13, 2007, the Company closed a Securities Purchase Agreement with
        three funds affiliated with two institutional investors, pursuant to which
        the
        company raised ¥77,410,000 by issuing $10,000,000 senior convertible notes along
        with Series A warrants and Series B warrants. In connection with the issuance,
        the Company incurred ¥11,548,305 loan costs including ¥8,330,570 in cash and
¥3,217,735 of warrants issued to placement agent. Proceeds net of cash loan
        costs were ¥69,079,430. The Company amortized the loan costs over the period of
        the convertible notes outstanding.
 
 The
        convertible notes are due on March 12, 2012 and bear interest per annum as
        below, payable quarterly:
 
 **Period**
              
              **Interest Rate**March
                  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-23




**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**




The
      convertible notes are initially convertible into 400,160 ordinary shares of
      the
      Company at $24.99 per share. Per the Agreement, the conversion price is subject
      to reset on July 24, 2008, if the market price of the Company’s common stock is
      below $19.00 at that day. If so, the maximum number of Ordinary Shares into
      which the Convertible Notes are convertible, based on a conversion Floor Price
      of $19.00, is 526,316 Shares.




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
      are
      exercisable by the Holder within 1 year 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, subject to adjustment. The Company also issued
      Placement Agent warrants to 73,291 ordinary shares of the Company, exercisable
      by the Holder within 1 year on any day on or after September 9, 2007 at an
      initial price of $24.99, subject to adjustment. The fair value of Series A
      warrants and Series B warrants was $ 4,291,015 aggregately, and the fair value
      of Placement Agent warrants was $1,055,823, computed using Black-Scholes option
      pricing model based upon the following assumptions: future estimated volatility
      of 86.3%, risk-free interest rate of 4.41% and 4.9%, estimated life of 1.33
      and
      5 years, respectively, and 0% dividend yield.





Prior
      to
      obtaining Shareholder approval, the Selling Shareholders may not convert or
      exercise (as applicable) their prorated share of convertible notes or Series
      A
      warrants in excess of 526,699 ordinary shares, which amount is equal to one
      ordinary share less than 20% of the outstanding number of ordinary shares prior
      to the closing of the Securities Purchase Agreement. Further, none of the Series
      B or Placement Agent warrants may be exercised prior to Shareholder approval.
      Notwithstanding the foregoing, the company has agreed to register for public
      resale the shares issued to the recipients in the Private Placement. 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.





The
      proceeds from the issuance of the Securities were allocated between the
      convertible notes, the Series A warrants and Series B warrants, and the
      beneficial conversion feature associated with the Convertible Notes, based
      on
      the relative fair value of each instrument or feature as follows:





Convertible
                Notes
            
            ¥
            42,292,138Series
                A and B warrants
            
            
            23,243,099Beneficial
                conversion feature
            
            
            11,874,763Total
                proceed
            
            ¥
            77,410,000




The
      Agreement contained 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.
      Therefore, the Company accrued  ¥23,106,037
      of Make-Whole obligation, which was the present value of the future interest
      payments. The Company recorded the sum of Make-Whole obligation, allocated
      value
      of Series A and Series B warrants and beneficial conversion feature as debt
      discount:





Make-Whole
                obligation
            
            ¥
            23,106,037Series
                A and B warrants
            
            
            23,243,099Beneficial
                conversion feature
            
            
            11,874,763Total
                debt discount
            
            ¥
            58,223,899




The
      Company amortized the debt discount over the period of the convertible notes
      outstanding.





On
      October 3, 2007, one of the investors converted $5,000,000 of the convertible
      notes to 200,080 ordinary shares. Pursuant to the terms of the Note, the Company
      paid ¥10,903,992 under the Make-Whole provision of the Note. In addition to
      recognizing the Make-Whole obligation payment as interest expense, the Company
      recognized the remaining unamortized discount relative to the $5,000,000 portion
      of the Note and the related loan costs as a one-time interest expense.





F-24




**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





**NOTE
      13. OTHER NOTES PAYABLE AND CONTINGENCIES**





***Short-term
      Loan –*** In
      February 2005, the Company entered into a short-term loan for ¥2,800,000 which
      required a guarantor, was due in February 2006 and bore interest at 5.58
      percent. The loan was paid in full during January 2006. The Company loaned
      the
      unrelated guarantor ¥800,000 under the same terms. The guarantor also paid this
      loan in full during January 2006.





***Operating
      Lease Agreements***  ***–*** The
      Company leases offices in Beijing and Shanghai. The amounts of commitments
      for
      non-cancelable operating leases in effect at December 31, 2007, were as
      follows:





**Chinese Yuan****(Renminbi)**
            
            **U.S. Dollars****(Unaudited)**2008
            
            ¥
            2,337,662
            
            $
            320,4652009
            
            
            362,897
            
            $
            49,749Total
            
            ¥
            2,700,559
            
            $
            370,214




The
      Company incurred rental expense, of ¥2,039,835, ¥1,625,148 and ¥2,207,402 during
      the years ended December 31, 2005, 2006 and 2007, respectively. All leases
      agreements are for One year and will be ended in 2009.





***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.





***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 is currently in the procedure of first
      instance or first trial.





In
      the
      administration of adjudication of civil litigation in the PRC, the people's
      courts adopt the system whereby a case shall be finally decided after at most
      two trials, which are called first instance and second instance respectively.
      This means: (a) Judgments or orders of the first instance shall come from a
      local people's court, and a party may bring an appeal only once to the people's
      court at the next higher level; (b)Judgments or orders of the first
      instance of the local people's courts at various levels become legally effective
      if, within the prescribed period for appeal, no party makes an appeal;
      (c)judgments and orders of the court of the second instance, if any, shall
      be seen as final decisions of the case and cannot be appealed, however, any
      judgments and orders rendered by the Supreme People's Court as the court of
      the
      first instance shall become immediately legally effective. This case is not
      with
      the Supreme People's Court.




The
      Company has accrued ¥665,500 in accrued legal expenses. There might be
      additional expenses related to this claim but it is impossible for management
      to
      forecast all of the possibilities related to this case. The additional
      expenses that could be incurred include: additional accrued interest
      expense, execution (of the legally effective legal documents) expenses of
      the case and accepting fee of People's Court(s).





Management
      has considered the likely out come of this case based on past experience with
      similar cases and determined that the total amount of estimated costs should
      be
      accrued and expensed as a result of the claim.  There
      could be additional costs related to the case which can not be estimated at
      this
      time.





***Contingent
      payments of acquisitions and investments*** –
      The Company has contingent payments due under the acquisition of Healthfield
      and
      Biaoshang. See Notes 8 and 9.





F-25




**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





**NOTE
      14. SUBSEQUENT EVENTS**





During
      2008, warrants issued in the initial public offering during October 2006 (see
      Note 7) were exercised. Of the original 113,500 warrants issued, 20,000 were
      exercised on January 2, 2008, 16,675 warrants were exercised on Janauary 4,
      2008, 16,675 warrants were exercised on March 19, 2008, and 17,500 warrants
      were
      exercised on May 5, 2008.





On
      April
      8 2008, the Company signed an assets purchase agreement to acquire
      Proadvancer Systems Inc., a leading provider of logistics software and services
      in Mainland China and Asia., for an aggregate of ¥15,000,000 in cash and
¥15,000,000 in the Company's ordinary shares subject to the
      satisfaction and attainment of certain post closing operating and financial
      milestones of Proadvancer at December 31, 2008.  There is an additional
      contingent payment required  that can be up to ¥ 15,000,000
      in cash and ¥ 25,000,000 in the Company's ordinary shares depending upon the
      revenue in 2008 and 2009. The payments will be paid in
      U.S. dollars at the rate of ¥7.02 = US$1.00.





On
      May 14
      2008, the company completed the acquisition of additional 31% stake in Wangku
      for ¥3,400,000 in cash and ¥3,400,000 in the
      Company’s ordinary shares ,
      as
      explained in Note 12.




F-26


**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





**NOTE
      15. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION**





**Condensed
      balance sheets**


**Chinese Yuan (Renminbi)**
              
              **U.S. Dollars****December 31,**
              
              **December 31,****2006**
              
              **2007**
              
              **2007****(Unaudited**)******ASSETS****Current
                  assets**Cash
                  and cash equivalents
              
              ¥
              33,399,189
              
              ¥
              41,848,057
              
              $
              5,736,856Other
                  receivables
              
              
              -
              
              
              129,332
              
              
              17,730Prepaid
                  expense
              
              
              325,171
              
              
              291,784
              
              
              40,000**Total
                  current assets**
              
              
              33,724,360
              
              
              42,269,173
              
              
              5,794,586**Non-current
                  assets**Investment
                  in and receivables due from subsidiaries
              
              
              30,948,777
              
              
              51,319,424
              
              
              7,035,262Long-term
                  investment
              
              
              -
              
              
              4,182,843
              
              
              573,416Intangible
                      assets, net of accumulated amortization of ¥ 6,981,305
                      ($957,051)
              
              
              -
              
              
              29,167,695
              
              
              3,998,532Goodwill
              
              
              -
              
              
              46,438,280
              
              
              6,366,117Deferred
                  loan cost
              
              
              -
              
              
              4,847,633
              
              
              664,551**Total
                  non-current assets**
              
              
              30,948,777
              
              
              135,955,875
              
              
              18,637,878**Total
                  assets**
              
              ¥
              64,673,137
              
              ¥
              178,225,048
              
              $
              24,432,464**LIABILITIES
                  AND SHAREHOLDERS' EQUITY****Current
                  liabilities**Accrued
                  expense
              
              
              124,148
              
              
              **-**
              
              
              **-**Accrued
                  interest
              
              
              -
              
              
              278,420
              
              
              38,168Royalstone
                  acquisition obligation, current portion
              
              
              -
              
              
              16,398,925
              
              
              2,248,091Healthfield
                  acquisition obligation
              
              
              -
              
              
              3,300,000
              
              
              452,389Make-whole
                  obligation, current portion
              
              
              -
              
              
              1,164,116
              
              
              159,586**Total
                  current liabilities**
              
              
              124,148
              
              
              21,141,461
              
              
              2,898,234**Long-term
                  liabilities**Royalstone
                  acquisition obligation, net of current portion
              
              
              -
              
              
              6,416,970
              
              
              879,688Make-whole
                  obligation, net of current portion
              
              
              -
              
              
              9,290,082
              
              
              1,273,55612%
                  ¥36,473,000 ($5,000,000) convertible note payable, net of ¥26,053,509
                  ($3,571,616) of unamortized discount based on an imputed interest
                  rate of
                  28.9%
              
              
              -
              
              
              10,419,491
              
              
              1,428,384Deferred
                  Tax
              
              
              -
              
              
              5,282,076
              
              
              724,108**Total
                  long-term liabilities**
              
              
              -
              
              
              31,408,619
              
              
              4,305,736**Shareholders'
                  equity**Ordinary
                  shares, $0.0756 U.S. Dollars par value; 6,613,756 shares authorized;
                  2,633,500 and 2,924,702 shares outstanding, respectively
              
              
              1,647,781
              
              
              1,811,589
              
              
              248,347Additional
                  paid-in capital
              
              
              77,726,236
              
              
              165,678,075
              
              
              22,712,428Statutory
                  reserves
              
              
              3,084,020
              
              
              3,084,020
              
              
              422,781Accumulated
                  foreign currency translation adjustment
              
              
              (491,079
              )
              
              -
              
              
              -Accumulated
                  deficit
              
              
              (17,417,969
              )
              
              (44,898,716
              )
              
              (6,155,062
              )**Total
                  shareholders' equity**
              
              
              64,548,989
              
              
              125,674,968
              
              
              17,228,494**Total
                  liabilities and shareholders' equity**
              
              ¥
              64,673,137
              
              ¥
              178,225,048
              
              $
              24,432,464


F-27


**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





**Condensed
      statements of operations**


**Chinese Yuan (Renminbi)**
              
              **U.S. Dollars****For the**
                **Year Ended****For the Years Ended December 31,**
              
              **December 31,****2005**
              
              **2006**
              
              **2007**
              
              **2007****(Unaudited)**Operating
                  expenses
              
              ¥
              (983
              )
              ¥
              (401,123
              )
              ¥
              (12,806,499
              )
              $
              (1,755,613
              )**Operating
                  loss**
              
              
              (983
              )
              
              (401,123
              )
              
              (12,806,499
              )
              
              (1,755,613
              )Equity
                  in profit of subsidiary
              
              
              5,707,988
              
              
              8,396,431
              
              
              19,538,077
              
              
              2,678,430Interest
                  income
              
              
              -
              
              
              109,418
              
              
              3,235,834
              
              
              443,593Interest
                  expense
              
              
              (236,742
              )
              
              -
              
              
              (818,338
              )
              
              (112,184
              )Interest
                  expense - amortization of discount on notes payable
              
              
              -
              
              
              -
              
              
              (31,320,836
              )
              
              (4,293,702
              )Interest
                  expense - amortization of deferred loan costs
              
              
              -
              
              
              -
              
              
              (6,610,234
              )
              
              (906,182
              )Income
                  on investments
              
              
              -
              
              
              -
              
              
              1,207,627
              
              
              165,551Foreign
                  currency exchange loss
              
              
              -
              
              
              -
              
              
              93,622
              
              
              12,834**Net
                  income (loss)**
              
              ¥
              5,470,263
              
              ¥
              8,104,726
              
              ¥
              (27,480,747
              )
              $
              (3,767,273
              )


F-28


**E-FUTURE
      INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(Information
      in United States Dollars, as of December 31, 2007, is
      Unaudited)**





**Condensed
      cash flow statements**


**Chinese Yuan (Renminbi)**
              
              **U.S. Dollars****For the**
                **Year Ended****For the Years Ended December 31,**
              
              **December 31,****2005**
              
              **2006**
              
              **2007**
              
              **2007****(Unaudited)****Cash
                  flows from operating activities:**Net
                  income (loss)
              
              ¥
              5,470,263
              
              ¥
              8,104,726
              
              ¥
              (27,480,747
              )
              $
              (3,767,273
              )Adjustments
                  to reconcile net income (loss) to net cash provided by (used in)
                  operating
                  activities:Equity
                  in (profit) loss of subsidiary
              
              
              (5,707,988
              )
              
              (8,396,431
              )
              
              (19,538,077
              )
              
              (2,678,430
              )Amortization
                  of intangible assets
              
              
              -
              
              
              -
              
              
              6,981,305
              
              
              957,051Amortization
                  of discount on notes payable
              
              
              -
              
              
              -
              
              
              31,320,836
              
              
              2,650,271Amortization
                  of deferred loan costs
              
              
              -
              
              
              -
              
              
              6,610,234
              
              
              906,182Investment
                  income
              
              
              -
              
              
              -
              
              
              (1,207,627
              )
              
              (165,551
              )Expenses
                  paid by subsidiary on behalf of parent
              
              
              (446,035
              )
              
              (11,433,110
              )
              
              -
              
              
              -Foreign
                  exchange loss
              
              
              -
              
              
              -
              
              
              93,622
              
              
              12,834Compensation
                  expense for options issued to employees
              
              
              -
              
              
              -
              
              
              2,663,105
              
              
              365,079Interest
                  on notes payable contributed by shareholders
              
              
              236,742
              
              
              -
              
              
              -
              
              
              -Changes
                  in assets and liabilitiesOther
                  receivables
              
              
              -
              
              
              -
              
              
              26,033
              
              
              3,569Accrued
                  interest
              
              
              -
              
              
              -
              
              
              278,420
              
              
              38,168Prepaid
                  expenses
              
              
              -
              
              
              (330,717
              )
              
              33,387
              
              
              4,577Accrued
                  expenses
              
              
              454,300
              
              
              (889,691
              )
              
              (124,145
              )
              
              (17,019
              )**Net
                  cash provided by (used in) operating activities**
              
              
              7,282
              
              
              (12,945,223
              )
              
              (343,654
              )
              
              (1,690,542
              )**Cash
                  flows from investing activities:**Acuqisition
                  of business
              
              
              -
              
              
              -
              
              
              (42,858,738
              )
              
              (5,875,402
              )Payment
                  on amount due to related company
              
              
              (575,723
              )
              
              -
              
              
              -
              
              
              -Investment
                  in consolidated subsidiaries
              
              
              -
              
              
              -
              
              
              (987,937
              )
              
              (135,434
              )Long-term
                  investments
              
              
              -
              
              
              -
              
              
              (2,975,216
              )
              
              (407,866
              )**Net
                  cash used in investing activities**
              
              
              (575,723
              )
              
              -
              
              
              (46,821,891
              )
              
              (6,418,702
              )**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
              
              
              145,449Issuance
                  of convertible notes
              
              
              -
              
              
              -
              
              
              69,079,430
              
              
              9,469,941Payment
                  of make-whole obligation
              
              
              
              
              
              -
              
              
              (11,988,170
              )
              
              -Proceeds
                  from subscription receivable
              
              
              575,722
              
              
              -
              
              
              -
              
              
              -**Net
                  cash provided by investing activities**
              
              
              575,722
              
              
              47,128,495
              
              
              58,152,252
              
              
              9,615,390**Effect
                  of exchange rate changes on cash**
              
              
              -
              
              
              (791,476
              )
              
              (2,537,839
              )
              
              (347,908
              )**Net
                  increase in cash**
              
              
              7,281
              
              
              33,391,796
              
              
              8,448,868
              
              
              1,158,238**Cash
                  and cash equivalents at beginning of year**
              
              
              116
              
              
              7,393
              
              
              33,399,189
              
              
              4,578,618**Cash
                  and cash equivalents at end of year**
              
              ¥
              7,397
              
              ¥
              33,399,189
              
              ¥
              41,848,057
              
              $
              5,736,856




**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. and Biao Shang Information
      Technology, Inc. under the equity method of accounting as prescribed in APB
      opinion No. 18, “ *The
      Equity Method of Accounting for Investments in Common Stock* ”.





Since
      acquiring eFuture (Beijing) Royalstone Information Technology, Inc. in December
      2001, the subsidiary incurred losses that exceeded the Company’s investment. The
      excess losses in excess of the investment have been credited to amounts due
      from
      subsidiaries. The profit or loss from the subsidiary is reflected on the
      condensed statements of operations as “Equity in profit (loss) of
      subsidiary”.




F-29




**E-FUTURE
        INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **(Information
        in United States Dollars, as of December 31, 2007, is
        Unaudited)**


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, 2007.




F-30