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,
2009





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)




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





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


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





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





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





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


As of
December 31, 2009, there were 3,368,424 shares of the registrant’s Common Stock
outstanding.





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


Yes oNo x





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


Yes oNo x





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


Yes oNo x





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


Yes xNo o





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




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





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




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





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


Yes oNo x





TABLE
OF CONTENTS





Item
      1.
              Identity
      of Directors, Senior Management and Advisers
              1Item
      2.
              Offer
      Statistics and Expected Timetable
              1Item
      3.
              Key
      Information
              1Item
      4.
              Information
      on the Company
              10Item
      4A.
              Unresolved
      Staff Comments
              23Item
      5.
              Operating
      and Financial Review and Prospects
              24Item
      6.
              Directors,
      Senior Management and Employees
              37Item
      7.
              Major
      Shareholder and Related Party Transactions
              44Item
      8.
              Financial
      Information
              45Item
      9.
              The
      Offer and Listing
              45Item
      10.
              Additional
      Information
              46Item
      11.
              Quantitative
      and Qualitative Disclosures about Market Risk
              53Item
      12.
              Description
      of Securities Other than Equity Securities
              54Item
      13.
              Defaults,
      Dividend Arrearages and Delinquencies
              55Item
      14.
              Material
      Modifications to the Rights of Securities Holders and Use of
      Proceeds
              55Item
      15.
              Controls
      and Procedures
              55Item
      15T.
              Controls
      and Procedures
              55Item
      16.
              [Reserved]
              56Item
      16A.
              Audit
      Committee Financial Expert
              56Item
      16B.
              Code
      of Ethics
              57Item
      16C.
              Principal
      Accountant Fees and Services
              57Item
      16D.
              Exemptions
      from the Listing Standards for Audit Committees
              57Item
      16E.
              Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
              57Item
      16F.
              Change
      in Registrant’s Certifying Accountant.
              57Item
      16G.
              Corporate
      Governance
              57Item
      17.
              Financial
      Statements
              58Item
      18.
              Financial
      Statements
              58Item
      19.
              Exhibits
              58





In
this Annual Report on Form 20-F, references to “dollars” and “$” are to United
States dollars, references to “RMB”, “renminbi” or “yuan” are to the Chinese
Yuan, and, unless the context otherwise requires, references to “eFuture,” “we,”
“us” and “our” refer to eFuture Information Technology Inc., its consolidated
subsidiaries and effectively controlled variable interest entities as defined in
Part I of this Annual Report.


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.


i


PART
I





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





Item
1.                  Identity
of Directors, Senior Management and Advisers





Not
applicable.





Item
2.                  Offer
Statistics and Expected Timetable





Not
applicable.





Item
3.                  Key
Information





A.
            Selected
      Consolidated Financial Data





The
following table presents the selected consolidated financial information for our
company. The selected consolidated statements of income data for the three years
ended December 31, 2007, 2008 and 2009 and the consolidated balance sheet
data as of December 31, 2008 and 2009 have been derived from our audited
consolidated financial statements set forth in ―Item 18–Financial Statements. The
selected consolidated balance sheet data for the year ended December 31,
2007 have been derived from our audited consolidated balance sheet as of
December 31, 2007,
which is not included in this annual report. The selected consolidated
statements of income data for the years ended December 31, 2005 and 2006
and the selected consolidated balance sheet data as of December 31, 2005
and 2006 have been derived from our audited consolidated financial statements
for the years ended December 31, 2005 and 2006, which are not included in
this annual report. Our historical results do not necessarily indicate results
expected for any future periods. The selected consolidated financial data should
be read in conjunction with, and are qualified in their entirety by reference
to, our audited consolidated financial statements and related notes and
“Item 5. Operating and Financial Review and Prospects” below. Our audited
consolidated financial statements are prepared and presented in accordance with
Generally Accepted Accounting Principles in the United States of America, or
U.S. GAAP .





RMB
                                          
                                          
                                          USDFor the YearFor the Year Ended December 31,
                                          
                                          
                                          
                                          
                                          
                                          EndedDecember 31,2005
                                          
                                          
                                          2006
                                          
                                          
                                          2007
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2009Total
      Revenues
                                          
                                          ¥
                                          39,244,001
                                          
                                          
                                          ¥
                                          47,843,530
                                          
                                          
                                          ¥
                                          84,920,993
                                          
                                          
                                          ¥
                                          139,863,502
                                          
                                          
                                          ¥
                                          122,267,642
                                          
                                          
                                          $
                                          17,912,311Profit
      (Loss) From Operations
                                          
                                          
                                          5,843,028
                                          
                                          
                                          
                                          7,976,967
                                          
                                          
                                          
                                          6,562,255
                                          
                                          
                                          
                                          (10,037,244
                                          )
                                          
                                          
                                          (29,525,848
                                          )
                                          
                                          
                                          (4,325,561
                                          )Earnings
      (Loss) From OperationsPer Common Stock
                                          
                                          
                                          4.73
                                          
                                          
                                          
                                          4.72
                                          
                                          
                                          
                                          2.44
                                          
                                          
                                          
                                          (3.12
                                          )
                                          
                                          
                                          (8.78
                                          )
                                          
                                          
                                          (1.29
                                          )Net
      loss attributable to eFutureInformation
      Technology
                                          
                                          
                                          5,470,263
                                          
                                          
                                          
                                          8,104,726
                                          
                                          
                                          
                                          (21,526,314
                                          )
                                          
                                          
                                          (4,478,112
                                          )
                                          
                                          
                                          (25,265,497
                                          )
                                          
                                          
                                          (3,701,416
                                          )Basic
      Earnings (Loss) Per Share
                                          
                                          
                                          4.43
                                          
                                          
                                          
                                          4.80
                                          
                                          
                                          
                                          (8.01
                                          )
                                          
                                          
                                          (1.39
                                          )
                                          
                                          
                                          (7.51
                                          )
                                          
                                          
                                          (1.10
                                          )Diluted
      Earnings (Loss) Per Share
                                          
                                          
                                          3.50
                                          
                                          
                                          
                                          4.43
                                          
                                          
                                          
                                          (8.01
                                          )
                                          
                                          
                                          (1.39
                                          )
                                          
                                          
                                          (7.51
                                          )
                                          
                                          
                                          (1.10
                                          )




1





RMB
                                                
                                                
                                                USDAs of December 31,
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                As of December31,2005
                                                
                                                
                                                2006
                                                
                                                
                                                2007
                                                
                                                
                                                2008
                                                
                                                
                                                2009
                                                
                                                
                                                2009Total
      Assets
                                                
                                                ¥
                                                31,657,674
                                                
                                                
                                                ¥
                                                83,025,047
                                                
                                                
                                                ¥
                                                208,877,159
                                                
                                                
                                                ¥
                                                238,862,093
                                                
                                                
                                                ¥
                                                228,537,620
                                                
                                                
                                                $
                                                33,480,951Total
      Current Liabilities
                                                
                                                
                                                (19,565,356
                                                )
                                                
                                                
                                                (18,476,058
                                                )
                                                
                                                
                                                (55,815,000
                                                )
                                                
                                                
                                                (93,306,490
                                                )
                                                
                                                
                                                (106,202,185
                                                )
                                                
                                                
                                                (15,558,708
                                                )Long-term
      Liabilities
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (49,849,390
                                                )
                                                
                                                
                                                (10,595,717
                                                )
                                                
                                                
                                                (7,970,483
                                                )
                                                
                                                
                                                (1,167,682
                                                )Net
      Assets
                                                
                                                
                                                12,092,318
                                                
                                                
                                                
                                                64,548,989
                                                
                                                
                                                
                                                103,212,769
                                                
                                                
                                                
                                                134,755,472
                                                
                                                
                                                
                                                116,260,412
                                                
                                                
                                                
                                                17,032,247Common
      Stock
                                                
                                                
                                                938,550
                                                
                                                
                                                
                                                1,647,781
                                                
                                                
                                                
                                                1,811,589
                                                
                                                
                                                
                                                2,039,196
                                                
                                                
                                                
                                                2,042,384
                                                
                                                
                                                
                                                299,211Number
      of Weighted-averageCommon Stock
                                                
                                                
                                                938,550
                                                
                                                
                                                
                                                1,689,434
                                                
                                                
                                                
                                                2,687,380
                                                
                                                
                                                
                                                3,214,466
                                                
                                                
                                                
                                                3,362,986




Exchange
Rate Information





Our
business is primarily conducted in China and all of our revenues are denominated
in RMB. However, periodic reports made to shareholders will include current
period amounts translated into U.S. dollars using the then current exchange
rates, for the convenience of the readers. The conversion of RMB into U.S.
dollars in this annual financial report is based on the noon buying rate in The
City of New York for cable transfers of RMB as certified for customs purposes by
the Federal Reserve Bank of New York. Unless otherwise noted, all translations
from RMB to U.S. dollars and from U.S. dollars to RMB in this annual financial
report were made at a rate of RMB6.8259 to US$1.00, the noon buying rate in
effect as of December 31, 2009. 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 RatePeriod
                                  
                                  Period-End
                                  
                                  
                                  Average (1)
                                  
                                  
                                  Low
                                  
                                  
                                  High(RMB
      per US Dollar)2006
                                  
                                  
                                  7.8041
                                  
                                  
                                  
                                  7.9723
                                  
                                  
                                  
                                  7.8041
                                  
                                  
                                  
                                  8.07022007
                                  
                                  
                                  7.2946
                                  
                                  
                                  
                                  7.6072
                                  
                                  
                                  
                                  7.2946
                                  
                                  
                                  
                                  7.81272008
                                  
                                  
                                  6.8225
                                  
                                  
                                  
                                  6.9477
                                  
                                  
                                  
                                  6.7800
                                  
                                  
                                  
                                  7.29462009
                                  
                                  
                                  6.8259
                                  
                                  
                                  
                                  6.8275
                                  
                                  
                                  
                                  6.8244
                                  
                                  
                                  
                                  6.82992010January
                                  
                                  
                                  6.8268
                                  
                                  
                                  
                                  6.8269
                                  
                                  
                                  
                                  6.8258
                                  
                                  
                                  
                                  6.8295February
                                  
                                  
                                  6.8258
                                  
                                  
                                  
                                  6.8285
                                  
                                  
                                  
                                  6.8258
                                  
                                  
                                  
                                  6.8330March
                                  
                                  
                                  6.8258
                                  
                                  
                                  
                                  6.8262
                                  
                                  
                                  
                                  6.8254
                                  
                                  
                                  
                                  6.8270April
                                  
                                  
                                  6.8247
                                  
                                  
                                  
                                  6.8256
                                  
                                  
                                  
                                  6.8275
                                  
                                  
                                  
                                  6.8229May
                                  
                                  
                                  6.8305
                                  
                                  
                                  
                                  6.8275
                                  
                                  
                                  
                                  6.8245
                                  
                                  
                                  
                                  6.8310June
      (through June 18, 2010)
                                  
                                  
                                  6.8267
                                  
                                  
                                  
                                  6.8298
                                  
                                  
                                  
                                  6.8267
                                  
                                  
                                  
                                  6.8323







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




B.
            Capitalization
      and Indebtedness





Not
applicable.




C.
            Reasons
      for the Offer and Use of Proceeds





Not
applicable.


2


D.
            Risk
      Factors





You
should carefully consider all of the information in this Annual Report and, in
particular, the risks outlined below. Any of the following risks could have a
material adverse effect on our business, financial condition and results of
operations.





Lingering
effects of the global economic crisis, could materially and adversely affect our
business, financial condition and results of operations.





Over the
last two years, the global economic crisis has affected all areas of business in
all the regions we operate in.





While the
Chinese economy has begun to show signs of recovery and improvement in recent
months, disruptions in orderly financial markets, resulting from, among other
factors, severely diminished liquidity and credit availability plus volatile and
declining valuations of securities and other investments have caused business
and consumer confidence to ebb, business activities to slow down, and
unemployment to increase.





We are
unable to predict whether the economic downturn has completely subsided. A
continuing economic downturn may adversely affect our business in a number of
ways, including:





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





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





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





·
            Additional restructuring and
      impairment charges.  If we are unable to generate the
      level of revenues, profits, and cash flow contemplated by our business
      plan, management will be forced to take further action to focus our
      business activities and align our cost structure with anticipated
      revenues. These actions, if necessary could result in additional
      restructuring charges and/or asset impairment charges being recognized in
      2010 and beyond.





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





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





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


3


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





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





We
have generated a significant shareholders’ deficit, and we cannot provide any
assurance that our business will be profitable in the future.





Though we
achieved profitability from 2004 to 2006, we had an accumulated deficit of RMB
68,687,892 as of December 31, 2009. As of December 31, 2009, our
shareholders’ equity was RMB 116,260,412. 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 RMB 25,265,497 in the
fiscal year ended December 31, 2009.





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.





Although
we remained stable in service fee revenue in the fiscal year 2009 due to the
economic downtown, we believe we are well positioned to extend our track record
of growth throughout 2010. We intend to optimize our revenue mix by focusing on
generating more service fee income through a wider range and different levels of
service. 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.





Our
operating results may seasonally fluctuate, which could cause our results to
fall short of expectations.





Our
business has historically experienced the highest revenue in the fourth quarter
of each year, primarily due to a massive year-end capital purchases by
customers. Such factors have resulted in 2009, 2008, and 2007 first quarter
revenue being lower than revenue in the prior year’s fourth quarter. We believe
that this trend will continue in the future and that our revenue will
continue to peak in the fourth quarter of each year and decline from that level
in the first quarter of the following year. As we continue to grow, we expect
that the seasonality in our business may cause our operating results to
fluctuate.


4


We are heavily dependent upon the
services of technical and managerial personnel who develop and implement
our one-stop front-end
supply chain total solutions, 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 front-end supply chain total
solutions is substantially dependent upon our ability to locate, hire and train
qualified personnel. 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 front-end supply chain total solutions
is subject to intense competition, the number of significant competitors is
relatively limited, 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 front-end
supply chain total solutions and related services, a single, concentrated group
of products.





We derive
most of our revenues from the license and implementation of software
applications for China’s retail and consumer goods industries and 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 China’s
retail and consumer goods industries industry. To the extent we are unable to
continually improve our front-end supply chain total solutions to address the
changing needs of the China’s retail and consumer goods industries front market,
we may experience a significant decline in the demand for our programs. In such
a scenario, our revenues may significantly decline.





The
market for front-end supply chain total solutions is intensely
competitive.





Although
we believe that we have principal competitive factors in our markets, 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 China’s retail and consumer
goods industries. 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.


5


Our
financial performance is directly related to our ability to adapt to
technological change and evolving standards when developing and improving our
front-end supply chain total solutions.





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. 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 China’s retail and consumer goods industries 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.





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. 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 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 front-end supply chain total solutions, which may afford only
limited protection. 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.





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





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


6


Our
front-end supply chain total solutions 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 common stock. Although we achieved profitability from 2004 to 2006, we
cannot assure you that our operations will continue to result in sufficient
revenues to enable us to operate at profitable levels or to generate positive
cash flows. Indeed, we had net losses of RMB 4,478,112 and RMB 25,265,497 in the
fiscal years ended December 31, 2008 and 2009, respectively. Furthermore, there
is no assurance our Board of Directors will declare dividends even if we are
profitable. Dividend policy is subject to the discretion of our Board of
Directors and will depend on, among other things, our earnings, financial
condition, capital requirements and other factors. Under Cayman Islands 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 common stock in the future, as a holding company, we will be dependent on
receipt of funds from our operating wholly- and partially-owned
subsidiaries.





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





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%.


7


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





Governmental
control of currency conversion may affect the value of our common
stock.





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





Fluctuation
in the value of the Renminbi may have a material adverse effect on the value of
our common stock.





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. The Renminbi is permitted to fluctuate within a narrow and managed
band against a basket of certain foreign currencies. There remains significant
international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant
appreciation of the Renminbi against the U.S. dollar. We rely entirely on
dividends and other fees paid to us by our subsidiaries in China. Any
significant revaluation of Renminbi may materially and adversely affect our cash
flows, revenues, earnings and financial position, and the value of, and any
dividends payable on, our common stock in U.S. dollars. For example, an
appreciation of Renminbi against the U.S. dollar would make any new Renminbi
denominated investments or expenditures more costly to us, to the extent that we
need to convert U.S. dollars into Renminbi for such purposes. An appreciation of
Renminbi against the U.S. dollar would also result in foreign currency
translation losses for financial reporting purposes when we translate our U.S.
dollar denominated financial assets into Renminbi, as the Renminbi is our
reporting currency.





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





The
economy of China has historically been a planned economy subject to governmental
plans and quotas and has, in certain aspects, been transitioning to a more
market-oriented economy. Although we believe that the economic reform and the
macroeconomic measures adopted by the Chinese government have had a positive
effect on the economic development of China, we cannot predict the future
direction of these economic reforms or the effects these measures may have on
our business, financial position or results of operations.





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





According
to the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on
January 1, 2008, as further clarified by subsequent tax regulations
implementing the EIT Law, foreign-invested enterprises and domestic enterprises
are subject to enterprise income tax, or EIT, at a uniform rate of 25%. The EIT
rate of enterprises established before March 16, 2007 that were eligible
for preferential tax rates according to the effective tax laws and regulations
will gradually transition to the uniform 25% EIT rate by January 1, 2013.
In addition, certain enterprises may still benefit from a preferential tax rate
of 15% under the EIT Law if they qualify as “high and new technology enterprises
strongly supported by the state,” subject to certain general factors described
in the EIT Law and the related regulations.


8


In
December 2008, our subsidiary eFuture Beijing was designated as “High and New
Technology Enterprises” under the EIT Law, which entitles it to a preferential
EIT rate of 15% from 2008 to 2010. If it fails to maintain the “High and
New Technology Enterprises” qualification, its applicable EIT rate may increase
to up to 25%, which could have a material adverse effect on our results of
operations. We cannot assure you that we will be able to maintain our current
effective tax rate in the future.





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 “High and New Technology
Enterprises” or if we ceased to qualify as such, we would be subject to the
standard statutory tax rate, which currently is 25%, and we would be unable to
obtain business tax refunds for our provision of technology consulting
services.





China’s
legal system embodies uncertainties that could adversely affect our ability to
engage in the development and integration of the front-end supply chain total
solutions.





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 (2007 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.


9


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





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





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





Item
4.                  Information
on the Company





A. History
and Development of the Company





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





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





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


10


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





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





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





OUR
MARKET





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





According
to data from the National Bureau of Statistics of China, in 2009, the total
retail sales of consumer goods reached RMB 12.5 trillion, up by 15.5% over the
previous year. An analysis on different areas showed that the retail sales of
consumer goods in cities reached RMB 8.5 trillion up by 15.5% and the retail
sales of consumer goods at and below county level was RMB 4.0 trillion, up by
15.7%. Analyzed by different sectors, the sales for the wholesale and retail
trade reached RMB 10.5 trillion, up 15.6%; the sales of the lodging and catering
industry was RMB 1.8 trillion, up 16.8%, and the sales for the other industries
were RMB 193.2 billion, up 2.5%.





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





eFuture Market
Position





We are a
leading front-end supply chain total solutions provider in retail and consumer
goods industries as companies in China increase expenditures on software and
services.





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 our
principal competitive advantages are:





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


l
            Extensive
      nationwide network coverage;


l
            Strategic
      partnership with leading global technology companies;
  and


l
            Disciplined
      expansion of our core software business and ability to leverage of our
      large retail install base to expand our eServices
  offering;


11


B.           Business
Overview





General





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










eFuture
currently serves more than 1,000 retailers and 5,000 suppliers operating in
China. eFuture is one of IBM’s premier business partners in Asia Pacific and a
strategic partner of Oracle, Microsoft, JDA, Motorola and Samsung Network in
China. eFuture has more than 670 employees and 20+ offices/service sites across
China.





Mission and
Strategy





Mission





eFuture’s
mission is to help customers win a sustained competitive advantage by
improving the DNA of the supply chain. Our valuable offerings of software and
services can help customers perform at a significantly higher level of
liquidity and efficiency by enabling front-end supply
chain performance optimization to achieve profitable, sustainable growth.
We strives to build upon our established leading position and accelerate
business innovation to ensure our long term success.





Growth
Strategy





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





l
            Organic Growth – Software
      Business- We aim to drive the long-term organic growth and
      profitability of our core software solutions business and related
      professional services by:





u
            Solidifying
      our leading position and competitive advantage in the front-end supply
      chain market


u
            Increasing
      our software related value-added services to optimize demand processes
      from factory to consumer, including recurring support services for
      existing software installation, client retention, delivery services,
      consulting services and outsourcing
services


u
            Expanding
      our geographic coverage, including growth into second and third tier,
      cities





l
            Organic Growth – eServices
      - We plan to grow our eService business through organic expansion.
      This is a key growth engine for the company and an area where we have made
      significant progress by leveraging existing retailer relationships and
      suppliers and consumers and resources. Our eService solutions
      include:


12


u
            Business-to-business
      (B2B) service between retailers and
suppliers


u
            Software-as-a-Service
      (SaaS) including Supply Chain Management (SCM)
  solutions


u
            Business-to-consumer
      (B2C) solutions


u
            Transaction
      plus one day supply chain financing (T+1 SCF)
  service





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





u
            Diversify
      our product offering-Independent
      Software Vendors (ISV) with offerings complementary to our solutions,
      which focus on industries including fashion, auto,consumer
      electronics,
      drugstores and fast-moving consumer
  goods.


u
            Broaden
      our regional coverage - ISVs with extensive coverage
      in South, East, and North
China.


u
            Penetrate
      the small and medium sized businesses (SMB) market - Companies withstandardized, scalable product
      offerings that facilitate penetration into SMBs in second and third tier
      cities in China.


u
            Create
      additional recurring revenue streams - Companies with products and
      services delivering a stable and recurring revenue stream, and which
      provide potential for
growth.





Our
Business





Our
businesses include our front-end supply chain total solution business and our
eService business.





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





eService
business is our emerging business segment, and includes B2B services, SaaS which
includes SCM solutions and B2C store solutions, and T+1 SCF
services.





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





We
achieved consistent organic growth and expansion through mergers and
acquisitions from 2006 to 2008. Total revenues decreased in 2009 in comparison
to 2008 due largely to decreased technology spending by our customers as a
result of the challenging macro economic environment. However, the key factors
which we believe will support our growth in the future include:





l
            China’s
      robust macroeconomic environment and strong growth catalysts in the retail
      and consumer goods industries;


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


l
            Extensive
      nationwide network coverage;


l
            Strategic
      partnership with leading global technology companies;
  and


l
            Disciplined
      expansion of our core software business and ability to leverage our large
      retail install base to expand our eServices
  offering.


13


The
market in China for our products and services is driven by robust growth
catalysts. Our brand is well known among prominent international and local
clients, including 15 Fortune 500 companies. We are a leading front-end supply
chain total solutions provider and are one of the only nationwide software and
service vendors of our kind. At the same time, we are expanding from our core
competency of front-end supply chain total solutions into B2B services and SaaS
by leveraging the resources of our large install-base of retail
clients.





SOFTWARE
BUSINESS





Software
Solutions





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





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





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





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





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





Related
Value-Added Services





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





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





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





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


14




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





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











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





Outsourcing
Services – Flexible by design to meet our clients’ changing requirements,
eFuture outsourcing services can manage all or parts of our clients’ non-core
business processes or technology operations, from selective outsourcing to
full-scope system and network outsourcing and data center management. eFuture
teams manage and operate client internal business processes. Leveraging
technology and our industry and process expertise, we provide design,
development, implementation, operation, and continuous improvement of both IT
and business functions. Our call center, based in Wuhan and also referred to as
our help desk department, provides a single point of contact to receive and
manage all customers’ requests (problem notification, information request,
service request) across the entire range of services provided.





ESERVICE
BUSINESS





Our
eServices business based on cloud computing architechture, includes B2B
services, SaaS services which includes SCM solutions and B2C store solutions,
and T+1 SCF services.





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





Since May
2008, through the purchase of a 51% ownership stake, we gained effective control
of Wangku, a leading B2B service provider in China with a focus on the retail
and fast-moving consumer goods industries. Since the fourth quarter of 2008, we
have focused on establishing more robust sales capabilities and practices at
Wangku, to speed up the business pipeline in order to convert more prospects
into deals.


15


The goal
of our B2B services is two-fold:





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


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





SaaS
Business (www.bFuture.com.cn)





Throughout
2009, we focused on enhancing our SaaS-based applications, allowing us to become
a fully integrated software application company. Among other benefits, our
SaaS-based applications generate revenue both at the time of sale, and on a
consistent and ongoing basis with the sale of corresponding service
agreements.





l
            SaaS
      is a model of software delivery where the software company provides
      maintenance, daily technical operation, and support for the software
      provided to their clients. SaaS is a model of software delivery rather
      than a market segment; software can be delivered using this method to any
      market segment including home consumers, small businesses, as well as
      medium and large businesses.


l
            We
      will focus on using this method to deliver software to SMBs in China,
      especially in SCM, CRM, B2C store, and POS for mini
  store.





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





SCM
SaaS





We
co-developed a SCM SaaS service with IBM Research Lab and IBM Global Service
team in October of 2007. We control 51% of the ownership of bFuture by
VIE.





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





In line
with our organic growth strategy to expand our eService offering, we began in
2009 to see growing interest from existing clients to scale-up and expand their
relationship with eFuture by utilizing our eService applications.





We
started to deploy a bundled package offering bFuture SCM SaaS service together
with its POS-ERP software in two of our Strategic Business Units (“SBUs”), the
Department Store and Shopping Mall SBU and the Grocery Business
SBU.





We have
installed and are currently serving three retailers and their 3,000 suppliers
with the bundled POS-ERP package.  In addition, over 10 retailers are
in the process of deploying the package.  Following deployment, these
retailers will be able to open SaaS services with their suppliers.  We
expect to see more profitable growth from this service as we increase the scale
of the operation.





SaaS
B2C Store





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


16


cFuture,
established in September 2009, is a provider of services that enable e-commerce,
multichannel retailing to the retail and consumer goods industry in China.
cFuture delivers an integrated, end-to-end solution and service allowing
retailers to establish business-to-consumer ("B2C") online stores through a B2C
platform (or "e-Cube"), which is comprised of  consulting,
infrastructure, technology and fulfillment.





In March
2010, the Company acquired control over a 15% equity position in cFuture for
RMB240,000 in cash.





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





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





bFuture
will provide the necessary software and services for retailers and their
small-to-medium-sized suppliers to execute the program with banks, and charge
software and service fees for the program implementation.





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





SALES
AND MARKETING





We
recently restructured our sales organization from a product driven model to a
customer driven model by building major account teams and three regional sales
teams focused on North, South and East China.





Furthermore,
we appointed Mr. Dehong Yang in the newly created position of President of
eFuture Information Technology Inc. in December 4, 2009. Mr. Yang officially
joined eFuture on January 1st, bringing with him over 10 years of international
business management experience and a proven track record of successfully
implementing and driving strategic initiatives. He has held senior roles at
Wincor Nixdorf and IBM, and has extensive experience in the retail and consumer
goods and e-commerce markets, providing him with an ideal background to support
eFuture’s growth initiatives.





As
President, Mr. Yang is responsible for the overall management of operations
company-wide. Since coming onboard in January, he has begun to drive the
development and execution of a number of key priorities. Under his guidance, we
restructured our sales organization from a product driven model to a customer
driven model by building major account teams and three regional sales teams
focused on North, South and East China at the beginning of 2010 and we are
firmly focused on optimizing our revenue mix by moving toward a higher margin
structure, realigning our cost base with industry best practices to enhance our
profitability.





Marketing
Initiatives





In 2009,
we significantly strengthened our market position through investment in new
releases of core software solutions and sales-related activities to further
strengthen penetration into tier-2 and tier-3 cities.





Since
early 2009, we have redeployed 35% of our sales team to help expand new client
development in tier-2 and tier-3 cities in China. This effort is a critical
building block to help us expand our geographic reach and client base. In
addition, we have invested in new marketing initiatives to support our sales
team as they work to deepen our penetration in tier 2, 3, and 4 cities. We also
set up a new, specialized marketing team with about 50 staff located around
China to help speed up the sales cycle, develop new sales leads, and increase
our market share in all key markets in China. This effort has resulted in
significant progress. During the second, third, and fourth quarters, we expanded
our sales and marketing outreach efforts into a number of tier- 2, 3, and 4
cities. As of December the 31st, our pipeline had grown to over 1,000 clients
with operations in 350 cities across China. We also believe we will start to
generate new contract signings in the coming year.


17




We have
seen steady growth in our pipeline of new projects. In fact, out of a total of
968 new contracts with a value of $20.4 million, new contracts from tier-2, 3,
and 4 cities accounted for 25.7% of the total contract value. This will help us
to continue to build up our revenue for the next few years.





Geographical
Coverage





To date,
we have provided our products and services to businesses located throughout
China via our extensive nationwide network:-


l
            Operating
      20+ offices/service sites across
China


l
            Headquartered
      in Beijing


l
            R&D
      centers in Guangzhou & Wuhan


l
            Regional
      service centers in Shanghai, Guangzhou and
Wuhan











Our
Ecosystem





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





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





As of the
date of this annual report, we have entered into the following agreements with
large global corporations to generate business opportunities:





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


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


18




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


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


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


l
            In
      2009, through our collaboration with IBM, we launched China’s first SaaS
      solution for the retail distribution industry. We successfully completed
      the deployment of the solution at select Beijing Wangfujing Department
      Store Group (“Wangfujing Group”) stores in Beijing. Wangfujing Group is
      one of the largest retail groups in
Beijing.


l
            In
      2009, we entered into a strategic relationship with JDA Software focused
      on collaborative growth. We believe this alliance will fuel delivery of
      our combined solution, which is designed to help retail and consumer goods
      companies in China optimize their operations and improve
      profitability.


l
            In
      2009, we entered into a strategic relationship with Microsoft Corporation
      to provide a standardized POS-ERP system for retailers in China. This
      system will integrate Microsoft Windows Embedded POSReady 2009 into
      eFuture's POS-ERP Store Operation
System.





Our
Key Clients





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





We
currently serve over 1,000 retailers and over 5,000 suppliers and manufacturers
operating in China, including Fortune 500 companies that do business in China,
such as Procter & Gamble, Yum! Brands, PepsiCo, Kraft, Kimberly-Clark,
B&Q-Kingfisher, L’Oreal, JUSCO-Aeon, Guangzhou China and China COFCO; and
the top 100 retailers, such as China Resources Vanguard, BELLE, Shanghai
Lianhua, Nanjing Suning Appliance, Chongqing Department Store, Shangdong Yinzuo,
Shangdong Jiajiayue, Beijing Wangfujing, Beijing Jingkelong, Wuhan Zhongbai,
Wuhan Wushang Group, Hunan Bubugao, Fujian Yonghui and PARKSON
China.





Currently,
our software solutions are utilized:





l
            in
      all provinces in China except Taiwan and
Macau;


l
            in
      more than 200 cities;


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


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


l
            by
      over 36 of the top 100 retailers and 24 of the 60 largest retailers in
      China;


l
            more
      than 5,000 distribution nodes.





Our
Competitive Landscape





We are a
leading front-end supply chain total solutions provider in retail and consumer
goods industries. The market is segmented into multiple tiers.





Tier 1 Market – Comprised of
Multinational Corporations in the retail and FMCG markets with operations in
China


In this
market, our chief competitors are SAP, Oracle, JDA, ORACLE and IBM. eFuture
concentrates on the front-end supply chain solutions segment, whereas our
competitors are less specialized and address other segments of the IT market,
such as database management applications (Oracle, IBM), IT services (IBM), and
back-office applications (SAP, Oracle).


19


Our
strategy is to provide “global solution and local service” and bundled solutions
by collaborating with larger global technology companies. Our front-end supply
chain solutions, including POS, Store Operation, Distribution Management and
Customer Relationship Management, ect., are quite flexible and can be bundled
together with 3rd party back-office solutions, including Financial Management
System and Human Resources Management System, etc.





Tier 2 Market – Comprised of
the top 100 retailers and leading regional retailers in China


We are
the market leader in this segment in terms of software and software-related
service revenue. We won 36 clients among China’s top 100 retailers in 2009. Our
global peers are very active and aggressive in this market. We compete with
global peers as well as some local peers, such as Changyi, Tech-Trans and
Heading, etc. Our competitive advantages in the Tier 2 market include
competitive pricing and more flexible localized solutions compared with global
peers and global best practice offering compared with local peers.





Tier 3 Market and Others –
Comprised of all retail and FMCG companies outside the Tier 2
market


We
compete against an additional 170+ companies such as UFIDA and Kingdee in the
Tier 3 market, which deliver solutions to small and medium sized businesses
located throughout China. Our competitors in this segment are typically more
focused on a regional level or on certain industries, and in many cases lack our
broad service offering and nationwide network.





Our
Research & Development





In 2009,
management increased investment in new products and services to RMB 12.1 million
in order to increase revenue potential from existing clients and drive the
expansion of eFuture’s addressable markets:





eFuture
Business Intelligence (“BI”) Solutions


l
            eFuture’s
      fully integrated suite of BI software solutions provide retailers with the
      ability to better understand customer buying behavior, to drive sales and
      profitability, to decrease supply chain costs, and to reduce operational
      costs.


l
            eFuture
      BI Solutions integrate data from across the customer’s enterprise, and
      provides easily accessible self-service reporting and
      analysis.


l
            We
      developed and launched our BI solutions to address the needs of our SBU in
      three areas: marketing, operations and
  merchandizing.


l
            We
      are currently conducting a trial with one client to ascertain the market
      reception and potential of this product
line.


l
            Thus
      far in 2009, the Company has successfully completed CRM pilot programs
      with a few major Beijing-based department store groups, with positive
      market reception.





eFuture
ONE CRM


l
            eFuture
      ONE CRM provides a robust platform for retail and consumer clients to
      analyze customer and transactional data in order to strategically profile
      and segment customers to predict their future
  behavior.


l
            Specific
      solutions offer profiling and segmentation of retail outlets based on
      transaction history and trade area demographics; market-basket analysis
      for determining which products are likely to be purchased together;
      tracking of customer movement between segments; analysis of customer
      behavior and price sensitivity; and customized reports of customer data
      based on a variety of inputs.


l
            The
      eFuture CRM system is specifically designed to cater to the growing needs
      of customers in our Department Store
SBU.


l
            Thus
      far in 2009, the Company has successfully completed CRM pilot programs
      with a few major Beijing-based department store groups, with positive
      market reception.


20


Regulation





Proprietary
Rights





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





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





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





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.


21


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





Regulation
on Software Products





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





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.





C.
            Organizational
      structure





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





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


22


D.      Property,
Plant and Equipment





Facilities





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





Office
                  
                  Address
                  
                  Rental Term
                  
                  SpaceBeijing
                  
                  8/F
      Topnew Tower
                    15
      Guanghua Road
                    Chaoyang
      Distinct
                    Beijing
      100026, PRC
                  
                  Expires
      April 24, 2012
                    Commenced
      on April 25, 2009
                  
                  1,496.77
      sq. metersShanghai
                  
                  Floor
      19E, F, G, H, I
                    Shentong
      Information Plaza
                    55
      West Road of Huaihai Street
                    Shanghai,
      Xu Jiahu District, PRC
                  
                  Expires
      March 19, 2011
                  
                  757.47
      sq. metersNanjing
                  
                  Floor
      3,49 Jiangsu Software Park,169 Road of Longpan zhong street,
                    Nanjing,
      Jiangsu province, PRC
                  
                  Expires
      December 31, 2010
                  
                  283
      sq. metersShijiazhuang
                  
                  R2108,Floor
      21
                    Changan
      Plaza
                    289
      East Road of Zhongshan Street
                    Shijiazhuang,
      Hebei province, PRC
                  
                  Expires
      December 31, 2010
                  
                  647.68
      sq. metersGuangzhou
                  
                  Rear
      Building
                    Huicheng
      Plaza
                    130
      Zhongshan Street
                    Guangzhou,
      Guangdong province, PRC
                  
                  Expires
      November 30, 2011
                  
                  500
      sq. metersWuhan
                  
                  Floor
      2 and 3
                    Office
      Building of Machine Bureau
                    Fujiapo,
      Wuchang District
                    Wuhan,
      Hubei Province, PRC
                  
                  Expires
      June 30, 2010
                  
                  846
      sq. metersWuhan
                  
                  Floor
      36 and 40
                    No.
      7 of Zhongnan Road
                    Wuchang
      District
                    Wuhan,
      Hubei Province, PRC
                  
                  Expires
      May 19, 2015
                  
                  2293.73
      sq. meters





We leased
a new facility in Wuhan to support our expanded business needs which is under
internal decoration and will be ready for use in July, 2010.





Item
4A.               Unresolved
Staff Comments





Not
applicable.


23


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





A.       
Operating Results





Overview





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





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





Revenues





Our
revenues increased from RMB84,920,993 in 2007 to RMB139,863,502 in 2008 but
decreased to RMB122,267,642 in 2009. The significant increase in 2008
reflected organic growth driven by the successful expansion of our product
and service lines and our increasing market penetration, both in China’s largest
cities and expansion into second and third tier cities. The increase in 2008
also reflected our acquisitions of Wangku and Proadvancer in 2008. For the
fiscal year 2009, we experienced a year-over-year decline of 12.6% in total
revenues, primarily attributable to the fact that customers delayed or reduced
their IT expenditures during the year as a result of the economic
downturn.





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





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





·
            global
      economic conditions;


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


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


·
            new
      product introductions by us and our
competitors;


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


·
            exchange
      rate fluctuations; and


·
            the
      availability of credit for our
customers;


24


Cost of
Revenues





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





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





Operating
Expenses





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





Summary
of 2009 Operations





Despite
the difficult operating environment in 2009 as a result of the economic
downturn, we took the opportunity to implement a number of business reforms. We
continued to solidify our core enterprise software business, grow value-added
service revenues, and strengthen our eService offering and capabilities. We
believe we are positioned to renew our track record of growth in 2010. Apart
from the above stated external factors, we believe our performance reflects our
continued execution, focused growth strategy, affordable and flexible suite of
solutions, our large and diversified install base and the continued resilience
of China’s retail and consumer goods industry.





We also
solidified our core enterprise software business and forged into new frontiers
of eService, including our B2B service and SaaS service for SCM and B2C store.
And while still a relatively nascent endeavor, our eService strategy remains a
key long-term growth driver. The eService segment began to make a positive
contribution in 2009, representing 8.0% of our total revenues for the full
year.


25


Results
of Operations





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




Chinese Yuan (Renminbi)
                                  
                                  
                                  U.S. DollarsFor theYear EndedFor the Years Ended December 31,
                                  
                                  
                                  December 31,2007
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2009RevenuesSoftware
      sales
                                  
                                  ¥
                                  42,076,411
                                  
                                  
                                  ¥
                                  66,215,769
                                  
                                  
                                  ¥
                                  54,187,769
                                  
                                  
                                  $
                                  7,938,553Hardware
      sales
                                  
                                  
                                  16,198,402
                                  
                                  
                                  
                                  26,655,967
                                  
                                  
                                  
                                  21,518,084
                                  
                                  
                                  
                                  3,152,417Service
      fee income
                                  
                                  
                                  26,646,180
                                  
                                  
                                  
                                  46,991,766
                                  
                                  
                                  
                                  46,561,789
                                  
                                  
                                  
                                  6,821,341Total
      Revenues
                                  
                                  
                                  84,920,993
                                  
                                  
                                  
                                  139,863,502
                                  
                                  
                                  
                                  122,267,642
                                  
                                  
                                  
                                  17,912,311Cost
      of revenuesCost
      of software
                                  
                                  
                                  15,648,282
                                  
                                  
                                  
                                  22,928,605
                                  
                                  
                                  
                                  13,265,401
                                  
                                  
                                  
                                  1,943,392Cost
      of hardware
                                  
                                  
                                  12,601,230
                                  
                                  
                                  
                                  21,989,087
                                  
                                  
                                  
                                  17,294,931
                                  
                                  
                                  
                                  2,533,722Cost
      of service fee income
                                  
                                  
                                  6,965,367
                                  
                                  
                                  
                                  20,247,922
                                  
                                  
                                  
                                  22,916,896
                                  
                                  
                                  
                                  3,357,344Amortization
      of acquired technology
                                  
                                  
                                  8,231,375
                                  
                                  
                                  
                                  13,308,030
                                  
                                  
                                  
                                  11,983,299
                                  
                                  
                                  
                                  1,755,563Amortization
      of software costs
                                  
                                  
                                  2,889,118
                                  
                                  
                                  
                                  3,632,744
                                  
                                  
                                  
                                  4,280,232
                                  
                                  
                                  
                                  627,058Total
      Cost of Revenue
                                  
                                  
                                  46,335,372
                                  
                                  
                                  
                                  82,106,388
                                  
                                  
                                  
                                  69,740,759
                                  
                                  
                                  
                                  10,217,079Gross
      Profit
                                  
                                  
                                  38,585,621
                                  
                                  
                                  
                                  57,757,114
                                  
                                  
                                  
                                  52,526,883
                                  
                                  
                                  
                                  7,695,232Operating
      ExpensesResearch
      and development expenses
                                  
                                  
                                  816,479
                                  
                                  
                                  
                                  6,512,776
                                  
                                  
                                  
                                  3,165,788
                                  
                                  
                                  
                                  463,791General
      and administrative expenses
                                  
                                  
                                  19,192,286
                                  
                                  
                                  
                                  40,488,964
                                  
                                  
                                  
                                  43,840,536
                                  
                                  
                                  
                                  6,422,675Selling
      and distribution expenses
                                  
                                  
                                  12,014,601
                                  
                                  
                                  
                                  20,792,618
                                  
                                  
                                  
                                  34,284,407
                                  
                                  
                                  
                                  5,022,694Impairment
      loss of goodwill
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  762,000
                                  
                                  
                                  
                                  111,633Total
      Operating Expenses
                                  
                                  
                                  32,023,366
                                  
                                  
                                  
                                  67,794,358
                                  
                                  
                                  
                                  82,052,731
                                  
                                  
                                  
                                  12,020,793Profit/(loss)
      from operations
                                  
                                  
                                  6,562,255
                                  
                                  
                                  
                                  (10,037,244
                                  )
                                  
                                  
                                  (29,525,848
                                  )
                                  
                                  
                                  (4,325,561
                                  )Other
      income (expenses):Interest
      income
                                  
                                  
                                  3,533,326
                                  
                                  
                                  
                                  1,424,029
                                  
                                  
                                  
                                  425,103
                                  
                                  
                                  
                                  62,278Interest
      expense
                                  
                                  
                                  (2,813,489
                                  )
                                  
                                  
                                  (1,246,780
                                  )
                                  
                                  
                                  (453,861
                                  )
                                  
                                  
                                  (66,491
                                  )Interest
      expenses - amortization of discount on notes payable
                                  
                                  
                                  (22,415
                                  )
                                  
                                  
                                  (33,212
                                  )
                                  
                                  
                                  (13,316
                                  )
                                  
                                  
                                  (1,951
                                  )Interest
      expenses - amortization of deferred loan costs
                                  
                                  
                                  (2,114,685
                                  )
                                  
                                  
                                  (978,204
                                  )
                                  
                                  
                                  (350,996
                                  )
                                  
                                  
                                  (51,421
                                  )Income/(loss)
      on investments
                                  
                                  
                                  985,085
                                  
                                  
                                  
                                  (3,552,902
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Gain
      on derivatives
                                  
                                  
                                  10,324,874
                                  
                                  
                                  
                                  33,122,465
                                  
                                  
                                  
                                  1,290,329
                                  
                                  
                                  
                                  189,034Loss
      on extinguishment of convertible notes
                                  
                                  
                                  (39,504,662
                                  )
                                  
                                  
                                  (22,529,233
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Foreign
      currency exchange gain/(loss)
                                  
                                  
                                  544,173
                                  
                                  
                                  
                                  368,127
                                  
                                  
                                  
                                  (133,087
                                  )
                                  
                                  
                                  (19,497
                                  )Loss
      before tax
                                  
                                  
                                  (22,505,538
                                  )
                                  
                                  
                                  (3,462,954
                                  )
                                  
                                  
                                  (28,761,676
                                  )
                                  
                                  
                                  (4,213,609
                                  )Income
      tax expense/(benefit)
                                  
                                  
                                  946,704
                                  
                                  
                                  
                                  (810,744
                                  )
                                  
                                  
                                  1,396,305
                                  
                                  
                                  
                                  204,560Net
      loss
                                  
                                  
                                  (21,558,834
                                  )
                                  
                                  
                                  (4,273,698
                                  )
                                  
                                  
                                  (27,365,371
                                  )
                                  
                                  
                                  (4,009,049
                                  )Net
      profit (loss) attributable to the noncontrolling interest
                                  
                                  
                                  32,520
                                  
                                  
                                  
                                  (204,414
                                  )
                                  
                                  
                                  2,099,874
                                  
                                  
                                  
                                  307,633Net
      loss attributable to eFuture Information Technology
                                  
                                  
                                  (21,526,314
                                  )
                                  
                                  
                                  (4,478,112
                                  )
                                  
                                  
                                  (25,265,497
                                  )
                                  
                                  
                                  (3,701,416
                                  )Other
      comprehensive incomeForeign
      currency translation adjustment
                                  
                                  
                                  491,079
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Comprehensive
      loss
                                  
                                  ¥
                                  (21,035,235
                                  )
                                  
                                  ¥
                                  (4,478,112
                                  )
                                  
                                  ¥
                                  (25,265,497
                                  )
                                  
                                  $
                                  (3,701,416
                                  )Loss
      per common stockBasic
                                  
                                  ¥
                                  (8.01
                                  )
                                  
                                  ¥
                                  (1.39
                                  )
                                  
                                  ¥
                                  (7.51
                                  )
                                  
                                  $
                                  (1.10
                                  )Diluted
                                  
                                  ¥
                                  (8.01
                                  )
                                  
                                  ¥
                                  (1.39
                                  )
                                  
                                  ¥
                                  (7.51
                                  )
                                  
                                  $
                                  (1.10
                                  )Basic
      Weighted-average Shares Outstanding
                                  
                                  
                                  2,687,380
                                  
                                  
                                  
                                  3,214,466
                                  
                                  
                                  
                                  3,362,986
                                  
                                  
                                  
                                  3,362,986Fully-Diluted
      Weighted-average Shares Outstanding
                                  
                                  
                                  2,687,380
                                  
                                  
                                  
                                  3,214,466
                                  
                                  
                                  
                                  3,396,881
                                  
                                  
                                  
                                  3,396,881


26




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 in 2007, 2008 and
2009.




RMBPercentage
                        
                        
                        
                        
                        
                        Percentage
                        
                        
                        
                        
                        
                        Percentage
                        
                        
                        Change
                        
                        
                        
                        
                        
                        Changeof FY 2007
                        
                        
                        
                        
                        
                        of FY 2008
                        
                        
                        
                        
                        
                        of FY 2009
                        
                        
                        FY 2007 v FY
                        
                        
                        
                        
                        
                        FY 2008 v FYFY 2007
                        
                        
                        Revenues
                        
                        
                        FY 2008
                        
                        
                        Revenues
                        
                        
                        FY 2009
                        
                        
                        Revenues
                        
                        
                        2008
                        
                        
                        % Change
                        
                        
                        2009
                        
                        
                        % ChangeRevenuesSoftware
      sales
                        
                        
                        42,076,411
                        
                        
                        
                        49.5
                        %
                        
                        
                        66,215,769
                        
                        
                        
                        47.3
                        %
                        
                        
                        54,187,769
                        
                        
                        
                        44.3
                        %
                        
                        
                        24,139,358
                        
                        
                        
                        57.4
                        %
                        
                        
                        (12,028,000
                        )
                        
                        
                        -18.2
                        %Hardware
      sales
                        
                        
                        16,198,402
                        
                        
                        
                        19.1
                        %
                        
                        
                        26,655,967
                        
                        
                        
                        19.1
                        %
                        
                        
                        21,518,084
                        
                        
                        
                        17.6
                        %
                        
                        
                        10,457,565
                        
                        
                        
                        64.6
                        %
                        
                        
                        (5,137,883
                        )
                        
                        
                        -19.3
                        %Service
      fee income
                        
                        
                        26,646,180
                        
                        
                        
                        31.4
                        %
                        
                        
                        46,991,766
                        
                        
                        
                        33.6
                        %
                        
                        
                        46,561,789
                        
                        
                        
                        38.1
                        %
                        
                        
                        20,345,586
                        
                        
                        
                        76.4
                        %
                        
                        
                        (429,977
                        )
                        
                        
                        -0.9
                        %Total
      Revenues
                        
                        
                        84,920,993
                        
                        
                        
                        100.0
                        %
                        
                        
                        139,863,502
                        
                        
                        
                        100.0
                        %
                        
                        
                        122,267,642
                        
                        
                        
                        100.0
                        %
                        
                        
                        54,942,509
                        
                        
                        
                        64.7
                        %
                        
                        
                        (17,595,860
                        )
                        
                        
                        -12.6
                        %Cost
      of RevenuesCost
      of software
                        
                        
                        15,648,282
                        
                        
                        
                        18.4
                        %
                        
                        
                        22,928,605
                        
                        
                        
                        16.4
                        %
                        
                        
                        13,265,401
                        
                        
                        
                        10.8
                        %
                        
                        
                        7,280,323
                        
                        
                        
                        46.5
                        %
                        
                        
                        (9,663,204
                        )
                        
                        
                        -42.1
                        %Cost
      of hardware
                        
                        
                        12,601,230
                        
                        
                        
                        14.8
                        %
                        
                        
                        21,989,087
                        
                        
                        
                        15.7
                        %
                        
                        
                        17,294,931
                        
                        
                        
                        14.1
                        %
                        
                        
                        9,387,857
                        
                        
                        
                        74.5
                        %
                        
                        
                        (4,694,156
                        )
                        
                        
                        -21.3
                        %Cost
      of service fee income
                        
                        
                        6,965,367
                        
                        
                        
                        8.2
                        %
                        
                        
                        20,247,922
                        
                        
                        
                        14.5
                        %
                        
                        
                        22,916,896
                        
                        
                        
                        18.7
                        %
                        
                        
                        13,282,555
                        
                        
                        
                        190.7
                        %
                        
                        
                        2,668,974
                        
                        
                        
                        13.2
                        %Amortization
      of acquired technology
                        
                        
                        8,231,375
                        
                        
                        
                        9.7
                        %
                        
                        
                        13,308,030
                        
                        
                        
                        9.5
                        %
                        
                        
                        11,983,299
                        
                        
                        
                        9.8
                        %
                        
                        
                        5,076,655
                        
                        
                        
                        61.7
                        %
                        
                        
                        (1,324,731
                        )
                        
                        
                        -10.0
                        %Amortization
      of software costs
                        
                        
                        2,889,118
                        
                        
                        
                        3.4
                        %
                        
                        
                        3,632,744
                        
                        
                        
                        2.6
                        %
                        
                        
                        4,280,232
                        
                        
                        
                        3.5
                        %
                        
                        
                        743,626
                        
                        
                        
                        25.7
                        %
                        
                        
                        647,488
                        
                        
                        
                        17.8
                        %Total
      Cost of Revenue
                        
                        
                        46,335,372
                        
                        
                        
                        54.5
                        %
                        
                        
                        82,106,388
                        
                        
                        
                        58.7
                        %
                        
                        
                        69,740,759
                        
                        
                        
                        56.9
                        %
                        
                        
                        35,771,016
                        
                        
                        
                        77.2
                        %
                        
                        
                        (12,365,629
                        )
                        
                        
                        -15.1
                        %Gross
      Profit
                        
                        
                        38,585,621
                        
                        
                        
                        45.4
                        %
                        
                        
                        57,757,114
                        
                        
                        
                        41.3
                        %
                        
                        
                        52,526,883
                        
                        
                        
                        43.0
                        %
                        
                        
                        19,171,493
                        
                        
                        
                        49.7
                        %
                        
                        
                        (5,230,231
                        )
                        
                        
                        -9.1
                        %Operating
      ExpensesResearch
      and development
                        
                        
                        816,479
                        
                        
                        
                        1.0
                        %
                        
                        
                        6,512,776
                        
                        
                        
                        4.7
                        %
                        
                        
                        3,165,788
                        
                        
                        
                        2.6
                        %
                        
                        
                        5,696,297
                        
                        
                        
                        697.7
                        %
                        
                        
                        (3,346,988
                        )
                        
                        
                        -51.4
                        %General
      and administrative
                        
                        
                        19,192,286
                        
                        
                        
                        22.6
                        %
                        
                        
                        40,488,964
                        
                        
                        
                        28.9
                        %
                        
                        
                        43,840,536
                        
                        
                        
                        35.9
                        %
                        
                        
                        21,296,678
                        
                        
                        
                        111.0
                        %
                        
                        
                        3,351,572
                        
                        
                        
                        8.3
                        %Selling
      and distribution expenses
                        
                        
                        12,014,601
                        
                        
                        
                        14.1
                        %
                        
                        
                        20,792,618
                        
                        
                        
                        14.9
                        %
                        
                        
                        34,284,407
                        
                        
                        
                        28.0
                        %
                        
                        
                        8,778,017
                        
                        
                        
                        73.1
                        %
                        
                        
                        13,491,789
                        
                        
                        
                        64.9
                        %Impairment
      loss of goodwill
                        
                        
                        -
                        
                        
                        
                        0.0
                        %
                        
                        
                        -
                        
                        
                        
                        0.0
                        %
                        
                        
                        762,000
                        
                        
                        
                        0.6
                        %
                        
                        
                        -
                        
                        
                        
                        0.0
                        %
                        
                        
                        762,000
                        
                        
                        
                        100.0
                        %Total
      Operating Expenses
                        
                        
                        32,023,366
                        
                        
                        
                        37.7
                        %
                        
                        
                        67,794,358
                        
                        
                        
                        48.5
                        %
                        
                        
                        82,052,731
                        
                        
                        
                        67.1
                        %
                        
                        
                        35,770,992
                        
                        
                        
                        111.7
                        %
                        
                        
                        14,258,373
                        
                        
                        
                        21.0
                        %Profit/(loss)
      from operations
                        
                        
                        6,562,255
                        
                        
                        
                        7.7
                        %
                        
                        
                        (10,037,244
                        )
                        
                        
                        -7.2
                        %
                        
                        
                        (29,525,848
                        )
                        
                        
                        -24.1
                        %
                        
                        
                        (16,599,499
                        )
                        
                        
                        -253.0
                        %
                        
                        
                        (19,488,604
                        )
                        
                        
                        194.2
                        %





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




RMBGross
                  
                  
                  
                  
                  
                  Gross
                  
                  
                  
                  
                  
                  GrossMargin for
                  
                  
                  
                  
                  
                  Margin for
                  
                  
                  
                  
                  
                  Margin forFY 2007
                  
                  
                  FY 2007
                  
                  
                  FY 2008
                  
                  
                  FY 2008
                  
                  
                  FY 2009
                  
                  
                  FY 2009RevenuesSoftware
      sales
                  
                  
                  42,076,411
                  
                  
                  
                  
                  
                  
                  66,215,769
                  
                  
                  
                  
                  
                  
                  54,187,769Hardware
      sales
                  
                  
                  16,198,402
                  
                  
                  
                  
                  
                  
                  26,655,967
                  
                  
                  
                  
                  
                  
                  21,518,084Service
      fee income
                  
                  
                  26,646,180
                  
                  
                  
                  
                  
                  
                  46,991,766
                  
                  
                  
                  
                  
                  
                  46,561,789Total
      Revenues
                  
                  
                  84,920,993
                  
                  
                  
                  
                  
                  
                  139,863,502
                  
                  
                  
                  
                  
                  
                  122,267,642Cost
      of RevenuesCost
      of software
                  
                  
                  15,648,282
                  
                  
                  
                  62.8
                  %
                  
                  
                  22,928,605
                  
                  
                  
                  65.4
                  %
                  
                  
                  13,265,401
                  
                  
                  
                  75.5
                  %Cost
      of hardware
                  
                  
                  12,601,230
                  
                  
                  
                  22.2
                  %
                  
                  
                  21,989,087
                  
                  
                  
                  17.5
                  %
                  
                  
                  17,294,931
                  
                  
                  
                  19.6
                  %Cost
      of service fee income
                  
                  
                  6,965,367
                  
                  
                  
                  73.9
                  %
                  
                  
                  20,247,922
                  
                  
                  
                  56.9
                  %
                  
                  
                  22,916,896
                  
                  
                  
                  50.8
                  %Amortization
      of acquired technology
                  
                  
                  8,231,375
                  
                  
                  
                  
                  
                  
                  
                  13,308,030
                  
                  
                  
                  
                  
                  
                  
                  11,983,299Amortization
      of software costs
                  
                  
                  2,889,118
                  
                  
                  
                  
                  
                  
                  
                  3,632,744
                  
                  
                  
                  
                  
                  
                  
                  4,280,232Total
      Cost of Revenue
                  
                  
                  46,335,372
                  
                  
                  
                  
                  
                  
                  
                  82,106,388
                  
                  
                  
                  
                  
                  
                  
                  69,740,759Gross
      Profit
                  
                  
                  38,585,621
                  
                  
                  
                  45.4
                  %
                  
                  
                  57,757,114
                  
                  
                  
                  41.3
                  %
                  
                  
                  52,526,883
                  
                  
                  
                  43.0
                  %




Comparison
of Years Ended December 31, 2007, 2008 and 2009





Revenue





Total revenue. Total
revenue is comprised of software sales, hardware sales and service fee revenue.
Total revenue increased 64.7% from RMB 84.9 million in 2007 to RMB 139.9 million
in 2008 but decreased 12.6% from 2008 to RMB 122.3 million in
2009.


27


The 2008
increase was primarily attributable to our significant growth across all product
lines and revenues generated from the acquired companies. The 2009 decrease was
primarily attributable to decrease in software sales and hardware sales
resulting from the economic downturn and the competitive market.





Software sales. Our
software sales increased 57.4% from RMB 42.1 million in 2007 to RMB 66.2 million
in 2008 but decreased 18.2% from 2008 to RMB 54.2 million in 2009.





The 2008
increase was primarily attributable to the re-alignment of our clients into
seven major categories and improved operating efficiency. Conversely, the 2009
decrease was primarily attributable to reduced sales to our Supermarket,
Department Store and Shopping Mall and Specialty Retailing customers, many of
whom delayed plans for new store opening as result of the economic downturn.
However, customers maintained a solid level of investment in upgrading systems
in existing stores and management believes there are now positive signs of a
market rebound. As a result, we expect to generate increased software sales in
the future.





Hardware sales. Our
hardware sales increased 64.6% from RMB 16.2million in 2007 to RMB 26.7 million
in 2008 but decreased 19.3% from 2008 to RMB 21.5 million in 2009.





In recent
years, we decided to de-emphasize hardware sales in an increasingly competitive
hardware sales market. As a relatively young company, we do not believe that it
is strategically justifiable to leverage a low margin, high volume sales sector.
Consequently, while we will continue to sell computer hardware in connection
with our software sales, we have not emphasized and do not expect to emphasize
hardware sales as part of our marketing and sales strategies. Nonetheless, there
may be occasions where we may profitably include hardware in projects that we
complete for clients that possess superior credit. This has occurred since 2007,
especially during 2008 when several customers from our key accounts required the
purchase of new hardware for integration into their software products. As a
result, we experienced an increase in hardware sales in 2008, compared to the
previous year, whereas, a decrease in hardware sales in fiscal year 2009 as a
result of the economic slowdown. We expect that, in the short-term, we may
capture additional revenues from hardware sales, but our management believes
that the long-term health of our company is substantially dependent upon the
licensing of our software products.





Service fee income.
Service fee income revenues increased 76.4% from RMB 26.6 million in 2007 to RMB
47.0 million in 2008 but decreased 0.9% from 2008 to RMB 46.6 million in 2009.
Service fee income revenues represented 31.4%, 33.6% and 38.1% of our total
revenues, respectively, in 2007, 2008 and 2009.





The
increase in service fee income in 2008, compared to the previous year is
primarily attributable to the service fee income generated from eService in 2008
including B2B services and SaaS. In May 2008, we acquired an additional 31%
ownership interest in Wangku to further expand its eService business
initiatives, allowing us to offer a leading B2B platform that connects retailers
and small to medium-sized suppliers. In addition, as our software sales continue
to grow, our customer base has also increased year-over-year, which provides
additional opportunities for our company to generate service fees associated
with such software. Conversely, in 2009, we experienced a slight decrease in
service fee income, compared with the fiscal year 2008. The decrease is mainly
attributable to the fact that some of our major customers delayed or reduced
value-added services expenditures in 2009 as result of the economic downtown.
However, despite the slowdown, revenue from our existing client remained
relatively stable. As we continue to refine our business model, we expect to
generate increased service fee income.





Cost
of revenues





Cost of software.
Cost of software consists of wages, materials, handling charges and other
expenses associated with the development of our software. Cost of software
increased 46.5% from RMB 15.6 million in 2007 to RMB 22.9 million in 2008 but
decreased 42.1% from 2008 to RMB 13.3 million in 2009.





The 2008
increase resulted from the expansion of our sales force in key geographic
markets in 2007 and a proportionate increase in sales volume in 2008.
Conversely, the 2009 decrease resulted directly from the decrease in software
sales we experienced in 2009. We will continue to pursue marquee global accounts
in China including B&Q-Kingfisher, Johnson & Johnson, Jusco and Aeon as
well as leading domestic software providers such as Beijing Jade Bird Sihua and
others. We are now supplying solutions to over 1,000 retail clients. As such,
these projects require more integration services to reach completion. Over time,
however, we believe that as our customer base grows, our cost of license and
related maintenance revenue will increase as we hire personnel for our customer
support organization.


28


As a
percentage of software sales, cost of software was 37.2% for 2007, 34.6% for
2008 and 24.5% for 2009. The 2008 decrease was primarily attributable to
improved processes to shorten the software implementation cycle. In 2007, the
completion percentage for contracts signed in the current year was 44%; at the
end of 2008, the percentage increased to 54.2%, and remained stable in 2009. The
higher completion rate was achieved through improved training programs, hiring
policies, and software design. However, the 2009 decrease was primarily
attributable to the increase of software license income compared with the prior
year. The margin for our software license income was relatively higher than the
margins of other forms of income.





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 74.5% from RMB12.6 million in 2007 to RMB22.0 million in 2008 but
decreased by 21.3% from 2008 to RMB 17.3 million in 2009.





The 2008
increase resulted directly from the increase in hardware sales we experienced in
2008. Oppositely, the 2009 decrease resulted directly from the decrease in
hardware sales we experienced in 2009. As a percentage of hardware sales, cost
of hardware was 78% in 2007, 82.5% in 2008 and 80.4% in 2009.  The
2008 increase was primarily attributable to the diminished margin in hardware
sales, and the 2009 decrease was primarily attributable to our selective high
margin deal in hardware sales. Gross margins were 17.5% and 19.6% in 2008 and
2009, respectively.





Cost of service fee
income. Cost of service fee income includes salaries and related expenses
of our consulting organization and an allocation of our facilities and
depreciation expenses. Cost of services increased 190.7% from RMB7.0 million for
2007 to RMB20.2 million for 2008 and increased 13.2% from 2008 to RMB 22.9
million for 2009. These increases were a result of several factors:





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


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





Amortization of acquired
technology. The amortization of acquired software technology in 2007,
2008 and 2009 resulted from amortization of software technology acquired in a
variety of acquisitions noted above. Amortization of acquired technology expense
increased 61.7% from RMB8.2 million in 2007 to RMB13.3 million in 2008 but
decreased 10.0% from RMB13.3 million in 2008 to RMB12.0 million in
2009.





We have
been making acquisitions since 2007, the increase in amortization of acquired
technology in 2008 is attributable to the acquisitions we did in 2008. The
decrease in the amortization of acquired technology in 2009 is primarily due to
the complete amortization of parts of our acquired technology in
2009.





Amortization of software
costs. Intangible assets include the cost of computer software we
acquired and developed. These costs are amortized over the useful life of the
software. Costs included are mostly salary and employee benefits for those
involved in the development of the software. Amortization expense increased
25.7% from RMB2.9 million in 2007 to RMB3.6 million in 2008 and increased 17.8%
from 2008 to RMB4.3 million in 2009.





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





Operating
expenses





Research and
development. Research and development expenses, which are expensed as
incurred, consist primarily of salaries and related costs of our engineering
organization; consultants; and an allocation of our facilities and depreciation
expenses. We believe that our success depends on continued enhancement of our
current products and our ability to develop new technologically advanced
products that meet the increasingly sophisticated requirements of our customers.
Research and development expenses increased 697.7% from RMB0.8 million in 2007
to RMB6.5 million in 2008 but decreased 51.4% from 2008 to RMB3.2 million in
2009.


29


The 2008
increase was primarily attributable to the fact that since 2007 we have focused
on integrating and upgrading software products to meet the evolving complexities
of our customers’ businesses to gain market acceptance of our software products
that were developed in previous fiscal periods. On the other hand, the 2009
decrease was primarily attributable to the fact that product launches following
the successful completion of product development and pilot phases which resulted
in an increase of Research and development capitalization. Research and
development represented 1.0% of total revenue for 2007, 4.7% of total revenue
for 2008 and 2.6% of total revenue for 2009.





General and
administrative. General and administrative expenses consist primarily of
costs from our finance and human resources departments; third party legal and
other professional services fees; and an allocation of our facilities costs and
depreciation expenses. General and administrative expenses increased 111.0% from
RMB 19.2 million in 2007 to RMB 40.5 million in 2008 and increased 8.3 % from
2008 to RMB 43.8 million in 2009.





The 2008
increase in general and administrative expenses was attributable to a RMB 1.5
million increase in salaries, a RMB 3.0 million increase in maintenance costs of
eight new branches, and RMB 1.6 million expenses associated with audit and
Sarbanes-Oxley Act compliance. The 2009 increase in general and administrative
expenses was attributable to a RMB 1.8 million increase in incentive
compensation, a RMB 1.8 million increase in rental, electricity and water
expenses.





General
and administrative expenses were 22.6% of total revenues for 2007, 28.9% of
total revenues in 2008 and 35.9% of the total revenues in 2009. This increase in
general and administrative expenses as a percentage of revenue was attributable
to the increase of general and administrative expenses noted above. We expect
that as a public company we will likely experience an increase in general and
administrative expenses as a percentage of total revenues in future fiscal
periods. These expenses include additional legal and accounting fees and public
relations costs.





Selling and distribution
expenses. Selling and distribution expenses consist primarily of salaries
and related costs of our sales and marketing departments, sales bonuses, costs
of our marketing programs, public relations, advertising, trade shows,
collateral sales bonuses, and an allocation of our facilities. Selling and
distribution expenses increased 73.1% from RMB 12.0 million in 2007 to RMB 20.8
million in 2008 and increased 64.9% from 2008 to RMB 34.3 million in
2009.





The
increase in selling and distribution expenses was primarily due to additional
labor costs associated with the expansion of our sales force and the expansion
of our business year over year. We added 11 employees to our sales department in
2008 and 15 employees in 2009. 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 14.1% of total revenue for
2007 and 14.9% of total revenues in 2008 and 28.0% of total revenues in
2009.





Impairment of goodwill.The Company performed a two-step goodwill test annually. The Company
recognized no impairment loss on goodwill in the years prior to December 31,
2008. During the year ended December 31, 2009, the Company recorded a goodwill
impairment loss of RMB 0.7 million due to reductions in expected future cash
flows.





Other
Expenses





Interest Income.
Interest income represents the interest accrued as a result of bank deposits.
Our interest income decreased 59.7% from RMB 3.5 million in 2007 to RMB1.4
million in 2008 and decreased 70.1% from 2008 to RMB 425,103 in
2009.





The
substantial decrease in 2008 was primarily due to reduced interest earned in
2008 on proceeds from our initial public offering and private offering in 2007
as we began to use such proceeds to grow our business. The decrease in 2009 was
mainly attributable to a reduction in the amount of interest earned from on term
bank deposits during 2009.


30


Interest Expense. Our
interest expense decreased dramatically from RMB5.0 million in 2007 to RMB2.3
million in 2008 and decreased further to RMB 818,173 in 2009.





The 2008
decrease primarily resulted from the reduced interest on the Convertible Notes
issued to institutional investors on March 13, 2007 as the institutional
investors began to convert the Convertible Notes. The 2009 decrease was
primarily due to the reduced principle of Convertible Notes.





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





Our gain
on derivatives increased dramatically from RMB 10.3 million in 2007 to RMB 33.1
million in 2008 but significantly decreased to RMB 1.3 million in
2009.





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





The
Company recognized a loss of RMB 39.5 million in 2007, RMB 22.5 million in 2008,
but nil in 2009 on extinguishment of Convertible Notes as there was no
conversion in 2009. This is recorded as a non-operating expense in the
consolidated statement of operations.





Holding
Company Structure





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





Critical
Accounting Policies and Estimates





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


31


Revenue
Recognition





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





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





l
            we
      have persuasive evidence of an
arrangement;


l
            delivery
      has occurred;


l
            the
      sales price is fixed or determinable;
and


l
            collectability
      is reasonably assured.





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





For
software sales, the Company recognizes revenues in accordance with ASC 985-605,
Software Revenue
Recognition. We recognize revenue from perpetual (one-time charge)
licensed software at the inception of the license term. We recognize revenue
from term (monthly license charge) arrangements on a subscription basis over the
term of the license. We include revenues from maintenance for the first year and
initial training in the purchase price of the software. We provide initial
training at the time of installation and recognize such income as part of the
price of the software since it is minimal in value. We value maintenance based
on a fee schedule we use for providing our regular level of maintenance. We
include maintenance revenue in the income statement under services and recognize
it over the term of the agreement. We allocate revenues applicable to
multiple-element fee arrangements among elements such as software, hardware, and
post-contact service using vendor-specific objective evidence of fair value.
Such evidence consists primarily of pricing of multiple elements sold as
separate elements in the contract.





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


32


Allowance
for Doubtful Accounts





Trade
receivables are stated as the amount management expects to collect from
outstanding balances. An estimate for doubtful debts is made when collection of
the full amount is no longer probable. We maintain an allowance for potentially
uncollectible accounts receivable based on our assessment of the collectability
of accounts receivable. In evaluating the collectability of individual
receivable balances, we consider many factors, including the age of the balance,
the customer’s past payment history, its current credit-worthiness and current
economic trends. Our allowance for doubtful account was RMB 4.7 million in 2007,
RMB 4.7 million in 2008 and RMB 4.2 million in 2009.





Share-Based
Compensation





We
account for share-based compensation in accordance with ASC subtopic 718-10, or
ASC 718-10, Compensation-Stock
Compensation: Overall. Under the provisions of ASC 718-10, share-based
compensation cost is estimated at the grant date based on the award’s fair value
as calculated by the Black-Scholes-Merton (BSM) option-pricing model and is
recognized as expense over the requisite service period. The BSM model requires
various highly judgmental assumptions including volatility and expected option
life. Volatility is measured using historical daily price changes of our each
common stock over the respective expected life of the option. Expected option
life is the number of years that we estimate, based on the vesting and
contractual terms and employee demographics. If any of the assumptions used in
the BSM model change significantly, share-based compensation expenses may differ
materially in the future from that recorded in the current period.





Property
and Equipment





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





Research
and Development, and Intangible Asset,





We charge
all of our development costs to research and developmentexpensesuntil we have established
technological feasibility. We acknowledge technological feasibility of our
software when a detailed program design or working model is completed. Upon
reaching technological feasibility, we capitalize additional software costs
until the software is available for general release to customers. 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 estimated period of realization
of revenue from the related intangible assets. The estimated life of our
software is based upon historical usefulness of similar software products and
the rate of change in technology in general. Our estimate of the useful lives of
our software has been reasonably accurate in the past, but it is reasonably
likely to change in the future due to the highly uncertain nature of this
estimate. Should economic conditions change or technological advances occur
rapidly, our estimate of the useful lives of our software products could decline
quickly, which would result in recognition of increased
amortization.


33


Valuation
of Long-Lived Assets





We
evaluate long-lived assets, such as fixed assets and purchased or internally
developed intangible assets with finite lives, for impairment whenever events or
changes in circumstances indicate the carrying value of an asset may not be
recoverable in accordance with ASC subtopic 360-10, Property, Plant and Equipment:
Overall. When such events occur, we assess the recoverability of the
assets group based on the undiscounted future cash flow the asset group is
expected to generate and recognizes an impairment loss when estimated
undiscounted future cash flow expected to result from the use of the asset group
plus net proceeds expected from disposition of the assets group, if any, is less
than the carrying value of the assets group. If we identify an impairment, we
reduce the carrying amount of the assets group to its estimated fair value based
on a discounted cash flow approach or, when available and appropriate, to
comparable market values. We use estimates and judgments in our impairment tests
and if different estimates or judgments had been utilized, the timing or the
amount of any impairment charges could be different. Asset groups to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell, and no longer depreciated. The assets and liabilities of a disposal group
classified as held for sale would be presented separately in the appropriate
asset and liability sections of the balance sheet.  However,
circumstances could cause us to have to reduce the value of our capitalized
software more rapidly than we have in the past if our revenues were to
significantly decline. Estimated cash flows from the use of the long-lived
assets are highly uncertain and therefore the estimation of the need to impair
these assets is reasonably likely to change in the future. Should the economy or
acceptance of our software change in the future, it is likely that our estimate
of the future cash flows from the use of these assets will change materially.
The amount of possible change is discussed above under Property and Equipment and
Intangible
Assets.





Goodwill





Goodwill
represents the excess of the purchase price over the fair value of the
identifiable net assets acquired in a business combination. Under ASC 350-20,
Intangibles—Goodwill and Other:
Goodwill, goodwill is subject to an annual impairment test. If an event
occurs or circumstances change that would more-likely-than-not reduce the fair
value of a reporting unit below its carrying amount, an interim impairment test
is performed between annual tests. The impairment test includes a comparison of
estimated discounted cash flows associated with the asset’s carrying amount. If
the fair value is less than the carrying amount of the asset, the second step of
the impairment test shall be performed to measure the amount of impairment loss,
if any. In the second step, the implied fair market value of goodwill is
estimated and compared to the carrying amount. If the carrying amount of
goodwill exceeds its implied fair market value, an impairment loss equal to this
excess is recorded. The recorded loss cannot exceed the carrying amount of
goodwill.





B.            
Liquidity and Capital
Resources





Overview





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





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





2008
                
                
                2009(In
      millions)Cash
      and cash equivalents
                
                RMB
                60.8
                
                
                RMB
                59.1Net
      cash generated from operating activities
                
                
                31.1
                
                
                
                10.6Net
      cash used in investing activities
                
                
                (32.8
                )
                
                
                (12.3
                )Net
      cash (used in) generated from financing activities
                
                
                (4.4
                )
                
                
                -


34


Operating activitiesprovided
cash of RMB10.6 million in 2009 compared to RMB31.1 million in 2008.
The principal sources of our cash flow from operations are net income adjusted
for depreciation, software amortization, the gain on derivatives and loss on
extinguishment of convertible notes and compensation expenses for directors and
employees.  The decrease in cash provided by operating activities was
primarily due to a proportionate decrease in revenue.





Investing activitiesused
cash of RMB12.3 million in 2009 and RMB32.8 million in 2008. The primary use of
cash in investing activities in 2009 was capital expenditures. Whereas our
investing activities in 2008 consisted of RMB7.7 million in capital expenditures
and RMB57.7 million in payment of direct costs related to the Royalstone and
other acquisitions.





Financing activitiesused
cash of nil in 2009 and used cash of RMB4.4 million in 2008. Financing
activities in 2008 included RMB8.1 million payment of the make-whole obligation
on the convertible notes completed in March 2007, which was partially offset by
the receipt of proceeds of RMB3.6 million from the warrants issued to the
underwriter in our IPO.





Indebtedness





On
March 13, 2007, we closed a Securities Purchase Agreement with three funds
affiliated with two institutional investors, pursuant to which we raised
RMB69,079,430 (net of cash loan costs of RMB8,330,570) by issuing $10,000,000
senior convertible notes along with Series A warrants and Series B
warrants.





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





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





On
October 3, 2007, one of the investors converted RMB37,529,400 ($5,000,000) of
the convertible notes into 200,080 common stock. In July and August of 2008,
another investor converted RMB27,326,700 ($4,000,000) of the convertible notes
into 210,526 common stock.  As of the date of this filing, $1,000,000
in convertible notes remains outstanding.  These notes bear interest
at an annual rate of 3% from issuance to March 12, 2008; 5% from March 13, 2008
through March 12, 2009; 7% from March 13, 2009 through March 12, 2010 and 10%
from March 13, 2010 through maturity.





C.            Research and
Development





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





D.            Trend Information





China
Outlook





In
November, 2008, China unveiled a stimulus package estimated at RMB 4
trillion (about $570 billion). It will be spent over two year span to finance
programs in 10 major areas, such as low-income housing, rural infrastructure,
water, electricity, transportation, the environment, technological innovation
and rebuilding from several disasters, most notably the May 12, 2008 earthquake
in Sichuan province.  We believe China’s recent stimulus package is
likely to contribute to our growth and the growth of our customers in the retail
and consumer goods industries in future periods.


35




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





Industry and Market
Outlook





Management
expects macroeconomic factors, such as retail sales of consumer goods and IT
spending, to increase at a healthy rate in 2010. According to data from the
National Bureau of Statistics of China, total retail sales of consumer goods in
cities in China reached RMB 8.5 trillion in 2009, an increase of 15.5% over the
prior year. eFuture expects to remain in a strong position to compete in the SCM
sector.





While we
expect that retail sales of consumer goods in China are likely to grow in 2010,
in light of the lingering effects of the worldwide financial crisis and the
current instability in the world’s markets, it is impossible to predict the
effect of global macroeconomic factors on our industry and company. Any
prolonged weakness in the world’s retail industry in general or in China in
particular could harm our customers and, as a result, our business.





Top Line Growth
Drivers





·
            As
      of December 31, 2009, our uncompleted project base was RMB 72.5 million
      (US$10.6 million), including RMB 33.3 million (US$4.9 million) of software
      license income and RMB 36.1 million (US$5.3 million) of service fee income
      expected to be recognized in future
years.





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





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





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





Channel Expansion
Initiatives





Currently,
we derive approximately half of our revenue from China’s three
mega-cities—Beijing, Shanghai and Guangzhou—and approximately 80% of our total
revenue from eight first tier cities (including the mega-cities) in
China.  However, the continued expansion of many retailers, including
current eFuture customers, into China’s second and third tier cities presents a
significant opportunity to gain additional market share in these growing
markets. As such, one of our key initiatives going forward was to enhance
penetration into second and third tier cities, by investing approximately RMB7.5
million in order to increase the coverage of our sales and distribution network
from 10 up to 15 provinces in China. In the first quarter of 2010, eFuture
benefited from increased expenditure from both our large accounts and our
fast-growing second and third tier cities. We have restructured our sales
organization from a product driven model to a customer driven model by building
major account teams and three regional sales teams focused on North, South and
East China since the beginning of 2010.





Underpinning
our successful sales & marketing strategy is our continued investment in
R&D, which is focused on two areas: core software solutions and development
platform. Our strategy consists of either upgrading existing systems or
developing new versions. In 2010, we will continue to invest in new products and
services to increase revenue potential from existing clients and drive the
expansion of our addressable markets.


36


R&D
investment in new releases of core software solutions and sales-related
activities has enabled us to improve our market position, further strengthening
our penetration into second and third tier cities. We will continue to broaden
our service offering in order to generate new revenue streams and a more even
distribution of total revenue throughout the year.





E.  Off-Balance Sheet
Arrangements





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





F. Tabular Disclosure of Contractual
Obligations





The
following table sets forth our contractual obligations as of December 31,
2009:




Payments Due By PeriodLess than
                  
                  
                  
                  
                  
                  
                  
                  
                  More thanTotal
                  
                  
                  1 Year
                  
                  
                  1-3 Years
                  
                  
                  3-5 Years
                  
                  
                  5 YearsConvertible
      Notes
                  
                  ¥
                  8,286,643
                  
                  
                  ¥
                  641,635
                  
                  
                  ¥
                  7,645,008
                  
                  
                  ¥
                  -
                  
                  
                  ¥
                  -Operating
      Lease Obligations
                  
                  ¥
                  7,602,476
                  
                  
                  ¥
                  4,162,849
                  
                  
                  ¥
                  3,439,627
                  
                  
                  ¥
                  -
                  
                  
                  ¥
                  -Purchase
      Obligations
                  
                  ¥
                  36,786,493
                  
                  
                  ¥
                  36,786,493
                  
                  
                  ¥
                  -
                  
                  
                  ¥
                  -
                  
                  
                  ¥
                  -Total
                  
                  ¥
                  52,675,612
                  
                  
                  ¥
                  41,590,977
                  
                  
                  ¥
                  11,084,635
                  
                  
                  ¥
                  -
                  
                  
                  ¥
                  -





Item
6.                  Directors,
Senior Management and Employees





A.           Directors
and Senior Management





The
following table sets forth our executive officers and directors, their ages and
the positions held by them as of June 29, 2010.





Name
            
            Age
            
            PositionAdam
      Yan (1)(8)
            
            42
            
            Chairman
      and Chief Executive OfficerDehong
      Yang (1)
            
            47
            
            PresidentDeliang
      Tong (1)(8)
            
            45
            
            Chief
      Operating Officer and DirectorQicheng
      Yang (1)
            
            44
            
            Chief
      Technology OfficerJack
      Qiu (1)
            
            44
            
            Chief
      Innovation Officer and Senior Vice PresidentPing
      Yu (1)(7)
            
            40
            
            Chief
      Financial Officer and DirectorTony
      Zhao (1)
            
            45
            
            Chief
      Strategy Officer and Vice PresidentJohnson
      Li(1)
            
            43
            
            Senior
      Vice PresidentHongjun
      Zou (1)
            
            42
            
            Senior
      Vice PresidentMing
      Zhu (2)(9)
            
            51
            
            DirectorDong
      Cheng, Ph.D. (1)(3)(4)(5)(9)
            
            42
            
            DirectorJohn
      Dai (1)(4)(5)(8)
            
            47
            
            DirectorDennis
      O. Laing(3)(5)(6)(7)
            
            64
            
            DirectorBrian
      Lin (1)(3)(4)(9)
            
            45
            
            DirectorWeiquan
      Ren (1)(7)
            
            47
            
            Director





(1)
            The
      individual’s business address is c/o eFuture Information Technology Inc.,
      8/F Topnew Tower, 15 Guanghua Road, Chaoyang Distinct, Beijing 100026,
      China.


(2)
            Mr.
      Zhu’s business address is c/o RMCC International, Inc. 6724 Patterson
      Avenue, Richmond, Virginia 23226.


(3)
            Member
      of audit committee.


(4)
            Member
      of compensation committee.


37




(5)
            Member
      of corporate governance committee.


(6)
            Mr.
      Laing’s business address is 4860 Cox Road, Suite 200, Glen Allen, Virginia
      23060.


(7)
            Class
      II director whose term expires in
2010.


(8)
            Class
      III director whose term expires in
2011.


(9)
            Class
      I director whose term expires in
2012.





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





Dehong Yang. Mr. Yang is our
President. Mr. Yang began serving in his role as our President January 1, 2010.
From 2002 to 2009, Mr. Yang served as the General Manager of the Retail Division
of Wincor Nixdorf Retail & Banking Systems Co., Ltd. From 1995 to 2000, he
served as a consultant to the distribution industry for IBM China Company Ltd.
Mr. Yang also serves as a permanent member of the China Chain Store &
Franchise Association, Vice Director of the IT Committee of the China Chain
Store & Franchise Association, Vice Director of the Chinese Electronic
Commerce Association, and Vice Director of the Commercial Automation Committee
of the China Electronic Chamber of Commerce. Mr. Yang holds a bachelor’s degree
in Mathematics from the North-East University in Shenyang, Liaoning, PRC. Mr.
Yang’s over 10 years of international business management experience and a
proven track record of successfully implementing and driving strategic
initiatives provides our Board with a valuable resource in understanding company
operations and evaluating strategic opportunities.





Deliang Tong. Mr. Tong has
served as our Chief Operating Officer since July 1, 2008 and also is the
President of our wholly-owned subsidiary, eFuture (Beijing). Mr. Tong founded
Guangzhou Royalstone System Integration Co. Ltd. in 1992, and served as its
Chairman and CEO. Mr. Tong received a bachelor’s degree in electronics and a
master’s degree in software engineering from the University of Electronic
Science and Technology of China. Mr. Tong served as department manager for
Sichuan Xinchao Computing Group from 1989 to 1991. Mr. Tong also served as the
general manager for the south for Beijing Stone Group from 1991 to 1992. Mr.
Tong’s over 20 years of management experience and extensive software and
services industry background provide our Board with key insights into the
development and management of an efficient and effective operational
platform.





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.
Mr. Yang’s extensive technical background provides us with the leadership and
experience needed to further develop our leading edge software and services
solutions.





Jack Qiu. He has served as
Vice President since 2007 and General Manager of Retail and Distribution
Research Lab in Beijing eFuture. From 1998 to 2007, he was served as Executive
Vice President of Guangzhou Royalstone System Integration Co. Ltd.. Mr. Qiu also
serves as a permanent member of the Commercial Automation Committee of the China
Electronic Chamber of Commerce and senior consultant of Guangdong Chain Store
& Franchise Association and Linkshop, the most famous website of retail
industry information in China. Mr. Qiu received a bachelor’s degree in
electronic engineering in Beijing Institute of Technology. Mr Qiu’s rich
experience in retail and consumer good industry provide him with the ideal
background to lead our efforts of developing new and innovative products and
services for our customer base.


38


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





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





Johnson Li. Mr. Li has served
as Beijing eFuture’s Vice President since 1997. In 2008, he also served as
General Manager of Key Account SBU. From 2006 to 2007, he served as the
Secretary of the Board in eFuture. From 1994 to 1997, Mr. Li served as a manager
of the project implementation department of Hainan Fujie Industrial Inc., the
information technology company delivering software and system integration
services in the Hainan province of China. Mr. Li received a bachelor’s degree in
computer science from China People’s Police Officer University in China. Mr.
Li’s exemplary performance and management skills were rewarded over 17 years in
software industry uniquely qualify him as a valuable member to the
Company.





Hongjun Zou. Mr. Zou is our
Senior Vice President and was served as our Chief Innovation Officer in 2009 and
our Chief Operating Officer from 1997 to 2007. 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. Mr. Zou with a wealth of industry
experience also shares the company's philosophy, enthusiasm and desire to bring
innovative ideas and service excellence to our market.





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. Mr. Zhu’s utilizes his
extensive business and consulting background to offer advice on best practices
and business development and expansion.





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. Dr. Cheng leverages his role as Professor at the Business School at
Renmin University to provide insight into emerging trends within China’s
economic and business development.


39


John Dai. Mr. Dai is
currently the Dean of EMBA Center at Renmin University of China and 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. Mr. Dai’s over 2o years’ executive management experience in
multinational company and extensive resources in retail industry, along with his
understanding of the demands business within China, make him an instrumental
source for Board’s strategic decision.





Dennis O. Laing. Mr. Laing
has practiced law in Richmond, Virginia for over 30 years. Mr. Laing’s law
practice centers upon corporate law with special interest in energy, healthcare
and technology sectors. Mr. Laing received a bachelor’s degree in
government from the University of Virginia and a law degree from the University
of Richmond. Mr. Laing also serves as a director of Sino-Global Shipping
America, Ltd. (NASDAQ: SINO). Mr. Laing’s more than three decades of corporate
law practice provides our Board with expert legal advice and guidance on
regulations and compliance.





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. Mr. Lin’s
successful corporate career in managing listed company provides us with
strategic advice into the most effective and efficient ways to further create
suitable shareholders value.





Weiquan Ren. Since 2006, Mr.
Ren has served as a senior partner at Cybernaut-Capital.  Since 2007,
Mr. Ren has served as the vice dean at Zhejiang University Institute,
International. Previously, Mr. Ren held senior management positions at Peking
University Founder Group Corp from 1993 to 2006.  Mr. Ren also
previously served as the CEO at Founder Electronics (Hong Kong listed company HK
0418) from 2001 to 2006, the vice president at Founder Technology Group Corp.
(Shanghai listed company 600601) from 1998 to 2001, and the general manager at
the Eastern China Region of Founder Group in 1998 and the general manager at
Hangzhou branches of Founder Group from 1998 to 2001. Before joining Founder,
Mr. Ren was a university professor for seven years.  Mr. Ren received
his Master of Engineering degree from the Department of Electric Machine
Engineering at Zhejiang University in 1989 and his Bachelor of Engineering
degree from the Department of Information Science and Electronic Engineering,
Zhejiang University in 1983. Mr. Ren leverages his vast experience in the
technology industry to provide our Board with key insights into the effective
development and implementation of new, innovative platforms and
services.





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.





B.             Compensation





For the
fiscal year ended December 31, 2009, we paid an aggregate compensation of RMB
3.6 million (US$524K) in cash to our executive officers. Our subsidiaries
are required by law to make contributions equal to certain percentages of each
employee’s salary for his or her pension insurance, medical insurance,
unemployment and other statutory benefits. Other than the above-mentioned
pension insurance mandated by applicable PRC law, we have not set aside or
accrued any amount to provide pension, retirement or other similar benefits to
our executive officers and directors. We made contribution s of RMB 3.7 million
(US$542K) to employee benefit plans for the fiscal year ended December 31
2009.


40


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,
2009.





Annual Compensation for Year Ended December 31, 2009OrdinarySharesUnderlying
                                                                        
                                                                        
                                                                        Other Annual
                                                                        
                                                                        
                                                                        All OtherName
                                                                        
                                                                        Salary
                                                                        
                                                                        
                                                                        Bonus
                                                                        
                                                                        
                                                                        Restricted Shares
                                                                        
                                                                        
                                                                        Compensation
                                                                        
                                                                        
                                                                        CompensationAdam
      Yan
                                                                        
                                                                        ¥
                                                                        325,768
                                                                        
                                                                        
                                                                        ¥
                                                                        200,000
                                                                        
                                                                        
                                                                        5,000
      shares
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —Chairman,
      Chief Executive Officer andDirectorDeliang
      Tong
                                                                        
                                                                        ¥
                                                                        468,100
                                                                        
                                                                        
                                                                        ¥
                                                                        190,000
                                                                        
                                                                        
                                                                        6,000
      shares
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —Chief
      Operating Officer and DirectorQicheng
      Yang
                                                                        
                                                                        ¥
                                                                        348,868
                                                                        
                                                                        
                                                                        ¥
                                                                        120,000
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —Chief
      Technology OfficerHongjun
      Zou
                                                                        
                                                                        ¥
                                                                        356,993
                                                                        
                                                                        
                                                                        ¥
                                                                        146,762
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —Senior
      Vice PresidentPing
      Yu
                                                                        
                                                                        ¥
                                                                        336,868
                                                                        
                                                                        
                                                                        ¥
                                                                        120,000
                                                                        
                                                                        
                                                                        10,000
      shares
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —Chief
      Financial Officer and DirectorTony
      Zhao
                                                                        
                                                                        ¥
                                                                        276,868
                                                                        
                                                                        
                                                                        ¥
                                                                        120,000
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —Vice
      President and Chief StrategyOfficerJames
      Mu
                                                                        
                                                                        ¥
                                                                        175,550
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —Vice
      President and Chief MarketingOfficerMing
      Zhu
                                                                        
                                                                        $
                                                                        11,200
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        15,000
      shares
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —DirectorDong
      Cheng, Ph.D.
                                                                        
                                                                        $
                                                                        6,700
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        18,000
      shares
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —DirectorJohn
      Dai
                                                                        
                                                                        $
                                                                        11,200
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        18,000
      shares
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —DirectorDennis
      O. Laing
                                                                        
                                                                        $
                                                                        13,110
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        15,000
      shares
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —DirectorBrian
      Lin
                                                                        
                                                                        $
                                                                        12,700
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        18,000
      shares
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —DirectorWeiquan
      Ren
                                                                        
                                                                        $
                                                                        2,500
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —Director




Incentive
Compensation Plans


On June
15, 2005, the Compensation Committee issued a proposal “the 2005 Plan” that the
Company may grant options to our key employees (including directors and senior
management who are key employees) and to consultants in order to provide an
incentive upon successful listing on NASDAQ.





On
January 31, 2007, the Company adopted the 2005 Option Plan Set One (the “2005
Plan I”), which reserved 65,875 shares of common stock for issuance under the
plan. In the aggregate, 65,875 performance stock options were granted to
key employees (including directors and senior management who are key employees),
each with an exercise price of $25.42, a contractual life of 10 years and are
vested over a five year period.





On
September 17, 2007, the Company adopted the 2005 Option Plan Set Two (the “2005
Plan II”), which reserved 65,800 shares of common stock for issuance under the
plan. In the aggregate, 65,800 performance stock options were granted to
key employees, each with an exercise price of $11.71, a contractual life of 10
years and are vested over a five year period.





Under the
2005 Plan I and Plan II, the Company’s board of directors may amend or terminate
the Plan at any time if required under the Plan, subject to shareholder
approval.





On
December 11, 2009, the Company adopted a share incentive plan (the “2009
Plan”), which reserved 332,000 shares of common stock for issuance. The 2009
Plan provides for the granting of share incentives, which include Incentive
Stock Option (ISO) and restricted shares to our key employees. In the aggregate,
175,000 performance stock options were granted to key employees with an exercise
price of $6.55, 84,000 and 69,000 restricted shares are granted to members of
the board of directors and senior management, receptively, with no cash
consideration. Options were granted for a term of ten years (commencing from
December 11, 2009). Pursuant to the 2009 Plan, options and restricted shares are
vested over a three year period with the first 25% vested on the grant
day.


41


The 2009
Plan is administered by the Company’s Nominee and Compensation Committee. The
Nominee and Compensation Committee has the authority to determine the
individuals who will receive grants, the type of grant, the number of shares
subject to the grant, the terms of the grant, the time the grants will be made,
the duration of any exercise or restriction period, and to deal with any other
matters arising under the Plan. The Company’s board of directors may amend or
terminate the Plan at any time if required under the Plan, subject to
shareholder approval.





Summarized
details of the above incentive plans are as follows:





2005 Plan I
                    
                    
                    2005 Plan II
                    
                    
                    2009 PlanOption
                    
                    
                    Option
                    
                    
                    Option
                    
                    
                    Restricted sharesTotal
      Option/Restricted Shares Granted
                    
                    
                    65,875
                    
                    
                    
                    65,800
                    
                    
                    
                    175,000
                    
                    
                    
                    84,000
                    
                    
                    
                    69,000Grant
      Date
                    
                    31-Jan-07
                    
                    
                    17-Sep-09
                    
                    
                    11-Dec-09
                    
                    
                    11-Dec-09
                    
                    
                    11-Dec-09Exercise
      Price
                    
                    
                    25.42
                    
                    
                    
                    11.71
                    
                    
                    
                    6.55Vesting
      Period
                    
                    5
      years
                    
                    
                    5
      years
                    
                    
                    3
      years
                    
                    
                    3
      years
                    
                    
                    3
      yearsVesting
      Terms
                    
                    
                    20
                    %
                    
                    
                    20
                    %
                    
                    
                    25
                    %
                    
                    
                    25
                    %
                    
                    
                    25
                    %Expired
      Period
                    
                    10
      years
                    
                    
                    10
      years
                    
                    
                    10
      yearsFair
      Value per option/restriceted share
                    
                    
                    25.72
                    
                    
                    
                    8.27
                    
                    
                    
                    5.02
                    
                    
                    
                    6.55
                    
                    
                    
                    6.55





As
of December 31, 2009, there was RMB9.7 million (US$1.4 million)
unrecognized share-based compensation cost related to stock options, which is
expected to be recognized over a weighted-average vesting period of
2.64 years. In the aggregate, the share-based compensation costs
during the years ended December 31, 2009, 2008 and 2007 were RMB 6.2
million, RMB 3.1million and RMB 2.7 million (US$0.9 million),
respectively.





C.            
Board
practices





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





Board
of Directors and Board Committees





Our board
of directors consists of nine 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 2012 and every three years
thereafter. Class II directors shall face re-election at our annual general
meeting of shareholders in 2010 and every three years thereafter. Class III
directors shall face re-election at our annual general meeting of shareholders
in 2011 and every three years thereafter.





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





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


42


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





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





The
compensation committee of the board of directors reviews and makes
recommendations to the board regarding our compensation policies for our
officers and all other forms of compensation, and also administers our incentive
compensation plans and equity-based plans (but our board retains the authority
to interpret those plans). The compensation committee consists of Dr. Cheng, Mr.
Dai and Mr. Lin.





The
corporate governance committee of the board of directors is responsible for the
assessment of the performance of the board, considering and making
recommendations to the board with respect to the nominations or elections of
directors and other governance issues. The corporate governance committee
consists of Dr. Cheng, Mr. Dai and Mr. Dennis O. Laing.





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





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





D.            Employees





As of
December 31, 2009, we had 670 employees, all of whom were based in China. We
believe that our relations with our employees are good. We have never had a work
stoppage, and our employees are not subject to a collective bargaining
agreement. As of December 31, 2009, 2008 and 2007, we had 670, 601 and 588
employees, respectively.





December
      31, 2007
                                
                                
                                December 31, 2008
                                
                                
                                December 31, 2009Total
                                
                                
                                588
                                
                                
                                
                                601
                                
                                
                                
                                671Mid
      and high level Manager
                                
                                
                                47
                                
                                
                                
                                45
                                
                                
                                
                                54Sales
                                
                                
                                94
                                
                                
                                
                                92
                                
                                
                                
                                94R&D
      and Customization
                                
                                
                                152
                                
                                
                                
                                178
                                
                                
                                
                                202Service
                                
                                
                                248
                                
                                
                                
                                224
                                
                                
                                
                                248Pre-sales
                                
                                
                                12
                                
                                
                                
                                25
                                
                                
                                
                                38Back-office
                                
                                
                                35
                                
                                
                                
                                37
                                
                                
                                
                                35





E.            Share ownership





The
following table sets forth information with respect to beneficial ownership of
our common stock and options as of the date of this annual report, 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 common stock shown as
beneficially owned by them. The number of our common stock outstanding used in
calculating the percentage for each listed person includes our common stock
underlying options held by such persons, but excludes common stock underlying
options held by any other person. Percentage of beneficial ownership is based on
3,875,866 ordinary shares, which includes 3,598,689 ordinary shares currently
outstanding and 277,177 options to purchase ordinary shares which have vested or
will vest within 60 days. These shareholders do not possess voting rights that
differ from our other shareholders.


43





Amount of Beneficial Ownership (1)
                
                
                Percentage Ownership (2)Adam
      Yan (3)
                
                
                390,075
                
                
                
                10.06
                %Dehong
      Yang (4)
                
                
                5,000
                
                
                
                *Deliang
      Tong (5)
                
                
                70,045
                
                
                
                1.81
                %Qicheng
      Yang (6)
                
                
                44,423
                
                
                
                1.15
                %Hongjun
      Zou (7)
                
                
                169,970
                
                
                
                4.39
                %Ping
      Yu (8)
                
                
                8,500
                
                
                
                *Tony
      Zhao (9)
                
                
                2,000
                
                
                
                *Ming
      Zhu (10)
                
                
                3,750
                
                
                
                *Dong
      Cheng, Ph.D. (11)
                
                
                11,700
                
                
                
                *Dennis
      O. Laing (10)
                
                
                3,750
                
                
                
                *Brian
      Lin (12)
                
                
                4,500
                
                
                
                *John
      Dai (12)
                
                
                4,500
                
                
                
                *All
      directors and executive officers as a group (12 people)
    (13)
                
                
                718,213
                
                
                
                18.53
                %





* 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 common
      stock.


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


(3)
            Includes
      1,250 vested restricted shares and currently exercisable options to
      purchase 5,397 common stock.


(4)
            Includes
      5,000 vested restricted shares.


(5)
            Includes
      1,500 vested restricted shares.


(6)
            Includes
      2,000 vested restricted shares and currently exercisable options to
      purchase 4,979 common stock.


(7)
            Includes
      750 vested restricted shares and currently exercisable options to purchase
      5,177 common stock.


(8)
            Includes
      2,500 vested restricted shares and currently exercisable options to
      purchase 6,000 common stock.


(9)
            Includes
      2,000 vested restricted shares.


(10)
            Includes
      3,750 vested restricted shares.


(11)
            Includes
      4,500 vested restricted shares and currently exercisable options to
      purchase 7,200 common stock.


(12)
            Includes
      4,500 vested restricted shares.


(13)
            Includes
      36,000 vested restricted shares and currently exercisable options to
      purchase 28,753 common stock.





Share Incentive
Plan





As of
December 31, 2009, we had three share incentive plans in
effect.  62,499 shares underlie our 2001 Share Incentive Plan, 131,678
shares underlie our 2005 Share Incentive Plan and 332,000 shares underlie our
2009 Share Incentive Plan.





Item
7.       
          Major Shareholder
and Related Party Transactions





A.            Major
shareholders





The
following table sets forth information with respect to beneficial ownership of
our common stock and options as of December 31, 2009, for all of our executive
officers and directors individually. Beneficial ownership is determined in
accordance with the rules of the SEC and includes voting or investment power
with respect to the securities. Except as indicated below, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all common stock shown as
beneficially owned by them. The number of our common stock outstanding used in
calculating the percentage for each listed person includes our common stock
underlying options held by such persons, but excludes common stock underlying
options held by any other person. Percentage of beneficial ownership is based on
3,875,866 ordinary shares, which includes 3,598,689 ordinary shares currently
outstanding and 277,177 options to purchase ordinary shares which have vested or
will vest within 60 days. These shareholders do not possess voting rights
that differ from our other shareholders.


44




Amount of Beneficial Ownership (1)
                
                
                Percentage Ownership (2)Adam
      Yan (3)
                
                
                390,075
                
                
                
                10.06
                %Unitrust
                
                
                397,175
                
                
                
                10.25
                %Hudson
      Bay Fund, LP
                
                
                194,489
                
                
                
                5.02
                %Hudson
      Bay Overseas Fund Ltd.
                
                
                237,772
                
                
                
                6.13
                %







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


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


(3)
            Includes
      currently exercisable options to purchase 4,622 common
    stock.





B.
            Related
      party transactions





As of
December 31, 2008 and 2009, the loan balance from Mr.Wang, a minority
shareholder of Wangku, is RMB 0.3 million and RMB 1.2 million respectively.
There is no interest bearing for this loan.





C.
            Interests
      of experts and
counsel





Not
applicable





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 table sets forth the high and low market prices for (i) the fiscal
years ended December 31, 2009 and December 31, 2008, (ii) the fiscal years ended
December 31, 2009 and December 31, 2008 on a quarterly basis, and (iii) the most
recent six months on a monthly basis.





Full Financial Years
                                              
                                              Low
                                              
                                              
                                              HighJanuary
      1, 2009 – December 31, 2009
                                              
                                              $
                                              4.71
                                              
                                              
                                              $
                                              13.84January
      1, 2008 – December 31, 2008
                                              
                                              $
                                              2.51
                                              
                                              
                                              $
                                              19.44January
      1, 2007 – December 31, 2007
                                              
                                              $
                                              11.01
                                              
                                              
                                              $
                                              38.84Fiscal Quarters
                                              
                                              Low
                                              
                                              
                                              HighOctober
      1, 2009 – December 31, 2009
                                              
                                              $
                                              6.26
                                              
                                              
                                              $
                                              10.05July
      1, 2009 – September 30, 2009
                                              
                                              $
                                              7.50
                                              
                                              
                                              $
                                              11.28April
      1, 2009 – June 30, 2009
                                              
                                              $
                                              5.45
                                              
                                              
                                              $
                                              13.84January
      1, 2009 – March 31, 2009
                                              
                                              $
                                              4.71
                                              
                                              
                                              $
                                              7.48October
      1, 2008 – December 31, 2008
                                              
                                              $
                                              2.51
                                              
                                              
                                              $
                                              8.45July
      1, 2008 – September 30, 2008
                                              
                                              $
                                              6.01
                                              
                                              
                                              $
                                              12.67April
      1, 2008 – June 30, 2008
                                              
                                              $
                                              10.72
                                              
                                              
                                              $
                                              18.43January
      1, 2008 – March 31, 2008
                                              
                                              $
                                              10.79
                                              
                                              
                                              $
                                              19.44




45





Monthly
                
                Low
                
                
                HighJune
      2010 (through June 25, 2010)
                
                $
                4.35
                
                
                $
                5.79May
      2010
                
                $
                4.59
                
                
                $
                6.13April
      2010
                
                $
                5.75
                
                
                $
                6.57March2010
                
                $
                5.52
                
                
                $
                6.60February
      2010
                
                $
                5.25
                
                
                $
                5.83January
      2010
                
                $
                5.32
                
                
                $
                6.92





B.            Plan of
distribution





Not
applicable.





C.            Markets





Our
common stock are listed on the NASDAQ Capital Market under the symbol
“EFUT.”





D.
            Selling
      shareholders





Not
applicable.





E.
            Dilution





Not
applicable.





F.
            Expenses
      of the issue





Not
applicable.





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  described in Item 4, “Information on
the Company”


46


D.            Exchange controls





Foreign
Currency Exchange





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





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





Dividend
Distribution





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





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





Notice
75





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





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





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


47


New
M&A Regulations and Overseas Listings





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





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





E.            Taxation





Cayman
Islands Taxation





The
Cayman Islands currently levies 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


·
            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
common stock. 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 common stock 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 common stock.


48


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 common stock 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 common stock 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 common stock 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 common stock that
is:





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


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


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


·
            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 common stock, 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 common stock
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 common stock.





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 Common Stock





Subject
to the passive foreign investment company rules discussed below, all
distributions to a U.S. Holder with respect to the common stock, other than
certain pro rata distributions of our shares, will be includible in a U.S.
Holder’s gross income as ordinary dividend income when received, but only to the
extent that the distribution is paid out of our current or accumulated earnings
and profits. For this purpose, earnings and profits will be computed under U.S.
federal income tax principles. The dividends will not be eligible for the
dividends-received deduction allowed to corporations. To the extent that the
amount of the distribution exceeds our current and accumulated earnings and
profits, it will be treated first as a tax-free return of the tax basis in the
common stock, 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 common
stock 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.


49


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 common stock will be “passive
income” or, in the case of certain U.S. Holders, “financial services income.” In
particular circumstances, a U.S. Holder that:




·
            has
      held the common stock 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 common stock 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 common stock.





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 common stock
between the common stock 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 common stock 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 common stock on which the distribution was
made.





Taxation
of Disposition of Common Stock





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 common stock
equal to the difference between the amount realized (in U.S. dollars) for the
common stock and the U.S. Holder’s tax basis (in U.S. dollars) in the common
stock. 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 common stock 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%.


50


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
common stock, 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 common stock, in that year and all subsequent years although a
shareholder election to terminate such deemed passive foreign investment company
status may be made in certain circumstances. U.S. Holders should consult their
own tax advisors regarding our status as a passive foreign investment company,
the consequences of an investment in a passive foreign investment company, and
the consequences of making a shareholder election to terminate deemed passive
foreign investment company status if we no longer meet the income or asset test
for passive foreign investment company status in a subsequent taxable
year.





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





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


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





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





Our
belief that we are not a passive foreign investment company is based on our
estimate of the fair market value of our intangible assets, including goodwill,
not reflected in our financial statements under US GAAP. In the future, in
calculating the value of these intangible assets, we will value our total
assets, in part, based on our total market value determined using the average of
the quarterly selling prices of the common stock 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 common stock, the U.S. Holder will be subject to special tax rules
with respect to:





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


·
            Any
      gain the U.S. Holder realizes from a sale or other disposition (including
      a pledge) of the common stock, 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 common
stock 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 common stock,


·
            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.


51


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 common stock cannot be treated as
capital, even if the U.S. Holder holds the common stock 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 common stock, 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 common stock as of the close of your taxable year over the
U.S. Holder’s adjusted basis in such common stock. A U.S. Holder is allowed a
deduction for the excess, if any, of the adjusted basis of the common stock 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 common stock 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 common stock, are treated as ordinary income. Ordinary
loss treatment also applies to the deductible portion of any mark-to-market loss
on the common stock, as well as to any loss realized on the actual sale or
disposition of the common stock, to the extent that the amount of such loss does
not exceed the net mark-to-market gains previously included for such common
stock. A U.S. Holder’s basis in the common stock 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 common stock 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 common stock 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 common stock and any gain realized on the
disposition of our common stock.





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 common stock 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 common stock unless such
gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or
business within the United States or the Non-U.S. Holder is a natural person who
is present in the United States for 183 days or more and certain other
conditions exist.





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


52


Information
Reporting and Backup Withholding





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





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





F.
            Dividends
      and paying agents





Not
applicable.




G.
            Statement
      by experts





Not
applicable.





H.
            Documents
      on display





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




I.
            Subsidiary
      Information





Not
applicable.





Item
11.                Quantitative
and Qualitative Disclosures about Market Risk





Interest
Rate Risk





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





Foreign
Exchange Risk





Virtually
all of our revenues and costs are denominated in Renminbi and substantially all
of our assets and liabilities are denominated in Renminbi. As a result, we are
exposed to foreign exchange risk as our revenues and results of operations may
be impacted by fluctuations in the exchange rate between U.S. dollars and
Renminbi. We have not hedged exposures denominated in foreign currencies
using any derivative financial instruments. Any significant revaluation of RMB
against the U.S. dollar may materially affect our revenues, earnings and
financial position in U.S. dollars. The RMB appreciated by 6.47% against
the U.S. dollar in 2008 and the exchange rate between the RMB and the
U.S. dollar was relatively stable in 2009. If the Renminbi continuously
appreciates against the U.S. dollar, the value of our Renminbi revenues and
assets as expressed in U.S. dollars in our financial statements will be subject
to change. See “Risk Factors — Fluctuation of the Renminbi could materially
affect our financial condition and results of operations.”


53


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 4.8%, 5.9% and negative 0.7% in
2007, 2008 and 2009, respectively. The Chinese government may introduce measures
in the future intended to reduce the inflation rate in China.  We cannot
assure you that these measures will not have a significant impact on our
business.  Any such measures may not be successful or immediately effective
in reducing or slowing the increase in China’s inflation rate.  Sustained
or increased inflation in China may have an impact on China’s economy and our
customers, which may adversely affect our business and financial
results.





Taxation





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





On
March 16, 2007, the National People’s Congress enacted the Enterprise
Income Tax Law (the “New EIT Law”), which became effective on January 1,
2008 and has replaced the previous separate income tax laws for domestic
enterprises and FIEs by adopting an unified 25% enterprise income tax rate
applicable to all resident enterprises in China, including FIEs and foreign
enterprises operating in the PRC, except for certain entities that are eligible
to tax holidays and entities enjoying tax holidays under the Previous IT Law
grandfathered by the New EIT Law. In accordance with the implementation rules of
the New EIT Law, a qualified “High and New Technology Enterprise” under the New
EIT Law will be granted the preferential tax rate of 15%. eFuture Beijing is
recognized as “High and New Technology Enterprise” under the New EIT Law by
relevant authorities effective from fiscal year 2008. Therefore, eFuture Beijing
enjoyed the reduced EIT rate of 15% for fiscal year 2008 and
2009.  Biaoshang and Wangku were subject to a 25% tax rate in 2008 and
2009.





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





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





Item
12.                Description
of Securities Other than Equity Securities





Not
applicable.


54


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, 2009. Disclosure controls
and procedures refer to controls and other procedures designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating and implementing possible
controls and procedures.





Management’s
Annual Report on Internal Control over Financial Reporting





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





Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2009. In making this assessment, management used the framework
set forth in the report entitled “Internal Control - Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
or COSO. The COSO framework summarizes each of the components of a company’s
internal control system, including (i) the control environment,
(ii) risk assessment, (iii) control activities, (iv) information
and communication and (v) monitoring. Based on that evaluation, management
concluded that these controls were not effective at December 31, 2009, based on
the following internal control matters that constitute material
weaknesses:





1.
            We
      did not maintain sufficient control over the financial reporting processes
      due to an insufficient complement of internal personnel with a level of
      accounting knowledge, experience and training in the application of US
      GAAP to ensure that the financial statements were prepared in compliance
      with US GAAP and SEC requirements. As a result, we did not adequately
      review accounting policies and US GAAP adjustments relating torevenue recognition
      and share-based award plan.


55


2.
            We
      did not maintain sufficient internal controls over the monthly and year
      end closing process to ensure that standard and non-standard transactions
      were accurately recorded. Furthermore, controls in place were insufficient
      to ensure that adequate identification, review, and approval of journal
      entries was performed and
documented.





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




Management’s
assessment of internal controls over financial reporting was not subject to
auditor attestation as of December 31, 2009 pursuant to temporary rules of the
Securities and Exchange Commission. Accordingly, this Annual Report does not
include an attestation report by our independent registered public accounting
firm regarding internal control over financial reporting.





Remediation
of Material Weaknesses





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





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





1.           We
plan to hire and train up our staff internally in 2010 with relevant accounting
experience, skills and knowledge in the preparation of financial statements
under the requirements of US GAAP and financial reporting disclosure under the
requirement of SEC rules;





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





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





Changes
in Internal Controls over Financial Reporting





Other
than the remediation measures described above, there were no changes in our
internal controls over financial reporting during the year ended December 31,
2009 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.





Item
16.                [Reserved]





Item
16A.             Audit
Committee Financial Expert





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


56


Item
16B.             Code
of Ethics





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





eFuture
Information Technology Inc.


8F Topnew
Tower


15
Guanghua Road


Chaoyang
District


Beijing
100026, People’s Republic of China


Attention:
Secretary





Item
16C.             Principal
Accountant Fees and Services





Audit
Fees





We
incurred in the aggregate amounts of $220,000 and $214,000 for the annual audit
of our financial statements for fiscal years 2009 and 2008,
respectively.  Amounts represent fees billed or expected to be billed
by Grant Thornton Hong Kong.





Tax
Fees





We did
not pay Grant Thornton Hong Kong any fees for tax services for fiscal years 2009
and 2008, respectively.


Pre-Approval
Policies





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





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





Not
applicable.





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





Not
applicable.





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





Not
applicable.





Item
16G.            Corporate
Governance.





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


57


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 Common Stock (1)


4.1
            Securities
      Purchase Agreement dated as of March 13, 2007 by and among the Company,
      Capital Ventures International (“CVI”), Hudson Bay Fund, LP (“HBF”) and
      Hudson Bay Overseas Fund, Ltd. (“HBOF”)
(2)


4.2
            Registration
      Rights Agreement, dated March 13, 2007 by and among the Company, CVI, HBF
      and HBOF (2)


4.3
            Form
      of Senior Convertible Note issued pursuant to the Securities Purchase
      Agreement dated as of March 13, 2007
(2)


4.4
            Form
      of Series A Warrant issued pursuant to the Securities Purchase Agreement
      dated as of March 13, 2007 (2)


4.5
            Form
      of Series B Warrant issued pursuant to the Securities Purchase Agreement
      dated as of March 13, 2007 (2)


4.6
            Acquisition
      of Beijing Wangku Hutong Information Technology Co., Ltd.
    (3)


4.7
            Acquisition
      of Crownhead Holdings Ltd. and Royalstone System Integrated Co., Ltd
      (4)


8.1
            Subsidiaries
      of the Registrant (5)


12.1
            Section
      302 Certification of Adam Yan (6)


12.2
            Section
      302 Certification of Yu Ping (6)


13.1
            Section
      906 Certification of Adam Yan (6)


13.2
            Section
      906 Certification of Yu Ping (6)







(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)
            Incorporated
      by reference to the Registrant’s Annual Report on Form 20-F (File No.
      001-33113) filed with the SEC on October 13, 2009.(6)
            Filed
      herewith.


58


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 29th day of June,
2010.





EFUTURE
      INFORMATION TECHNOLOGY INC.By:
                      /s/
      Adam YanName:
                      Adam
      YanTitle:
                      Chairman
      and Chief Executive OfficerDate:  June
      29, 2010


59




EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 
 INDEX
TO FINANCIAL STATEMENTS
 
 PageReports
      of Independent Registered Public Accounting Firms
                F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2009
                F-4Consolidated
      Statements of Operations and Comprehensive Income (Loss) for the Years
      Ended December 31, 2007, 2008 and 2009
                F-6Consolidated
      Statements of Stockholders’ Equity (Deficit) for the Years Ended December
      31, 2007, 2008 and 2009
                F-7Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007, 2008 and
      2009
                F-8Notes
      to Consolidated Financial Statements
                F-10
  F-1
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board of
Directors and Shareholders
 
 eFuture
Information Technology Inc.
 
 We have
audited the accompanying consolidated balance sheets of eFuture Information
Technology Inc. (a Cayman Islands corporation) and subsidiaries (the "Company")
as of December 31, 2009 and 2008, and the related consolidated statements of
operations and comprehensive income (loss), stockholders’ equity (deficit), and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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, 2009 and 2008, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America.
 
 /s/ GRANT
THORNTON
 
 GRANT
THORNTON
 
 Hong
Kong
 June 29,
2010
  F-2
 
 HANSEN,
      BARNETT & MAXWELL, P.C.A
      Professional CorporationCERTIFIED
      PUBLIC ACCOUNTANTS
                    5
      Triad Center, Suite 750
                    Salt
      Lake City, UT 84180-1128
                    Phone:
      (801) 532-2200
                    Fax:
      (801) 532-7944
                    www.hbmcpas.com
                  
                  Registered
      with the Public Company
                    Accounting
      Oversight Board
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and
 Stockholders
of eFuture Information Technology Inc.
 
 We have
audited the accompanying consolidated statements of operations and comprehensive
income (loss), stockholders’ equity (deficit), and cash flows of eFuture
Information Technology Inc. and subsidiaries (“the Company”) for the year ended
December 31, 2007. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
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 audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the 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
audit provides a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of the operations and the cash flows of
eFuture Information Technology Inc. and subsidiaries for the year ended December
31, 2007, in conformity with U.S. generally accepted accounting
principles.
 
 HANSEN,
BARNETT & MAXWELL, P.C.
 
 Salt Lake
City, Utah
 June 24,
2008, except for Note 16, as to
which the date is October 12, 2009
  F-3
  
 EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 Chinese Yuan (Renminbi)
                    
                    
                    U.S. DollarsDecember 31,
                    
                    
                    December 31,Notes
                    
                    2008
                    
                    
                    2009
                    
                    
                    2009ASSETSCurrent
      assetsCash
      and cash equivalents
                    
                    
                    ¥
                    60,787,734
                    
                    
                    ¥
                    59,114,876
                    
                    
                    $
                    8,660,378Trade
      receivables, less allowance for doubtful accounts of ¥4,743,679 and
      ¥4,196,302($614,762), respectively
                    3
                    
                    
                    19,468,029
                    
                    
                    
                    15,008,666
                    
                    
                    
                    2,198,782Refundable
      value added tax
                    
                    
                    
                    2,755,702
                    
                    
                    
                    2,600,299
                    
                    
                    
                    380,946Advances
      to employees
                    
                    
                    
                    3,205,953
                    
                    
                    
                    1,612,691
                    
                    
                    
                    236,261Advances
      to suppliers
                    
                    
                    
                    198,752
                    
                    
                    
                    297,604
                    
                    
                    
                    43,599Other
      receivables
                    
                    
                    
                    2,229,535
                    
                    
                    
                    2,821,682
                    
                    
                    
                    413,379Prepaid
      expenses
                    
                    
                    
                    735,083
                    
                    
                    
                    1,479,505
                    
                    
                    
                    216,749Inventory
      and work in process, less inventory provision of Nil and
      ¥1,103,382($161,646), respectively
                    4
                    
                    
                    2,879,250
                    
                    
                    
                    5,547,216
                    
                    
                    
                    812,672Total
      current assets
                    
                    
                    
                    92,260,038
                    
                    
                    
                    88,482,539
                    
                    
                    
                    12,962,766Non-current
      assetsLong-term
      investments
                    
                    
                    
                    654,192
                    
                    
                    
                    654,192
                    
                    
                    
                    95,840Deferred
      loan costs
                    
                    
                    
                    1,182,588
                    
                    
                    
                    836,337
                    
                    
                    
                    122,524Property
      and equipment, net of accumulated depreciation of ¥3,020,838 and
      ¥4,314,846($632,129), respectively
                    5
                    
                    
                    3,605,458
                    
                    
                    
                    5,208,594
                    
                    
                    
                    763,063Intangible
      assets, net of accumulated amortization of ¥34,704,373 and
      ¥50,972,300($7,467,484), respectively
                    6
                    
                    
                    49,875,082
                    
                    
                    
                    42,833,223
                    
                    
                    
                    6,275,103Goodwill
                    6
                    
                    
                    91,284,735
                    
                    
                    
                    90,522,735
                    
                    
                    
                    13,261,655Total
      non-current assets
                    
                    
                    
                    146,602,055
                    
                    
                    
                    140,055,081
                    
                    
                    
                    20,518,185Total
      assets
                    
                    
                    ¥
                    238,862,093
                    
                    
                    ¥
                    228,537,620
                    
                    
                    $
                    33,480,951
 
 See the
accompanying notes to consolidated financial statements.
  F-4
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS (CONTINUED)
 
 Chinese Yuan (Renminbi)
                                
                                
                                U.S. DollarsDecember 31,
                                
                                
                                December 31,2008
                                
                                
                                2009
                                
                                
                                2009LIABILITIES
      AND EQUITYCurrent
      liabilitiesTrade
      accounts payable
                                
                                
                                
                                
                                ¥
                                5,646,259
                                
                                
                                ¥
                                9,080,949
                                
                                
                                $
                                1,330,367Other
      payable
                                
                                
                                8
                                
                                
                                
                                11,097,702
                                
                                
                                
                                15,716,207
                                
                                
                                
                                2,302,436Accrued
      expenses
                                
                                
                                9
                                
                                
                                
                                6,873,703
                                
                                
                                
                                10,058,468
                                
                                
                                
                                1,473,574Taxes
      payable
                                
                                
                                
                                
                                
                                
                                7,933,734
                                
                                
                                
                                6,985,256
                                
                                
                                
                                1,023,346Advances
      from customers
                                
                                
                                
                                
                                
                                
                                22,839,530
                                
                                
                                
                                26,185,691
                                
                                
                                
                                3,836,225Royalstone
      acquisition obligation
                                
                                
                                
                                
                                
                                
                                6,416,970
                                
                                
                                
                                6,420,168
                                
                                
                                
                                940,560Health
      field acquisition obligation
                                
                                
                                
                                
                                
                                
                                594,000
                                
                                
                                
                                -
                                
                                
                                
                                -Proadvancer
      System acquisition obligation
                                
                                
                                
                                
                                
                                
                                29,958,518
                                
                                
                                
                                29,973,448
                                
                                
                                
                                4,391,135BFuture
      acquisition obligation
                                
                                
                                
                                
                                
                                
                                392,877
                                
                                
                                
                                392,877
                                
                                
                                
                                57,557Deferred
      tax, current portion
                                
                                
                                15
                                
                                
                                
                                1,553,197
                                
                                
                                
                                1,389,121
                                
                                
                                
                                203,508Total
      current liabilities
                                
                                
                                
                                
                                
                                
                                93,306,490
                                
                                
                                
                                106,202,185
                                
                                
                                
                                15,558,708Long-term
      liabilities3%-10%
      ¥6,825,900 ($1,000,000) convertible note payable, net of ¥6,789,061
      ($994,603) of unamortized discount
                                
                                
                                
                                
                                
                                
                                26,068
                                
                                
                                
                                36,839
                                
                                
                                
                                5,397Derivative
      liabilities
                                
                                
                                16
                                
                                
                                
                                5,111,417
                                
                                
                                
                                3,824,552
                                
                                
                                
                                560,300Deferred
      tax
                                
                                
                                15
                                
                                
                                
                                5,458,232
                                
                                
                                
                                4,109,092
                                
                                
                                
                                601,985Total
      long-term liabilities
                                
                                
                                
                                
                                
                                
                                10,595,717
                                
                                
                                
                                7,970,483
                                
                                
                                
                                1,167,682EquityCommon
      stock, $0.0756 U.S. dollars par value; 6,613,756 shares authorized;
      3,362,241 shares and 3,368,424 shares outstanding,
      respectively
                                
                                
                                10
                                
                                
                                
                                2,039,196
                                
                                
                                
                                2,042,384
                                
                                
                                
                                299,211Additional
      paid-in capital
                                
                                
                                10
                                
                                
                                
                                173,054,651
                                
                                
                                
                                179,821,900
                                
                                
                                
                                26,344,057Statutory
      reserves
                                
                                
                                10
                                
                                
                                
                                3,084,020
                                
                                
                                
                                3,084,020
                                
                                
                                
                                451,812Accumulated
      deficit
                                
                                
                                
                                
                                
                                
                                (43,422,395
                                )
                                
                                
                                (68,687,892
                                )
                                
                                
                                (10,062,833
                                )Total
      eFuture Information Technology Shareholders' Equity
                                
                                
                                
                                
                                
                                
                                134,755,472
                                
                                
                                
                                116,260,412
                                
                                
                                
                                17,032,247Noncontrolling
      interest
                                
                                
                                12
                                
                                
                                
                                204,414
                                
                                
                                
                                (1,895,460
                                )
                                
                                
                                (277,686
                                )Total
      equity
                                
                                
                                
                                
                                
                                
                                134,959,886
                                
                                
                                
                                114,364,952
                                
                                
                                
                                16,754,561Total
      liabilities and equity
                                
                                
                                
                                
                                
                                ¥
                                238,862,093
                                
                                
                                ¥
                                228,537,620
                                
                                
                                $
                                33,480,951
 
 See the
accompanying notes to consolidated financial statements.
  F-5
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 
 Chinese Yuan (Renminbi)
                                              
                                              
                                              U.S. DollarsFor theYear EndedFor the Years Ended December 31,
                                              
                                              
                                              December 31,Notes
                                              
                                              
                                              2007
                                              
                                              
                                              2008
                                              
                                              
                                              2009
                                              
                                              
                                              2009RevenuesSoftware
      sales
                                              
                                              
                                              
                                              
                                              ¥
                                              42,076,411
                                              
                                              
                                              ¥
                                              66,215,769
                                              
                                              
                                              ¥
                                              54,187,769
                                              
                                              
                                              $
                                              7,938,553Hardware
      sales
                                              
                                              
                                              
                                              
                                              
                                              16,198,402
                                              
                                              
                                              
                                              26,655,967
                                              
                                              
                                              
                                              21,518,084
                                              
                                              
                                              
                                              3,152,417Service
      fee income
                                              
                                              
                                              
                                              
                                              
                                              26,646,180
                                              
                                              
                                              
                                              46,991,766
                                              
                                              
                                              
                                              46,561,789
                                              
                                              
                                              
                                              6,821,341Total
      Revenues
                                              
                                              
                                              
                                              
                                              
                                              84,920,993
                                              
                                              
                                              
                                              139,863,502
                                              
                                              
                                              
                                              122,267,642
                                              
                                              
                                              
                                              17,912,311Cost
      of revenuesCost
      of software
                                              
                                              
                                              
                                              
                                              
                                              15,648,282
                                              
                                              
                                              
                                              22,928,605
                                              
                                              
                                              
                                              13,265,401
                                              
                                              
                                              
                                              1,943,392Cost
      of hardware
                                              
                                              
                                              
                                              
                                              
                                              12,601,230
                                              
                                              
                                              
                                              21,989,087
                                              
                                              
                                              
                                              17,294,931
                                              
                                              
                                              
                                              2,533,722Cost
      of service fee income
                                              
                                              
                                              
                                              
                                              
                                              6,965,367
                                              
                                              
                                              
                                              20,247,922
                                              
                                              
                                              
                                              22,916,896
                                              
                                              
                                              
                                              3,357,344Amortization
      of acquired technology
                                              
                                              
                                              
                                              
                                              
                                              8,231,375
                                              
                                              
                                              
                                              13,308,030
                                              
                                              
                                              
                                              11,983,299
                                              
                                              
                                              
                                              1,755,563Amortization
      of software costs
                                              
                                              
                                              
                                              
                                              
                                              2,889,118
                                              
                                              
                                              
                                              3,632,744
                                              
                                              
                                              
                                              4,280,232
                                              
                                              
                                              
                                              627,058Total
      Cost of Revenue
                                              
                                              
                                              
                                              
                                              
                                              46,335,372
                                              
                                              
                                              
                                              82,106,388
                                              
                                              
                                              
                                              69,740,759
                                              
                                              
                                              
                                              10,217,079Gross
      Profit
                                              
                                              
                                              
                                              
                                              
                                              38,585,621
                                              
                                              
                                              
                                              57,757,114
                                              
                                              
                                              
                                              52,526,883
                                              
                                              
                                              
                                              7,695,232Operating
      ExpensesResearch
      and development expenses
                                              
                                              
                                              
                                              
                                              
                                              816,479
                                              
                                              
                                              
                                              6,512,776
                                              
                                              
                                              
                                              3,165,788
                                              
                                              
                                              
                                              463,791General
      and administrative expenses
                                              
                                              
                                              
                                              
                                              
                                              19,192,286
                                              
                                              
                                              
                                              40,488,964
                                              
                                              
                                              
                                              43,840,536
                                              
                                              
                                              
                                              6,422,675Selling
      and distribution expenses
                                              
                                              
                                              
                                              
                                              
                                              12,014,601
                                              
                                              
                                              
                                              20,792,618
                                              
                                              
                                              
                                              34,284,407
                                              
                                              
                                              
                                              5,022,694Impairment
      loss of goodwill
                                              
                                              
                                              6
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              762,000
                                              
                                              
                                              
                                              111,633Total
      Operating Expenses
                                              
                                              
                                              
                                              
                                              
                                              
                                              32,023,366
                                              
                                              
                                              
                                              67,794,358
                                              
                                              
                                              
                                              82,052,731
                                              
                                              
                                              
                                              12,020,793Profit/(loss)
      from operations
                                              
                                              
                                              
                                              
                                              
                                              
                                              6,562,255
                                              
                                              
                                              
                                              (10,037,244
                                              )
                                              
                                              
                                              (29,525,848
                                              )
                                              
                                              
                                              (4,325,561
                                              )Other
      income (expenses):Interest
      income
                                              
                                              
                                              
                                              
                                              
                                              
                                              3,533,326
                                              
                                              
                                              
                                              1,424,029
                                              
                                              
                                              
                                              425,103
                                              
                                              
                                              
                                              62,278Interest
      expense
                                              
                                              
                                              
                                              
                                              
                                              
                                              (2,813,489
                                              )
                                              
                                              
                                              (1,246,780
                                              )
                                              
                                              
                                              (453,861
                                              )
                                              
                                              
                                              (66,491
                                              )Interest
      expenses - amortization of discount on notes payable
                                              
                                              
                                              
                                              
                                              
                                              
                                              (22,415
                                              )
                                              
                                              
                                              (33,212
                                              )
                                              
                                              
                                              (13,316
                                              )
                                              
                                              
                                              (1,951
                                              )Interest
      expenses - amortization of deferred loan costs
                                              
                                              
                                              
                                              
                                              
                                              
                                              (2,114,685
                                              )
                                              
                                              
                                              (978,204
                                              )
                                              
                                              
                                              (350,996
                                              )
                                              
                                              
                                              (51,421
                                              )Income/(loss)
      on investments
                                              
                                              
                                              
                                              
                                              
                                              
                                              985,085
                                              
                                              
                                              
                                              (3,552,902
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Gain
      on derivatives
                                              
                                              
                                              16
                                              
                                              
                                              
                                              10,324,874
                                              
                                              
                                              
                                              33,122,465
                                              
                                              
                                              
                                              1,290,329
                                              
                                              
                                              
                                              189,034Loss
      on extinguishment of convertible notes
                                              
                                              
                                              16
                                              
                                              
                                              
                                              (39,504,662
                                              )
                                              
                                              
                                              (22,529,233
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Foreign
      currency exchange gain/(loss)
                                              
                                              
                                              
                                              
                                              
                                              
                                              544,173
                                              
                                              
                                              
                                              368,127
                                              
                                              
                                              
                                              (133,087
                                              )
                                              
                                              
                                              (19,497
                                              )Loss
      before tax
                                              
                                              
                                              
                                              
                                              
                                              
                                              (22,505,538
                                              )
                                              
                                              
                                              (3,462,954
                                              )
                                              
                                              
                                              (28,761,676
                                              )
                                              
                                              
                                              (4,213,609
                                              )Income
      tax expense/(benefit)
                                              
                                              
                                              15
                                              
                                              
                                              
                                              946,704
                                              
                                              
                                              
                                              (810,744
                                              )
                                              
                                              
                                              1,396,305
                                              
                                              
                                              
                                              204,560Net
      loss
                                              
                                              
                                              
                                              
                                              
                                              
                                              (21,558,834
                                              )
                                              
                                              
                                              (4,273,698
                                              )
                                              
                                              
                                              (27,365,371
                                              )
                                              
                                              
                                              (4,009,049
                                              )Net
      profit (loss) attributable to the noncontrolling interest
                                              
                                              
                                              
                                              
                                              
                                              
                                              32,520
                                              
                                              
                                              
                                              (204,414
                                              )
                                              
                                              
                                              2,099,874
                                              
                                              
                                              
                                              307,633Net
      loss attributable to eFuture Information Technology
                                              
                                              
                                              
                                              
                                              
                                              
                                              (21,526,314
                                              )
                                              
                                              
                                              (4,478,112
                                              )
                                              
                                              
                                              (25,265,497
                                              )
                                              
                                              
                                              (3,701,416
                                              )Other
      comprehensive incomeForeign
      currency translation adjustment
                                              
                                              
                                              
                                              
                                              
                                              
                                              491,079
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Comprehensive
      loss
                                              
                                              
                                              
                                              
                                              
                                              ¥
                                              (21,035,235
                                              )
                                              
                                              ¥
                                              (4,478,112
                                              )
                                              
                                              ¥
                                              (25,265,497
                                              )
                                              
                                              $
                                              (3,701,416
                                              )Loss
      per common stockBasic
                                              
                                              
                                              
                                              
                                              
                                              ¥
                                              (8.01
                                              )
                                              
                                              ¥
                                              (1.39
                                              )
                                              
                                              ¥
                                              (7.51
                                              )
                                              
                                              $
                                              (1.10
                                              )Diluted
                                              
                                              
                                              
                                              
                                              
                                              ¥
                                              (8.01
                                              )
                                              
                                              ¥
                                              (1.39
                                              )
                                              
                                              ¥
                                              (7.51
                                              )
                                              
                                              $
                                              (1.10
                                              )Basic
      Weighted-average Shares Outstanding
                                              
                                              
                                              
                                              
                                              
                                              
                                              2,687,380
                                              
                                              
                                              
                                              3,214,466
                                              
                                              
                                              
                                              3,362,986
                                              
                                              
                                              
                                              3,362,986Fully-Diluted
      Weighted-average Shares Outstanding
                                              
                                              
                                              
                                              
                                              
                                              
                                              2,687,380
                                              
                                              
                                              
                                              3,214,466
                                              
                                              
                                              
                                              3,396,881
                                              
                                              
                                              
                                              3,396,881
 
 See the
accompanying notes to consolidated financial statements.
  F-6
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
 For the Years Ended December 31,
2007, 2008 and 2009
 
 Chinese Yuan (Renminbi)Additional
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Accumulated OtherCommon Stock
                                                        
                                                        
                                                        Paid-in
                                                        
                                                        
                                                        Statutory
                                                        
                                                        
                                                        Comprehensive
                                                        
                                                        
                                                        Accumulated
                                                        
                                                        
                                                        Non controlling
                                                        
                                                        
                                                        TotalShares
                                                        
                                                        
                                                        Amount
                                                        
                                                        
                                                        Capital
                                                        
                                                        
                                                        Reserves
                                                        
                                                        
                                                        Income/(loss)
                                                        
                                                        
                                                        Deficit
                                                        
                                                        
                                                        Interests
                                                        
                                                        
                                                        EquityBalance
      as of January 1, 2007
                                                        
                                                        
                                                        2,633,500
                                                        
                                                        
                                                        ¥
                                                        1,647,781
                                                        
                                                        
                                                        ¥
                                                        77,726,236
                                                        
                                                        
                                                        ¥
                                                        3,084,020
                                                        
                                                        
                                                        ¥
                                                        (491,079
                                                        )
                                                        
                                                        ¥
                                                        (17,417,969
                                                        )
                                                        
                                                        ¥
                                                        32,520
                                                        
                                                        
                                                        ¥
                                                        64,581,509Conversion
      of convertible notes
                                                        
                                                        
                                                        200,080
                                                        
                                                        
                                                        
                                                        113,445
                                                        
                                                        
                                                        
                                                        47,305,512
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        47,418,957Issuance
      of ordinary shares in Royalstone acquisition
                                                        
                                                        
                                                        71,122
                                                        
                                                        
                                                        
                                                        39,223
                                                        
                                                        
                                                        
                                                        8,516,738
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        8,555,961Warrants
      exercised
                                                        
                                                        
                                                        20,000
                                                        
                                                        
                                                        
                                                        11,140
                                                        
                                                        
                                                        
                                                        1,049,852
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,060,992Issuance
      of options to employees
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,663,105
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,663,105Net
      loss for the year
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (21,526,314
                                                        )
                                                        
                                                        
                                                        (32,520
                                                        )
                                                        
                                                        
                                                        (21,558,834
                                                        )Foreign
      currency translation adjustment
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        491,079
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        491,079Balance
      as of December 31,2007
                                                        
                                                        
                                                        2,924,702
                                                        
                                                        
                                                        ¥
                                                        1,811,589
                                                        
                                                        
                                                        ¥
                                                        137,261,443
                                                        
                                                        
                                                        ¥
                                                        3,084,020
                                                        
                                                        
                                                        ¥
                                                        -
                                                        
                                                        
                                                        ¥
                                                        (38,944,283
                                                        )
                                                        
                                                        ¥
                                                        -
                                                        
                                                        
                                                        ¥
                                                        103,212,769Conversion
      of convertible notes
                                                        
                                                        
                                                        210,526
                                                        
                                                        
                                                        
                                                        108,518
                                                        
                                                        
                                                        
                                                        14,834,371
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        14,942,889Issuance
      of ordinary shares in Health Field acquisition
                                                        
                                                        
                                                        6,184
                                                        
                                                        
                                                        
                                                        3,192
                                                        
                                                        
                                                        
                                                        590,808
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        594,000Issuance
      of ordinary shares in Royalstone acquisition
                                                        
                                                        
                                                        66,035
                                                        
                                                        
                                                        
                                                        34,158
                                                        
                                                        
                                                        
                                                        6,382,812
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        6,416,970Issuance
      of ordinary shares in Proadvancer acquisition
                                                        
                                                        
                                                        83,944
                                                        
                                                        
                                                        
                                                        43,357
                                                        
                                                        
                                                        
                                                        7,255,788
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        7,299,145Warrants
      exercised
                                                        
                                                        
                                                        70,850
                                                        
                                                        
                                                        
                                                        38,382
                                                        
                                                        
                                                        
                                                        3,619,526
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        3,657,908Issuance
      of options to employees
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        3,109,903
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        3,109,903Net
      loss for the year
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (4,478,112
                                                        )
                                                        
                                                        
                                                        204,414
                                                        
                                                        
                                                        
                                                        (4,273,698
                                                        )Balance
      as of December 31,2008
                                                        
                                                        
                                                        3,362,241
                                                        
                                                        
                                                        ¥
                                                        2,039,196
                                                        
                                                        
                                                        ¥
                                                        173,054,651
                                                        
                                                        
                                                        ¥
                                                        3,084,020
                                                        
                                                        
                                                        ¥
                                                        -
                                                        
                                                        
                                                        ¥
                                                        (43,422,395
                                                        )
                                                        
                                                        ¥
                                                        204,414
                                                        
                                                        
                                                        ¥
                                                        134,959,886Issuance
      of ordinary shares in Health Field acquisition
                                                        
                                                        
                                                        6,183
                                                        
                                                        
                                                        
                                                        3,188
                                                        
                                                        
                                                        
                                                        591,195
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        594,383Issuance
      of options to employees
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,464,698
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,464,698Restricted
      shares awarded to directors and senior management
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,711,356
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,711,356Net
      loss for the year
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (25,265,497
                                                        )
                                                        
                                                        
                                                        (2,099,874
                                                        )
                                                        
                                                        
                                                        (27,365,371
                                                        )Balance
      as of December 31,2009
                                                        
                                                        
                                                        3,368,424
                                                        
                                                        
                                                        ¥
                                                        2,042,384
                                                        
                                                        
                                                        ¥
                                                        179,821,900
                                                        
                                                        
                                                        ¥
                                                        3,084,020
                                                        
                                                        
                                                        ¥
                                                        -
                                                        
                                                        
                                                        ¥
                                                        (68,687,892
                                                        )
                                                        
                                                        ¥
                                                        (1,895,460
                                                        )
                                                        
                                                        ¥
                                                        114,364,952
 
 U.S. DollarsAdditional
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          Accumulated OtherOrdinary Shares
                                                          
                                                          
                                                          Paid-in
                                                          
                                                          
                                                          Statutory
                                                          
                                                          
                                                          Comprehensive
                                                          
                                                          
                                                          Accumulated
                                                          
                                                          
                                                          Non controlling
                                                          
                                                          
                                                          TotalShares
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          Capital
                                                          
                                                          
                                                          Reserves
                                                          
                                                          
                                                          Income/(loss)
                                                          
                                                          
                                                          Deficit
                                                          
                                                          
                                                          Interests
                                                          
                                                          
                                                          EquityBalance
      as of January 1, 2009
                                                          
                                                          
                                                          3,362,241
                                                          
                                                          
                                                          $
                                                          298,744
                                                          
                                                          
                                                          $
                                                          25,352,650
                                                          
                                                          
                                                          $
                                                          451,812
                                                          
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          (6,361,418
                                                          )
                                                          
                                                          $
                                                          29,947
                                                          
                                                          
                                                          $
                                                          19,771,735Issuance
      of ordinary shares in Health Field acquisition
                                                          
                                                          
                                                          6,183
                                                          
                                                          
                                                          
                                                          467
                                                          
                                                          
                                                          
                                                          86,611
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          87,078Issuance
      of options to employees
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          654,082
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          654,082Restricted
      shares awarded to directors and senior management
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          250,715
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          250,715Net
      loss for the year
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          (3,701,416
                                                          )
                                                          
                                                          
                                                          (307,633
                                                          )
                                                          
                                                          
                                                          (4,009,049
                                                          )Balance
      as of December 31, 2009
                                                          
                                                          
                                                          3,368,424
                                                          
                                                          
                                                          $
                                                          299,211
                                                          
                                                          
                                                          $
                                                          26,344,058
                                                          
                                                          
                                                          $
                                                          451,812
                                                          
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          (10,062,834
                                                          )
                                                          
                                                          $
                                                          (277,686
                                                          )
                                                          
                                                          $
                                                          16,754,561
  See the
accompanying notes to consolidated financial statements.
  F-7
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 Chinese Yuan (Renminbi)
                                              
                                              
                                              U.S. DollarsFor theYear EndedFor the Years Ended December 31,
                                              
                                              
                                              December 31,2007
                                              
                                              
                                              2008
                                              
                                              
                                              2009
                                              
                                              
                                              2009Cash
      flows from operating activities:Net
      loss attributable to eFuture Information Technology
                                              
                                              ¥
                                              (21,526,314
                                              )
                                              
                                              ¥
                                              (4,478,112
                                              )
                                              
                                              ¥
                                              (25,265,497
                                              )
                                              
                                              $
                                              (3,701,416
                                              )Adjustments
      to reconcile net loss attributable to eFuture InformationTechnology
      to net cash provided by (used in) operating activities:Depreciation
      of property and equipment
                                              
                                              
                                              500,633
                                              
                                              
                                              
                                              891,183
                                              
                                              
                                              
                                              1,371,421
                                              
                                              
                                              
                                              200,914Amortization
      of intangible assets
                                              
                                              
                                              11,120,493
                                              
                                              
                                              
                                              16,940,774
                                              
                                              
                                              
                                              16,263,531
                                              
                                              
                                              
                                              2,382,621Impairment
      of goodwill
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              762,000
                                              
                                              
                                              
                                              111,633Impairment
      of intangible assets
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,143,290
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Amortization
      of discount on notes payable
                                              
                                              
                                              22,413
                                              
                                              
                                              
                                              33,212
                                              
                                              
                                              
                                              13,316
                                              
                                              
                                              
                                              1,951Amortization
      of deferred loan costs
                                              
                                              
                                              2,114,685
                                              
                                              
                                              
                                              978,204
                                              
                                              
                                              
                                              350,996
                                              
                                              
                                              
                                              51,421Gain
      on derivatives
                                              
                                              
                                              (10,324,873
                                              )
                                              
                                              
                                              (33,122,465
                                              )
                                              
                                              
                                              (1,290,329
                                              )
                                              
                                              
                                              (189,034
                                              )Loss
      on extinguishment of convertible notes
                                              
                                              
                                              39,504,662
                                              
                                              
                                              
                                              22,529,233
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Investment
      (income)/loss
                                              
                                              
                                              (985,085
                                              )
                                              
                                              
                                              3,552,902
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Loss
      on disposition of property and equipment
                                              
                                              
                                              -
                                              
                                              
                                              
                                              385,995
                                              
                                              
                                              
                                              49,900
                                              
                                              
                                              
                                              7,310Provision
      for doubtful debt
                                              
                                              
                                              2,585,988
                                              
                                              
                                              
                                              2,340,706
                                              
                                              
                                              
                                              4,044,232
                                              
                                              
                                              
                                              592,483Provision
      for loss in inventory and work in process
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,449,542
                                              
                                              
                                              
                                              1,103,382
                                              
                                              
                                              
                                              161,646Compensation
      expenses for options issued to employees
                                              
                                              
                                              2,663,105
                                              
                                              
                                              
                                              3,109,903
                                              
                                              
                                              
                                              4,464,698
                                              
                                              
                                              
                                              654,082Compensation
      expenses for restricted shares awarded todirectors
      and senior management
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,711,356
                                              
                                              
                                              
                                              250,715Deferred
      taxes
                                              
                                              
                                              (946,704
                                              )
                                              
                                              
                                              481,774
                                              
                                              
                                              
                                              (1,513,216
                                              )
                                              
                                              
                                              (221,687
                                              )Foreign
      exchange loss
                                              
                                              
                                              (652,397
                                              )
                                              
                                              
                                              (2,222,996
                                              )
                                              
                                              
                                              (134,451
                                              )
                                              
                                              
                                              (19,697
                                              )Noncontrolling
      interest
                                              
                                              
                                              (32,520
                                              )
                                              
                                              
                                              204,414
                                              
                                              
                                              
                                              (2,099,874
                                              )
                                              
                                              
                                              (307,633
                                              )Change
      in assets and liabilities:
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              -Accounts
      receivable
                                              
                                              
                                              (13,788,696
                                              )
                                              
                                              
                                              (2,526,441
                                              )
                                              
                                              
                                              2,898,851
                                              
                                              
                                              
                                              424,684Refundable
      value added tax
                                              
                                              
                                              (1,220,094
                                              )
                                              
                                              
                                              935,333
                                              
                                              
                                              
                                              155,403
                                              
                                              
                                              
                                              22,767Deposits
                                              
                                              
                                              (111,752
                                              )
                                              
                                              
                                              156,695
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Advances
      to employees
                                              
                                              
                                              (2,378,346
                                              )
                                              
                                              
                                              370,994
                                              
                                              
                                              
                                              1,593,262
                                              
                                              
                                              
                                              233,414Advances
      to suppliers
                                              
                                              
                                              (214,694
                                              )
                                              
                                              
                                              991,888
                                              
                                              
                                              
                                              (98,852
                                              )
                                              
                                              
                                              (14,482
                                              )Other
      receivables
                                              
                                              
                                              537,784
                                              
                                              
                                              
                                              136,565
                                              
                                              
                                              
                                              (3,077,188
                                              )
                                              
                                              
                                              (450,811
                                              )Prepaid
      expenses
                                              
                                              
                                              (291,548
                                              )
                                              
                                              
                                              305,014
                                              
                                              
                                              
                                              (744,422
                                              )
                                              
                                              
                                              (109,058
                                              )Inventories
      and work in process
                                              
                                              
                                              265,645
                                              
                                              
                                              
                                              1,421,159
                                              
                                              
                                              
                                              (3,771,348
                                              )
                                              
                                              
                                              (552,506
                                              )Trade
      payables
                                              
                                              
                                              1,827,696
                                              
                                              
                                              
                                              1,230,861
                                              
                                              
                                              
                                              3,434,690
                                              
                                              
                                              
                                              503,185Other
      payables
                                              
                                              
                                              (1,013,731
                                              )
                                              
                                              
                                              7,269,063
                                              
                                              
                                              
                                              4,770,671
                                              
                                              
                                              
                                              698,908Accrued
      expenses
                                              
                                              
                                              1,570,905
                                              
                                              
                                              
                                              2,360,449
                                              
                                              
                                              
                                              3,184,765
                                              
                                              
                                              
                                              466,571Accrued
      interest
                                              
                                              
                                              278,420
                                              
                                              
                                              
                                              (278,420
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Taxes
      payable
                                              
                                              
                                              2,437,452
                                              
                                              
                                              
                                              (1,084,826
                                              )
                                              
                                              
                                              (948,478
                                              )
                                              
                                              
                                              (138,953
                                              )Advances
      from customers
                                              
                                              
                                              4,575,302
                                              
                                              
                                              
                                              4,542,952
                                              
                                              
                                              
                                              3,346,161
                                              
                                              
                                              
                                              490,215Net
      cash provided by operating activities
                                              
                                              ¥
                                              16,518,429
                                              
                                              
                                              ¥
                                              31,048,845
                                              
                                              
                                              ¥
                                              10,574,980
                                              
                                              
                                              $
                                              1,549,243Cash
      flows from investing activities:Purchases
      of property and equipment
                                              
                                              
                                              (527,743
                                              )
                                              
                                              
                                              (1,618,331
                                              )
                                              
                                              
                                              (3,024,457
                                              )
                                              
                                              
                                              (443,085
                                              )Payments
      for intangible assets
                                              
                                              
                                              (7,151,309
                                              )
                                              
                                              
                                              (2,930,247
                                              )
                                              
                                              
                                              (9,226,066
                                              )
                                              
                                              
                                              (1,351,626
                                              )Long-term
      investments
                                              
                                              
                                              (4,475,216
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Acquisition
      of business
                                              
                                              
                                              (53,188,175
                                              )
                                              
                                              
                                              (28,278,247
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Amounts
      due from a related party
                                              
                                              
                                              (3,000,000
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Net
      cash used in investing activities
                                              
                                              ¥
                                              (68,342,443
                                              )
                                              
                                              ¥
                                              (32,826,825
                                              )
                                              
                                              ¥
                                              (12,250,523
                                              )
                                              
                                              $
                                              (1,794,711
                                              )
 
 See the
accompanying notes to consolidated financial statements.
  F-8
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
 
 Chinese Yuan (Renminbi)
                                          
                                          
                                          U.S. DollarsFor
      theYear
      EndedFor the Years Ended December
      31,
                                          
                                          
                                          December 31,2007
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2009Cash
      flows from financing activities:Proceeds
      from exercise of warrants
                                          
                                          
                                          1,060,992
                                          
                                          
                                          
                                          3,657,908
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Issuance
      of convertible notes
                                          
                                          
                                          69,079,430
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Payment
      of make-whole obligation
                                          
                                          
                                          (10,015,958
                                          )
                                          
                                          
                                          (8,054,079
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Net
      cash provided by (used in) financing activities
                                          
                                          
                                          60,124,464
                                          
                                          
                                          
                                          (4,396,171
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Effect
      of exchange rate changes on cash
                                          
                                          
                                          (2,537,839
                                          )
                                          
                                          
                                          (265,463
                                          )
                                          
                                          
                                          2,685
                                          
                                          
                                          
                                          393Net
      increase (decrease) in cash
                                          
                                          
                                          5,762,611
                                          
                                          
                                          
                                          (6,439,614
                                          )
                                          
                                          
                                          (1,672,858
                                          )
                                          
                                          
                                          (245,075
                                          )Cash
      and cash equivalents at beginning of year
                                          
                                          
                                          61,464,737
                                          
                                          
                                          
                                          67,227,348
                                          
                                          
                                          
                                          60,787,734
                                          
                                          
                                          
                                          8,905,453Cash
      and cash equivalents at end of year
                                          
                                          ¥
                                          67,227,348
                                          
                                          
                                          ¥
                                          60,787,734
                                          
                                          
                                          ¥
                                          59,114,876
                                          
                                          
                                          $
                                          8,660,378Supplemental
      cash flow informationInterest
      paid
                                          
                                          ¥
                                          510,282
                                          
                                          
                                          ¥
                                          1,525,200
                                          
                                          
                                          ¥
                                          450,826
                                          
                                          
                                          $
                                          66,046Non-cash
      Investing and Financing ActivitiesAcquiring
      assets by assuming payment obligation
                                          
                                          ¥
                                          23,118,925
                                          
                                          
                                          ¥
                                          36,813,365
                                          
                                          
                                          ¥
                                          -
                                          
                                          
                                          $
                                          -Conversion
      of convertible notes
                                          
                                          ¥
                                          36,473,000
                                          
                                          
                                          ¥
                                          27,273,200
                                          
                                          
                                          ¥
                                          -
                                          
                                          
                                          $
                                          -Issuance
      of common stock for acquisition
                                          
                                          ¥
                                          8,555,961
                                          
                                          
                                          ¥
                                          14,310,115
                                          
                                          
                                          ¥
                                          594,383
                                          
                                          
                                          $
                                          87,078
  See the
accompanying notes to consolidated financial statements.
  F-9
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  NOTE
1. ORGANIZATION AND NATURE OF OPERATIONS
 
 Organization
 eFuture
Information Technology, Inc. (the “Company”) is a Cayman Islands Corporation.
Its wholly owned subsidiary eFuture (Beijing) Tornado Information Technology,
Inc. is a Beijing foreign investment enterprise in the People’s Republic of
China (the “PRC”). In August, 2007, eFuture (Beijing) Tornado Information
Technology Inc. was renamed as eFuture (Beijing) Royalstone Information
Technology Inc. (“eFuture Beijing”). As of December 31, 2009, 2008 and
2007, eFuture Information Technology, Inc. effectively controlled two variable
interest entities (“VIEs”), the details of which are as follows (see note
13):
 
 •
              Beijing
      Wangku Hutong Information Technology Co., Ltd. (“Wangku”), 51% variable
      interest acquired on May 14,
2008, and
 •
              Beijing
      Fuji Biaoshang Information Technology Co., Ltd. (“Biaoshang”), 51%
      variable interest acquired on October 24,
2007.
 
 Nature
of Operations
 The
Company is mainly engaged in developing and selling Enterprise Resource Planning
(ERP) software and providing ONE-STOP solutions for distribution, retail and
logistics businesses focused on the supply chain front market for manufacturers,
retailers, distributors and third party logistics, and in providing the related
system integration service and technical training services. Systems integration
services involve system design and system implementation through the application
of the software as well as ongoing technical supporting services. Revenues are
generated solely from sales to customers in China.
 
 NOTE
2. SIGNIFICANT ACCOUNTING POLICIES
 
 Basis
of Presentation and Translating Financial Statements
 The
Company’s functional currency is the Chinese Yuan (“Renminbi” or “RMB”) and the
consolidated financial statements have been expressed in Chinese Yuan. The
consolidated financial statements as of and for the year ended December 31, 2009
have been translated into United States dollars (“US$” or “$”) solely for the
convenience of the reader.  Translations of amounts from RMB into
US$ have been calculated at the exchange rate of RMB 6.8259 per US$1.00 on
December 31, 2009, as published on the website of the Federal Reserve Bank of
New York. 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.
 
 Principles of
Consolidation
 The
accompanying consolidated financial statements include the accounts of eFuture
Information Technology Inc., its wholly owned subsidiary, eFuture (Beijing)
Royalstone Information Technology Inc., and its 51% owned variable interest
entities, Fuji Biaoshang Information Technology Co., Ltd., and Wangku Hutong
Information Technology Co., Ltd., from the respective dates of their
acquisitions. All significant inter-company balances and transactions have been
eliminated in consolidation.
  F-10
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 The
Company adopted ASC 810, Consolidation. Pursuant to ASC 810, Biaoshang and Wang
are variable interest entities of the Company and the Company is the primary
beneficiary of these variable interest entities. Accordingly, these variable
interest entities have been consolidated in the Company’s financial
statements.
 
 Accounting
Estimates
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. Management bases the estimates on historical experience
and on various other assumptions that are believed to be reasonable, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities. Actual results could differ from these estimates.
 
 Foreign
Currency Translation
 The
Renminbi is the functional currency for all of the Company's subsidiaries. The
assets and liabilities of entities whose records are denominated in currencies
other than the functional currency are remeasured at the end of the period
exchange rates, except non monetary assets, which have been remeasured at
historical rates. The statements of operations have been remeasured at average
rates of exchange for the period. Gains and losses from remeasurement are
recognized as foreign currency exchange gain or loss in the statement of
operations.
 
 Fair
Values of Financial Instruments
 The
Company records certain of its financial assets and liabilities at fair value on
a recurring basis. Fair value reflects the price that would be received from
selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required or permitted to be
recorded at fair value, the Company considers the principal or most advantageous
market in which it would transact and considers assumptions that market
participants would use when pricing the asset or liability.
 
 The
Company applies a fair value hierarchy that requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. A financial instrument’s categorization within the fair
value hierarchy is based upon the lowest level of input that is significant to
the fair value measurement. There are three levels of inputs that may be used to
measure fair value:
 
 Level 1
applies to assets or liabilities for which there are quoted prices in active
markets for identical assets or liabilities.
 
 Level 2
applies to assets or liabilities for which there are inputs other than quoted
prices included within Level 1 that are observable for the asset or liability
such as quoted prices for similar assets or liabilities in active markets;
quoted prices for identical assets or liabilities in markets with insufficient
volume or infrequent transactions (less active markets); or model- derived
valuations in which significant inputs are observable or can be derived
principally from, or corroborated by, observable market data.
  F-11
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 Level 3
applies to assets or liabilities for which there are unobservable inputs to the
valuation methodology that are significant to the measurement of the fair value
of the assets or liabilities.
 
 The
carrying amount of cash, trade receivables, other receivable, advance to
suppliers, advances to employees, trade accounts payable, other payables,
accrued liabilities, advances from customers and acquisition obligations
approximates fair value due to their immediate or short-term
nature.
 
 Cash
and Cash Equivalents
 Cash and
cash equivalents are comprised of cash on hand and demand deposits with original
maturities of no more than three months. As of December 31, 2009 and
2008, RMB 59.1 million and RMB 60.8 million of the Company’s cash and cash
equivalents were maintained in non-US banks or financial institutions, which are
not protected by FDIC insurance or other insurance.
 
 Trade
and Other receivables
 Trade
receivables are stated at the amount management expects to collect from
outstanding balances. An estimate for doubtful accounts is made when collection
of the full amount is no longer probable. We maintain an allowance for
potentially uncollectible trade receivables based on our assessment of the
collectability of trade receivables. In evaluating the collectability of
individual receivable balances, we consider many factors, including the age of
the balance, the customer’s past payment history, its current credit-worthiness
and current economic trends.
 
 Other
receivables consist of miscellaneous items arising from transactions with
non-trade customers.
 
 The
Company writes off receivables when they are deemed uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts.
 
 Inventory and Work in
Process
 Inventory
is comprised of purchased software available for resale and other consumable
materials. Inventory is stated at the lower of average cost or net realizable
value. Work in process consists of costs incurred on contracts that have not
been completed. In the year ended December 31, 2008 the Company modified its
inventory costing method to allocate labor and overhead costs to each project
based on actual labor hours incurred to improve the method of allocation of
overhead to contracts. The Company determined that the impact of this change on
our income from operations, net income, and inventory for the year ended
December 31, 2008 was not available since it was impractical to evaluate the
effect of applying this change retrospectively, as complete labor records for
prior periods were not available.
 
 Deferred
Offering Costs
 The
Company capitalizes direct and incremental costs associated with the acquisition
of equity financing, which will be netted against the actual equity proceeds. If
the equity offering is abandoned, the deferred offering costs will be charged to
expense.
  F-12
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 Long-term
Investments
 The
Company accounts for an equity investment over which it has significant
influence but does not own a majority equity interest or otherwise control using
the equity method. For equity investments over which the Company does not have
significant influence, cost method accounting is used.
 
 Valuation
of Long-lived Assets
 The
Company evaluates long-lived assets, such as fixed assets and purchased or
internally developed intangible assets with finite lives, for impairment
whenever events or changes in circumstances indicate the carrying value of an
asset may not be recoverable in accordance with ASC subtopic 360-10, Property, Plant and Equipment:
Overall. When such events occur, the Company assesses the recoverability
of the assets group based on the undiscounted future cash flow the asset group
is expected to generate and recognizes an impairment loss when estimated
undiscounted future cash flow expected to result from the use of the asset group
plus net proceeds expected from disposition of the assets group, if any, is less
than the carrying value of the assets group. If the Company identifies an
impairment, the Company reduces the carrying amount of the assets group to its
estimated fair value based on a discounted cash flow approach or, when available
and appropriate, to comparable market values. The Company uses estimates and
judgments in its impairment tests and if different estimates or judgments had
been utilized, the timing or the amount of any impairment charges could be
different. Asset groups to be disposed of would be reported at the lower of the
carrying amount or fair value less costs to sell, and no longer depreciated. The
assets and liabilities of a disposal group classified as held for sale would be
presented separately in the appropriate asset and liability sections of the
balance sheet.
 
 Intangible
Assets - Computer Software
Costs and Research and Development
 The
Company charges all development costs to research and development until
technological feasibility has been established. Technological feasibility is
established when a detail program design or working model is completed. After
reaching technological feasibility, additional software costs are capitalized
until the software is available for general release to customers. The estimated
useful life of capitalized software development expenditures is the shorter of
four years or the estimated period of realization of revenue from the related
software. Research and development costs for the years ended December 31, 2007,
2008 and 2009 were RMB 0.8 million, RMB 6.5 million and RMB 3.2 million (US$0.5
million), respectively.
 
 Accounting
for Impairment of Goodwill and Other Intangible Assets
 Goodwill
represents the excess of the purchase price over the fair value of the
identifiable net assets acquired in a business combination. Under ASC 350-20,
Intangibles—Goodwill and Other:Intangibleassets, goodwill and
indefinite lived intangible assets are subject to an annual impairment test. If
an event occurs or circumstances change that would more-likely-than-not reduce
the fair value of a reporting unit below its carrying amount, an interim
impairment test is performed between annual tests. The impairment test includes
a comparison of estimated discounted cash flows associated with the asset’s
carrying amount. If the fair value is less than the carrying amount of the
asset, the second step of the impairment test shall be performed to measure the
amount of impairment loss, if any. In the second step, the implied fair market
value of goodwill is estimated and compared to the carrying amount. If the
carrying amount of goodwill exceeds its implied fair market value, an impairment
loss equal to this excess is recorded. The recorded loss cannot exceed the
carrying amount of goodwill.
  F-13
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 Revenue
Recognition
 The
Company recognizes revenue when it is realized and earned. The Company considers
revenue realized or realizable and earned when (1) it has persuasive evidence of
an arrangement, (2) delivery has occurred, (3) the sales price is fixed or
determinable, and (4) collectability is reasonably assured. Delivery does not
occur until products have been shipped or services have been provided to the
client and the client has signed a completion and acceptance report, risk of
loss has transferred to the client, client acceptance provisions have lapsed, or
the Company has objective evidence that the criteria specified in client
acceptance provisions have been satisfied. The sales price is not considered to
be fixed or determinable until all contingencies related to the sale have been
resolved.
 
 Revenue
from software and hardware sales represents the invoiced value of products, net
of a value-added tax (“VAT”). All of the Company’s software and hardware that
are sold in the PRC are subject to a Chinese VAT at a rate of 17% of the gross
sales price or at a rate approved by the Chinese local government. This VAT may
be offset by VAT paid by the Company on externally purchased software and
hardware from suppliers. The VAT amounts paid and available for offset are
maintained in current liabilities.
 
 The
Company provides the following products and services: self-developed software,
purchased software, purchased hardware, system design and integration, and
value-added services, including post contract maintenance, technical support,
and eServices.
 
 Software
 The
Company sells self-developed software and software purchased from other
vendors.
 
 For
software sales, the Company recognizes revenues in accordance with ASC 985-605,
Software Revenue
Recognition. 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.
 
 For sales
are considered multiple accounting units, the Company recognizes revenues in
accordance with ASC subtopic 605-25 (“ASC 605-25”), Revenue recognition:
Multiple-Element Arrangements. 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.
  F-14
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 Hardware
 Revenue
from hardware sales is recognized when the product is shipped to the customer
and when there are no unfulfilled company obligations that affect the customer’s
final acceptance of the arrangement.
 
 Services
 Value-added
service
 The
Company provides system integration which involves the design and development of
complex IT systems to the customer’s specifications. These services are provided
on a fixed-price contract and the contract terms are generally short term.
Revenue is recognized on the completed contract method when delivery and
acceptance is determined by a completion report signed by the
customer.
 
 The
Company offers telephone and minimal on-site support to its customers. Revenue
from maintenance and technical support is recognized over the period of the
agreement.
 
 eService
 The
Company provides eServices including B2B service which helps link local and
overseas suppliers to stores throughout China and help efficiently exchange new
product supply and demand information between potential suppliers and retailers,
and SaaS service which serves the retail distribution industry in China by
bringing retailer’s suppliers onto a platform, allowing them to exchange
business information, arrange payments online and access purchase orders,
returns, payment status, inventory levels and analysis of sales data. Revenue is
recognized over the period of the agreement.
 
 Advances
from Customers
 Amounts
collected related to projects that have yet to be completed and unearned amounts
billed to customers related to post-contract maintenance agreements are deferred
until earned.
 
 Cost
of Revenues
 Costs
associated with contracts are deferred and recognized as inventory and work in
process until the services are completed, the products and software are
installed and delivered to and accepted by the customer. When the criteria for
revenue recognition have been met, costs incurred are recognized as cost of
revenue. Cost of revenues include wages, materials, handling charges, and other
expenses associated with the development of IT systems to customers’
specifications, the cost of purchased hardware and software, and costs related
to technical support services. Amortization of capitalized software costs and
costs of acquired technology are included in the cost of revenue.
 
 Advertising
Costs
 Advertising
costs are expensed when incurred. Total advertising expense were RMB430,757,
RMB546,585, and RMB379,766 (US$55,636) for the years ended December 31, 2007,
2008 and 2009, respectively.
  F-15
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 Income
Taxes
 The
Company recognizes income taxes under the liability method. Deferred income
taxes are recognized for differences between the financial reporting and tax
bases of assets and liabilities at enacted tax rates in effect for the years in
which the differences are expected to reverse. A valuation allowance is recorded
against deferred tax assets if management does not believe the Company has met
the "more likely than not" standard imposed by ASC subtopic 740-10.
 
 The
Company adopted the provisions of ASC subtopic 740-10 (“ASC 740-10”), Income Taxes: Overall, on
January 1, 2008. ASC 740-10 clarified the accounting for uncertainty in
income taxes by prescribing the recognition threshold a tax position is required
to meet before being recognized in the financial statements. The Company did not
incur a cumulative effect adjustment upon adoption of ASC 740-10 nor did the
standard have a material impact on the Company’s financial statements for the
years ended December 31, 2007, 2008 and 2009.
 
 In
general, the PRC tax authorities have up to five years to conduct examinations
of the Company’s tax filings. Accordingly, the PRC subsidiaries’ tax years
2005-2009 remain open to examination by the respective taxing
jurisdictions.
 
 Convertible
Debt and Embedded Derivatives
 The
Company applies ASC subtopic 470-20 (“ASC 470-20”), Debtwith Conversion Options—Recognition. The Company
identifies any embedded derivative instruments that may be contained within its
convertible debt instruments in accordance with the provisions of ASC subtopic
815-10 (“ASC 815-10”), Derivativesand Hedging—Overall and records the fair
value of such derivatives separately from the value of the host instrument.
Changes in the fair value of the derivative instruments are recorded in the
statements of operations and comprehensive income for each reporting period. The
fair value of the embedded derivative is bifurcated from the host contract at
inception and is recorded as a discount to the face value of the convertible
debt. The discount is amortized as additional finance cost over the period of
the debt.
 
 Net
Earnings (Loss) per share of Common Stock
 Basic
earnings (loss) per share is computed by dividing net income (loss) attributable
to common shareholders by the weighted average number of shares of common stock
outstanding. Diluted earnings (loss) per share is computed by dividing net
income (loss) attributable to common shareholders as adjusted for the effect of
dilutive common stock equivalent shares, if any, by the weighted average number
of common stock and dilutive potential common stock equivalents outstanding.
Potential common stock equivalents consist of shares issuable upon the
conversion of preferred stock, convertible notes, the exercise of stock options
and warrants and restricted shares subject to cancellation.
  F-16
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 The
number of anti-dilutive shares excluded from the calculation of diluted net
income (loss) per share was as follows as of December 31, 2007, 2008 and
2009:
 
 Years ended December 31,2007
                  
                  
                  2008
                  
                  
                  2009Stock
      options and warrants
                  
                  
                  774,989
                  
                  
                  
                  462,794
                  
                  
                  
                  123,087Contingent
      issuable shares in acquisition obligation
                  
                  
                  138,807
                  
                  
                  
                  150,174
                  
                  
                  
                  143,991Issuable
      shares from Convertible notes
                  
                  
                  200,080
                  
                  
                  
                  52,631
                  
                  
                  
                  52,631Total
      anti-dilutive shares
                  
                  
                  1,113,876
                  
                  
                  
                  665,599
                  
                  
                  
                  319,709
 
 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 common stock outstanding for the years ended December 31, 2007,
2008 and 2009:
 
 Chinese Yuan (Renminbi)
                  
                  
                  U.S. DollarsFor theYear EndedFor the Years Ended December 31,
                  
                  
                  December 31,2007
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2009Net
      loss attributable to eFuture Information Technology
                  
                  ¥
                  (21,526,314
                  )
                  
                  ¥
                  (4,478,112
                  )
                  
                  ¥
                  (25,265,497
                  )
                  
                  $
                  (3,701,416
                  )Basic
      weighted-average ordinary shares outstanding
                  
                  
                  2,687,380
                  
                  
                  
                  3,214,466
                  
                  
                  
                  3,362,986
                  
                  
                  
                  3,362,986Effect
      of dilutive securities:Stock
      options and warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  33,895
                  
                  
                  
                  33,895Contingent
      issuable shares in acquisition obligation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Diluted
      weighted-average ordinary shares outstanding
                  
                  
                  2,687,380
                  
                  
                  
                  3,214,466
                  
                  
                  
                  3,396,881
                  
                  
                  
                  3,396,881Basic
      loss per share
                  
                  ¥
                  (8.01
                  )
                  
                  ¥
                  (1.39
                  )
                  
                  ¥
                  (7.51
                  )
                  
                  $
                  (1.10
                  )Diluted
      loss per share
                  
                  ¥
                  (8.01
                  )
                  
                  ¥
                  (1.39
                  )
                  
                  ¥
                  (7.51
                  )
                  
                  $
                  (1.10
                  )
 
 Shares-Based
Compensation
 We
account for share-based compensation in accordance with ASC subtopic
718-10 (“ASC 718-10), Compensation-Stock Compensation:
Overall. Under the provisions of ASC 718-10, share-based compensation
cost is estimated at the grant date based on the award’s fair value as
calculated by the Black-Scholes-Merton (BSM) option-pricing model and is
recognized as expense over the requisite service period. The BSM model requires
various highly judgmental assumptions including volatility and expected option
life. Volatility is measured using historical daily price changes of our common
stock over the respective expected life of the option. Expected option life is
the number of years that we estimate, based on the vesting and contractual terms
and employee demographics. If any of the assumptions used in the BSM model
change significantly, share-based compensation expenses may differ materially in
the future from that recorded in the current period.
  F-17
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 Recently
Enacted Accounting Standards
 
 On
January 1, 2009, the Company adopted FASB Accounting Standards Codification
(“ASC”) 810-10-65, “Consolidations - Overall -Transition
and Open Effective Date Information”. A noncontrolling interest in a
subsidiary or VIE of the Company represents the portion of the equity (net
assets) in the subsidiary or VIE not directly or indirectly attributable to the
Company. This pronouncement requires noncontrolling interests to be presented as
a separate component of equity in the consolidated balance sheet and modifies
the presentation of net income by requiring earnings and other comprehensive
income to be attributed to controlling and noncontrolling interest. The
presentation regarding noncontrolling interest was retrospectively applied for
all the periods presented. The adoption of ASC 810-10-65 did not have a material
impact on the Company’s consolidated results of operations or financial
position.
 
 In May
2009, the FASB issued new accounting guidance, as codified in ASC 855,
“Subsequent Events” (“ASC 855”) to establish general standards of accounting for
and disclosure of subsequent events. ASC 855 renames the two types of subsequent
events as recognized subsequent events or non-recognized subsequent events and
modifies the definition of the evaluation period for subsequent events as events
or transactions that occur after the balance sheet date, but before the
financial statements are issued. ASC 855 is effective for interim or annual
financial periods ending after June 15, 2009. The adoption of ASC 855 did not
have a material impact on the Company’s financial statement
disclosures.
 
 In
December 2009, the Financial Accounting Standards Board (the “FASB”) issued new
accounting guidance which amends the Codification as a result of the FASB’s
issuance of “Amendments to FASB Interpretation No. 46(R)” during June of
2009. This amendment requires an enterprise to perform an analysis to determine
whether the enterprise’s variable interest or interests give it a controlling
financial interest in a variable interest entity. This guidance requires ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity. This amendment eliminates the quantitative approach previously
required for determining the primary beneficiary of a variable interest entity,
which was based on determining which enterprise absorbs the majority of the
entity’s expected losses, receives a majority of the entity’s expected residual
returns, or both. This guidance requires enhanced disclosures that will provide
users of financial statements with more transparent information about an
enterprise’s involvement in a variable interest entity. This amendment is
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. We have adopted this new guidance
as of the required effective date of January 1, 2010 and the adoptions did
not have any significant impact on its consolidated balance sheets, statements
of operations, or disclosures
 
 In August
2009, the Company adopted ASU 2009-05, “Fair Value Measurements and Disclosures
(Topic 820) — Measuring Liabilities at Fair Value”. ASU 2009-05 amends ASC
820-10, “Fair Value Measurements and Disclosures — Overall”, for the fair value
measurement of liabilities. ASU 2009-5 is effective for the Company beginning
October 1, 2009. The adoption of ASU2009-5 did not have a material impact on the
Company’s financial statement disclosures.
 
 In May
2009, the FASB issued SFAS No. 165, “Subsequent Events”, as codified in ASC 855,
“Subsequent Events” (“ASC 855”) to establish general standards of accounting for
and disclosure of subsequent events. ASC 855 renames the two types of subsequent
events as recognized subsequent events or non-recognized subsequent events and
modifies the definition of the evaluation period for subsequent events as events
or transactions that occur after the balance sheet date, but before the
financial statements are issued. ASC 855 is effective for interim or annual
financial periods ending after June 15, 2009. The adoption of ASC 855 did not
have a material impact on the Company’s financial statement
disclosures.
  F-18
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 In
October 2009, the FASB issued Accounting Standards Update, or ASU,
No. 2009-13, Multiple-Deliverable Revenue
Arrangements. ASU 2009-13 amends ASC 605-25, Revenue Recognition:
Multiple-Element Arrangements, regarding revenue arrangements with
multiple deliverables. These updates addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting, and how the arrangement consideration should be allocated among the
separate units of accounting. These updates are effective for fiscal years
beginning after June 15, 2010 and may be applied retrospectively or
prospectively for new or materially modified arrangements. In addition, early
adoption is permitted. We do not expect that the adoption of ASU 2009-13 will
have a material impact on our consolidated financial
statements.
 
 In
October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That
Include Software Elements. ASU 2009-14 amends the scope of ASC sub-topic
985-605, Software: Revenue
Recognition, to exclude all tangible products containing both software
and non-software components that function together to deliver the product’s
essential functionality. ASU 2009-14 is effective for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010 and shall be applied on a prospective basis. Early
application is permitted as of the beginning of an entity’s fiscal year. We do
not expect that the adoption of ASU 2009-14 will have a material impact on our
conciliated financial statements.
 
 In
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures: Improving Disclosures about Fair Value Measurements. ASU
2010-06 amends ASC 820 to require a number of additional disclosures regarding
(1) the different classes of assets and liabilities measured at fair value,
(2) the valuation techniques and inputs used, (3) the activity in
Level 3 fair value measurements, and (4) the transfers between
Levels 1, 2, and 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years.
The Company does not expect that the adoption of ASU 2010-06 will have a
material impact on its consolidated financial statements.
  F-19
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 NOTE
3. TRADE RECEIVABLES
 
 The trade
receivables amount included in the consolidated balance sheets for the years
ended December 31, 2008 and 2009 were as follows:
 
 Chinese Yuan (Renminbi)
                                                        
                                                        
                                                        U.S. DollarsDecember 31,
                                                        
                                                        
                                                        December 31,2008
                                                        
                                                        
                                                        2009
                                                        
                                                        
                                                        2009Trade
      receivables
                                                        
                                                        ¥
                                                        24,211,708
                                                        
                                                        
                                                        ¥
                                                        19,204,968
                                                        
                                                        
                                                        $
                                                        2,813,544Less
      : Allowance for doubtful accounts
                                                        
                                                        
                                                        (4,743,679
                                                        )
                                                        
                                                        
                                                        (4,196,302
                                                        )
                                                        
                                                        
                                                        (614,762
                                                        )Trade
      receivables, net
                                                        
                                                        ¥
                                                        19,468,029
                                                        
                                                        
                                                        ¥
                                                        15,008,666
                                                        
                                                        
                                                        $
                                                        2,198,782
  The
movement of the allowance for doubtful accounts during the years was as
follows:
 
 Chinese Yuan (Renminbi)
                                                                  
                                                                  
                                                                  U.S. DollarsDecember 31,
                                                                  
                                                                  
                                                                  December 31,2008
                                                                  
                                                                  
                                                                  2009
                                                                  
                                                                  
                                                                  2009Movements
      in allowance for doubtful accountsBalance
      at the beginning of the year
                                                                  
                                                                  ¥
                                                                  4,695,898
                                                                  
                                                                  
                                                                  ¥
                                                                  4,743,679
                                                                  
                                                                  
                                                                  $
                                                                  694,953Provision
      for the year
                                                                  
                                                                  
                                                                  2,340,706
                                                                  
                                                                  
                                                                  
                                                                  1,560,512
                                                                  
                                                                  
                                                                  
                                                                  228,616Write-offs
                                                                  
                                                                  
                                                                  (2,292,925
                                                                  )
                                                                  
                                                                  
                                                                  (2,107,889
                                                                  )
                                                                  
                                                                  
                                                                  (308,807
                                                                  )Balance
      at the end of the year
                                                                  
                                                                  ¥
                                                                  4,743,679
                                                                  
                                                                  
                                                                  ¥
                                                                  4,196,302
                                                                  
                                                                  
                                                                  $
                                                                  614,762
  NOTE
4. INVENTORY AND WORK IN PROCESS
 
 The
inventory amounts included in the consolidated balance sheets for the years
ended December 31, 2008 and 2009 comprised of:
 
 Chinese Yuan (Renminbi)
                                      
                                      
                                      U.S. DollarsDecember 31,
                                      
                                      
                                      December 31,2008
                                      
                                      
                                      2009
                                      
                                      
                                      2009Work
      in process
                                      
                                      ¥
                                      2,842,262
                                      
                                      
                                      ¥
                                      6,612,424
                                      
                                      
                                      $
                                      968,725Other
      inventory
                                      
                                      
                                      36,988
                                      
                                      
                                      
                                      38,174
                                      
                                      
                                      
                                      5,593Less:
      Inventory provision
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,103,382
                                      )
                                      
                                      
                                      (161,646
                                      )Total
      inventories, net
                                      
                                      ¥
                                      2,879,250
                                      
                                      
                                      ¥
                                      5,547,216
                                      
                                      
                                      $
                                      812,672
  F-20
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 The
movement of inventory provision during the years was as follows:
 
 Chinese Yuan (Renminbi)
                                                      
                                                      
                                                      U.S. DollarsDecember 31,
                                                      
                                                      
                                                      December 31,2008
                                                      
                                                      
                                                      2009
                                                      
                                                      
                                                      2009Balance
      as at January 1
                                                      
                                                      ¥
                                                      -
                                                      
                                                      
                                                      ¥
                                                      -
                                                      
                                                      
                                                      $
                                                      -Add:
      Current year additions
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,103,382
                                                      
                                                      
                                                      
                                                      161,646Less:
      Current year reduction of inventory provision
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Balance
      as at December 31
                                                      
                                                      ¥
                                                      -
                                                      
                                                      
                                                      ¥
                                                      1,103,382
                                                      
                                                      
                                                      $
                                                      161,646
  NOTE
5. PROPERTY AND EQUIPMENT
 
 Property
and equipment are stated at cost less accumulated depreciation. Depreciation is
computed on a straight-line basis over the estimated useful lives of the assets
as follows:
 
 Motor
      vehicles
                5
      YearsLeasehold
      improvements - shorter of
                3
      Years or Lease TermOffice
      equipment
                4
      YearsCommunication
      equipment
                4
      YearsSoftware
                4
      Years
 
 Maintenance
and repairs are charged to expense as incurred and major improvements are
capitalized. Gains or losses on sales or retirements are included in the
consolidated statements of operations in the year of disposition as general and
administrative expenses.
 
 Depreciation expense was RMB 0.5
million, RMB 0.9 million and RMB1.4 million (US$0.2 million) for the years ended
December 31, 2007, 2008, and 2009, respectively.
 
 Property and equipment included
in the consolidated balance sheets for the years ended December 31, 2008 and
2009 comprised of:
 
 Chinese Yuan (Renminbi)
                            
                            
                            U.S. DollarsDecember 31,
                            
                            
                            December 31,2008
                            
                            
                            2009
                            
                            
                            2009Motor
      vehicles
                            
                            ¥
                            1,056,762
                            
                            
                            ¥
                            1,431,444
                            
                            
                            $
                            209,708Leasehold
      improvements
                            
                            
                            403,394
                            
                            
                            
                            1,158,515
                            
                            
                            
                            169,723Office
      equipment
                            
                            
                            4,599,800
                            
                            
                            
                            6,314,479
                            
                            
                            
                            925,076Communication
      equipment
                            
                            
                            15,700
                            
                            
                            
                            62,326
                            
                            
                            
                            9,132Software
                            
                            
                            550,640
                            
                            
                            
                            556,676
                            
                            
                            
                            81,553Total
                            
                            
                            6,626,296
                            
                            
                            
                            9,523,440
                            
                            
                            
                            1,395,192Less:
      Accumulated depreciation
                            
                            
                            (3,020,838
                            )
                            
                            
                            (4,314,846
                            )
                            
                            
                            (632,129
                            )Property
      and equipment, net
                            
                            ¥
                            3,605,458
                            
                            
                            ¥
                            5,208,594
                            
                            
                            $
                            763,063
  F-21
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 NOTE
6. GOODWILL AND INTANGIBLE ASSETS
 
 The
carrying amount of goodwill included in the consolidated balance sheets for the
years ended December 31, 2008 and 2009 were as follows:
 
 Chinese Yuan (Renminbi)
                          
                          
                          U.S. Dollars2008
                          
                          
                          2009
                          
                          
                          2009Balance
      as of January 1
                          
                          ¥
                          45,013,827
                          
                          
                          ¥
                          91,284,735
                          
                          
                          $
                          13,373,288Goodwill
      acquired
                          
                          
                          46,270,908
                          
                          
                          
                          -
                          
                          
                          
                          -Impairment
      loss
                          
                          
                          -
                          
                          
                          
                          (762,000
                          )
                          
                          
                          (111,633
                          )Balance
      as of December 31
                          
                          ¥
                          91,284,735
                          
                          
                          ¥
                          90,522,735
                          
                          
                          $
                          13,261,655
  The
Company completed its annual impairment test of goodwill arising from its
acquisition of 51% equity interest in Wangku using a discounted cash flow method
and determined that the carrying value of the reporting unit exceeded the fair
value of the reporting unit.  The value of the reporting unit implied by
the test was based on management’s current assessment of the time frame for
recovery of the retail and consumer goods industries and the related expected
future cash flows based on working capital requirements.  In addition, the
lack of success in implementing new sales capabilities and practices at Wangku
to convert more prospects into actual deals due to general economic conditions
and competition from existing competitors also attributed to reductions in
expected future cash flows.
 
 The
Company recognized no impairment loss on goodwill in the years prior to December
31, 2008. During the year ended December 31, 2009, the Company recorded a
goodwill impairment loss of RMB 762,000 (US$0.1 million).
 
 Intangible
assets included in the consolidated balance sheets for the years ended December
31, 2009 comprised of:
 
 WeightedAverageAmortization
                      Gross Carrying
                      
                      AccumulatedPeriod
                      
                      Amount
                      
                      
                      Amortization
                      
                      
                      Net Book ValueCustomer
      relationship
                      4.48
      years
                      
                      ¥
                      36,747,048
                      
                      
                      ¥
                      18,365,959
                      
                      
                      ¥
                      18,381,089
                      
                      
                      $
                      2,692,845Contract
      backlog
                      7.67
      months
                      
                      
                      9,089,998
                      
                      
                      
                      8,641,665
                      
                      
                      
                      448,333
                      
                      
                      
                      65,681Non-compete
                      2.42
      years
                      
                      
                      1,399,999
                      
                      
                      
                      1,137,773
                      
                      
                      
                      262,226
                      
                      
                      
                      38,416Software
                      5
      years
                      
                      
                      9,167,307
                      
                      
                      
                      5,111,591
                      
                      
                      
                      4,055,716
                      
                      
                      
                      594,166Distributor
      network
                      15
      years
                      
                      
                      3,463,000
                      
                      
                      
                      365,539
                      
                      
                      
                      3,097,461
                      
                      
                      
                      453,781Internally
      generated software
                      4
      years
                      
                      
                      31,488,171
                      
                      
                      
                      17,349,773
                      
                      
                      
                      14,138,398
                      
                      
                      
                      2,071,287Trademark
                      Indefinite
                      
                      
                      2,450,000
                      
                      
                      
                      -
                      
                      
                      
                      2,450,000
                      
                      
                      
                      358,927Balance
      at of December 31,2009
                      
                      
                      ¥
                      93,805,523
                      
                      
                      ¥
                      50,972,300
                      
                      
                      ¥
                      42,833,223
                      
                      
                      $
                      6,275,103
  Amortization
expense for the years ended December 31, 2007, 2008 and 2009 was RMB 11.1
million, RMB 16.9 million and RMB 16.3 million (US$2.4 million), respectively.
For internally generated software, amortization expenses for the years ended
December 31, 2007, 2008 and 2009 was RMB 2.7 million, RMB 3.6 million and RMB
4.3 million (US$0.6 million), respectively. Unamortized capitalized software
costs as of December 31 2008 and 2009 was RMB 9.2 million and RMB 14.1 million
(US$2.1 million), respectively.
  F-22
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 Estimated
aggregate amortization related to the existing intangible assets with definite
lives for the each of succeeding five years is as follows:
 
 Chinese Yuan(Renminbi)
                    
                    
                    U.S. DollarsFor
      the year ending December 31,2010
                    
                    ¥
                    15,491,352
                    
                    
                    $
                    2,269,4962011
                    
                    
                    12,061,519
                    
                    
                    
                    1,767,0232012
                    
                    
                    7,049,544
                    
                    
                    
                    1,032,7642013
                    
                    
                    1,844,136
                    
                    
                    
                    270,1672014
                    
                    
                    230,867
                    
                    
                    
                    33,822Thereafter
                    
                    
                    1,943,128
                    
                    
                    
                    284,670
 
 NOTE
7. IMPAIRMENT FOR LONG-LIVED ASSETS
 
 The
Company’s long-lived assets include intangible assets, fixed assets and other
assets.  In 2008, management identified impairment on certain
internally generated software as well as software acquired through acquisitions
as they are not expected to generate future revenue, or be sellable to a third
party. These intangibles were significantly aged, and no further capital
investment for upgrades is planned as the software does not fit the Company's
development strategy going forward. As a result, impairment expense of RMB 2.1
million was recognized for the year ended December 31, 2008.
 
 As of
December 31, 2009, the Company was not aware of the occurrence of any event
or change of circumstances that would result in material impairment losses in
long-lived assets so did not recognize any impairment loss for the long-lived
assets.
 
 NOTE
8. OTHER PAYABLES
 
 Other
payables included in the consolidated balance sheets for the years ended
December 31, 2008 and 2009 comprised of:
 
 Chinese Yuan (Renminbi)
                                          
                                          
                                          U.S. DollarsDecember 31,
                                          
                                          
                                          December 31,2008
                                          
                                          
                                          2009
                                          
                                          
                                          2009Social
      welfare accrual
                                          
                                          ¥
                                          7,229,212
                                          
                                          
                                          ¥
                                          8,626,218
                                          
                                          
                                          $
                                          1,263,748Expenses
      payable to employees
                                          
                                          
                                          615,838
                                          
                                          
                                          
                                          3,365,784
                                          
                                          
                                          
                                          493,090Individal
      income tax payable
                                          
                                          
                                          835,461
                                          
                                          
                                          
                                          957,416
                                          
                                          
                                          
                                          140,262Miscellaneous
      payable
                                          
                                          
                                          2,417,191
                                          
                                          
                                          
                                          2,766,789
                                          
                                          
                                          
                                          405,336Total
      other payables
                                          
                                          ¥
                                          11,097,702
                                          
                                          
                                          ¥
                                          15,716,207
                                          
                                          
                                          $
                                          2,302,436
  F-23
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 NOTE
9. ACCRUED EXPENSES
 
 Accrued
expenses included in the consolidated balance sheets for the years ended
December 31, 2008 and 2009 comprised of:
 
 Chinese Yuan (Renminbi)
                          
                          
                          U.S. DollarsDecember 31,
                          
                          
                          December 31,2008
                          
                          
                          2009
                          
                          
                          2009Accrued
      payroll
                          
                          ¥
                          6,010,380
                          
                          
                          ¥
                          7,230,696
                          
                          
                          $
                          1,059,303Other
      accruals
                          
                          
                          863,323
                          
                          
                          
                          2,827,772
                          
                          
                          
                          414,271Total
      accrued expenses
                          
                          ¥
                          6,873,703
                          
                          
                          ¥
                          10,058,468
                          
                          
                          $
                          1,473,574
 
 NOTE
10. 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.
 
 Common
stock
 During
October 2006 the Company closed its initial public offering of 1,133,500 common
stock at RMB 47.27 per share under the terms of the offering and realized gross
proceeds of RMB 53,581,679 before cash offering costs of RMB 8,738,655. In
addition, the Company issued the placement agents warrants to purchase 113,350
shares of common stock at RMB 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 common stock were exercised. The Company
received RMB 1,060,992 proceeds and recorded RMB 1,049,852 additional paid-in
capital. On October 3, 2007, $5,000,000 of convertible notes was converted into
200,080 common stock at a conversion price of $24.99 per share; the Company
recorded RMB 47,305,512 additional paid-in capital for this conversion. In
connection with the Royalstone acquisition, the Company issued 71,122 common
stock on December 31, 2007 as part of the satisfaction of the purchase
obligation.
 
 On
January 3, January 7, March 19 and May 5 of 2008, warrants to purchase 20,000,
16,675, 16,675 and, 17,500 common stock were exercised by the placement agents
of the initial public offering, respectively. The Company received RMB 3,657,908
proceeds and recorded RMB 3,619,526 additional paid-in capital. In July and
August of 2008, US$4,000,000 of convertible notes was converted into 210,526
common stock at a conversion price of $19 per share; the Company recorded RMB
14,834,371 additional paid-in capital for this conversion. In connection with
the Royalstone acquisition, the Company issued 66,035 common stock on September
1, 2008 as part of the satisfaction of the purchase obligation, and finally, the
company issued 83,944 and 6,184 common stock on September 1, 2008 and November
25, 2008 to the Proadvancer and Healthfield acquisition,
respectively.
  F-24
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 On
November 18, 2009, in connection with the Healthfield acquisition, the Company
issued 6,183 common stock as the final satisfaction of the purchase
obligation.
 
 On
December 11, 2009, the Company adopted a share incentive plan (the “2009
Plan”), which reserved 332,000 shares of common stock for issuance. Under
2009 Plan, 84,000 and 69,000 restricted shares are granted to members of
the board of directors and senior management, respectively. The Company recorded
RMB1,711,356 additional paid-in capital for this award. Restricted shares vest
over a three year period with the first 25% vested on the grant day. No
restricted shares were issued or registered as of December 31,
2009.
 
 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 Corporate Law, 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 RMB 678,779 and RMB 820,539, respectively. There was no change in
statutory reserves for the years ended December 31, 2006, 2007, 2008 and 2009.
As of December 31, 2009, the amount comprising the surplus reserve fund was RMB
2,056,013; the amount comprising the public welfare fund was RMB
1,028,007.
 
 NOTE
11. SHARE-BASED AWARDS PLAN
 
 On
January 31, 2007, the Company adopted the 2005 Option Plan Set One (the “2005
Plan I”), which reserved 65,875 shares of common stock for issuance under the
plan. In the aggregate, 65,875 performance stock options were granted to
key employees (including directors and senior management who are key employees),
each with an exercise price of $25.42, a contractual life of 10 years and are
vested over a five years period.
 
 On
September 17, 2007, the Company adopted the 2005 Option Plan Set Two (the “2005
Plan II”), which reserved 65,800 shares of common stock for issuance under the
plan. In the aggregate, 65,800 performance stock options were granted to
key employees, each with an exercise price of $11.71, a contractual life of 10
years and are vested over a five years period.
 
 Under the
2005 Plan I and Plan II, the Company’s board of directors may amend or terminate
the Plan at any time if required under the Plan, subject to shareholder
approval.
 
 On
December 11, 2009, the Company adopted a share incentive plan (the “2009
Plan”), which reserved 332,000 shares of common stock for issuance. The 2009
Plan provides for the granting of share incentives, which include Incentive
Stock Option (ISO) and restricted shares to our key employees. In the aggregate,
175,000 performance stock options were granted to key employees with an exercise
price of $6.55, 84,000 and 69,000 restricted shares are granted to members of
the board of directors and senior management, receptively, with no cash
consideration. Options were granted for a term of ten years (commencing from
December 11, 2009). Pursuant to the 2009 Plan, options and restricted shares are
vested over a three years period with the first 25% vested on the grant
day.
  F-25
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 The 2009
Plan is administered by the Company’s Nominee and Compensation Committee. The
Nominee and Compensation Committee has the authority to determine the
individuals who will receive grants, the type of grant, the number of shares
subject to the grant, the terms of the grant, the time the grants will be made,
the duration of any exercise or restriction period, and to deal with any other
matters arising under the Plan. The Company’s board of directors may amend or
terminate the Plan at any time if required under the Plan, subject to
shareholder approval.
 
 The fair
value of this option and restricted shares grant are estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
  2005 Plan I
                                    
                                    
                                    2005 Plan II
                                    
                                    
                                    2009 PlanJanuary 31,
                                    
                                    
                                    September 17,
                                    
                                    
                                    December 11,Grant date
                                    
                                    2007
                                    
                                    
                                    2007
                                    
                                    
                                    2009Expected
      life
                                    
                                    6.5
      years
                                    
                                    
                                    6.5
      years
                                    
                                    
                                    5.25
      yearsRisk-free
      interest rate
                                    
                                    4.82%
                                    
                                    
                                    4.32%
                                    
                                    
                                    2.94%Expected
      volatility
                                    
                                    75%
                                    
                                    
                                    75%
                                    
                                    
                                    100%Expected
      dividend yield
                                    
                                    0%
                                    
                                    
                                    0%
                                    
                                    
                                    0%Forfeited
      rate
                                    
                                    3%
                                    
                                    
                                    3%
                                    
                                    
                                    3%
  The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock volatility. Because the
Company’s employee stock options have characteristics significantly different
from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The Company recognized
share-based compensation expense of 2005 Plan using a straight line
basis over the requisite service period, whereas, the Company
recognized share-based compensation expense of 2009 Plan using a
graded vesting attribution method.
 
 A summary
of the options issued by the Company for the year ended December 31, 2009
is as follows:
 
 Weighted -
                                    
                                    
                                    Weighted - AverageAverage
                                    
                                    
                                    Remaining Contractal
                                    
                                    
                                    AggregateOptions
                                    
                                    
                                    Exercise Price
                                    
                                    
                                    Life (years)
                                    
                                    
                                    Intrinsic ValueOutstanding
      on January 1, 2009
                                    
                                    
                                    182,709
                                    
                                    
                                    $
                                    14.48
                                    
                                    
                                    
                                    5.16
                                    
                                    
                                    $
                                    95,859Granted
                                    
                                    
                                    175,000
                                    
                                    
                                    $
                                    6.55Exercised
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Forfeited/Expired
                                    
                                    
                                    (6,640
                                    )
                                    
                                    $
                                    10.32Outstanding
      on December 31, 2009
                                    
                                    
                                    351,069
                                    
                                    
                                    $
                                    10.61
                                    
                                    
                                    
                                    6.55
                                    
                                    
                                    $
                                    93,622Exercisable
      on December 31, 2009
                                    
                                    
                                    147,774
                                    
                                    
                                    $
                                    10.01
                                    
                                    
                                    
                                    5.13
                                    
                                    
                                    $
                                    93,622
 
 The
weighted average estimated fair value of the options granted for the years ended
December 31, 2007 and 2009 was US$17.00 and US$5.02, respectively. No options
were granted in 2008.
  F-26
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 A summary
of the status of the Company’s non-vested option as of December 31, 2009 is
presented below:
 
 Weighted -Average GrantedNonvested Options
                          
                          Options
                          
                          
                          Date Fair ValueNonvested
      at January 1, 2009
                          
                          
                          100,780
                          
                          
                          $
                          17.40Granted
                          
                          
                          175,000
                          
                          
                          
                          5.02Vested
                          
                          
                          (68,145
                          )
                          
                          
                          9.56Forfeited/Expired
                          
                          
                          (4,340
                          )
                          
                          
                          8.27Nonvested
      at December 31, 2009
                          
                          
                          203,295
                          
                          
                          $
                          9.57
 
 The total
fair value of shares vested during the years ended December 31, 2007, 2008, and
2009 was Nil, RMB3.0 million, and RMB4.4 million (US$0.7 million),
respectively.
 
 As of
December 31, 2009, there was RMB9.7 million (US$1.4 million) unrecognized
share-based compensation cost related to stock options, which is expected to be
recognized over a weighted-average vesting period of 2.64 years. In
the aggregate, the share-based compensation costs related to stock options
during the years ended December 31, 2007, 2008 and 2009 were RMB 2.7
million, RMB 3.1million and RMB 4.5 million (US$0.7 million),
respectively.
 
 NOTE
12. NON CONTROLLING INTEREST
 
 On
January 1, 2009, the Company adopted FASB Accounting Standards Codification
(“ASC”) 810-10-65, “Consolidations -Overall -Transition
and Open Effective Date Information”. This accounting standard defines a
non-controlling interest in a subsidiary as the portion of the equity (net
assets) in a subsidiary not attributable, directly or indirectly, to a parent
and requires a non-controlling interest to be presented as a separate component
of equity in the consolidated balance sheet. This standard also modifies the
presentation of net income by requiring earnings and other comprehensive income
to be attributed to controlling and non-controlling interest.
 
 Previously,
noncontrolling interest’s share of loss is only limited to the capital
contribution in the entity and any excess loss is absorbed in the consolidation
of majority shareholder. As a result of the adoption of this standard, Biaoshang
and Wangku were in net deficit positions that the previous noncontrolling
interest should share their loss in 2009.
  F-27
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 Pro Forma
Non-controlling interest information for the years ended December 31, 2007 and
2008 is as follows. The amounts are shown as if the pronouncement was adopted on
January 1, 2007.
 
 Pro forma non-controlling interestFor the Years Ended December 31,2007
                    
                    
                    2008Biaoshang
                    
                    ¥
                    (104,539
                    )
                    
                    ¥
                    204,414Wangku
                    
                    
                    -
                    
                    
                    
                    (1,800,850
                    )Total
                    
                    ¥
                    (104,539
                    )
                    
                    ¥
                    (1,596,436
                    )
 
 NOTE
13. VARIABLE INTEREST ENTITIES AND OTHER LONG-TERM INVESTMENT
 
 (a)
Variable interest entities
 ASC 810,
Consolidation, 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, 2009,
the aggregate amount of these loans was RMB10,762,679.
 
 As of
December 31, 2009 the Company effectively controlled two variable interest
entities, Biaoshang and Wangku, which have been consolidated in the Company's
financial statements.
 
 Wangku
 
 Wangku
Hutong Information Technology, Co. Ltd., (“Wangku”) is a Web enabler of China
Yellow Pages and a B2B e-Business service provider. In May, 2007, the Company
purchased 20% of Wangku’s equity interest at a price of RMB3,000,000 through
Xuejun Zhang, an employee of the Company.
 
 The
following table summarizes the allocation of the purchase price for the
proportionate share of Wangku’s net assets acquired at fair
value:
  F-28
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 Purchase
      PriceCash
      to acquire 20% of Wangku
                                      
                                      ¥
                                      3,000,000Less:
      Fair Value of identifiable assets acquired:Current
      assets
                                      
                                      ¥
                                      846,792Fixed
      assets
                                      
                                      
                                      203,136¥
                                      1,049,928Plus:
      Fair value of liabilities assumed:Current
      liabilities
                                      
                                      ¥
                                      445,796¥
                                      445,796Excess
      of cost over fair value of net assets acquired-intangible assets and
      goodwill
                                      
                                      ¥
                                      2,395,868
 
 The
excess cost over the fair value of the net assets acquired has been allocated
RMB1,200,000 to distributor network, the only identifiable intangible asset, as
of the date of the acquisition. The remaining amount of RMB1,195,868 was
recorded as goodwill.
 
 Goodwill
and the intangible asset are not deductible for tax purposes. The intangible
asset, except for goodwill, is being amortized over its estimated useful life as
described above from the date of acquisition and was recorded against our equity
in earnings. Wangku generated net income of RMB6,038,135 for the period from
June 1 to December 31, 2007 and our 20% equity ownership accounted for
investment income of RMB1,207,627 by equity method.
 
 Prior to
purchase accounting adjustments, Wangku generated net loss of RMB14,489,530 for
the period from January 1 to May 13, 2008 and our 20% equity ownership accounted
for investment loss of RMB2,929,636 by equity method.
 
 On May
14, 2008, the Company gained effective control over an additional 31% of Wangku
for RMB6,762,679 in cash. The acquisition of Wangku has been accounted for
as a step acquisition business combination in fiscal year 2008. We have
allocated our investment basis to our pro rata share of Wangku’s assets and
liabilities at each significant acquisition date based on the estimated fair
values of such assets and liabilities on such dates, and the excess of our
investment basis over the adjusted estimated fair values of such identifiable
net assets has been allocated to goodwill. For financial reporting purposes, we
have accounted for Wangku using the equity method through May 13, 2008, and as a
consolidated subsidiary thereafter.
  F-29
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 The
following table summarizes the allocation of the 31% purchase price for the
proportionate share of Wangku’s net assets acquired at fair value at the date of
acquisition:
 
 Purchase
      PriceCash
      to acquire an additional 31% of Wangku
                          
                          ¥
                          6,762,679Less:
      Fair Value of identifiable assets acquired:Current
      asstes
                          
                          ¥
                          1,321,761Fixed
      assets
                          
                          
                          372,403¥
                          1,694,164Plus:
      Fair value of liabilities assumed:Current
      liabilities
                          
                          ¥
                          3,465,288Non-current
      liabilities
                          
                          
                          2,799,519¥
                          6,264,807Excess
      of cost over fair value of net assets acquired-intangible assets and
      goodwill
                          
                          ¥
                          11,333,322
 
 The excess cost over the fair
value of the net assets acquired of RMB2,263,000 has been allocated to
distributor network, the only identifiable intangible asset, as of the date of
the acquisition, and the remaining amount of RMB9,070,322 was recorded as
goodwill.
 
 In 2008
and 2009, Wangku realized a net loss of RMB 3.7 million and RMB 2.6 million for
the period from June 1 to December 31, 2008 and for the year ended December 31,
2009 respectively.
 
 Biaoshang
 
 Biaoshang
was incorporated in the PRC in 2000 and engages in B2B business to connect
retailers to their suppliers, enabling them to share information and manage work
processes in China. On October 24, 2007, the Company effectively controlled 51%
of the interest in Biaoshang through Tingchao Zhao, an employee of the Company.
Before the transaction, Peter Jiang held 100% equity interest in Biaoshang. Then
Peter Jiang sold 51% of the equity interest to Tingchao Zhao, while Peter Jiang
held the remaining 49%.
 
 In 2007,
2008 and 2009, Biaoshang realized a net loss of RMB0.3 million, a net profit of
RM B 0.6 million and a net loss of RMB 1.6 million respectively.
 
 Pursuant
to the equity interest transfer agreement between Peter Jiang and Tingchao Zhao,
the Company is subject to pay a contingent payment of RMB 392,877 since the
audited net income for the six month period ended June 30, 2008 was more than
RMB 300,000. This was considered additional purchase consideration and recorded
as an increase to goodwill.
  F-30
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 (b)
Other long-term investment
 
 Other
long-term investment includes the investment in which the Company does not have
the ability to exercise significant influence (generally, when the Company has
an investment of less than 20% ownership) and for which there is not a readily
determinable fair value, is accounted for using the cost method. Dividends and
other distributions of earnings from investee, if any, are included in income
when declared.
 
 On March
5, 2007, the Company entered into an agreement with three other parties to
establish a new company: Beijing Kubang Fuji New Media Technology Limited
Company (“Kubang”). Kubang is an advertising company, specializing in new media
advertising, customer behavior research and business data mining. The total
paid-in capital of Kubang is RMB5,000,000; the Company contributed RMB1,500,000
and so held 30% of the equity interest. Kubang realized a net loss of RMB741,806
in 2007 and the Company recognized an investment loss on Kubang of RMB222,642
for the year ended December 31, 2007 by applying the equity method of
accounting. On August
28, 2008, Kubang raised an additional RMB5,000,000 as paid in capital and
consequently the Company's equity interest was diluted from 30% to 15% at which
point the Company determined it did not have significant influence on the
management of Kubang. From January 1, 2008 through August 28, 2008, in applying
the equity method of accounting the Company recognized an investment loss on
Kubang of RMB623,266. Subsequent to August 28, 2008, the Company accounted for
the 15% interest under the cost method. The carrying value of the investment was
RMB654,192, RMB654,192 and RMB1,277,458 as of December 31, 2009, 2008 and 2007,
respectively.
 
 NOTE
14. RELATED PARTY TRANSACTIONS
 
 As of
December 31, 2008 and 2009, the loan balance from Mr. Wang, a minority
shareholder of Wangku, is RMB 0.3 million and RMB 1.2 million,
respectively. There is no interest bearing for this loan.
 
 NOTE
15. INCOME TAXES
 
 The
Company is incorporated in the Cayman Islands and conducts its primary business
operations through the subsidiaries and VIEs in the PRC. Under the current laws
of the Cayman Islands and BVI, the Company is not subject to tax on income or
capital gains. Additionally, upon payments of dividends by the Company to its
shareholders, no Cayman Islands and BVI withholding tax will be imposed. Before
2008, Enterprises with foreign investment and foreign enterprises doing business
in the People’s Republic of China (“PRC”) were generally subject to Enterprise
Income Tax (“EIT”) at a rate of 30% and a local income tax at a rate of 3%;
however, due to the Company’s location in a State Standard High Technology
Development Zone, the Company was granted a certification of High Technology
Enterprise and was taxed at a 15% federal rate for taxable income generated
after 2001 and was exempt from local tax.
  F-31
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 According
to the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on
January 1, 2008, as further clarified by subsequent tax regulations
implementing the EIT Law, foreign-invested enterprises and domestic enterprises
are subject to enterprise income tax, or EIT, at a uniform rate of 25%. The EIT
rate of enterprises established before March 16, 2007 that were eligible
for preferential tax rates according to then effective tax laws and regulations
will gradually transition to the uniform 25% EIT rate by January 1, 2013.
In addition, certain enterprises may still benefit from a preferential tax rate
of 15% under the EIT Law if they qualify as “high and new technology enterprises
strongly supported by the state,” subject to certain general factors described
in the EIT Law and the related regulations.
 
 In
December 2008, our subsidiary eFuture Beijing was designated as “High and
New Technology Enterprises” under the EIT Law, which entitles it to a
preferential enterprise income tax rate of 15% from 2008 to 2010. Biaoshang
and Wangku were subject to a 25% tax rate in 2008, 2009 and 2010.
 
 The New
EIT Law treats enterprises established outside of China with “effective
management and control” located in China as PRC resident enterprises for tax
purposes. The term “effective management and control” is generally defined as
exercising overall management and control over the business, personnel,
accounting, properties, etc. of an enterprise. The Company, if considered a PRC
resident enterprise for tax purposes, would be subject to the
PRC Enterprise Income Tax at the rate of 25% on its worldwide income for
the period after January 1, 2008. As of December 31, 2009, the Company
has not accrued for PRC tax on such basis. The Company will continue to monitor
its tax status.
 
 Profit/(loss)
before tax for the years ended December 31, 2009, 2008 and 2007 was taxed in the
following jurisdictions:
 
 Chinese Yuan (Renminbi)
                        
                        
                        U.S. DollarsFor theYear EndedFor the Years Ended December 31,
                        
                        December 31,2007
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2009PRC
                        
                        ¥
                        19,505,557
                        
                        
                        ¥
                        7,830,387
                        
                        
                        ¥
                        (2,656,552
                        )
                        
                        $
                        (389,187
                        )Cayman
      Islands
                        
                        
                        (42,011,095
                        )
                        
                        
                        (11,293,341
                        )
                        
                        
                        (26,105,124
                        )
                        
                        
                        (3,824,422
                        )Profit/(Loss)
      before tax
                        
                        ¥
                        (22,505,538
                        )
                        
                        ¥
                        (3,462,954
                        )
                        
                        ¥
                        (28,761,676
                        )
                        
                        $
                        (4,213,609
                        )
 
 The
provision (benefit) from income taxes is as follows:
 
 Chinese Yuan (Renminbi)
                              
                              
                              U.S. DollarsFor theYear EndedFor the Years Ended December 31,
                              
                              December 31,2007
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2009Current
      tax before benefit of operating loss carry forwards
                              
                              ¥
                              2,761,443
                              
                              
                              ¥
                              672,476
                              
                              
                              ¥
                              601,162
                              
                              
                              $
                              88,071Benefit
      of operating loss carry forwards
                              
                              
                              (2,761,443
                              )
                              
                              
                              (343,506
                              )
                              
                              
                              (484,250
                              )
                              
                              
                              (70,943
                              )Current
      tax
                              
                              
                              -
                              
                              
                              
                              328,970
                              
                              
                              
                              116,912
                              
                              
                              
                              17,128Deferred
      tax
                              
                              
                              (946,704
                              )
                              
                              
                              481,774
                              
                              
                              
                              (1,513,217
                              )
                              
                              
                              (221,688
                              )Total
      provision for income taxes
                              
                              ¥
                              (946,704
                              )
                              
                              ¥
                              810,744
                              
                              
                              ¥
                              (1,396,305
                              )
                              
                              $
                              (204,560
                              )
  F-32
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 The
reconciliation of income tax (benefit) computed by applying the statutory income
tax rate to pre-tax income (loss) to the actual tax (benefit) is as
follows:
 
 Chinese Yuan (Renminbi)
                            
                            
                            U.S. DollarsFor theYear EndedFor the Years Ended December 31,
                            
                            
                            December 31,2007
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2009Income
      tax computed at statutory tax rate
                            
                            ¥
                            (6,751,661
                            )
                            
                            ¥
                            (865,739
                            )
                            
                            ¥
                            (7,190,419
                            )
                            
                            $
                            (1,053,402
                            )Non-deductible
      expenses
                            
                            
                            12,309,561
                            
                            
                            
                            3,592,737
                            
                            
                            
                            8,125,806
                            
                            
                            
                            1,190,437Non-taxable
      income
                            
                            
                            -
                            
                            
                            
                            (1,808,246
                            )
                            
                            
                            (1,661,977
                            )
                            
                            
                            (243,481
                            )Effect
      of lower actual tax rates
                            
                            
                            (2,778,950
                            )
                            
                            
                            (600,183
                            )
                            
                            
                            -
                            
                            
                            
                            -Valuation
      allowance
                            
                            
                            (3,725,654
                            )
                            
                            
                            492,175
                            
                            
                            
                            (669,715
                            )
                            
                            
                            (98,114
                            )Total
      income tax
                            
                            ¥
                            (946,704
                            )
                            
                            ¥
                            810,744
                            
                            
                            ¥
                            (1,396,305
                            )
                            
                            $
                            (204,560
                            )
 
 The
components of the deferred income tax asset and liabilities were as
follows:
 
 Chinese Yuan (Renminbi)
                                            
                                            
                                            U.S. DollarsDecember 31,
                                            
                                            
                                            December 31,2008
                                            
                                            
                                            2009
                                            
                                            
                                            2009Deferred
      Tax Assets:Net
      operating loss carry forwards
                                            
                                            ¥
                                            1,109,413
                                            
                                            
                                            ¥
                                            472,243
                                            
                                            
                                            $
                                            69,184Allowance
      for doubtful accounts and write offs
                                            
                                            
                                            621,244
                                            
                                            
                                            
                                            323,095
                                            
                                            
                                            
                                            47,334Inventory
      provision
                                            
                                            
                                            -
                                            
                                            
                                            
                                            165,507
                                            
                                            
                                            
                                            24,247Trade
      receivables
                                            
                                            
                                            640,322
                                            
                                            
                                            
                                            741,135
                                            
                                            
                                            
                                            108,577Inventory
      and work in process
                                            
                                            
                                            1,917,900
                                            
                                            
                                            
                                            -Accruals
      and others
                                            
                                            
                                            768,770
                                            
                                            
                                            
                                            2,754,782
                                            
                                            
                                            
                                            403,578Gross
      deferred tax assets
                                            
                                            
                                            5,057,649
                                            
                                            
                                            
                                            4,456,762
                                            
                                            
                                            
                                            652,920Valuation
      allowance
                                            
                                            
                                            (2,372,086
                                            )
                                            
                                            
                                            (1,300,836
                                            )
                                            
                                            
                                            (190,574
                                            )Total
      deferred tax assets
                                            
                                            ¥
                                            2,685,563
                                            
                                            
                                            ¥
                                            3,155,926
                                            
                                            
                                            $
                                            462,346Deferred
      Tax Liabilities:Inventory
      and work in process
                                            
                                            ¥
                                            -
                                            
                                            
                                            ¥
                                            (529,873
                                            )
                                            
                                            $
                                            (77,627
                                            )Advance
      from customers
                                            
                                            
                                            (7,521,589
                                            )
                                            
                                            
                                            (4,574,831
                                            )
                                            
                                            
                                            (670,217
                                            )Intangible
      assets
                                            
                                            
                                            (2,175,403
                                            )
                                            
                                            
                                            (3,549,435
                                            )
                                            
                                            
                                            (519,995
                                            )Total
      deferred tax liabilities
                                            
                                            ¥
                                            (9,696,992
                                            )
                                            
                                            ¥
                                            (8,654,139
                                            )
                                            
                                            $
                                            (1,267,839
                                            )Net
      deferred tax liabilities
                                            
                                            ¥
                                            (7,011,429
                                            )
                                            
                                            ¥
                                            (5,498,213
                                            )
                                            
                                            $
                                            (805,493
                                            )
  F-33
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 At
December 31, 2009, the Company had the following operating loss carry forwards
that will expire, if unused:
  Expire
                        December 31:2010
                      
                      ¥
                      370,6532011
                      
                      
                      -2012
                      
                      
                      -2013
                      
                      ¥
                      1,666,5802014
                      
                      
                      -¥
                      2,037,233
 
 The
Company recorded a valuation allowance against the 2010 operating loss carry
forwards of Wangku and Biaoshang as it believes it is more likely than not to be
unrealized.
 
 The
Company has evaluated its income tax uncertainty under ASC 740-10. ASC 740-10
clarifies the accounting for uncertainty in income taxes by prescribing the
recognition threshold a tax position is required to meet before being recognized
in the financial statements. The Company has elected to classify interest and
penalties related to an uncertain tax position, if and when required, as part of
income tax expense in the consolidated statements of operations. As of and for
the years ended December 31, 2008 and 2009, no unrecognized tax benefits or
interest and penalties associated with uncertainty in income taxes have been
recognized.
 
 NOTE
16. CONVERTIBLE NOTES AND WARRANTS - DERIVATIVE FINANCIAL
INSTRUMENTS
 
 On
March 13, 2007, the Company closed a Securities Purchase Agreement (the
“Agreement”) with three funds affiliated with two institutional investors,
pursuant to which the Company raised RMB77,410,000 by issuing $10,000,000 of
senior convertible notes along with Series A warrants and Series B
warrants.
 
 In
connection with the issuance, the Company incurred RMB17,627,511 of loan costs
including RMB8,330,570 in cash and RMB 9,296,941of warrants issued to the
placement agent. Proceeds, net of cash loan costs, were RMB69,079,430. The
Company is amortizing the loan costs over the period the convertible notes are
outstanding, using the effective interest method.
  The
convertible notes are due on March 12, 2012 and bear interest per annum as
below, payable quarterly:
 
 Period
                    
                    Interest RateMarch
      13, 2007-March 12, 2008
                    
                    
                    3
                    %March
      13, 2008-March 12, 2009
                    
                    
                    5
                    %March
      13, 2009-March 12, 2010
                    
                    
                    7
                    %March
      13, 2010-March 12, 2012
                    
                    
                    10
                    %
  F-34
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 The
convertible notes were initially convertible into 400,160 common stock of the
Company at $24.99 per share. Pursuant to the Agreement, the conversion price was
reset to $19.00 per share on June 11, 2008 since the market price of the
Company’s common stock was below $19.00 at that day. The maximum number of
Common stock into which the Convertible Notes were convertible, based on a
conversion Floor Price of $19.00 per share, was 526,316 Shares. If the Company
fails to convert timely, the Company shall pay damages to the Holder for each
Trading Day of such Conversion Failure in an amount equal to 1.5% of the product
of the sum of the number of Common stock not issued to the Holder on or prior to
the Share Delivery Date and to which the Holder is entitled, and the Closing
Sale Price of the Common stock on the Share Delivery Date.
 
 The
Agreement contains an optional redemption right whereby if the market price of
the common stock for any thirty consecutive trading days following the optional
redemption eligibility date exceeds 150% of the conversion price $24.99 on the
issuance date (subject to appropriate adjustments for share splits, share
dividends, share combinations and other similar transactions after the
subscription date) and there has been no equity conditions failure, the Company
has the right to redeem all or any portion of the remaining unconverted
notes.
  The
Agreement also contains a Make-Whole provision which guarantees the payment of
the present value of the interest that, but for the applicable conversion or
redemption, would have been paid to the holder through the maturity date minus
the amount of interest already paid to the holder through the conversion date or
optional redemption date.
 
 The
Series A warrants are exercisable by the holder within five years on any day on
or after September 9, 2007 for an aggregate of 184,077 Shares, at an initial
price of $28.25 per common stock, subject to adjustment. Series B warrants have
expired since they had a one year life and were exercisable on any day on or
after September 9, 2007 to purchase an aggregate of 230,097 common stock, with
an initial exercise price of $24.99 per Share. Warrants were also issued to the
Placement Agent to purchase 73,291 common stock of the Company, exercisable by
the Holder within five years on any day on or after September 9, 2007 at an
initial price of $24.99. The Series A Warrants, Series B Warrants and Placement
Agent Warrants contain a Cashless provision that if at any time following one
calendar year from the Date of Issuance a Registration Statement is not
available for the resale of such Unavailable Warrant Shares, the Holder may
exercise this Warrant in whole or in part and elect instead to receive upon such
exercise the "Net Number" of Common stock determined according to the defined
formula.
 
 On June
12, 2007, the Securities and Exchange Commission declared the Company's
registration statement effective. The Company will not receive any of the
proceeds of the sale of the shares by the Selling Shareholders; however, the
Company could receive up to $12,781,841 from the exercise by the Selling
Shareholders and Placement Agent of all of the Series A, Series B and Placement
Agent warrants at their current prices of $28.25, $24.99 and $24.99,
respectively.
 
 We
identified the following instruments and derivatives requiring valuation and
accounting under the relevant guidance applicable to
financial derivatives:
 
 ·Conversion
price reset feature
 ·Company’s
optional early redemption right
 ·Make-whole
provision
 ·Warrants with
exercise price reset feature
  F-35
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 We
identified the conversion price reset feature, our optional
early redemption right and the make-whole provision within the Convertible
Notes to represent embedded derivatives. These embedded derivatives were
bifurcated from the host debt contracts and accounted for as derivative
liabilities in accordance with ASC815. The conversion price reset feature, our
optional early redemption right and the make-whole provision within the
Convertible Notes were bundled together as a single hybrid compound instrument
in accordance with ASC 815 Derivatives and Hedging.
 
 We
identified the common stock warrants to be detachable derivatives. The warrant
exercise price reset provision was identified as an embedded derivative
within the common stock warrants. The common stock warrants and the embedded
warrants exercise price reset provision were accounted for as a separate
single hybrid compound instrument.
 
 The
single compound embedded derivative within convertible notes was recorded at
fair value at the date of issuance (March 13, 2007). We utilized a third party
valuation firm to determine the fair value of the single compound embedded
derivatives by using the Monte Carlo method when the conversion price was
adjustable, and by the binomial tree model when the conversion price effectively
became fixed, subsequent to the price reset on June 11, 2008. The valuation
methodology uses unobservable (Level 3) inputs in calculating fair
value.
 
 The
derivative was not intended to hedge any specific risk exposures, such as
fluctuating interest rates, exchange rates, commodity prices, etc. Therefore,
the derivative constituted neither a cash flow hedge, nor a fair value hedge.
The volume of derivative activity relates solely to the embedded derivative
instrument itself, and changes in fair value thereon.
 
 The
effect of the derivative instrument on the consolidated statements of operations
for the year ended December 31, 2009 is as follows:
 
 Amount of Gain(Loss) Recognized inLocation of Gain
                    
                    Income StatementRecognized in
                    
                    for the Year endedIncome Statement
                    
                    December 31, 2009Chinese
      Yuan(Renminbi)Derivatives
      not designated as hedging instruments under ASC 815-10:Embedded
      Derivative
                    Gain
      on derivatives
                    
                    ¥
                    1,290,329Total
                    
                    
                    ¥
                    1,290,329
 
 The fair
value of these derivatives was determined to be RMB87,775,199 and was recorded
as a derivative liability at inception. The debt discount amount of
RMB77,255,180 is being accreted through charges to the statement of operations
using the effective interest method over the period of the note obligations. At
December 31, 2009, 2008 and 2007, the fair value of the derivatives recognized
in the balance sheets was RMB3,824,552, RMB5,111,417 and RMB46,521,310,
respectively. The gain on derivatives recognized in the consolidated
statements of operations for the year ended December 31, 2009, 2008 and
2007 was RMB1,290,329, RMB33,122,465 and RMB10,324,874,
respectively.
  F-36
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
  The table
below sets forth a summary of changes in the fair value of the Company’s level 3
derivative for the 12 months ended December 31, 2009.
  Chinese Yuan(Renminbi)Balance
      as of December 31, 2008
                    
                    ¥
                    5,111,417Change
      in Fair Value of Derivative Liability
                    
                    ¥
                    (1,290,329
                    )Foreign
      Currency Translation Difference
                    
                    
                    3,464Balance
      as of December 31, 2009
                    
                    ¥
                    3,824,552
  The fair
value of Series A warrants and Series B warrants at the issuance date was
RMB38,619,849 and the fair value of Placement Agent warrants was RMB9,296,941,
computed using Black- Scholes pricing model based upon the following
assumptions: future estimated volatility of 100%, risk-free interest rate of
4.41% and 4.9%, estimated life of 5.5 years, and 0% dividend yield.
 
 On
October 3, 2007, one of the investors converted RMB37,529,400 (US$5,000,000) of
the convertible notes to 200,080 common stock. Pursuant to the terms of the
Note, the Company paid RMB11,239,036 under the Make-Whole provision of the Note.
Upon conversion the Company recognized a loss on extinguishment of the
convertible notes of RMB39,504,662. This is recorded as a non-operating expense
in the consolidated statement of operations.
 
 In July
and August of 2008, another investor converted RMB27,326,700 ($4,000,000) of the
convertible notes to 210,526 common stock. Pursuant to the terms of the Note,
the Company paid RMB8,054,079 under the Make-Whole provision of the Note. Upon
conversion the Company recognized a loss on extinguishment of RMB22,529,233.
This is recorded as a non-operating expense in the consolidated statement of
operations. No warrants have been exercised in the
transactions.
  F-37
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 NOTE
17. OTHER NOTES PAYABLE AND CONTINGENCIES
 
 Operating Lease
Agreements –Operating lease commitments include the commitments under the lease
agreements for the Company’s office premises. The Company leases office
facilities in Beijing, Guangzhou and Shanghai under non-cancelable operating
leases with various expiration dates. The amounts of commitments for
non-cancelable operating leases in effect at December 31, 2009, were as
follows:
 
 Chinese Yuan(Renminbi)
                    
                    
                    U.S. Dollars2010
                    
                    ¥
                    4,162,849
                    
                    
                    $
                    609,8612011
                    
                    
                    2,738,220
                    
                    
                    
                    401,1512012
                    
                    
                    701,407
                    
                    
                    
                    102,757Total
                    
                    ¥
                    7,602,476
                    
                    
                    $
                    1,113,769
 
 The
Company incurred rental expense, of RMB2,207,402, RMB4,591,404 and RMB7,519,484,
during the years ended December 31, 2007, 2008 and 2009, respectively. All
leases agreements have different lease periods, ranging from 1 year to 4
years.
 
 Software
Infringement Indemnity –Standard software license agreements
contain an infringement indemnity clause under which the company agrees to
indemnify and hold harmless customers and business partners against liability
and damages arising from claims of various copyright or other intellectual
property infringements by their software products. The terms constitute a form
of guarantee that is subject to the provision. The estimated liability under the
guarantee is zero as of December 31, 2008 and 2009.
 
 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 RMB665,500 (US$82,464). The case was resolved on September 26, 2008
and the Company is liable to pay RMB403,300. The Company recorded this amount as
other payables at December 31, 2008 and 2009.
 
 NOTE
18. SUBSEQUENT EVENTS
 
 In March
2010, the Company acquired control over a 15% equity position in cFuture for
RMB240,000 in cash.
  F-38
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 NOTE
19. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
 
 Parent
Company Only Condensed Balance Sheets
  Chinese Yuan (Renminbi)
                        
                        
                        U.S. DollarsDecember 31,
                        
                        December 31,2008
                        
                        
                        2009
                        
                        
                        2009ASSETSCurrent
      assetsCash
      and cash equivalents
                        
                        ¥
                        3,836,317
                        
                        
                        ¥
                        2,739,027
                        
                        
                        $
                        401,270Other
      receivables
                        
                        
                        120,959
                        
                        
                        
                        148,323
                        
                        
                        
                        21,729Advances
      to employees
                        
                        
                        52,956
                        
                        
                        
                        52,983
                        
                        
                        
                        7,762Prepaid
      expense
                        
                        
                        267,215
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      current assets
                        
                        
                        4,277,447
                        
                        
                        
                        2,940,333
                        
                        
                        
                        430,761Non-current
      assetsInvestment
      in and receivables due from subsidiaries
                        
                        
                        64,649,549
                        
                        
                        
                        56,838,469
                        
                        
                        
                        8,326,882Intangible
      assets, net of accumulated amortization of ¥18,054,442 and
      ¥29,316,997($4,294,964), respectively
                        
                        
                        31,549,463
                        
                        
                        
                        21,733,003
                        
                        
                        
                        3,183,903Goodwill
                        
                        
                        80,927,975
                        
                        
                        
                        79,547,575
                        
                        
                        
                        11,653,786Deferred
      loan cost
                        
                        
                        1,182,588
                        
                        
                        
                        836,337
                        
                        
                        
                        122,524Total
      non-current assets
                        
                        
                        178,309,575
                        
                        
                        
                        158,955,384
                        
                        
                        
                        23,287,095Total
      assets
                        
                        ¥
                        182,587,022
                        
                        
                        ¥
                        161,895,717
                        
                        
                        $
                        23,717,856LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesAccrued
      expense
                        
                        
                        434,076
                        
                        
                        
                        1,642,994
                        
                        
                        
                        240,699Royalstone
      acquisition obligation
                        
                        
                        6,416,970
                        
                        
                        
                        6,420,168
                        
                        
                        
                        940,560Healthfield
      acquisition obligation
                        
                        
                        594,000
                        
                        
                        
                        -
                        
                        
                        
                        -Proadvancer
      System acquisition obligation
                        
                        
                        29,958,518
                        
                        
                        
                        29,973,448
                        
                        
                        
                        4,391,135BFuture
      acquisition obligation
                        
                        
                        392,877
                        
                        
                        
                        392,877
                        
                        
                        
                        57,557Deferred
      tax, current portion
                        
                        
                        1,553,197
                        
                        
                        
                        1,389,121
                        
                        
                        
                        203,507Total
      current liabilities
                        
                        
                        39,349,638
                        
                        
                        
                        39,818,608
                        
                        
                        
                        5,833,458Long-term
      liabilities3%-10%
      ¥6,825,900 ($1,000,000) convertible note payable, net of ¥6,789,061
      ($994,603) of unamortized discount
                        
                        
                        26,068
                        
                        
                        
                        36,839
                        
                        
                        
                        5,397Derivative
      liabilities
                        
                        
                        5,111,417
                        
                        
                        
                        3,824,552
                        
                        
                        
                        560,300Deferred
      tax, net of current portion
                        
                        
                        3,344,427
                        
                        
                        
                        1,955,306
                        
                        
                        
                        286,454Total
      long-term liabilities
                        
                        
                        8,481,912
                        
                        
                        
                        5,816,697
                        
                        
                        
                        852,151Shareholders'
      equityCommon
      stock, $0.0756 U.S. dollars par value; 6,613,756 shares authorized;
      3,362,241 shares and 3,368,424 shares outstanding,
      respectively
                        
                        
                        2,039,196
                        
                        
                        
                        2,042,384
                        
                        
                        
                        299,211Additional
      paid-in capital
                        
                        
                        173,054,651
                        
                        
                        
                        179,821,900
                        
                        
                        
                        26,344,057Statutory
      reserves
                        
                        
                        3,084,020
                        
                        
                        
                        3,084,020
                        
                        
                        
                        451,812Accumulated
      deficit
                        
                        
                        (43,422,395
                        )
                        
                        
                        (68,687,892
                        )
                        
                        
                        (10,062,833
                        )Total
      shareholders' equity
                        
                        
                        134,755,472
                        
                        
                        
                        116,260,412
                        
                        
                        
                        17,032,247Total
      liabilities and shareholders' equity
                        
                        ¥
                        182,587,022
                        
                        
                        ¥
                        161,895,717
                        
                        
                        $
                        23,717,856
  F-39
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 Parent
Company Only Condensed Statements of Operations
 
 Chinese Yuan (Renminbi)
                                
                                
                                U.S. DollarsFor theYear EndedFor the Years Ended December 31,
                                
                                
                                December 31,2007
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2009Operating
      loss
                                
                                ¥
                                (11,859,795
                                )
                                
                                ¥
                                (16,936,713
                                )
                                
                                ¥
                                (25,656,052
                                )
                                
                                $
                                (3,758,633
                                )Operating
      loss
                                
                                
                                (11,859,795
                                )
                                
                                
                                (16,936,713
                                )
                                
                                
                                (25,656,052
                                )
                                
                                
                                (3,758,633
                                )Equity
      in profit of subsidiary
                                
                                
                                19,157,816
                                
                                
                                
                                5,767,873
                                
                                
                                
                                48,429
                                
                                
                                
                                7,095Interest
      income
                                
                                
                                3,235,834
                                
                                
                                
                                672,737
                                
                                
                                
                                13
                                
                                
                                
                                2Interest
      expense
                                
                                
                                (2,790,550
                                )
                                
                                
                                (983,924
                                )
                                
                                
                                (450,817
                                )
                                
                                
                                (66,045
                                )Interest
      expense - amortization of discount on notes payable
                                
                                
                                (22,415
                                )
                                
                                
                                (33,212
                                )
                                
                                
                                (13,316
                                )
                                
                                
                                (1,951
                                )Interest
      expense - amortization of deferred loan costs
                                
                                
                                (2,114,685
                                )
                                
                                
                                (978,204
                                )
                                
                                
                                (350,996
                                )
                                
                                
                                (51,421
                                )Income
      on investments
                                
                                
                                1,207,627
                                
                                
                                
                                (2,929,636
                                )
                                
                                
                                -
                                
                                
                                
                                -Loss
      on derivatives
                                
                                
                                10,324,874
                                
                                
                                
                                33,122,465
                                
                                
                                
                                1,290,329
                                
                                
                                
                                189,034Loss
      on extinguishment of convertible notes
                                
                                
                                (39,504,662
                                )
                                
                                
                                (22,529,233
                                )
                                
                                
                                -
                                
                                
                                
                                -Foreign
      currency exchange loss/(gain)
                                
                                
                                839,642
                                
                                
                                
                                349,735
                                
                                
                                
                                (133,087
                                )
                                
                                
                                (19,497
                                )Net
      loss
                                
                                ¥
                                (21,526,314
                                )
                                
                                ¥
                                (4,478,112
                                )
                                
                                ¥
                                (25,265,497
                                )
                                
                                $
                                (3,701,416
                                )
  F-40
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 Parent
Company Only Condensed Cash Flow Statements
 
 Chinese Yuan (Renminbi)
                                                    
                                                    
                                                    U.S. DollarsFor
      theYear
      EndedFor the Years Ended December
      31,
                                                    
                                                    
                                                    December 31,2007
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    2009Cash
      flows from operating activities:Net
      income (loss)
                                                    
                                                    ¥
                                                    (21,526,314
                                                    )
                                                    
                                                    ¥
                                                    (4,478,112
                                                    )
                                                    
                                                    ¥
                                                    (25,265,497
                                                    )
                                                    
                                                    $
                                                    (3,701,416
                                                    )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Equity
      in (profit) loss of subsidiary
                                                    
                                                    
                                                    (19,157,816
                                                    )
                                                    
                                                    
                                                    (5,767,873
                                                    )
                                                    
                                                    
                                                    (48,429
                                                    )
                                                    
                                                    
                                                    (7,095
                                                    )Amortization
      of intangible assets
                                                    
                                                    
                                                    6,981,305
                                                    
                                                    
                                                    
                                                    11,281,835
                                                    
                                                    
                                                    
                                                    11,049,000
                                                    
                                                    
                                                    
                                                    1,618,688Impairment
      of goodwill
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    762,000
                                                    
                                                    
                                                    
                                                    111,633Impairment
      of intangible assets
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    286,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Amortization
      of discount on notes payable
                                                    
                                                    
                                                    22,415
                                                    
                                                    
                                                    
                                                    33,212
                                                    
                                                    
                                                    
                                                    13,316
                                                    
                                                    
                                                    
                                                    1,951Amortization
      of deferred loan costs
                                                    
                                                    
                                                    2,114,685
                                                    
                                                    
                                                    
                                                    978,204
                                                    
                                                    
                                                    
                                                    350,996
                                                    
                                                    
                                                    
                                                    51,421Gain
      on derivatives
                                                    
                                                    
                                                    (10,324,874
                                                    )
                                                    
                                                    
                                                    (33,122,465
                                                    )
                                                    
                                                    
                                                    (1,290,329
                                                    )
                                                    
                                                    
                                                    (189,034
                                                    )Loss
      on extinguishment of convertible notes
                                                    
                                                    
                                                    39,504,662
                                                    
                                                    
                                                    
                                                    22,529,233
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Investment
      income
                                                    
                                                    
                                                    (1,207,627
                                                    )
                                                    
                                                    
                                                    2,929,636
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Expenses
      paid by subsidiary on behalf of parent
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Foreign
      exchange loss
                                                    
                                                    
                                                    93,622
                                                    
                                                    
                                                    
                                                    (3,922,302
                                                    )
                                                    
                                                    
                                                    (134,451
                                                    )
                                                    
                                                    
                                                    (19,697
                                                    )Compensation
      expenses for options issued to employees
                                                    
                                                    
                                                    2,663,105
                                                    
                                                    
                                                    
                                                    3,109,903
                                                    
                                                    
                                                    
                                                    4,464,698
                                                    
                                                    
                                                    
                                                    654,082Compensation
      expenses for restricted shares awarded to directors and senior
      management
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1,711,356
                                                    
                                                    
                                                    
                                                    250,715Deferred
      taxes
                                                    
                                                    
                                                    (946,704
                                                    )
                                                    
                                                    
                                                    406,252
                                                    
                                                    
                                                    
                                                    (1,553,197
                                                    )
                                                    
                                                    
                                                    (227,545
                                                    )Changes
      in assets and liabilitiesOther
      receivables
                                                    
                                                    
                                                    26,033
                                                    
                                                    
                                                    
                                                    8,373
                                                    
                                                    
                                                    
                                                    7,364,513
                                                    
                                                    
                                                    
                                                    1,078,907Accrued
      interest
                                                    
                                                    
                                                    278,420
                                                    
                                                    
                                                    
                                                    (278,420
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Prepaid
      expenses
                                                    
                                                    
                                                    33,387
                                                    
                                                    
                                                    
                                                    24,569
                                                    
                                                    
                                                    
                                                    267,348
                                                    
                                                    
                                                    
                                                    39,167Accrued
      expenses
                                                    
                                                    
                                                    (124,145
                                                    )
                                                    
                                                    
                                                    434,076
                                                    
                                                    
                                                    
                                                    1,208,701
                                                    
                                                    
                                                    
                                                    177,076Advance
      to employees
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (52,956
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Net
      cash used in operating activities
                                                    
                                                    
                                                    (1,569,846
                                                    )
                                                    
                                                    
                                                    (5,600,835
                                                    )
                                                    
                                                    
                                                    (1,099,975
                                                    )
                                                    
                                                    
                                                    (161,147
                                                    )Cash
      flows from investing activities:Acuqisition
      of business
                                                    
                                                    
                                                    (42,858,738
                                                    )
                                                    
                                                    
                                                    (27,647,116
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Investment
      in consolidated subsidiaries
                                                    
                                                    
                                                    (987,937
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Long-term
      investments
                                                    
                                                    
                                                    (2,975,216
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Net
      cash used in investing activities
                                                    
                                                    
                                                    (46,821,891
                                                    )
                                                    
                                                    
                                                    (27,647,116
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Cash
      flows from financing activities:Issuance
      of ordinary shares for cash, net of offering costs paid
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Proceeds
      from exercise of warrants
                                                    
                                                    
                                                    1,060,992
                                                    
                                                    
                                                    
                                                    3,612,727
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Issuance
      of convertible notes
                                                    
                                                    
                                                    69,079,430
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Payment
      of make-whole obligation
                                                    
                                                    
                                                    (10,015,958
                                                    )
                                                    
                                                    
                                                    (8,054,079
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Proceeds
      from subscription receivable
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Net
      cash provided by (used in) investing activities
                                                    
                                                    
                                                    60,124,464
                                                    
                                                    
                                                    
                                                    (4,441,352
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Effect
      of exchange rate changes on cash
                                                    
                                                    
                                                    (3,283,859
                                                    )
                                                    
                                                    
                                                    (322,437
                                                    )
                                                    
                                                    
                                                    2,685
                                                    
                                                    
                                                    
                                                    393Net
      increase (decrease) in cash
                                                    
                                                    
                                                    8,448,868
                                                    
                                                    
                                                    
                                                    (38,011,740
                                                    )
                                                    
                                                    
                                                    (1,097,290
                                                    )
                                                    
                                                    
                                                    (160,754
                                                    )Cash
      and cash equivalents at beginning of year
                                                    
                                                    
                                                    33,399,189
                                                    
                                                    
                                                    
                                                    41,848,057
                                                    
                                                    
                                                    
                                                    3,836,317
                                                    
                                                    
                                                    
                                                    562,024Cash
      and cash equivalents at end of year
                                                    
                                                    ¥
                                                    41,848,057
                                                    
                                                    
                                                    ¥
                                                    3,836,317
                                                    
                                                    
                                                    ¥
                                                    2,739,027
                                                    
                                                    
                                                    $
                                                    401,270
  F-41
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
 Basis
of presentation
 For the
purposes of the presentation of eFuture Cayman’s (the parent) condensed
financial information, the parent has recorded its investment in eFuture
(Beijing) Royalstone Information Technology, Inc., Biaoshang Information
Technology Co. Ltd., and Wangku Hutong Information Technology Co. Ltd. under the
equity method of accounting as prescribed in APB opinion No. 18, “The Equity
Method of Accounting for Investments in Common Stock.” Such investments are
presented as “Long-term Investment” in the balance sheets and the profit or loss
from the subsidiaries are reflected on the condensed statements of operations as
“Equity in profit (loss) of subsidiaries”. These
Company-only financial statements should be read in conjunction with the
Company’s consolidated financial statements.
 
 Under PRC
laws and regulations, there are restrictions on the Company’s PRC subsidiary,
eFuture Beijing, to transfer certain of its net assets to the Company either in
the form of dividends, loans, and advances. The amounts restricted include
paid-in capital and statutory reserves of eFuture Beijing totaling approximately
RMB3,084,020 as of December 31, 2009.
  F-42