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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
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 For the transition periodfrom  to .
 Commission file number: 000-50975
 CHINA FINANCE ONLINE CO. LIMITED
  Not Applicable
 (Translation of Registrants name into English)
 Hong Kong
 (Jurisdiction of incorporation or organization)
 9th Floor of Tower C, Corporate Square
NO. 35 Financial Street, Xicheng District
Beijing 100032, China
  Title of each class
    
    Name of each exchange on which registeredNone
    
    None
  American Depositary Shares, each representing 5 ordinary shares,
 par value HK$0.001 per share *
 
  
 *
    
    Not for trading, but only in connection with the listing on the Nasdaq Global Market of American
Depository Shares each representing 5 ordinary shares pursuant to the requirements of the
Securities and Exchange Commission None
   o þ
  o þ
  þ o
  o o þ
  o þ
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CHINA FINANCE ONLINE CO. LIMITED
 TABLE OF CONTENTS
 INTRODUCTIONPART IITEM 1 Identity of Directors, Senior Management And Advisers
    
    
    4ITEM 2 Offer Statistics and Expected Timetable
    
    
    4ITEM 3 Key Information
    
    
    5ITEM 4 Information on the Company
    
    
    30ITEM 5 Operating and Financial Review and Prospects
    
    
    50ITEM 6 Directors, Senior Management and Employees
    
    
    67ITEM 7 Major Shareholders and Related Party Transaction
    
    
    75ITEM 8 Financial Information
    
    
    80ITEM 9 The Offer and Listing
    
    
    80ITEM 10 Additional Information
    
    
    81ITEM 11 Quantitative and Qualitative Disclosures About Market Risk
    
    
    89ITEM 12 Description of Securities Other than Equity Securities
    
    
    89PART IIITEM 13 Defaults, Dividend Arrearages and Delinquencies
    
    
    89ITEM 14 Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    89ITEM 15 Controls and Procedures
    
    
    89ITEM 16A Audit Committee Financial Expert
    
    
    89ITEM 16B Code of Ethics
    
    
    90ITEM 16C Principal Accountant Fee and Services
    
    
    90ITEM 16D Exemption from the Listing Standard for Audit Committees
    
    
    90ITEM 16E Purchases of Equity Securities by the Issue and Affiliated Purchasers
    
    
    90PART IIIITEM 17 Financial Statement
    
    
    90ITEM 18 Financial Statements
    
    
    90ITEM 19 Exhibits
    
    
    90EX-4.1 2004 INCENTIVE STOCK OPTION PLANEX-4.7 FRAMEWORK AGREEMENT ON EXERCISING PURCHASE OPTIONEX-4.8 SHARE TRANSFER CONTRACTEX-4.9 LOAN AGREEMENT DATED NOVEMBER 20, 2006EX-4.10 PURCHASE OPTION AND COOPERATION AGREEMENTEX-4.11 SHARE PLEDGE AGREEMENTEX-4.15 SHANGHAI STOCK EXCHANGE LEVEL-II QUOTATIONS LICENSE AGREEMENTEX-4.16 SHENZHEN STOCK EXCHANGE PROPRIETARY INFOMATION LICENSE AGREEMENTEX-4.17 DOMAIN NAME TRANSFER AGREEMENTEX-4.18 DOMAIN NAME TRANSFER AGREEMENTEX-4.22 LEASE CONTRACT FOR HOUSING UNITEX-4.23 LEASE CONTRACT FOR HOUSING UNITEX-4.25 LABOUR CONTRACT OF JEFF WANG DATED MAY 24, 2006EX-4.30 SHARE TRANSFER AGREEMENTEX-4.31 SHARE TRANSFER AGREEMENTEX-8.1 LIST OF SUBSIDIARIESEX-10.1 CONSENT OF DELOITTE TOUCHE TOHMATSU CPA LTD.EX-12.1 CEO CERTIFICATIONEX-12.2 CFO CERTIFICATIONEX-13.1 CEO CERTIFICATION - SECTION 906EX-13.2 CFO CERTIFICATION - SECTION 906
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INTRODUCTION
  
    
    we, us, our company and our refer to China Finance Online Co. Limited, or CFO
Hong Kong, its subsidiaries, China Finance Online (Beijing) Co., Ltd., or CFO Beijing,
Fortune Software (Beijing) Co., Ltd., or CFO Software, Stockstar Information Technology
(Shanghai) Co., Ltd., or CFO Stockstar, Shenzhen Genius Information Technology Co., Ltd.,
or CFO Genius, Jujin Software (Shenzhen) Co., Ltd. or Jujin, Zhengning Information
Technology (Shanghai) Co., Ltd., or Zhengning and, in the context of describing our
operations, also include our PRC-incorporated affiliate, Fuhua Innovation Technology
Development Co., Ltd., or Fuhua, and Shanghai Meining Computer Software Co., Ltd., or CFO
Meining, Fuhuas wholly owned subsidiary;
    
    shares and ordinary shares refer to our ordinary shares, preferred shares refers
to our preferred shares, all of which were converted into our ordinary shares upon the
completion of our initial public offering on October 20, 2004, ADSs refers to our
American depositary shares, each of which represents five ordinary shares, and ADRs
refers to the American depositary receipts which evidence our ADSs;
    
    China or PRC refers to the Peoples Republic of China, excluding Taiwan, Hong Kong
and Macau;
    
    Hong Kong refers to the Hong Kong Special Administrative Region of the Peoples
Republic of China; and
    
    all references to Renminbi, RMB or yuan are to the legal currency of China, all
references to U.S. dollars, dollars, $ or US$ are to the legal currency of the
United States and all references to Hong Kong dollars or HK$ are to the legal currency
of Hong Kong. Any discrepancies in any table between totals and sums of the amounts listed
are due to rounding.
  FORWARD-LOOKING INFORMATION
  
    
    our goals and strategies, including how we effect our goals and strategies;
    
    our future business developments, business prospects, financial condition and results
of operations;
    
    our future pricing strategies or policies;
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
    
    our plans to expand our service offerings;
    
    our plans to use acquisitions and strategic investments as part of our corporate
strategy;
    
    competition in the PRC financial data and information services industry;
    
    performance of Chinas securities markets;
    
    growth in our subscriber base;
    
    PRC governmental policies relating to taxes and how they will impact our business;
    
    PRC governmental policies relating to the Internet and Internet content providers;
    
    PRC governmental policies relating to the distribution of content, especially the
distribution of financial content over the Internet; and
    
    PRC governmental policies relating to mobile value-added services.
    
 PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
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ITEM 3. KEY INFORMATION
 A. Selected financial data .
  For the year ended December 31,(in thousands of U.S. dollars, except per share or per ADS data)(1)
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006 (4)Consolidated statement of operations and comprehensive income
(loss) data:Net revenues
    
    
    1,050
    
    
    
    2,271
    
    
    
    6,016
    
    
    
    7,482
    
    
    
    7,128Cost of revenues
    
    
    (254
    )
    
    
    (298
    )
    
    
    (394
    )
    
    
    (482
    )
    
    
    (1,468
    )Gross profit
    
    
    796
    
    
    
    1,973
    
    
    
    5,622
    
    
    
    7,000
    
    
    
    5,660Operating expenses:General and administrative
    
    
    (253
    )
    
    
    (400
    )
    
    
    (727
    )
    
    
    (1,740
    )
    
    
    (2,956
    )Product development
    
    
    (157
    )
    
    
    (149
    )
    
    
    (173
    )
    
    
    (236
    )
    
    
    (742
    )Sales and marketing
    
    
    (275
    )
    
    
    (284
    )
    
    
    (801
    )
    
    
    (1,795
    )
    
    
    (2,666
    )Total operating expenses
    
    
    (685
    )
    
    
    (833
    )
    
    
    (1,701
    )
    
    
    (3,771
    )
    
    
    (6,364
    )Income (loss) from operations
    
    
    111
    
    
    
    1,140
    
    
    
    3,921
    
    
    
    3,229
    
    
    
    (704
    )Interest income
    
    
    95
    
    
    
    51
    
    
    
    294
    
    
    
    1,486
    
    
    
    1,003Other income (expense)
    
    
    (4
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    
    
    
    
    115Exchange gain (net)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    366
    
    
    
    267Loss from impairment of cost method investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,322
    )Income (loss) before income taxes
    
    
    203
    
    
    
    1,190
    
    
    
    4,213
    
    
    
    5,081
    
    
    
    (641
    )Income tax benefit (provision)
    
    
    
    
    
    
    
    
    
    
    384
    
    
    
    (457
    )
    
    
    41Net income (loss)
    
    $
    203
    
    
    $
    1,190
    
    
    $
    4,597
    
    
    $
    4,624
    
    
    $
    (600
    )Dividends on preference shares
    
    
    
    
    
    
    (352
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) attributable to ordinary shareholders
    
    $
    203
    
    
    $
    838
    
    
    $
    4,597
    
    
    $
    4,624
    
    
    $
    (600
    )Income (loss) per share-basic
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.05
    
    
    $
    (0.01
    )Income (loss) per share-diluted
    
    $
    0
    
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    (0.01
    )Income per ADS equivalent-basic(2)
    
    $
    0.06
    
    
    $
    0.21
    
    
    $
    0.59
    
    
    $
    0.25
    
    
    $
    (0.03
    )Income per ADS equivalent-diluted(2)
    
    $
    0.01
    
    
    $
    0.06
    
    
    $
    0.26
    
    
    $
    0.22
    
    
    $
    (0.03
    )Dividends declared per ordinary share or preference shares
    
    
    
    
    
    $
    0.01
    
    
    
    
    
    
    
    
    
    
    
    
 For the year ended December 31,(in thousands of U.S. dollars)(1)
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006Consolidated balance sheet data:Cash and cash equivalents
    
    $
    4,451
    
    
    $
    5,806
    
    
    $
    70,596
    
    
    $
    46,168
    
    
    $
    44,956Current working capital(3)
    
    
    3,565
    
    
    
    4,306
    
    
    
    67,590
    
    
    
    45,227
    
    
    
    38,011Total assets
    
    
    4,929
    
    
    
    6,606
    
    
    
    71,861
    
    
    
    63,113
    
    
    
    71,119Deferred revenue
    
    
    934
    
    
    
    1,278
    
    
    
    3,487
    
    
    
    1,859
    
    
    
    6,419Total current liabilities
    
    
    982
    
    
    
    1,875
    
    
    
    3,773
    
    
    
    2,282
    
    
    
    8,521Total shareholders equity
    
    $
    3,947
    
    
    $
    4,731
    
    
    $
    68,088
    
    
    $
    60,831
    
    
    $
    62,453
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(1)
    
    For the results of operations for a specified period, all translations from Renminbi to U.S.
dollars were calculated at the average exchange rate for that period, calculated by using the
average of the exchange rates on the last day of each month during the period. All
translations from Renminbi to U.S. dollars were calculated for the periods listed below at
the corresponding rates: For the years ended December 31,
    
    RMB per US$1.002002
    
    
    8.27702003
    
    
    8.27702004
    
    
    8.27682005
    
    
    8.14722006
    
    
    7.9693
 For consolidated balance sheet data, all translations from Renminbi to U.S. dollars were calculated
at the exchange rate at the end of that year. The exchange rates were as set forth below as of the
corresponding dates:
 As at December 31,
    
    RMB per US$1.002002
    
    
    8.28002003
    
    
    8.27692004
    
    
    8.27652005
    
    
    8.07022006
    
    
    7.8087
 (2)
    
    Each ADS represents five ordinary shares.(3)
    
    Current working capital is the difference between total current assets and total current
liabilities.(4)
    
    In 2006, the Company changed its method of accounting for stock-based compensation to conform
to Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment,
effective on January 1, 2006.
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Exchange Rate Information
    Average(1)
    
    High
    
    Low
    
    Period-end(RMB per U.S.$1.00)2002
    
    
    8.2770
    
    
    
    8.2800
    
    
    
    8.2669
    
    
    
    8.28002003
    
    
    8.2770
    
    
    
    8.2800
    
    
    
    8.2765
    
    
    
    8.27692004
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.2764
    
    
    
    8.27652005
    
    
    8.1472
    
    
    
    8.2765
    
    
    
    8.0702
    
    
    
    8.07022006
    
    
    7.9693
    
    
    
    8.0705
    
    
    
    7.8051
    
    
    
    7.80872007 (through May 15, 2007)
    
    
    7.7450
    
    
    
    7.8135
    
    
    
    7.6739
    
    
    
    7.6948
 
 (1)
    
    Averages are calculated from month-end rates. B. Capitalization and indebtedness.
  C. Reasons for the offer and use of proceeds.
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D. Risk factors.
 Risks relating to our business
 Our business is substantially dependent on the level of trading activity in Chinas securities
markets, which is dependent on factors outside of our control such as stock market volatility, tax
and regulatory changes, inflation, interest rate and other factors that could dampen investors
interest in investing in Chinas securities markets and materially and adversely affect our revenue
and profitability.
    Our revenues and profits could decline if we fail to attract sufficient numbers of subscribers to
our more comprehensive service packages or if we fail to retain our existing subscribers.
 
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Our business could be materially and adversely affected if we fail to develop or introduce new
features and new research tools or if these new features and research tools are not accepted by
users.
  Our business could be materially and adversely affected if our service package Value Engine could
not generate sustainable growth.
  We have a limited operating history, which may make it difficult for you to evaluate our business.
  We may not be able to successfully implement our growth strategies, which could materially and
adversely affect our business, financial condition and results of operations.
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www.jrj.com www.stockstar.com
  We face significant competition which could adversely affect our business, financial condition and
results of operations
    Our business could be materially and adversely affected if the stock exchanges from which we
receive data and information fail to deliver us reliable data and price quotes or other trading
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related information on a real-time basis, or if we cannot maintain our current business
relationships with our historical data providers on commercially reasonable terms.
     Our business would be adversely affected if we do not continue to expand and maintain an effective
customer support force.
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Acquisitions present many risks, and we may not realize the financial and strategic goals that were
contemplated at the time of any transaction.
  
    
    the acquisition may not further our business strategy, or we may pay more than it is
worth;
    
    we may not realize the anticipated increase in our revenues if we are unable to sell
the acquired companys products to our customer base, or the acquired contract models of
acquired contract models companies;
    
    we may have difficulty identifying suitable acquisition opportunities and integrating
acquired companies with our existing operations or their products and services with our
existing products and services;
    
    we may have higher than anticipated costs in continuing support and development of
acquired products;
    
    we may have multiple and overlapping product lines that are offered, priced and
supported differently, which could cause customer confusion and delays;
    
    our due diligence process may fail to identify problems, such as issues with unlicensed
use of intellectual property;
    
    we may have legal and tax exposures or lose anticipated tax benefits as a result of
unforeseen difficulties in our legal entity integration activities;
    
    we may face contingencies related to intellectual property, financial disclosures and
accounting practices or internal controls;
    
    our ongoing business may be disrupted and our managements attention may be diverted by
transition or integration issues; and
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
    
    to the extent that we issue a significant amount of equity securities in connection
with future acquisitions, existing ADS holders and shareholders may be diluted and
earnings per share may decrease.
  Our plan to make strategic investments may negatively affect our business due to the poor financial
condition and operating performance of those companies we invest in and other risks.
   Our business could be materially and adversely affected if increased usage strains our server
systems or if we suffer from other system malfunctions.
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If we are not able to respond successfully to technological or industry developments, our business
may be materially and adversely affected.
  We may be subject to, and may expend significant resources in defending against claims based on the
content and services we provide through our website and our research tools.
  We may be subject to intellectual property infringement claims, which may force us to incur
substantial legal expenses and, if determined adversely against us, may materially disrupt our
business.
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Unauthorized use of our intellectual property by third parties, and the expenses incurred in
protecting our intellectual property rights, may adversely affect our business.
  We depend on our key personnel and our business and growth prospects may be severely disrupted if
we lose their services.
   Undetected programming errors or defects in our research tools could materially and adversely
affect our business, financial condition and results of operations.
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The discontinuation of any of the preferential tax treatments currently available to us in the PRC
could materially and adversely affect our business, financial condition and results of operations.
  
    
    Exempting the company from enterprise income tax for 2003 and 2004; and
    
    Providing the company a preferential enterprise income tax rate of 12% from 2005 to
2007, the rate currently applicable to wholly foreign-owned enterprises based in Beijing
and not subject to other tax holidays.
  
    
    Exempting the company from enterprise income tax from 2005 to 2007; and
    
    Providing the company a preferential enterprise income tax rate of 7.5% from 2008 to
2010, and 15% for taxable years thereafter, the rate currently applicable to companies
classified as high-technology companies based in Beijing and not subject to other tax
holidays.
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We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax
consequences to U.S. investors.
    Because there is limited business insurance coverage in China, any business disruption or
litigation we experience might result in our incurring substantial costs and the diversion of
resources.
  Risks relating to our industry
 The Internet infrastructure in China, which is not as well developed as in the United States or
other more developed countries, may limit our growth.
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The limited use of personal computers in China and the relatively high cost of Internet access with
respect to per capita gross domestic product may limit the development of the Internet in China and
impede our growth.
  We depend largely on the infrastructure of the telecommunications operators in China, and any
interruption of their network infrastructure may result in severe disruptions to our business.
   Unexpected network interruptions, security breaches or computer virus attacks could have a material
adverse effect on our business, financial condition and results of operations.
  
    
    Any break-downs or system failures resulting in a sustained shutdown of all or a
material portion of our servers, including failures which may be attributable to sustained
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power shutdowns, or efforts to gain unauthorized access to our systems causing loss or
corruption of data or malfunctions of software or hardware; and
 
    
    Any disruption or failure in the national backbone network, which would prevent our
users from logging on to our website or accessing our services.
  Concerns about the security and confidentiality of information on the Internet may increase our
costs, reduce the use of our website and impede our growth.
  Risks relating to regulation of our business and to our structure
 We rely on contractual arrangements with Fuhua, our PRC-incorporated affiliate, and its
shareholders for our China operations, which may not be as effective in providing operational
control as direct ownership. If Fuhua fails to perform its obligations under these contractual
arrangements or PRC laws impair the enforceability of these contracts, our business, financial
condition and results of operations may be materially and adversely affected.
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If the PRC government finds that the financial data and information services we provide do not
comply with Chinese laws and regulations relating to the provision of securities investment
advisory services, we may suffer severe disruption to our business operations and lose
substantially all of our revenue.
   If the PRC government finds that the agreements that establish the structure for operating our
China business do not comply with PRC government restrictions on foreign investment in the online
financial data and information service industry, we could be subject to severe penalties
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www.jrj.com
and www.stockstar.com
   
    
    Revoking business and operating licenses of CFO Beijing, CFO Software, Fuhua, CFO
Stockstar or CFO Genius;
    
    Discontinuing or restricting our operations or those of CFO Beijing, CFO Software,
Fuhua, CFO Stockstar or CFO Genius;
    
    Imposing conditions or requirements with which we, CFO Beijing, CFO Software, Fuhua,
CFO Stockstar or CFO Genius may not be able to comply;
    
    Requiring us, CFO Beijing, CFO Software, Fuhua, CFO Stockstar or CFO Genius to
restructure the relevant ownership structure or operations;
    
    Restricting or prohibiting our use of the proceeds of our initial public offering in
2004 to finance our business and operations in China; or
    
    Taking other regulatory or enforcement actions, including levying fines that could be
harmful to our business.
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Our contractual arrangements with Fuhua may be subject to scrutiny by the PRC tax authorities and
create a potential double layer of taxation for our revenue-generating services conducted by Fuhua.
  We rely principally on dividends and other distributions on equity paid by our wholly owned
operating subsidiaries to fund any cash and financing requirements we may have.
  The PRC government may prevent us from distributing, and we may be subject to liability for,
content that it believes is inappropriate.
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Risks relating to the Peoples Republic of China
  The PRCs economic, political and social conditions, as well as government policies, could affect
the financial markets in China and our business.
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The PRC legal system embodies uncertainties which could limit the legal protections available to
you and us.
  Restrictions on currency exchange may limit our ability to utilize our revenues effectively.
  Fluctuations in exchange rates could result in foreign currency exchange losses.
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Risks relating to our shares and ADSs
 Stock prices of Internet-related companies, particularly companies with business operations
primarily in China, have fluctuated widely in recent years, and the trading prices of our ADSs are
likely to be volatile, which could result in substantial losses to investors.
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If we grant employee share options and other share-based compensation in the future, our net income
could be materially and adversely affected.
  The sale or availability for sale of substantial amounts of our ADSs could adversely affect their
market price.
   A significant percentage of our outstanding ordinary shares is held by a small number of our
shareholders, and these shareholders may have significantly greater influence on us and our
corporate actions by nature of the size of their shareholdings relative to our public shareholders.
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Provisions in our charter documents and Hong Kong law, and change in control agreements we have
entered into with each of our chief executive officer and chief financial officer, may discourage
our acquisition by a third party, which could limit your opportunity to sell your shares at a
premium.
  
    
    Our articles of association provide for a staggered board, which means that our
directors, excluding our chief executive officer, are divided into two classes, with half
of our board, excluding our chief executive officer, standing for election every two
years. Our chief executive officer will at all times serve as a director, and will not
retire as a director, so long as he remains our chief executive officer. This means that,
with our staggered board, at least two annual shareholders meetings, instead of one, are
generally required in order to effect a change in a majority of our directors. Our
staggered board can discourage proxy contests for the election of our directors and
purchases of substantial blocks of our shares by making it more difficult for a potential
acquirer to take control of our board in a relatively short period of time.
    
    Hong Kong law permits shareholders of a company to remove directors by a shareholders
resolution. Our articles of association require any shareholder who wishes to remove a
director in this way to give us at least 120 days notice of the resolution, making it
more difficult and time consuming for a potential acquirer who has accumulated a
substantial voting position to obtain control of our board by removing opposing directors.
    
    Our articles of association provide that our board can have no less than five and no
more than nine directors. Our board currently has five directors. Any increase in the
maximum number of directors on our board beyond nine directors can only be accomplished by
amending our articles of association, which under Hong Kong law requires a shareholders
supermajority vote of 75% and at least 21 days notice. These restrictions can make it
more difficult for a potential acquirer who has accumulated a majority of our shares to
take control of us by promptly increasing the size of our board and appointing new
directors that are its nominees.
    
    Hong Kong does not have merger laws that permit Hong Kong companies to merge in the
same way as U.S. companies could in the U.S. However, the Hong Kong Companies Ordinance
has provisions that facilitate arrangements for the reconstruction and amalgamation of
companies. The arrangement must be approved by a majority in number of each class of
shareholders and creditors with whom the arrangement is to be made, representing
three-fourths in value of each such class of shareholders or creditors
 27




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that are present and voting either in person or by proxy at meetings convened by the High
Court of Hong Kong. The arrangements must be sanctioned by the High Court of Hong Kong
after shareholders or creditors approve it at the court-convened meeting.
    
    Our shareholders have authorized our board of directors, without any further action by
shareholders, to issue additional shares. Under Hong Kong law, the authority granted by
our shareholders will remain valid until the conclusion of our next annual general
meeting, or the time when our next annual general meeting is required to be held. For as
long as this approval remains effective, or is renewed, our board of directors will have
the power to issue additional ordinary shares (including ordinary shares represented by
ADSs) and preference shares without any further action by shareholders.
 We are a Hong Kong company and because the legal and procedural protections afforded minority
shareholders under Hong Kong law differ from those under U.S. law, you may have difficulty
protecting your interests as our shareholder relative to shareholders of corporations organized in
the U.S.
  
    
    to recognize or enforce against us judgments of courts of the United States based on
the civil liability provisions of U.S. securities laws; or
    
    to allow original actions brought in Hong Kong, based on the civil liability provisions
of U.S. securities laws that are penal in nature.
   The voting rights of holders of ADSs must be exercised in accordance with the terms of the deposit
agreement, the American depositary receipts, and the procedures established by the depositary. The
process of voting through the depositary may involve delays that limit the time available to you to
consider proposed shareholders actions and also may restrict your ability to subsequently revise
your voting instructions.
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You may not receive distributions on our ordinary shares or any value for them if such distribution
is illegal or if any required government approval cannot be obtained in order to make such
distribution available to you.
  29




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##### Table of Contents



You may be subject to limitations on transfer of your ADSs.
  Your right as a holder of ADSs to participate in any future rights offerings may be limited, which
may cause dilution to your holdings.
   
 ITEM 4. INFORMATION ON THE COMPANY
 A. History and development of the company.
 www.jrj.com.cn, www.jrj.com,
 30




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##### Table of Contents



www.stockstar.com
  B. Business overview.
  
    
    financial analysis tools that permit users to calculate and analyze quantitatively
financial data;
 31




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##### Table of Contents




    
    current and historical financial data and information for Chinas listed company
stocks, bonds and mutual funds;
    
    categorized news and research reports; and
    
    online forums and bulletin boards.
  www.jrj.com www.stockstar.com www.jrj.com www.stockstar.com www.jrj.com www.stockstar.com
   Comprehensive.
  32




---



##### Table of Contents



Integrated.
  Interactive.
  Timely.
  Unbiased.
  Easy to use.
  33




---



##### Table of Contents



Growth Strategy
  
    
    increase our subscriber base by expanding distribution channels such as banks, mutual
funds and brokerage firms;
    
    upgrade our existing service offerings and expand our present service offerings to
include data and information relating to other financial instruments such as mutual funds,
currencies, futures and commodities; and
    
    continue to encourage our subscribers to migrate to newer, more comprehensive and
higher priced service offerings.
 Our Services
  Our features
  Financial analysis tools.
 34




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##### Table of Contents




    
    fundamental analysis tools, which are designed to enable investors to analyze data
based on company fundamentals; and
    
    technical analysis tools, which are designed to enable investors to analyze data based
on trends formulated by historical trading data.
  Real-time and historical data.
   News.
  Research reports.
  Online forums.
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##### Table of Contents



Our website
  
    
    to attract visitors and market our subscription based service offerings;
    
    to store content and serve as an integral part of our information platform;
    
    to serve as download platforms for our service offerings; and
    
    to display online advertisements.
     Our research tools
  36




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##### Table of Contents




    
    Categorized macro information. This feature allows subscribers to search and sort
up-to-date and comprehensive news and information relating to the broader financial
markets or a specific financial topic or industry sector. We have a dedicated team of
professional editors who collect, organize, categorize and index macro-economic and
financial market information on a daily basis, according to user feedback and
classification methods that we believe are accepted practice in securities markets in
China.
    
    Industry sector analysis. Many investors in China seek to distinguish between listed
companies with investment potential and those prone to financial trouble by analyzing
listed companies financial data published in their financial statements and comparing
such data among companies within the same industry sector. We collect and process listed
company financial data and information according to classification methods set by relevant
PRC regulatory authorities, and allow subscribers to view the relative standings of listed
companies in the same industry sector or geographical locations based on market accepted
performance parameters such as price-to-earnings ratios and profit margins.
    
    Fundamental analysis. Historical and real-time financial information are important to
investors because they provide insight into company fundamentals. This research tool
integrates the historical and real-time trading information we maintain in our database,
as well as fundamental financial information such as earnings-per-share, shareholdings and
other related data and information. Our subscribers can receive fundamental financial and
trading information organized by their specifications and display these results on a
graphical interface that we designed to be easy to visualize and navigate.
    
    Mutual fund analysis. Our mutual fund research tool focuses on categorizing information
relating to the portfolio holdings of mutual funds. This feature allows subscribers to
study the collective effect of large market players on individual stocks. This feature
also offers information relating to the performance of individual mutual funds, allowing
subscribers to assess the risks and rewards of investing in mutual funds.
    
    Technical analysis. This feature allows investors interested in trends formulated by
historical trading data to perform technical analysis on listed companies. With over 60
markets accepted technical indicators and a complete database of historical data and
information on all of Chinas listed company stocks, our subscribers can perform extensive
chart analysis and pattern recognition on any stock listed on Chinas stock exchanges.
  37




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Our securities service packages.
  Securities Market Information
   Technical Analysis
  Fundamental Analysis
 Pricing policy
   Our new service features
 38




---



##### Table of Contents



Customer support
  Our content providers
  Shanghai and Shenzhen Stock Exchanges
   Data providers
 39




---



##### Table of Contents



Financial Institutions, securities advisors and stock brokerages
  News and media conglomerates
  Chinese news publishers and media companies
  Sales and marketing
   40




---



##### Table of Contents



Online advertisement
 www.jrj.com www.stockstar.com
 Product development
   
    
    to increase the breadth of our service offerings through the addition of new features
and functions to our service packages;
    
    to enhance our subscribers experience by improving the quality of our research tools
and website;
    
    to develop additional research tools, features and content specifically targeting the
high-end subscribers; and
    
    to design and build new financial instrument service products that fit our strategies.
  Technology and infrastructure
  41




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##### Table of Contents



Web server technology.
  Database technology.
  Remote data aggregation engine.
  Competition
  
    
    publishers and distributors of traditional media, including print, radio and
television, such as China Securities News, Shanghai Securities News, International
Financial Times, 21st Century Economic Reports, as well as radio and television programs
and news focused on financial news and information;
    
    internet portals providing information on business, finance and investing, such as
sina.com.cn and sohu.com;
    
    financial information web pages offered by websites such as hexun.com;
    
    personal stock research software vendors, such as Shanghai Qian Long High Tech
Corporation, that develop and market stock research software through stock brokerage
companies; and
 42




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##### Table of Contents




    
    stock brokerage companies, especially stock brokerage companies with online trading
capabilities, such as Haitong Securities.
   Intellectual property
   www.stockstar.com www.jrj.com.cn
 Regulation
  
    
    the Ministry of Information Industry;
 43




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##### Table of Contents




    
    the China Securities Regulatory Commission;
    
    the Ministry of Culture;
    
    the State Press and Publications Administration;
    
    the State Copyright Bureau;
    
    the State Administration of Industry and Commerce;
    
    the Ministry of Public Security; and
    
    the Ministry of Commerce.
  Foreign ownership restriction on Internet content provision businesses
   Licenses and permits
    44




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Regulation of Internet content
   Regulation of information security
   Intellectual property rights
 45




---



##### Table of Contents



www.jrj.com and www.stockstar.com,
 Website name
  Privacy protection
  Advertising regulation
  C. Organizational structure.
 46




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##### Table of Contents



Percentage ofCountry of
    
    Beneficial OwnershipName
    
    Incorporation
    
    InterestFortune Software (Beijing) Co., Ltd
    
    China
    
    100China Finance Online (Beijing) Co., Ltd.
    
    China
    
    100Beijing Fuhua Innovation Technology Development Co., Ltd.
    
    China
    
    100Stockstar Information Technology (Shanghai)
Co., Ltd
    
    China
    
    100Shanghai Meining Computer Software Co., Ltd.
    
    China
    
    100Zhengning Information & Technology
(Shanghai) Co., Ltd.
    
    China
    
    100Shenzhen Genius Information Technology Co.,
Ltd.
    
    China
    
    100Jujin software (Shenzhen) Co., Ltd.
    
    China
    
    100
 
 *
    
    Denotes variable interest entity 47




---



##### Table of Contents



48




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www.jrj.com.cn www.jrj.com www.jrj.com.cn www.jrj.com
  
    
    an equipment leasing agreement, pursuant to which Fuhua leases a substantial majority
of its operating assets from CFO Beijing;
    
    a technical support agreement, pursuant to which CFO Beijing provides technical support
for Fuhuas operations; and
    
    an amended and restated strategic consulting agreement, pursuant to which CFO Beijing
provides strategic consulting services to Fuhua, including consulting services in relation
to Fuhuas online advertising business.
  49




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
    
    the shareholders of Fuhua have granted us or individuals designated by us an
irrevocable proxy to exercise all their voting rights as shareholders of Fuhua, including
the right to appoint directors, the general manager and other senior management of Fuhua;
    
    Fuhua will not enter into any transaction that may materially affect its assets,
liabilities, equity or operations without our prior written consent;
    
    Fuhua will not distribute any dividends;
    
    we may purchase the entire equity interest in, or all the assets of, Fuhua when and if
such purchase is permitted by PRC law or the current shareholders of Fuhua cease to be
directors or employees of Fuhua;
    
    the shareholders of Fuhua have pledged their equity interest in Fuhua to CFO Beijing to
secure the payment obligations of Fuhua under the equipment leasing agreement, the
technical support agreement and the amended and restated strategic consulting agreement
between CFO Beijing and Fuhua; and
    
    the shareholders of Fuhua will not transfer, sell, pledge, dispose of or create any
encumbrance on their equity interest in Fuhua without the prior written consent of CFO
Beijing.
  D. Property and equipment.
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 The following discussion of our financial condition and results of operations is based upon and
should be read in conjunction with our consolidated financial statements and their related notes
included in this annual report on Form 20-F . 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, including, without limitation, statements regarding our expectations, beliefs,
intentions or future strategies that are signified by the words expect, anticipate, intend,
believe, or similar language. All forward-looking statements included in this annual report are
based on information available to us on the date hereof, and we assume no obligation to update any
such forward  looking statements. Actual results could differ materially from those projected in
the forward  looking statements. In evaluating our business, you should carefully consider the
information provided under the caption Risk Factors in this annual report on Form 20-F . We
caution you that our businesses and financial performance are subject to substantial risks and
uncertainties.
 50




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##### Table of Contents



A. Operating Results
 www.jrj.com
    Key factors affecting our operating results and financial condition
  
    
    performance of Chinas securities markets, and user demand for market intelligence on
Chinas securities markets, as well as the overall performance of Chinas economy;
    
    contribution of alternative revenue resources such as revenues from online advertising;
    
    seasonality associated with the level of activity of our users and subscribers and the
trading activities of Chinas securities markets;
    
    tax refund from the PRC tax authorities for value-added-taxes we are required to pay on
the sale of subscriptions to our service packages;
    
    other tax incentives we receive from PRC tax authorities resulting from CFO Beijing
being a foreign invested software development company and CFO Software being a foreign
invested high-technology company;
    
    our cost structure, including, in particular, our cost for raw data;
    
    the desirability of our service packages relative to other products and offerings
available in the market;
 51




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##### Table of Contents




    
    our ability to benefit from the acquisition of CFO Stockstar and CFO Genius; and
    
    PRC telecommunication and regulatory policies.
    Gross revenues
   
    
    the number of registered user accounts on our websites;
    
    the number of fee-based active subscribers; and
    
    the service packages selected by our subscribers.
 www.jrj.com www.stockstar.com www.jrj.com www.stockstar.com
  52




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Net revenues
  Revenue recognition
   Cost of revenues
  Cost of data.
 
    
    if we enter into additional commercial agreements for purchasing data from new sources
or if we obtain different or additional data from existing sources or
 53




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##### Table of Contents




    
    due to rate increases we may experience in the future upon renewal of our existing
agreements.
 Salary and compensation.
 Rent.
 Depreciation.
 Operating expenses
  
    
    advertising expenses relating to our sponsorship arrangements with portals, search
engines and other websites;
    
    salary and benefits for our employees, particularly our sales and marketing personnel
and our management team;
    
    professional services and other related costs associated with being publicly listed in
the U.S.; and
    
    expansion in operating scale associated with the acquisition of CFO Stockstar and CFO
Genius.
  General and administrative expenses.
 54




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Product development expenses.
 Sales and marketing expenses.
 Stock option plan and option agreements
   55




---



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Critical accounting policies
  Income taxes.
 Stock-based compensation.
  Cost method investment.
 Results of operations
  56




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For the year ended December 31,(in thousands of U.S. dollars, except as % of net revenues)(1)
    
    2004
    
    2005
    
    2006Consolidated statement of operations and
comprehensive income (loss) data:Gross revenues(2)
    
    $
    6,064
    
    
    
    100.8
    %
    
    $
    7,627
    
    
    
    101.9
    %
    
    $
    7,337
    
    
    
    102.9
    %Business tax
    
    
    (48
    )
    
    
    (0.8
    )
    
    
    (145
    )
    
    
    (1.9
    )
    
    
    (209
    )
    
    
    (2.9
    )Net revenues
    
    
    6,016
    
    
    
    100
    %
    
    
    7,482
    
    
    
    100
    %
    
    
    7,128
    
    
    
    100
    %Cost of revenues
    
    
    (394
    )
    
    
    (6.5
    )
    
    
    (482
    )
    
    
    (6.4
    )
    
    
    (1,468
    )
    
    
    (20.6
    )Gross profit
    
    
    5,622
    
    
    
    93.5
    
    
    
    7,000
    
    
    
    93.6
    
    
    
    5,660
    
    
    
    79.4Operating expenses:General and administrative
    
    
    (727
    )
    
    
    (12.1
    )
    
    
    (1,740
    )
    
    
    (23.3
    )
    
    
    (2,956
    )
    
    
    (41.5
    )Product development
    
    
    (173
    )
    
    
    (2.9
    )
    
    
    (236
    )
    
    
    (3.2
    )
    
    
    (742
    )
    
    
    (10.4
    )Sales and marketing
    
    
    (801
    )
    
    
    (13.3
    )
    
    
    (1,795
    )
    
    
    (24.0
    )
    
    
    (2,666
    )
    
    
    (37.4
    )Total operating expenses
    
    
    (1,701
    )
    
    
    (28.3
    )
    
    
    (3,771
    )
    
    
    (50.5
    )
    
    
    (6,364
    )
    
    
    (89.3
    )Income from operations
    
    
    3,921
    
    
    
    65.2
    
    
    
    3,229
    
    
    
    43.2
    
    
    
    (704
    )
    
    
    (9.9
    )Interest income
    
    
    294
    
    
    
    4.9
    
    
    
    1,486
    
    
    
    19.9
    
    
    
    1,003
    
    
    
    14.1Other expense, net
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    1.6Exchange gain (net)
    
    
    
    
    
    
    
    
    
    
    366
    
    
    
    4.9
    
    
    
    267
    
    
    
    3.7Loss from impairment of cost method investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,322
    )
    
    
    (18.5
    )Income before income taxes benefit (provision)
    
    
    4,213
    
    
    
    70.1
    
    
    
    5,081
    
    
    
    67.9
    
    
    
    (641
    )
    
    
    (9.0
    )Income tax benefit (provision)
    
    
    384
    
    
    
    6.4
    
    
    
    (457
    )
    
    
    (6.1
    )
    
    
    41
    
    
    
    0.58Net income (loss)
    
    $
    4,597
    
    
    
    76.4
    %
    
    $
    4,624
    
    
    
    61.8
    %
    
    $
    (600
    )
    
    
    (8.4
    %)
 
 (1)
    
    For the results of operations for a specified period, all
translations from Renminbi to U.S. dollars were calculated at the
average exchange rate for that period. For the years ended
December 31, 2004, 2005 and 2006, all translations from Renminbi
to U.S. dollars were calculated at RMB8.2768, RMB8.1472 and
RMB7.9693 per US$1.00, respectively.(2)
    
    We receive subscription fees at the beginning of
the subscribers subscription periods. Revenues
from the subscription fees are deferred and
recognized ratably over the twelve month
subscription period. Year ended December 31, 2006 compared to year ended December 31, 2005
 Revenues
   57




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Cost of revenues
  Gross profit
  Operating expenses
  General and administrative.
 Product development.
 Sales and marketing.
 58




---



##### Table of Contents



Income
(loss) from operations
  Interest income
  Loss from impairment of cost method investment
   Income
tax benefit
  Net
income (loss)
  Year ended December 31, 2005 compared to year ended December 31, 2004
 Revenues
 59




---



##### Table of Contents



Cost of revenues
  Gross profit
  Operating expenses
  General and administrative.
 60




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Product development.
 Sales and marketing.
 Income from operations
  Interest income
  Income
tax provision
  Net income
  B. Liquidity and capital resources.
 Cash flows and working capital
 61




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##### Table of Contents



For the year ended December 31,(in thousands of U.S. dollars)
    
    2004
    
    2005
    
    2006Net cash provided by operating activities
    
    $
    7,023
    
    
    $
    3,059
    
    
    $
    5,892Net cash used in investing activities
    
    
    (200
    )
    
    
    (15,235
    )
    
    
    (8,202
    )Net cash provided by (used in) financing activities
    
    
    57,968
    
    
    
    (12,923
    )
    
    
    76Net increase (decrease) in cash and cash
equivalents
    
    
    64,791
    
    
    
    (24,428
    )
    
    
    (1,213
    )Cash and cash equivalents at beginning of year
    
    
    5,806
    
    
    
    70,596
    
    
    
    46,168Cash and cash equivalents at end of year
    
    $
    70,596
    
    
    $
    46,168
    
    
    $
    44,956
   Capital resources
   62




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
    
    aggregate loans by us to CFO Beijing, a foreign invested enterprise, to finance its
activities, cannot in the aggregate exceed the difference between CFO Beijings currently
approved total investment amount and its currently approved registered capital amount, and
must be registered with the State Administration of Foreign Exchange for the loans to be
effective. The maximum amount we may loan to CFO Beijing, given CFO Beijings currently
approved registered capital and total investment amounts, is $18.0 million;
    
    aggregate loans by us to CFO Software, a foreign invested enterprise, to finance its
activities, cannot in the aggregate exceed the difference between CFO Softwares currently
approved total investment amount and its currently approved registered capital amount, and
must be registered with the State Administration of Foreign Exchange for the loans to be
effective. The maximum amount we may loan to CFO Software, given CFO Softwares currently
approved registered capital and total investment amounts, is $18.0 million; and
    
    loans by us to Fuhua, which is a domestic PRC enterprise, must be approved by the
relevant government authority and must also be registered with the State Administration of
Foreign Exchange, although in practice we could make loans to CFO Beijing or CFO Software,
and CFO Beijing or CFO Software could in separate transactions make loans to Fuhua through
financial or CFO Software, intermediaries, without approval from any PRC governmental
agencies.
   Restricted net assets
  63




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##### Table of Contents



C. Research and development.
  
    
    increase the breadth of our service offerings through the addition of new features and
functions to our service packages;
    
    enhance our subscribers experience by improving the quality of our research tools and
website; and
    
    develop additional research tools, features and content specifically targeting the
high-end subscribers.
  D. Trend information.
  E. Off-balance sheet arrangements.
  F. Tabular disclosure of contractual obligations.
  64




---



##### Table of Contents



Office Premises
    
    Data premises
    
    Total(in U.S. dollars)Less than 1 year
    
    
    709,818
    
    
    
    70,819
    
    
    
    780,6371 - 3 years
    
    
    1,696,184
    
    
    
    3,437
    
    
    
    1,699,6213 - 5 years
    
    
    53,753
    
    
    
    
    
    
    
    53,753More than 5 years
    
    
    
    
    
    
    
    
    
    
    
  G. Quantitative and qualitative disclosures about market risk.
 Interest rate risk
  Foreign currency risk
   H. Recent accounting standards.
       65




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##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and senior management.
  Name
    
    Age
    
    PositionZhiwei Zhao
    
    
    44
    
    
    Chief Executive Officer and a member of the Board of DirectorsHugo Shong
    
    
    51
    
    
    Chairman of the Board of DirectorsKheng Nam Lee(1)
    
    
    59
    
    
    DirectorLing Wang(1)(2)(3)
    
    
    44
    
    
    DirectorFansheng Guo(1)(2)(3)
    
    
    51
    
    
    DirectorJun (Jeff) Wang
    
    
    36
    
    
    Chief Financial Officer
 
 (1)
    
    Member, audit committee(2)
    
    Member, compensation committee(3)
    
    Member, nominations committee  Biographical Information
 Hugo Shong
 Zhiwei Zhao
 67




---



##### Table of Contents



Kheng Nam Lee
 Ling Wang
 Fansheng Guo
 Jun (Jeff) Wang
 B. Compensation of directors and executive officers.
   68




---



##### Table of Contents



Directors and officers liability insurance
  Employees stock option plan
     69




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##### Table of Contents



Number ofordinary Shares tobe issued upon
    
    
    Exercise price perexercise of options
    
    
    ordinary share
    
    
    Date of grant
    
    Date of expirationZhiwei Zhao
    
    
    400,000
    
    
    $
    1.120
    
    
    November 15, 2005
    
    November 15, 2015400,000
    
    
    $
    1.070
    
    
    July 5, 2006
    
    July 5, 2016800,000
    
    
    $
    0.960
    
    
    January 18, 2007
    
    January 17, 2017Hugo Shong
    
    
    *
    
    
    $
    0.160
    
    
    January 5, 2004
    
    March 5, 2009*
    
    
    $
    1.040
    
    
    June 15, 2004
    
    March 5, 2009*
    
    
    $
    1.314
    
    
    February 18, 2005
    
    February 18, 2015*
    
    
    $
    0.960
    
    
    January 18, 2007
    
    January 17, 2017Kheng Nam Lee
    
    
    *
    
    
    $
    0.160
    
    
    February 18, 2004
    
    March 5, 2009*
    
    
    $
    1.040
    
    
    June 15, 2004
    
    March 5, 2009*
    
    
    $
    1.314
    
    
    February 18, 2005
    
    February 18, 2015*
    
    
    $
    0.960
    
    
    January 18, 2007
    
    January 17, 2017Fansheng Guo
    
    
    *
    
    
    $
    0.160
    
    
    January 5, 2004
    
    March 5, 2009*
    
    
    $
    1.040
    
    
    June 15, 2004
    
    March 5, 2009*
    
    
    $
    1.314
    
    
    February 18, 2005
    
    February 18, 2015*
    
    
    $
    0.960
    
    
    January 18, 2007
    
    January 17, 2017Ling Wang
    
    
    *
    
    
    $
    0.160
    
    
    January 5, 2004
    
    March 5, 2009*
    
    
    $
    1.040
    
    
    June 15, 2004
    
    March 5, 2009*
    
    
    $
    1.314
    
    
    February 18, 2005
    
    February 18, 2015*
    
    
    $
    0.960
    
    
    January 18, 2007
    
    January 17, 2017Jun (Jeff) Wang
    
    
    *
    
    
    $
    1.070
    
    
    July 5, 2006
    
    July 5, 2016*
    
    
    $
    0.960
    
    
    January 18, 2007
    
    January 17, 2017Sam Qian
    
    
    *
    
    
    $
    1.314
    
    
    February 18, 2005
    
    February 18, 2015
 
 *
    
    Upon exercise of all options granted, would beneficially own less
than 1% of our outstanding ordinary shares. C. Board practices .
  Board committees
  Audit committee.
 70




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
    
    recommending to our shareholders, if appropriate, the annual re-appointment of our
independent registered public accounting firm and pre-approving all auditing and
non-auditing service fees permitted to be performed by the independent registered public
accounting firm;
    
    annually reviewing an independent registered public accounting firms report describing
the independent registered public accounting firms internal quality-control procedures,
any material issues raised by the most recent internal quality control review, or peer
review, of the independent registered public accounting firm and all relationships between
the independent registered public accounting firm and our company;
    
    setting clear hiring policies for employees or former employees of the independent
registered public accounting firm;
    
    reviewing with the independent registered public accounting firm any audit problems or
difficulties and managements response;
    
    reviewing and approving all proposed related-party transactions, as defined in Item 404
of Regulation S-K under the U.S. securities laws;
    
    discussing the annual audited financial statements with management and the independent
registered public accounting firm;
    
    discussing with management and the independent registered public accounting firm major
issues regarding accounting principles and financial statement presentations; reviewing
reports prepared by management or the independent auditors relating to significant
financial reporting issues and judgments;
    
    reviewing reports prepared by management or the independent registered public
accounting firm relating to significant financial reporting issues and judgments;
    
    discussing earnings press releases, as well as financial information and earnings
guidance provided to analysts and rating agencies;
    
    reviewing with management and the independent registered public accounting firm the
effect of regulatory and accounting initiatives, as well as off-balance sheet structures
on our financial statements;
    
    discussing policies with respect to risk assessment and risk management;
    
    reviewing major issues as to the adequacy of our internal controls and any special
audit steps adopted in light of material control deficiencies;
    
    timely reviewing annual reports from the independent registered public accounting firm
regarding all critical accounting policies and practices to be adopted by our company, all
alternative treatments of financial information within U.S. GAAP that have been discussed
with management and all other material written communications between the independent
registered public accounting firm and management;
    
    establishing procedures for the receipt, retention and treatment of complaints received
from our employees regarding accounting, internal accounting controls or auditing
 71




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matters
and the confidential, anonymous submission by our employees of concerns regarding
questionable accounting or auditing matters;
    
    annually reviewing and reassessing the adequacy of our audit committee charter;
    
    such other matters that are specifically delegated to our audit committee by our board
of directors from time to time;
    
    meeting separately, periodically, with management and the independent registered public
accounting firm; and
    
    reporting regularly to the full board of directors.
 Compensation committee.
 
    
    determining and recommending the compensation of our Chief Executive Officer;
    
    reviewing and making recommendations to our board of directors regarding our
compensation policies and forms of compensation provided to our directors and officers;
    
    reviewing and determining bonuses for our officers and other employees;
    
    reviewing and determining stock-based compensation for our directors, officers,
employees and consultants;
    
    administering our equity incentive plans in accordance with the terms thereof; and
    
    such other matters that are specifically delegated to the compensation committee by our
board of directors from time to time.
 Nominations committee.
 Corporate governance
   Duties of directors
  72




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
    
    convening shareholders meetings and reporting its work to shareholders at such
meetings;
    
    implementing shareholders resolutions;
    
    determining our business plans and investment proposals;
    
    formulating our profit distribution plans and loss recovery plans;
    
    determining our debt and finance policies and recommending proposals for the increase
or decrease in our share capital and the issuance of debentures;
    
    formulating our major acquisition and disposition plans, and plans for consolidation,
division or dissolution;
    
    proposing amendments to our articles of association; and
    
    exercising any other powers conferred at shareholders meetings or under our memorandum
and articles of association.
 Terms of directors and executive officers
  D. Employees .
  E. Share ownership.
  73




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
    
    each person known to us to own beneficially more than 5% of our ordinary shares; and
    
    each of our directors and executive officers who beneficially own any of our ordinary
shares.
  Number of Shares Beneficially OwnedName
    
    Number
    
    Percent5% ShareholderIDG Technology Venture Investment, Inc.(1)
    
    
    20,580,652
    
    
    
    19.49
    %IDG Technology Venture Investments, LP (2)
    
    
    6,723,115
    
    
    
    6.37
    %Vertex Technology Fund (III) Ltd. (3)
    
    
    14,481,319
    
    
    
    13.72
    %Jianping Lu (4)
    
    
    7,156,121
    
    
    
    6.78
    %Ling Zhang (5)
    
    
    8,746,370
    
    
    
    8.28
    %Directors and executive officersHugo Shong
    
    
    *
    
    
    
    *Kheng Nam Lee
    
    
    *
    
    
    
    *Ling Wang
    
    
    *
    
    
    
    *Fansheng Guo
    
    
    *
    
    
    
    *Zhiwei Zhao
    
    
    *
    
    
    
    *Jeff Wang
    
    
    *
    
    
    
    *Sam Qian
    
    
    1,056,800
    
    
    
    1.00
    %All current directors and executive officers as
a group (6 persons)
    
    
    1,854,400
    
    
    
    1.74
    %
 
 *
    
    Upon exercise of all options currently exercisable
or vesting within 60 days of the date of this
annual report, would beneficially own less than 1%
of our ordinary shares.(1)
    
    Includes 20,580,652 ordinary shares held by IDG
Technology Venture Investment, Inc. IDG Technology
Venture Investment, Inc. is the limited partner of
IDG Technology Venture Investments, LP and does not
control IDG Technology Venture Investments, LP. IDG
Technology Venture Investment, Inc., a
Massachusetts corporation, is wholly owned by
International Data Group Inc., a Massachusetts
corporation, which is controlled by Patrick
McGovern, the majority shareholder, founder and
chairman of International Data Group Inc. IDG
Technology Venture Investment, Inc. disclaims
beneficial ownership of all of the ordinary shares
owned by IDG Technology Venture Investments, LP.
The registered address of IDG Technology Venture
Investment, Inc. is 5 Speen Street, Framingham, MA
01701, U.S.A.(2)
    
    Includes 6,723,115 ordinary shares held by IDG
Technology Venture Investments, LP. The general
partner of IDG Technology Venture Investments, LP
is IDG Technology Venture 74




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Investments, LLC. Messrs.
Patrick McGovern and Quan Zhou are managing members
of IDG Technology Venture Investments, LLC, both of
whom disclaim beneficial ownership of our shares
held by IDG Technology Venture Investments, LLC.
IDG Technology Venture Investment, Inc. is a
limited partner of IDG Technology Venture
Investments, LP, and does not control IDG
Technology Venture Investments, LP. IDG Technology
Venture Investments, LP disclaims beneficial
ownership of all of the ordinary shares owned by
IDG Technology Venture Investment, Inc. The
registered address of IDG Technology Venture
Investments, LP is Corporation Service Company,
1013 Centre Road, Wilmington, County of New Castle,
Delaware 19805-1297, U.S.A.(3)
    
    Includes 14,481,319 ordinary shares held by Vertex
Technology Fund (III) Ltd. The majority shareholder
of Vertex Technology Fund (III) Ltd is Vertex
Venture Holdings Ltd, who may be deemed to have
power to vote and dispose of the shares held of
record by Vertex Technology Fund (III) Ltd. Vertex
Management (II) Pte Ltd is the fund manager of
Vertex Technology Fund (III) Ltd, and may be
deemed to have power to vote and dispose of the
shares held of record by Vertex Technology Fund
(III) Ltd. The address of Vertex Technology Fund
(III) Ltd is 51 Cuppage Road, #10-08 Starhub
Centre, Singapore 229469.(4)
    
    Includes (i) 4,028,156 ordinary shares held by Cast
Technology, Inc.; and (ii) 3,127,965 ordinary
shares held by Fanasia Capital Limited. Both Cast
Technology, Inc. and Fanasia Capital Limited are
held 45% and 55% by Jianping Lu and Ling Zhang,
respectively.(5)
    
    Includes (i)4,923,302 ordinary shares held by Cast Technology,
Inc.; and (ii) 3,823,068 ordinary shares held by Fanasia Capital
Limited. Both Cast Technology, Inc. and Fanasia Capital Limited are
held 45% and 55% by Jianping Lu and Ling Zhang, respectively.  
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major shareholders.
  B. Related party transactions .
 CFO Beijing/Fuhua arrangements
  75




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Leasing of equipment
 Equipment Leasing Agreement, dated May 27, 2004, between CFO Beijing and Fuhua.
  Provision of services
 Technical Support Agreement, dated May 27, 2004, between CFO Beijing and Fuhua.
  Amended and Restated Strategic Consulting Service Agreement, dated May 27, 2004, between CFO
Beijing and Fuhua.
  Loans to Zhiwei Zhao and Wu Chen
  76




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Loans to CFO Beijing and CFO Software
  Shareholder rights and corporate governance
 Transfer of ownership when permitted by law
   77




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pro rata
 Voting arrangement
  Share Pledge Agreement
  Financing support
  Indemnifications
 78




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Other related party transactions
 Shareholders Agreement
     
    
    the fifth anniversary of the consummation of our initial public offering;
    
    upon such holder holding less than 1% of our outstanding ordinary shares after our
initial public offering; and
    
    upon such holder becoming eligible to sell all of such holders registrable securities
pursuant to Rule 144 under the Securities Act within any three-month period without volume
limitations, under Rule 144(k), or under any comparable securities law of a jurisdiction
other than the United States for sale of registrable securities in such jurisdiction.
 79




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##### Table of Contents



C. Interests of experts and counsel.
  
 ITEM 8. FINANCIAL INFORMATION
 A. Consolidated financial statements and other financial information.
  Legal Proceedings
  Dividend Policy
  B. Significant changes since December 31, 2006 .
  
 ITEM 9. THE OFFER AND LISTING
 A. Offering and listing details.
   Sales PriceHigh
    
    LowYearly highs and lowsYear 2004 (from October 15, 2004)
    
    
    15.99
    
    
    
    8.30Year 2005
    
    
    11.14
    
    
    
    5.22Year 2006
    
    
    9.68
    
    
    
    3.95
 80




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##### Table of Contents



Sales PriceHigh
    
    LowQuarterly highs and lowsFirst Quarter 2005
    
    
    11.14
    
    
    
    5.80Second Quarter 2005
    
    
    7.17
    
    
    
    5.22Third Quarter 2005
    
    
    6.52
    
    
    
    5.50Fourth Quarter 2005
    
    
    6.90
    
    
    
    5.52First Quarter 2006
    
    
    9.68
    
    
    
    5.66Second Quarter 2006
    
    
    7.37
    
    
    
    4.74Third Quarter 2006
    
    
    6.60
    
    
    
    4.95Fourth Quarter 2006
    
    
    5.60
    
    
    
    3.95First Quarter 2007
    
    
    7.27
    
    
    
    4.53Second Quarter 2007 (through May 23, 2007)
    
    
    9.60
    
    
    
    6.04Monthly highs and lowsNovember 2006
    
    
    5.60
    
    
    
    3.95December 2006
    
    
    4.61
    
    
    
    4.20January 2007
    
    
    5.74
    
    
    
    4.53February 2007
    
    
    7.27
    
    
    
    5.00March 2007
    
    
    6.45
    
    
    
    5.80April 2007
    
    
    7.03
    
    
    
    6.04May 2007 (through May 23, 2007)
    
    
    9.60
    
    
    
    6.51
 B. Plan of distribution.
  C. Markets.
  D. Selling shareholders.
  E. Dilution.
  F. Expenses of the issue.
  
 ITEM 10. ADDITIONAL INFORMATION
 A. Share capital.
  B. Memorandum and articles of association.
  81




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C. Material contracts.
  D. Exchange controls.
     E. Taxation.
 Hong Kong taxation
 82




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Profits tax.
  Estate duty.
 Stamp duty.
 United States federal income taxation
  83




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##### Table of Contents




    
    dealers in securities or currencies;
    
    traders in securities that elect to use a mark-to-market method of accounting for
securities holdings;
    
    banks or other financial institutions;
    
    insurance companies;
    
    tax-exempt organizations;
    
    partnerships and other entities treated as partnerships for U.S. federal income tax
purposes or persons holding ADSs through any such entities;
    
    persons that hold ADSs as part of a hedge, straddle, constructive sale, conversion
transaction or other integrated investment;
    
    U.S. Holders (as defined below) whose functional currency for tax purposes is not the
U.S. dollar;
    
    persons liable for alternative minimum tax; or
    
    persons who actually or constructively own 10% or more of the total combined voting
power of all classes of our shares (including ADSs) entitled to vote.
    
    
    a citizen or resident of the United States for U.S. federal income tax purposes;
    
    a corporation, or other entity taxable as a corporation, that was created or
organized in or under the laws of the United States or any political
subdivision thereof;
    
    an estate the income of which is subject to U.S. federal income tax regardless
of its source; or
    
    a trust if (a) a court within the United States is able to exercise primary
supervision over its administration and one or more U.S. persons have the
authority to control all
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##### Table of Contents



substantial decisions of the trust, or (b) the trust
has a valid election in effect to be treated as a U.S. person.
   U.S. Holders
 Dividends on ADSs
    Sales and other dispositions of ADSs
  Passive Foreign Investment Company
  85




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86




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##### Table of Contents



Non-U.S. Holders
  
    
    that gain is effectively connected with the conduct of a U.S. trade or
business and, if an applicable income tax treaty so requires as a
condition for you to be subject to U.S. federal income tax with
respect to income from your ADSs, such gain is attributable to a
permanent establishment that you maintain in the United States; or
    
    you are a nonresident alien individual and are present in the United
States for at least 183 days in the taxable year of the sale or other
disposition and either (1) your gain is attributable to an office or
other fixed place of business that you maintain in the United States
or (2) you have a tax home in the United States.
  U.S. information reporting and backup withholding rules
  87




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##### Table of Contents



F. Dividends and paying agents.
  G. Statement by experts.
  H. Documents on display.
  www.sec.gov
   I. Subsidiaries information.
  88




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##### Table of Contents



ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
   
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    89




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ITEM 16B. CODE OF ETHICS
  www.chinafinanceonline.com/investor/governance.asp
 
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  For the Year Ended December 31,2006
    
    2005Audit
fees(1)
    
    US$
    257,000
    
    
    US$
    192,500
 
 (1)
    
    Audit fees means the aggregate fees billed in each of the fiscal years listed
for professional services rendered by our principal auditors for the audit of our annual financial
statements, review of interim financial statements and attestation services that are provided in
connection with statutory and regulatory filings or engagements. 
 ITEM 16D. EXEMPTION FROM THE LISTING STANDARD FOR AUDIT COMMITTEES
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
  
 PART III
 
 ITEM 17. FINANCIAL STATEMENT
  
 ITEM 18. FINANCIAL STATEMENTS
  
 ITEM 19. EXHIBITS
 90




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##### Table of Contents



Index to exhibits
 ExhibitNumber
    
    
    
    Description1.1
    
    
    
    Amended and Restated Memorandum and Articles of Association
of China Finance Online Co. Limited (incorporated by
reference to Exhibit 3.1 from our Registration Statement on
Form F-1 (File No. 333-119166) filed with the Securities and
Exchange Commission on October 4, 2004)2.1
    
    
    
    Specimen ordinary share certificate (incorporated by
reference to Exhibit 4.1 from our Registration Statement on
Form F-1 (File No. 333-119166) filed with the Securities and
Exchange Commission on September 21, 2004)2.2
    
    
    
    Specimen American depositary receipt of China Finance Online
Co. Limited (Incorporated by reference to the Registration
Statement on Form F-6 (File No. 333-119530) filed with the
Securities and Exchange Commission with respect to American
depositary shares representing ordinary shares on October 5,
2004.2.3
    
    
    
    Shareholders Agreement of China Finance Online Co. Limited
dated June 2000 among China Finance Online Co., Ltd. and
certain of its shareholders (incorporated by reference to
Exhibit 4.2 from our Registration Statement on Form F-1
(File No. 333-119166) filed with the Securities and Exchange
Commission on September 21, 2004)4.1
*
    
    
    
    2004 Incentive Stock Option Plan and form of option agreement4.2
    
    
    
    Form of Option Agreement with outside consultants and
strategic advisors (incorporated by reference to Exhibit
10.2 from our Registration Statement on Form F-1 (File No.
333-119166) filed with the Securities and Exchange
Commission on September 21, 2004)4.3
    
    
    
    Purchase Option and Cooperation Agreement dated May 27, 2004
among China Finance Online Co. Limited, Jun Ning, Wu Chen
and Fuhua Innovation Technology Development Co., Ltd.
(incorporated by reference to Exhibit 10.3 from our
Registration Statement on Form F-1 (File No. 333-119166)
filed with the Securities and Exchange Commission on
September 21, 2004)4.4
    
    
    
    Share Pledge Agreement dated May 27, 2004 among Jun Ning, Wu
Chen and China Finance Online (Beijing) Co., Ltd.
(incorporated by reference to Exhibit 10.4 from our
Registration Statement on Form F-1 (File No. 333-119166)
filed with the Securities and Exchange Commission on
September 21, 2004)4.5
    
    
    
    [Intentionally Omitted]4.6
    
    
    
    Proxy from Wu Chen to Jian Feng dated May 27, 2004
(incorporated by reference to Exhibit 10.6 from our
Registration Statement on Form F-1 (File No. 333-119166)
filed with the Securities and Exchange Commission on
September 21, 2004)4.7*
    
    
    
    Framework Agreement on Exercising Purchase Option dated
November 20, 2006 by and among Jun Ning, Wu Chen, Zhiwei
Zhao, Fuhua Innovation Technology Development Co., Ltd. and
Finance Online (Beijing) Co., Ltd.4.8*
    
    
    
    Share Transfer Contract (related to shares of Beijing Fuhua
Innovation Technology Development Co., Ltd.) dated November
20, 2006 by and between Jun Ning and Zhiwei Zhao
 91




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##### Table of Contents



ExhibitNumber
    
    
    
    Description4.9*
    
    
    
    Loan Agreement dated November 20, 2006 by and between China
Finance Online Co., Limited by and Zhiwei Zhao4.10*
    
    
    
    Purchase Option and Cooperation Agreement dated November 20,
2006 among China Finance Online Co. Limited, Zhiwei Zhao, Wu
Chen, Fuhua Innovation Technology Development Co., Ltd. and
China Finance Online (Beijing) Co., Ltd.4.11*
    
    
    
    Share Pledge Agreement dated November 20, 2006 among Zhiwei
Zhao, Wu Chen, Fuhua Innovation Technology Development Co.,
Ltd. and China Finance Online (Beijing) Co., Ltd.4.12
    
    
    
    Equipment Lease Agreement between China Finance Online
(Beijing) Co., Ltd. and Fuhua Innovative Technology
Development Co., Ltd. dated May 27, 2004 (incorporated by
reference to Exhibit 10.7 from our Registration Statement on
Form F-1 (File No. 333-119166) filed with the Securities and
Exchange Commission on September 21, 2004)4.13
    
    
    
    Technical Support Agreement between China Finance Online
(Beijing) Co., Ltd. and Fuhua Innovative Technology
Development Co., Ltd. dated May 27, 2004 (incorporated by
reference to Exhibit 10.8 from our Registration Statement on
Form F-1 (File No. 333-119166) filed with the Securities and
Exchange Commission on September 21, 2004)4.14
    
    
    
    Amended and Restated Strategic Consulting Agreement between
China Finance Online (Beijing) Co., Ltd. and Fuhua
Innovative Technology Development Co., Ltd. dated May 27,
2004 (incorporated by reference to Exhibit 10.9 from our
Registration Statement on Form F-1 (File No. 333-119166)
filed with the Securities and Exchange Commission on
September 21, 2004)4.15*
    
    
    
    Shanghai Stock Exchange Level-II Quotations License
Agreement dated June 15, 2006 between SSE Infonet Ltd. and
Fortune Software (Beijing) Co., Ltd.4.16*
    
    
    
    Shenzhen Stock Exchange Proprietary Information License
Agreement dated March 20, 2007 between Fortune Software
(Beijing) Co., Ltd. and Shenzhen Securities Information Co.,
Ltd.4.17*
    
    
    
    Domain Name Transfer Agreement dated October 30, 2006 by and
among China Finance Online Co., Ltd., China Finance Online
(Beijing) Co., Ltd. and Being Fuhua Innovation Technology
Development Co., Ltd.4.18*
    
    
    
    Domain Name Transfer Agreement dated October 30, 2006
between Stockstar Information Technology (Shanghai) Co.,
Ltd. and Shanghai Meining Computer Software Company Limited4.19
    
    
    
    Lease Contract for Housing Unit of Corporate Square dated
January 19, 2006 between Fortune Software (Beijing) Co. Ltd.
and China Galaxy Securities Company Limited (incorporated by
reference to Exhibit 4.20 from our Annual Report on Form
20-F filed with the Securities and Exchange Commission on
May 23, 2006)
 92




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##### Table of Contents



ExhibitNumber
    
    
    
    Description4.20
    
    
    
    Lease Contract for Housing Unit of Corporate Square dated
January 19, 2006 between Beijing Fuhua Innovation Technology
Co., Ltd. and China Galaxy Securities Company Limited
(incorporated by reference to Exhibit 4.20 from our Annual
Report on Form 20-F filed with the Securities and Exchange
Commission on May 23, 2006)4.21
    
    
    
    Lease Contract for Housing Unit of Corporate Square dated
January 19, 2006 between China Finance Online Co., Ltd. and
China Galaxy Securities Company Limited (incorporated by
reference to Exhibit 4.20 from our Annual Report on Form
20-F filed with the Securities and Exchange Commission on
May 23, 2006)4.22*
    
    
    
    Lease Contract for Housing Unit of Corporate Square dated
December 29, 2006 between Beijing Fuhua Innovation
Technology Co., Ltd. and China Galaxy Securities Company
Limited4.23*
    
    
    
    Lease Contract for Housing Unit of Corporate Square dated
December 29, 2006 between Fortune Software (Beijing) Co.
Ltd. and China Galaxy Securities Company Limited4.24
    
    
    
    Form of indemnification agreement for directors and officers
(incorporated by reference to Exhibit 10.18 from our
Registration Statement on Form F-1 (File No. 333-119166)
filed with the Securities and Exchange Commission on
September 21, 2004)4.25*
    
    
    
    Labor Contract of Jeff (Jun) Wang dated May 24, 20064.26
    
    
    
    Labor Contract of Zhao Zhiwei dated June 21, 2005
(incorporated by reference to Exhibit 4.26 from our Annual
Report on Form 20-F filed with the Securities and Exchange
Commission on May 23, 2006)4.27
    
    
    
    [Intentionally Omitted]4.28
    
    
    
    [Intentionally Omitted]4.29
    
    
    
    Form of Change in Control Agreement (incorporated by
reference to Exhibit 10.1 from our Registration Statement on
Form F-1 (File No. 333-119166) filed with the Securities and
Exchange Commission on October 4, 2004)4.30*
    
    
    
    Shanghai Meining Computer Software Company Limited Share
Transfer Agreement dated August 15, 2006 among Shanghai
Kemei Taidi Telecommunication Equipment Co., Ltd., Beijing
Fuhua Innovation Technology Development Co., Ltd., China
Finance Online (Beijing) Co., Ltd.4.31*
    
    
    
    Stockstar Information Technology (Shanghai) Co., Ltd. Share
Transfer Agreement dated August 15, 2006 by and among
Stockstar.com, Inc. and China Finance Online Co., Ltd.8.1*
    
    
    
    List of subsidiaries10.1*
    
    
    
    Consent of Deloitte Touche Tohmatsu CPA Ltd
 93




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ExhibitNumber
    
    
    
    Description12.1*
    
    
    
    CEO Certification Pursuant to Rule 13a-14(a) (17 CFR
240.13a-14(a)) (17 CFR 240.13a-14(a)) or Rule 15d-1(a) (17
CFR 240.15d-14(a))12.2*
    
    
    
    CFO Certification Pursuant to Rule 13a-14(a) (17 CFR
240.13a-14(a)) or Rule 15d-1(a) (17 CFR 240.15d-14(a))13.1*
    
    
    
    CEO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200213.2*
    
    
    
    CFO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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CHINA FINANCE ONLINE CO. LIMITED
 
 SIGNATURE
  Date: May 29, 2007
    
    CHINA FINANCE ONLINE CO. LIMITED/s/ Jeff Wang
Name: Jeff WangTitle: Chief Financial Officer
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CHINA FINANCE ONLINE CO. LIMITED
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 CONTENTS
    
    PAGEReport of Independent Registered Public Accounting Firm
    
    
    F - 2Consolidated Balance Sheets as of December 31, 2005 and 2006
    
    
    F - 3Consolidated Statements of Operations for the years ended December 31, 2004,
2005 and 2006
    
    
    F - 4Consolidated Statements of Shareholders Equity and Comprehensive Income
for the years ended December 31, 2004, 2005 and 2006
    
    
    F - 5Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2005 and 2006
    
    
    F - 6Notes to Consolidated Financial Statements
    
    
    F - 7Schedule 1
    
    
    F - 31
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 CHINA FINANCE ONLINE CO. LIMITED
     
 F-2




---



##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 
 CONSOLIDATED BALANCE SHEETS
 (In U.S. dollars, except share-related data)
 December 31,2005
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    46,168,385
    
    
    $
    44,955,553Accounts receivable
    
    
    144,694
    
    
    
    477,778Prepaid expenses and other current assets
    
    
    1,131,515
    
    
    
    927,697Deferred tax assets
    
    
    64,036
    
    
    
    170,478Total current assets
    
    
    47,508,630
    
    
    
    46,531,506Cost method investment
    
    
    15,000,000
    
    
    
    12,606,571Property and equipment, net
    
    
    512,179
    
    
    
    1,697,481Rental deposits
    
    
    41,393
    
    
    
    86,216Acquired intangible assets, net
    
    
    
    
    
    
    2,045,224Goodwill
    
    
    50,534
    
    
    
    8,151,851Total assets
    
    $
    63,112,736
    
    
    $
    71,118,849Liabilities and shareholders equityCurrent liabilities:Deferred revenue
    
    $
    1,859,321
    
    
    $
    6,418,502Accrued expenses and other current liabilities
    
    
    381,693
    
    
    
    2,096,552Income taxes payable
    
    
    40,762
    
    
    
    5,483Total current liabilities
    
    
    2,281,776
    
    
    
    8,520,537Deferred tax liabilities
    
    
    
    
    
    
    145,533Commitments
(Note 15)Shareholders equity:Ordinary shares ($0.00013 par value; 500,000,000 shares
authorized; shares issued and outstanding 101,329,933 in
2005 and 104,384,933 in 2006)
    
    
    13,077
    
    
    
    13,474Additional paid-in capital
    
    
    64,564,534
    
    
    
    65,756,313Treasury shares, at cost (10,708,030 shares in 2005 and 2006)
    
    
    (13,200,394
    )
    
    
    (13,200,394
    )Deferred stock-based compensation
    
    
    (67,129
    )
    
    
    Accumulated other comprehensive income
    
    
    671,122
    
    
    
    1,634,269Retained earnings
    
    
    8,849,750
    
    
    
    8,249,117Total shareholders equity
    
    
    60,830,960
    
    
    
    62,452,779Total liabilities and shareholders equity
    
    $
    63,112,736
    
    
    $
    71,118,849
  F-3




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In U.S. dollars, except share-related data)
 Years ended December 31,2004
    
    
    2005
    
    
    2006Net revenues
    
    $
    6,016,449
    
    
    $
    7,482,166
    
    
    $
    7,128,078Cost of revenues (including stock-based compensation
of $825, $740 and $111,612, respectively)
    
    
    393,841
    
    
    
    482,068
    
    
    
    1,467,745Gross profit
    
    
    5,622,608
    
    
    
    7,000,098
    
    
    
    5,660,333Operating expenses:General and administrative (including stock-based
compensation of $286,089, $365,949 and $833,685,
respectively)
    
    
    727,349
    
    
    
    1,740,117
    
    
    
    2,955,948Product development (including stock-based
compensation of $920, $1,610 and $131,134,
respectively)
    
    
    172,997
    
    
    
    236,438
    
    
    
    742,728Sales and marketing (including stock-based compensation
of $1,500, $2,482 and $107,231, respectively)
    
    
    801,481
    
    
    
    1,794,569
    
    
    
    2,665,847Total operating expenses
    
    
    1,701,827
    
    
    
    3,771,124
    
    
    
    6,364,523Income (loss) from operations
    
    
    3,920,781
    
    
    
    3,228,974
    
    
    
    (704,190
    )Interest income
    
    
    293,862
    
    
    
    1,486,276
    
    
    
    1,002,975Other (expense) income, net
    
    
    (1,579
    )
    
    
    365,965
    
    
    
    381,875Loss from impairment of cost method investment
    
    
    
    
    
    
    
    
    
    
    (1,322,000
    )Income (loss) before income tax benefit (provision)
    
    
    4,213,064
    
    
    
    5,081,215
    
    
    
    (641,340
    )Income tax benefit (provision)
    
    
    384,277
    
    
    
    (457,028
    )
    
    
    40,707Net income (loss)
    
    $
    4,597,341
    
    
    $
    4,624,187
    
    
    $
    (600,633
    )Income (loss) per shareBasic
    
    $
    0.12
    
    
    $
    0.05
    
    
    $
    (0.01
    )Diluted
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    (0.01
    )Weighted average shares used in calculating
net income (loss) per shareBasic
    
    
    38,912,491
    
    
    
    94,341,061
    
    
    
    93,650,653Diluted
    
    
    90,092,668
    
    
    
    104,781,492
    
    
    
    101,961,727
  F-4




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
 (In U.S. dollars, except share-related data)
 Accumulatedother
    
    
    RetainedSeries A convertible
    
    
    Series B convertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    Deferred
    
    
    comprehensive
    
    
    earnings
    
    
    Totalpreference shares
    
    
    preference shares
    
    
    Ordinary shares
    
    
    paid-in
    
    
    
    
    
    
    stock-based
    
    
    income
    
    
    (accumulated
    
    
    shareholders
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    Treasury shares
    
    
    compensation
    
    
    (loss)
    
    
    deficit)
    
    
    equity
    
    
    incomeBalance as of January 1, 2004
    
    
    30,643,000
    
    
    $
    3,954
    
    
    
    20,833,333
    
    
    $
    2,688
    
    
    
    22,123,600
    
    
    $
    2,852
    
    
    $
    5,093,384$
    
    
    
    
    
    
    $
    
    
    
    $
    186
    
    
    $
    (371,778
    )
    
    $
    4,731,286Issuance of
ordinary shares to an employee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    730,000
    
    
    
    94
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94Stock options issued to non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,764
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,764Deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    541,791
    
    
    
    
    
    
    
    (541,791
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    216,570
    
    
    
    
    
    
    
    
    
    
    
    216,570Issuance of ordinary shares upon the initial public offering
(net of offering costs of $6,469,282)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000,000
    
    
    
    3,226
    
    
    
    58,527,492
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,530,718Conversion of preference shares to ordinary shares upon
initial public offering
    
    
    (30,643,000
    )
    
    
    (3,954
    )
    
    
    (20,833,333
    )
    
    
    (2,688
    )
    
    
    51,476,333
    
    
    
    6,642
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distribution to the shareholders of Fuhua
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,299
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,299
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (197
    )
    
    
    
    
    
    
    (197
    )
    
    $
    (197
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,597,341
    
    
    
    4,597,341
    
    
    
    4,597,341Balances as of December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,329,933
    
    
    
    12,814
    
    
    
    64,175,132
    
    
    
    
    
    
    
    (325,221
    )
    
    
    (11
    )
    
    
    4,225,563
    
    
    
    68,088,277
    
    
    $
    4,597,144Repurchase of ordinary shares as treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,200,394
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,200,394
    )Issuance of
ordinary shares to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    263
    
    
    
    276,713
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    276,976Stock options issued to non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112,689
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112,689Amortization of deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    258,092
    
    
    
    
    
    
    
    
    
    
    
    258,092Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    671,133
    
    
    
    
    
    
    
    671,133
    
    
    $
    671,133Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,624,187
    
    
    
    4,624,187
    
    
    
    4,624,187Balance as of December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,329,933
    
    
    
    13,077
    
    
    
    64,564,534
    
    
    
    (13,200,394
    )
    
    
    (67,129
    )
    
    
    671,122
    
    
    
    8,849,750
    
    
    
    60,830,960
    
    
    $
    5,295,320Amortization of deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67,129
    )
    
    
    
    
    
    
    67,129
    
    
    
    
    
    
    
    
    
    
    
    Issuance of ordinary shares for exercise of stock option by employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000,000
    
    
    
    390
    
    
    
    66,453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,843Exercise of
stock options by non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,000
    
    
    
    7
    
    
    
    8,793
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,800Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,183,662
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,183,662Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    963,147
    
    
    
    
    
    
    
    963,147
    
    
    $
    963,147Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600,633
    )
    
    
    (600,633
    )
    
    
    (600,633
    )Balance as of December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    104,384,933
    
    
    $
    13,474
    
    
    $
    65,756,313
    
    
    $
    (13,200,394)
    
    
    $
    
    
    
    $
    1,634,269
    
    
    $
    8,249,117
    
    
    $
    62,452,779
    
    
    $
    362,514
  F-5




---



##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In U.S. dollars)
 Years ended December 31,2004
    
    
    2005
    
    
    2006Operating activities:Net income (loss)
    
    $
    4,597,341
    
    
    $
    4,624,187
    
    
    $
    (600,633
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Stock-based compensation
    
    
    289,334
    
    
    
    370,781
    
    
    
    1,183,662Depreciation and amortization
    
    
    133,208
    
    
    
    129,833
    
    
    
    301,941Deferred taxes
    
    
    (386,325
    )
    
    
    322,289
    
    
    
    (40,081
    )Loss on disposal of property and equipment
    
    
    463
    
    
    
    9,686
    
    
    
    Loss from impairment of cost method investment
    
    
    
    
    
    
    
    
    
    
    1,322,000Gain from
disposal of cost method investment
    
    
    
    
    
    
    
    
    
    
    (116,071
    )Changes in assets and liabilities:Accounts receivable
    
    
    (33,921
    )
    
    
    (110,773
    )
    
    
    122,363Income taxes recoverable
    
    
    268,711
    
    
    
    14,573
    
    
    
    Prepaid expenses and other current assets
    
    
    (239,513
    )
    
    
    (799,572
    )
    
    
    334,687Rental deposits
    
    
    (7,161
    )
    
    
    (10,657
    )
    
    
    (31,955
    )Deferred revenue
    
    
    2,209,155
    
    
    
    (1,627,937
    )
    
    
    3,840,892Accrued expenses and other current liabilities
    
    
    191,328
    
    
    
    95,997
    
    
    
    (388,662
    )Income taxes payable
    
    
    
    
    
    
    40,762
    
    
    
    (36,041
    )Net cash provided by operating activities
    
    
    7,022,620
    
    
    
    3,059,169
    
    
    
    5,892,102Investing activities:Acquisition of businesses (net of cash acquired of $828,494,
for the year ended December 31, 2006)
    
    
    
    
    
    
    
    
    
    
    (8,346,856
    )Proceeds from partial sale of cost method investment
    
    
    
    
    
    
    
    
    
    
    1,187,500Purchase of property and equipment
    
    
    (199,857
    )
    
    
    (234,696
    )
    
    
    (1,042,423
    )Acquisition of cost investment
    
    
    
    
    
    
    (15,000,000
    )
    
    
    Net cash used in investing activities
    
    
    (199,857
    )
    
    
    (15,234,696
    )
    
    
    (8,201,779
    )Financing activities:Proceeds from stock options exercised by employees
    
    
    94
    
    
    
    276,976
    
    
    
    66,843Proceeds from exercise of options granted to non-employee
    
    
    
    
    
    
    
    
    
    
    8,800Repurchase of treasury shares
    
    
    
    
    
    
    (13,200,394
    )
    
    
    Proceeds from initial public offering, net of
offering costs of $6,469,282
    
    
    58,530,718
    
    
    
    
    
    
    
    Dividend paid
    
    
    (502,552
    )
    
    
    
    
    
    
    Distribution to the shareholders of Fuhua
    
    
    (60,299
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    57,967,961
    
    
    
    (12,923,418
    )
    
    
    75,643Effect of exchange rate changes
    
    
    (197
    )
    
    
    671,133
    
    
    
    1,021,202Net increase (decrease) in cash and cash equivalents
    
    
    64,790,527
    
    
    
    (24,427,812
    )
    
    
    (1,212,832
    )Cash and cash equivalents, beginning of year
    
    
    5,805,670
    
    
    
    70,596,197
    
    
    
    46,168,385Cash and cash equivalents, end of year
    
    $
    70,596,197
    
    
    $
    46,168,385
    
    
    
    44,955,553Supplemental disclosure of cash flow informationIncome taxes paid
    
    $
    16,621
    
    
    $
    93,977
    
    
    $
    36,089Supplemental disclosures of non-cash financing activities:Conversion of Series A and Series B convertible
preference shares into ordinary shares
    
    $
    6,642
    
    
    $
    
    
    
    $
    
  F-6




---



##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In U.S. dollars)
 1.
    
    ORGANIZATION AND PRINCIPAL ACTIVITIESChina Finance Online Co. Limited (China Finance Online) was incorporated in Hong Kong on
November 2, 1998. China Finance Online and its subsidiaries including its variable interest
entity (collectively, the Company) are principally engaged in the sale of online financial
services analyzing financial and listed company information in the Peoples Republic of
China (PRC). The services are provided through downloadable proprietary software research
tools on their website www.jrj.com.Details of China Finance Onlines subsidiaries and variable interest entity as of December
31, 2006 were as follows:
 BeneficialPlace of
    
    ownershipCompany name
    
    incorporation
    
    interestChina Finance Online (Beijing) Co., Ltd. (CFO Beijing)
    
    Beijing, PRC
    
    
    100
    %Fortune Software (Beijing) Co., Ltd. (CFO Software)
    
    Beijing, PRC
    
    
    100
    %Beijing Fuhua Innovation Technology
Investment Co., Ltd. *
    
    Beijing, PRC
    
    
    100
    %Shenzhen Genius Information Technology Co., Ltd.
(CFO Genius) (Note 3)
    
    Shenzhen, PRC
    
    
    100
    %Shanghai Meining Computer Software Co., Ltd.
(CFO Meining) (Note 3)
    
    Shanghai, PRC
    
    
    100
    %Stockstar Information Technology (Shanghai) Co., Ltd.
(CFO Stockstar) (Note 3)
    
    Shanghai, PRC
    
    
    100
    %
 
 *
    
    Represents a variable interest entity PRC regulations prohibit direct foreign ownership of business entities providing internet
content, or ICP, services in the PRC such as the Companys business of providing financial
information and data to Internet users as certain licenses are required for the provision of
such services. China Finance Online and CFO Beijing are foreign or foreign invested
enterprises under PRC law and accordingly are ineligible for a license to operate ICP
services. In order to comply with these regulations, in December 2000, China Finance Online
established Beijing Fuhua Innovation Technology Investment Co., Ltd. (Fuhua), a variable
interest entity, (VIE) as defined by the Financial Accounting Standards Board (FASB)
Interpretation No. 46 (revised) (FIN 46(R)) through two designated equity owners who are
PRC citizens and legally own Fuhua.
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CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 1.
    
    ORGANIZATION AND PRINCIPAL ACTIVITIES  continuedIn 2004 China Finance Online signed a series of agreements with Fuhua and its
shareholders that provide the Company with the substantial ability to control Fuhua.
Pursuant to these contractual arrangements with Fuhua, China Finance Online provides
equipment, services and a domain name license to Fuhua in exchange for fees. The principal
equipment lease, services and domain name license agreements that China Finance Online has
entered into with Fuhua include:
 
 an equipment leasing agreement, pursuant to which Fuhua leases a
substantial majority of its operating assets from CFO Beijing;
 
 a technical support agreement, pursuant to which CFO Beijing provides
technical support for Fuhuas operations;
 
 an amended and restated strategic consulting agreement, pursuant to
which CFO Beijing provides strategic consulting services to Fuhua, including
consulting services in relation to Fuhuas online advertising business; and
 
 a domain name licensing agreement, pursuant to which CFO Beijing
licenses to Fuhua its domain name, www.jrj.com.cn.
    
 the shareholders of Fuhua have granted China Finance Online or
individuals designated by China Finance Online an irrevocable proxy to exercise
all their voting rights as shareholders of Fuhua, including the right to appoint
directors, the general manager and other senior management of Fuhua;
 Fuhua will not enter into any transaction that may materially affect
its assets, liabilities, equity or operations without China Finance Onlines
prior written consent;
 Fuhua will not distribute any dividends;
 China Finance Online may purchase the entire equity interest in, or
all the assets of, Fuhua when and if such purchase is permitted by PRC law or the
current shareholders of Fuhua cease to be directors or employees of Fuhua;
 the shareholders of Fuhua have pledged their equity interest in Fuhua
to CFO Beijing to secure the payment obligations of Fuhua under the equipment
leasing agreement, the technical support agreement and the amended and restated
strategic consulting agreement between CFO Beijing and Fuhua; and
 the shareholders of Fuhua will not transfer, sell, pledge, dispose of
or create any encumbrance on their equity interest in Fuhua without the prior
written consent of CFO Beijing.
     December 31,2005
    
    
    2006Total assets
    
    
    816,882
    
    
    
    3,294,204Total liabilities
    
    
    445,079
    
    
    
    2,915,166
 Years ended December 31,2004
    
    
    2005
    
    
    2006Total revenue
    
    
    125,090
    
    
    
    1,222,747
    
    
    
    1,286,614Total net income (loss)
    
    
    1,391
    
    
    
    435
    
    
    
    (4,999
    )
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of presentationThe consolidated financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S. GAAP).Basis of consolidationThe consolidated financial statements include the financial statements of China Finance
Online, its subsidiaries and a variable interest entity. All inter-company transactions and
balances have been eliminated upon consolidation.Cash and cash equivalentsCash and cash equivalents consist of cash on hand and highly liquid investments which are
unrestricted as to withdrawal or use, and which have remaining maturities of three months or
less when purchased.Use of estimatesThe preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities
and revenue and expenses in the financial statements and accompanying notes. Significant
accounting estimates reflected in the Companys financial statements include valuation allowance for
deferred tax assets,
stock-based compensation expense, and impairment of cost method investment. Actual results could differ
from those estimates.
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CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedProperty and equipment, netProperty and equipment, net are carried at cost less accumulated depreciation. Depreciation
is calculated on a straight-line basis over the following estimated useful lives:
 Technology infrastructure
    
    5 yearsComputer equipment
    
    5 yearsFurniture, fixtures and equipment
    
    5 yearsMotor vehicle
    
    5 yearsLeasehold improvements
    
    Shorter of the lease term or 5 years
 Acquired intangible assets, netAcquired intangible assets consists of intangible assets acquired through various
acquisitions as described in note 3 and are amortized on a straight-line basis over their
expected useful economic lives.If an intangible asset is determined to have an indefinite useful life, it should not be
amortized until its useful life is determined to be no longer indefinite. The Company
reviews intangible assets remaining useful lives in each reporting period. If such an asset is later
determined to have a finite useful life, the asset will be tested for impairment. That
asset will then be amortized prospectively over its estimated remaining useful life and
accounted for in the same way as intangible assets subject to amortization. An intangible
asset that is not subject to amortization is tested for impairment at least annually.Impairment of long-lived assetsThe Company reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may no longer be recoverable.
When these events occur, the Company measures impairment by comparing the carrying value of
the long-lived assets to the estimated undiscounted future cash flows expected to result
from the use of the assets and their eventual disposition. If the sum of the expected
undiscounted cash flow is less than the carrying amount of the assets, the Company would
recognize an impairment loss based on the fair value of the assets.
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CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedGoodwillThe excess of the purchase price over the fair value of net assets acquired is recorded on
the consolidated balance sheet as goodwill.The Company tests goodwill annually following a two-step process. The first step compares
the fair values of each reporting unit to its carrying amount, including goodwill. If the
fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to
be impaired and the second step will not be required. If the carrying amount of a reporting
unit exceeds its fair value, the second step compares the implied fair value of goodwill to
the carrying value of a reporting units goodwill. The implied fair value of goodwill is
determined in a manner similar to accounting for a business combination with the allocation
of the assessed fair value determined in the first step to the assets and liabilities of the
reporting unit. The excess of the fair value of the reporting unit over the amounts
assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss
is recognized for any excess in the carrying value of goodwill over the implied fair value
of goodwill.The Company performs a goodwill impairment test annually on
one reporting unit on December 31 and another two reporting units
on October 1 by comparing the
book value to the fair value of each reporting unit. Based on the Companys assessment,
there was no impairment of goodwill for the years ended December 31, 2004, 2005 and 2006.Revenue recognitionThe Company generates revenue primarily from annual subscription fees from subscribers to
their financial data and information services including their downloadable proprietary
software research tools. The Company recognizes revenue under the provisions of Statement
of Position No 97-2 (SOP 97-2) entitled Software Revenue Recognition (as amended by SOP
98-9). Accordingly, the Company recognizes revenues when all of the following criteria are
met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the
fee is fixed or determinable and (4) collectibility is probable. Upon receipt of the
upfront cash payments from the subscriber, the Company will activate the subscribers account
and provide the subscriber the access code. This will commence the one-year subscription
period and the full payment will be deferred and recognized ratably over the one-year
subscription period. Since the Company does not have sufficient vendor specific objective
evidence to allocate revenue to the various elements of the arrangement, the Company
recognizes revenue ratably over the life of the arrangement.
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CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedRevenue recognition  continuedThe Company provides short messaging services ("SMS") which
are delivered primarily through intermediary companies licensed to
provide SMS services on behalf of mobile phone service providers.
The Company evaluates the criteria outlined in EITF No. 99-19,
"Reporting Revenue Gross as Principal Versus Net as an Agent," in
determining whether it is appropriate to record the gross amount of
revenues and related costs or the net amount earned after deducting
service and network fees paid to the mobile phone service providers.
The Company records the net amount of revenue received from the intermediary company after deducting service
and network fees when the Company is the agent in transactions
primarily working through an intermediary of the mobile phone service
provider, has little latitude in establishing prices, and is not
involved in the determination of the service specification. The
Company records the gross amounts billed to its customers when the
Company is the primarily obligor in these transactions as it has
latitude in establishing prices, is involved in the determination of the
service specifications and has the right to select suppliers. When
recording the gross revenue, the Company measures its revenues based
on the total amount paid by its customers, for which
the mobile phone service provider bills and collects on the
Companys
behalf. Accordingly, the 15-35% service fee paid to the mobile phone
service provider is included in the cost of revenues.The Company generally derives its advertising fees from advertising sales on their Website
principally for a fixed period of time, generally less than one year. Revenues from
advertising arrangements are recognized ratably over the period the advertising is
displayed.Business taxes and value added taxesRevenue is recorded net of business taxes when incurred. The Company is subject to business
taxes of approximately 5% on taxable services provided to its customers. During the years
ended December 31, 2004, 2005, and 2006, business taxes totaled $47,914, $144,590, and
$208,559, respectively.The Companys PRC subsidiaries are subject to value added tax at a rate of 17% on
subscription-based revenue. Value added tax payable on subscription-based revenue is
computed net of value added tax paid on purchases. In respect of subscription-based
revenue, however, if the net amount of value added tax payable exceeds 3% of
subscription-based revenue, the excess portion of value added tax can be refunded
immediately. The Company therefore is subject to an effective net value added tax burden of
3% from subscription-based revenue and records value added tax on a net basis. Net amount
of value added tax is recorded either in the line item of other current liabilities or
prepaid expenses and other current assets on the face of consolidated balance sheet.Subscription-based revenue includes the benefit of the rebate of value added taxes on sale
of the downloadable software received from the Chinese tax authorities as part of the PRC
government policy of encouraging software development in the PRC. In 2004, 2005 and 2006,
the Company recognized $613,050, $708,613 and $516,773, respectively, in value added tax
refunds.
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CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedDeferred revenuePayments received in advance of service are recorded as deferred revenue until earned and
when the relevant revenue recognition requirements have been met.Cost method investmentFor investments in an investee over which the Company does not have significant influence,
the Company carries the investment at cost and recognizes income as any dividends received
from distribution of investees earnings. The Company reviews the cost investments for
impairment whenever events or changes in circumstances indicate that the carrying value may
no longer be recoverable. An impairment loss is recognized in earnings equal to the
difference between the investments cost and its fair value at the balance sheet date of the
reporting period for which the assessment is made. The fair value of the investment would
then become the new cost basis of the investment. The Company recorded an impairment charge
totaling $1,322,000 during the year ended December 31, 2006. No impairment charges were
recorded during the years ended December 31, 2004 and 2005.Foreign currency translationThe functional currency of China Finance Onlines subsidiaries and variable interest entity
is Renminbi (RMB). Monetary assets and liabilities denominated in other currencies are
translated into the applicable functional currencies at rates of exchange in effect at the
balance sheet date. Nonmonetary assets and liabilities are remeasured into the applicable
functional currencies at historical exchange rates and transactions denominated in other
currencies are translated using the average rate for the year. Exchange gains and
losses are recorded in the consolidated statement of operations.China Finance Online uses the U.S. dollar as its functional and reporting currency.
Accordingly assets and liabilities are translated using the exchange rates in effect on the
balance sheet date. Transactions in currencies other than the U.S. dollar are translated
using the average exchange rate prevailing in the period when transactions occurred.
Translation adjustments are reported as cumulative transition adjustments and are shown as a
separate component of other comprehensive income (loss) in the accompanying consolidated
statements of shareholders equity and comprehensive income (loss).
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CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedForeign currency riskThe RMB is not a freely convertible currency. The State Administration for Foreign
Exchange, under the authority of the Peoples Bank of China, controls the conversion of
Renminbi into foreign currencies. The value of the RMB is subject to changes in central
government policies and to international economic and political developments affecting
supply and demand in the China Foreign Exchange Trading System market. Cash and cash
equivalents of the Company included aggregate amounts of $42,676,039 at December 31, 2005
and $39,197,490 at December 31, 2006 which were denominated in RMB.Cost of dataCost of data is expensed as incurred and is recorded in cost of revenues.Product development expensesCosts of product development, including database technology, are expensed as incurred until
technological feasibility has been established, at which time any additional costs would be
capitalized. To date, the Company has essentially completed its development concurrently
with the establishment of technological feasibility, and, accordingly, no costs have been
capitalized.Advertising costsThe Company expenses advertising costs as incurred. Total advertising expenses were
$414,907, $1,389,899 and $921,365 for the years ended December 31, 2004, 2005 and 2006,
respectively, and have been included as part of sales and marketing expenses.Income taxesDeferred income taxes are recognized for temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements, net operating
loss carry forwards and credits by applying enacted statutory tax rates applicable to future
years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Current income taxes are provided for in accordance with the laws of
the relevant taxing authorities.Comprehensive incomeComprehensive income includes net income (loss) and foreign currency translation
adjustments. Comprehensive income is reported as a component of the consolidated statements
of shareholders equity and comprehensive income.Fair value of financial instrumentsFinancial instruments include cash and cash equivalents and accounts receivable. The carrying values of
cash and cash equivalents and accounts receivable approximate
their fair value due to their short-term maturities.
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedConcentrations of credit riskFinancial instruments that potentially expose the Company to concentrations of credit risk
consist principally of cash and cash equivalents and accounts receivable. The Company
places its cash and cash equivalents with financial institutions with high-credit ratings
and quality.The Company conducts ongoing credit evaluations of its customers and generally does not
require collateral or other security from its customers. The Company manages its credit
risk by collecting up-front retainers from its customers and billing at regular intervals
during the contract period. The Company assesses the adequacy of allowance for doubtful
accounts primarily based upon the age of the receivables and factors surrounding the credit
risk of specific customers.There were no customers with 10% or more of the Companys revenues and accounts receivable
during 2004, 2005, and 2006.Stock-based compensationEffective January 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)), using the modified prospective transition method. Under this
method, stock-based compensation expense recognized beginning January 1, 2006 includes: (a)
compensation expense for all stock-based compensation awards granted prior to, but not yet
vested as of January 1, 2006 based on the fair market value as of the grant date, measured
in accordance with SFAS 123, and (b) compensation expense for all stock-based compensation
awards granted on or subsequent to January 1, 2006, based on grant-date fair vale estimated
in accordance with the provisions of SFAS 123(R). The Company recognizes stock-based
compensation costs on a graded-vesting attribution method over the requisite service period
which is generally the vesting period.For options vested prior to January 1, 2006, the Company accounted for share-based
compensation plans in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, as amended (APB 25). Accordingly, the Company
recognized compensation expense only when options were granted with a discounted exercise
price. The compensation expense was recognized ratably over the requisite service period,
which was generally the vesting period of the options.
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedIncome (loss) per shareBasic income (loss) per share is computed by dividing net income (loss) by the weighted
average number of ordinary shares outstanding during the period. Diluted income (loss) per
ordinary share reflects the potential dilution that could occur if securities or other
contracts to issue ordinary shares were exercised or converted into ordinary shares.Recent accounting standardsIn December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets  an
amendment of APB Opinion No. 29, which amends Accounting Principles Board Opinion No. 29,
Accounting for Nonmonetary Transactions, to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. The Company adopted
SFAS No. 153 on January 1, 2006 and the adoption of SFAS No. 153 did not have a material
effect on its consolidated financial position or results of operations.In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which
replaces Accounting Principles Board Opinions No. 20 Accounting Changes and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements  An Amendment of APB Opinion
No. 28. SFAS No. 154 provides guidance on the accounting for and reporting of accounting
changes and error corrections. It establishes retrospective application, or the latest
practicable date, as the required method for reporting a change in accounting principle and
the reporting of a correction of an error. The Company adopted SFAS No. 154 on January 1,
2006 and the adoption of SFAS No. 154 did not have a material effect on its consolidated
financial position or results of operations.In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS No. 157), which provides enhanced guidance for using fair
value to measure assets and liabilities. SFAS No. 157 also responds to investors requests
for expanded information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. SFAS No. 157 does not expand the use of
fair value in any new circumstances. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 12, 2007, and interim periods within those
fiscal years. The Company is currently evaluating whether the adoption of SFAS No. 157 will
have a material effect on its consolidated results of operations and financial position.
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedRecent accounting standards  continuedIn February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of
FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 provides companies with an option to
report selected financial assets and liabilities at fair value. SFAS No. 159 requires
companies to provide additional information that will help investors and other users of
financial statements to more easily understand the effect of the companys choice to use
fair value on its earnings. It also requires entities to display the fair value of those
assets and liabilities for which the Company has chosen to use fair value on the face of the
balance sheet. SFAS No. 159 is effective as of the beginning of an entitys first fiscal
year beginning after November 15, 2007. The Company is currently evaluating whether the
adoption of SFAS No. 159 will have a material effect on its consolidated results of
operations and financial position.In September 2006, the SEC issued SAB 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB
108). SAB 108 provides guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of a materiality
assessment. SAB 108 establishes an approach that requires quantification of financial
statement errors based on the effects of each on a companys balance sheet and statement of
operations and the related financial statement disclosures. The
Company adopted SAB 108 on November 15, 2006 and the adoption of SAB 108 did not have a material impact
on the Companys consolidated financial position, results of operations or cash flows.In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entitys financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes, and prescribes a recognition
threshold and measurement attribute for financial statement disclosure of tax positions
taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company is in the process of implementing FIN 48 and has not yet determined
the effect, if any, on its consolidated financial statements as a result of adopting FIN 48.
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 3.
    
    ACQUISITIONSTo expand in markets in which the Company is not established or lacks experience and
expertise, during 2006, China Finance Online made a number of acquisitions of businesses.
Each acquisition has been recorded using the purchase method of accounting, and accordingly
the acquired assets and liabilities were recorded at their fair values on the dates of
acquisitions and the results of their operations have been included in the Companys results
of operations since the dates of their acquisitions. The fair values of the assets and
liabilities acquired were estimated using a combination of valuation methods, such as
income approach, market approach and cost approach method, considering, among other
factors, forecasted financial performance of the acquired business, market performance, and
market potential of the acquired business in China.Acquisition of CFO-GeniusOn September 21, 2006 China Finance Online entered into an agreement to acquire all the
equity interest in CFO-Genius, CFO-Genius engages in the business of constructing and
maintaining financial information databases and providing networked information solution.
It was the first company of its kind in China to build databases and to provide electronic
information networks for domestic securities and investment firms at the time of its
establishment in 1994. The acquisition is expected to strengthen the Companys position in
the industry and provide future opportunities to develop database products. CFO-Genius is a
financial information database provider primarily serving domestic securities and investment
firms, for a total cash consideration of $1,040,081, including $40,081 in transaction costs.
 AmortizationperiodPurchase price allocation (Preliminary):Cash and cash equivalents
    
    $
    35,802Accounts receivable
    
    
    14,174Prepaid and other current assets
    
    
    14,023Property and equipment, net
    
    
    42,506
    
    
    3-5 yearsAcquired intangible assets:Completed technology
    
    
    332,545
    
    
    5.3 yearsTrademark
    
    
    75,866
    
    
    IndefiniteCustomer relationships
    
    
    117,592
    
    
    5.3 yearsTotal assets acquired
    
    
    632,508Deferred revenue
    
    
    (361,361
    )Accrued expenses and other current liabilities
    
    
    (231,904
    )Deferred tax liabilities related to acquired
intangible assets
    
    
    (67,520
    )Total net liabilities
    
    
    (28,277
    )Goodwill
    
    
    1,068,358Total
    
    $
    1,040,081
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 3.
    
    ACQUISITIONS  continuedThe following unaudited pro forma information summarizes the results of operations for the
years ended December 31, 2005 and 2006 of China Finance Online as if the acquisition
occurred on January 1, 2005 and January 1, 2006. The following pro forma financial
information is not necessarily indicative of the results that would have occurred had the
acquisition been completed at the beginning of the periods indicated, nor is it indicative
of future operating results:
 Years ended December 31,2005
    
    
    2006(unaudited)
    
    
    (unaudited)Pro forma revenue
    
    
    8,707,507
    
    
    
    7,909,324Pro forma income from operations
    
    
    4,762,141
    
    
    
    449,072Pro forma net income (loss)
    
    
    4,762,141
    
    
    
    (832,221
    )Pro forma net income (loss) per share  basic and diluted
    
    
    0.05
    
    
    
    (0.01
    )Weighted average shares used in calculation of pro forma
net income (loss) per share:- basic
    
    
    94,341,061
    
    
    
    93,650,653- diluted
    
    
    104,781,492
    
    
    
    101,961,727
 Acquisition of CFO-Meining and CFO-StockstarOn October 1, 2006, China Finance Online acquired two companies to expand its business in
China. The Company acquired all the equity interests of CFO-Stockstar and CFO-Meining.
Stockstar is a leading finance and securities website in China, it will alter the China
Finance Onlines overall composition. For the acquisition, total cash consideration was
$8,135,269 including transaction costs of $117,953. The following table summarizes the
estimated fair values of the assets acquired and liabilities assumed at the date of
acquisition.
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 3.
    
    ACQUISITIONS  continuedAggregate purchase price allocation  CFO-Meining and CFO-Stockstar
 AmortizationPeriodPurchase price allocation (Preliminary):Cash and cash equivalents
    
    $
    792,692Accounts receivable
    
    
    432,753Prepaid expenses and other current assets
    
    
    78,298Property and equipment
    
    
    297,024Acquired intangible assets:Trademark
    
    
    652,446
    
    
    IndefiniteCompleted technology
    
    
    402,089
    
    
    5.3 yearAgreements with operators
    
    
    10,495
    
    
    3 yearCustomer relationships
    
    
    475,426
    
    
    4.3 yearValue-added
service license
    
    
    23,392
    
    
    3.3 yearTotal assets
acquired
    
    
    3,164,615Deferred revenue
    
    
    (222,868
    )Accrued expenses and other current liabilities
    
    
    (1,702,727
    )Deferred tax liabilities related to acquired
intangible assets
    
    
    (136,710
    )Total net
assets
    
    
    1,102,310Goodwill
    
    
    7,032,959Total
    
    $
    8,135,269
 CFO-Meining and CFO-Stockstar are identified as a single
reporting unit for goodwill allocation purposes and the goodwill
arising from this
acquisition is fully allocated to this reporting unit.The following unaudited pro
forma information summarizes the results of operations for the
years ended December 31, 2005 and 2006 of China Finance Online as if the acquisition
occurred as of January 1, 2005 and January 1, 2006. The following pro forma financial
information is not necessarily indicative of the results that would have occurred had the
acquisition been completed at the beginning of the periods indicated, nor is it indicative
of future operating results:
 Year ended December 31,2005
    
    
    2006(unaudited)
    
    
    (unaudited)Pro forma revenue
    
    
    10,026,915
    
    
    
    10,080,846Pro forma income from operations
    
    
    4,776,422
    
    
    
    (365,203
    )Pro forma
net income (loss)
    
    
    4,685,359
    
    
    
    (1,264,639
    )Pro forma net income (loss) per share:- basic
    
    
    0.05
    
    
    
    (0.01
    )- diluted
    
    
    0.04
    
    
    
    (0.01
    )Weighted average shares used in calculation of pro forma
net income per share:- basic
    
    
    94,341,061
    
    
    
    93,650,653- diluted
    
    
    104,781,492
    
    
    
    101,961,727
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 4.
    
    PREPAID EXPENSES AND OTHER CURRENT ASSETSPrepaid expenses and other current assets consisted of the following:
 December 31,2005
    
    
    2006Interest receivable
    
    $
    562,673
    
    
    $
    415,441Prepaid expenses
    
    
    470,926
    
    
    
    167,655Other current assets
    
    
    75,612
    
    
    
    330,343Advances to suppliers
    
    
    22,304
    
    
    
    14,258$
    1,131,515
    
    
    $
    927,697
 Interest receivable is interest earned from the Companys bank deposits.5.
    
    COST METHOD INVESTMENTIn December 2005, the Company purchased 9,800,000 Series B preferred shares in Moloon
International Inc. (Moloon) for $15,000,000, which represents a 25% interest in Moloon on
an if-converted basis. China Finance Online's investment in these
preferred shares is not in-substance common stock, and accordingly, the investment has been recorded as a
cost method investment.In April 2006, the Company sold part of its investment
in Moloon to a third party for a cash
consideration of $1,187,500, resulting in a gain of $116,071 which has been recorded as a
non operating income in the consolidated statements of operations. As a result of this
disposal, the Companys investment in Moloons preferred shares decreases to 9,100,000
shares.Moloon is a Chinese wireless technology and service provider. During the second half of
2006, China Mobile Communication Corporation announced policy changes which, among others,
required mobile value added service, or MVAS, providers to extend free trial periods for
customers prior to subscriptions and to send reminders to customers confirming new and
existing subscriptions. These policy changes had a substantial negative impact on Moloons
MVAS business. Consequently, following an independent valuation, the Company determined
that its investment in Moloon was impaired and recorded an impairment loss of $1,322,000 in
the accompanying consolidated statements of operations for 2006.
 F-20




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 6.
    
    PROPERTY AND EQUIPMENT, NETProperty and equipment, net consisted of:
 December 31,2005
    
    
    2006Technology infrastructure
    
    $
    626,188
    
    
    $
    1,277,972Computer equipment
    
    
    113,569
    
    
    
    255,246Furniture, fixtures and equipment
    
    
    88,580
    
    
    
    354,488Motor vehicle
    
    
    62,288
    
    
    
    64,374Leasehold improvements
    
    
    
    
    
    
    354,399890,625
    
    
    
    2,306,479Less: accumulated depreciation
    
    
    (378,446
    )
    
    
    (608,998
    )$
    512,179
    
    
    $
    1,697,481
 Depreciation expense for the years ended December 31, 2004, 2005, and 2006 were $133,208,
$129,833 and $230,552, respectively.7.
    
    ACQUIRED INTANGIBLE ASSETS, NETAcquired intangible assets, net arose from the acquisitions of Genius, CFO-Meining, and
CFO-Stockstar during 2006 and consisted of the following:
 December 31, 2006Completed technology
    
    $
    744,042Customer relationship
    
    
    600,612Agreement with operator
    
    
    10,629Value-added service license
    
    
    23,692Trademarks
    
    
    737,6382,116,613Less:
Accumulated amortization
    
    
    (71,389
    )$
    2,045,224
 Amortization expense for the years ended December 31,
2004, 2005, and 2006 was $71,389. Future amortization expenses of acquired intangible assets with
determinable lives are $285,559 for 2007, $285,559 for 2008, $284,673 for 2009, $280,795 for
2010, and $167,157 for 2011.
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 8.
    
    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIESAccrued expenses and other current liabilities consisted of:
 December 31,2005
    
    
    2006Accrued expenses
    
    $
    262,889
    
    
    $
    1,035,656Value added taxes payable
    
    
    51,612
    
    
    
    386,806Other taxes payable
    
    
    40,303
    
    
    
    56,811Accrued welfare benefits
    
    
    26,889
    
    
    
    18,891Accrued bonus
    
    
    
    
    
    
    598,388$
    381,693
    
    
    $
    2,096,552
 9.
    
    STOCK OPTIONSIn January 2004, the Company adopted the 2004 stock incentive plan (the Plan) which allows
the Company to offer a variety of incentive awards to employees, directors, officers and
other eligible persons in the Company. Options to purchase 5,688,488 ordinary shares are
authorized under the Plan. In September 2004 and December 2006, the Company increased the
total number of ordinary shares available for issuance under the Plan by an additional
5,000,000 shares, respectively, resulting in a total of 15,688,488 options to purchase
ordinary shares under the Plan. Options are generally granted at a price equal to the fair
market value of the Companys shares at the date of grant. Prior to the Companys initial
public offering the market value of the ordinary shares underlying the stock option was
determined by the Board of Directors. As of December 31, 2006, options to purchase
14,843,688 shares of ordinary shares were outstanding. All of the options granted under the Plan to our
directors and managers have vesting period of one to four years, while options granted under the Plan to
our other employees vest over a period of three to five years. The options we granted to consultants and advisers
vested immediately upon grant or from two to three years after grant. A specified portion of the shares subject
to each option vests at the end of the first year and the balance vests each month thereafter. The amortization of
options granted is based on the graded vesting schedule.Options to employeesIn February 2005, the Company granted 4,053,000 stock options to directors, officers and
employees at an exercise price that equaled the trading price of the stock upon the stock
option grant. In November 2005, the Company granted 400,000 stock options to the Companys
CEO and 200,000 stock options to the Companys Vice President. The company accounted for
these options under APB 25.In July 2006, the Company granted an additional 400,000 stock options to the companys CEO
and 300,000 stock options to the Chief Financial Officer. The exercise prices equaled the
trading price of the stock at the grant date of the option. These options are vested over 2
years. China Finance Online recorded compensation expense of $158,760 in 2006, estimated on
the basis of the Black-Scholes Option Pricing model with the following assumptions:
 Average risk free rate of return
    
    
    5.24
    %Weighted average expected option life
    
    5.75 yearsVolatility rate
    
    
    58.84
    %Dividend yield
    
    
    
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 9.
    
    STOCK OPTIONS  continuedOptions to non-employeesThe Company granted stock options to purchase up to 6,829,500 ordinary shares outside of the
stock option plan, which vested immediately and 90,000 options to purchase ordinary shares
under the Plan to consultants and strategic advisors, which vested over 2 years in 2004.
The Company also granted 350,000 options under the Plan to consultants and strategy advisors
in 2005. The Company recorded a compensation expense of approximately $112,689 and $16,615
for the years ended December 31, 2005 and 2006, respectively, estimated using the
Black-Scholes option pricing model as such method provided a more accurate estimate of the
fair value of services provided by the consultants and strategic
advisers. The fair value of the stock options is remeasured as of the end of each reporting period until the
services of these non-employees are complete under the service contracts.The following assumptions were used in the option pricing model:
 Years ended December 31,2004
    
    2005
    
    2006Options to non-employees:Weighted average risk-free rate of return
    
    
    2
    %
    
    
    3.48
    %
    
    
    4.70
    %Weighted average expected option life
    
    2 years
    
    2.14 years
    
    5.76 yearsVolatility
    
    
    73.78
    %
    
    
    56.96
    %
    
    
    73.33
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
 Summary of stock options to employees and non-employees
  Year ended December 31,2004
    
    2005
    
    2006Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    average
    
    Number
    
    average
    
    Number
    
    averageof options
    
    exercise price
    
    of options
    
    exercise price
    
    of options
    
    exercise priceOutstanding at beginning of year
    
    
    
    
    
    
    
    
    
    
    12,492,988
    
    
    $
    0.18
    
    
    
    15,250,488
    
    
    $
    0.52Granted
    
    
    12,517,988
    
    
    $
    0.18
    
    
    
    5,003,000
    
    
    $
    1.29
    
    
    
    700,000
    
    
    $
    1.07Exercised
    
    
    
    
    
    
    
    
    
    
    (1,731,500
    )
    
    $
    0.16
    
    
    
    (473,000
    )
    
    $
    0.17Cancelled
    
    
    (25,000
    )
    
    $
    0.17
    
    
    
    (514,000
    )
    
    $
    1.05
    
    
    
    (633,800
    )
    
    $
    0.69Outstanding at end of year
    
    
    12,492,988
    
    
    $
    0.18
    
    
    
    15,250,488
    
    
    $
    0.52
    
    
    
    14,843,688
    
    
    $
    0.56Shares exercisable at end of year
    
    
    8,482,988
    
    
    $
    0.16
    
    
    
    9,986,488
    
    
    $
    0.29
    
    
    
    11,705,508
    
    
    $
    0.43
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 9.
    
    STOCK OPTIONS  continuedThe following table summarizes information with respect to stock options outstanding at
December 31, 2006:
 Options outstanding
    
    Options exercisableWeightedaverage
    
    Weighted
    
    
    
    
    
    Weightedremaining
    
    average
    
    
    
    
    
    averageNumber
    
    contractual
    
    exercise
    
    Number
    
    exerciseoutstanding
    
    life
    
    price
    
    exercisable
    
    priceOrdinary shares
$0.16
    
    
    9,512,488
    
    
    2.18 years
    
    $
    0.16
    
    
    
    8,852,788
    
    
    $
    0.16$1.04
    
    
    320,000
    
    
    2.18 years
    
    $
    1.04
    
    
    
    320,000
    
    
    $
    1.04$1.31
    
    
    3,661,200
    
    
    8.14 years
    
    $
    1.31
    
    
    
    2,210,720
    
    
    $
    1.31$1.32
    
    
    50,000
    
    
    8.14 years
    
    $
    1.32
    
    
    
    22,000
    
    
    $
    1.32$1.12
    
    
    400,000
    
    
    8.88 years
    
    $
    1.12
    
    
    
    200,000
    
    
    $
    1.12$1.16
    
    
    200,000
    
    
    8.92 years
    
    $
    1.16
    
    
    
    100,000
    
    
    $
    1.16$1.07
    
    
    700,000
    
    
    9.52 years
    
    $
    1.07
    
    
    
    
    
    
    
    14,843,688
    
    
    4.92 years
    
    
    
    
    
    
    11,705,508
    
    
    $
    0.43
 As of December 31, 2006, options to purchase 5,469,800 ordinary shares were available for
future grant.The effect on net income and earnings per share would have been as follows if the fair value
method of recognizing stock compensation was adopted in 2004 and 2005:
 Years ended December 31,2004
    
    
    2005Income attributable to ordinary
shareholders as reported:
    
    $
    4,597,341
    
    
    
    4,624,187Add: Stock-based compensation as reported
    
    
    33,192
    
    
    
    13,589Less: Stock-based compensation determined
using the fair value method
    
    
    (256,947
    )
    
    
    (1,935,649
    )Pro forma income attributable to
ordinary shareholders
    
    $
    4,373,586
    
    
    
    2,702,127Basic net income per share:As reported
    
    $
    0.12
    
    
    $
    0.05Pro forma
    
    $
    0.11
    
    
    $
    0.04Diluted net income per share:As reported
    
    $
    0.05
    
    
    $
    0.04Pro forma
    
    $
    0.05
    
    
    $
    0.03
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 9.
    
    STOCK OPTIONS  continuedThe fair value of each option and share granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for grants during the
applicable period.
 Years endedDecember 31,2004
    
    2005Option grantsWeighted average risk-free rate of return
    
    
    1.87
    %
    
    
    3.37
    %Weighted average expected option life
    
    2.41 years
    
    2.94 yearsVolatility
    
    
    73.78
    %
    
    
    65.08
    %Dividend yield
    
    
    
    
    
    
    
 The Company recognizes the compensation costs net of a forfeiture rate. The estimate of
forfeitures will be adjusted over the requisite service period to the extent that actual
forfeitures differ or are expected to differ, from such estimates. Changes in estimated
forfeitures will be recognized through a cumulative catch-up adjustment in the period of
change and will also impact the amount of stock compensation expense to be recognized in the
future periods. There has been no change in estimated forfeitures in the year ended
December 31, 2006.In January 2007, the Company granted additional options under the Plan with the right
to purchase a total of 3,272,000 ordinary shares to employees.10.
    
    INCOME TAXESThe Company has not recorded a tax provision for Hong Kong tax purposes as the Company does
not have any assessable profit in Hong Kong.CFO Beijing, is subject to PRC income tax at a rate of 27% (24% PRC state income tax plus 3%
PRC local income tax). In accordance with the approval by the tax authority in March 2004,
CFO Beijing was exempted from PRC state income taxes for the years
2003 and 2004 and is
entitled to a 50% tax relief commencing from 2005 through 2007; and is entitled to an
exemption from PRC local income taxes from 2003 to 2007 and a 50% tax relief commencing from
2008 through 2012. Income taxes paid by CFO Beijing in 2003 before the notice of tax
exemption were received were recorded as income taxes recoverable on the consolidated
balance sheets. The amounts of the tax refunds were received during 2004 and 2005.CFO Software is subject to PRC income taxes at a rate of 15%. In accordance with the local
tax law, CFO Software is exempted for three years from PRC state income taxes through 2007
and is entitled to a 50% tax relief commencing from 2008 and through 2010.CFO Genius is registered in Shenzhen Special Economic Zone and enjoys a preferential tax
rate 15%. CFO Meining and CFO Stockstar are registered and operate in the High and New
Technology Industry Development Zone in Guangzhou, China, and are classified as high and
new technology enterprises. The effective income tax rate, subject to the approval of the
relevant tax authorities, for high and new technology enterprises registered in High and
New Technology Industry Development Zones is 15%.Fuhua is subject to PRC income taxes at a rate of 33%. For the years ended December 31,
2004, 2005 and 2006, provision for income taxes for Fuhua were $2,048, nil and $416,
respectively.
 F-25




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 10.
    
    INCOME TAXES  continuedThe principal components of deferred income taxes were as follows:
 December 31,2005
    
    
    2006Current deferred tax assets:Deferred revenue
    
    $
    64,036
    
    
    $
    135,658Accrued expenses and other liability
    
    
    
    
    
    
    34,820Current deferred taxes
    
    $
    64,036
    
    
    $
    170,478Non-current deferred tax assets (liabilities):Net operating loss carry forwards
    
    $
    47,781
    
    
    $
    802,010Intangible assets
    
    
    
    
    
    
    (204,043
    )47,781
    
    
    
    597,967Less: valuation allowance
    
    
    (47,781
    )
    
    
    (743,500
    )Non-current deferred tax liabilities, net
    
    $
    
    
    
    $
    (145,533
    )
 A valuation allowance of $47,781 and $743,500 were established as of December 31, 2005 and
2006, respectively, for the entities that have incurred losses. As such, it is considered
more likely than not that the related deferred tax assets will not be realized. The
valuation allowance at December 31, 2006 increased from 2005 as some subsidiaries tax loss
carryforwards will expire. At December 31, 2006, tax loss
carryforwards amounting to
approximately $4.2 million which will expire by 2011, and $1 million which will carry forward
indefinitely.During the years ended December 31, 2004, 2005 and 2006, if the China Finance Onlines
subsidiaries in the PRC were neither in the tax holiday period nor had they been
specifically allowed special tax concessions, they would have recorded additional income tax
expense of $1,230,873, $1,448,866 and $786,385 respectively, and basic and diluted income
per share would have been decreased to $0.09, $0.03 and ($0.01) and $0.04,$0.03 and ($0.01)
for the years ended December 31, 2004, 2005 and 2006, respectively.A reconciliation between the statutory PRC enterprise income
tax rate of 33% and the effective tax rate is as follows:
 Years ended December 31,2004
    
    2005
    
    2006%
    
    %
    
    %Statutory tax rate in PRC
    
    
    33.0
    
    
    
    33.0
    
    
    
    (33.0
    )Effect of tax holiday
    
    
    (32.0
    )
    
    
    (18.0
    )
    
    
    (92.1
    )Non-deductible expenses
    
    
    4.1
    
    
    
    3.6
    
    
    
    139.9Non-taxable income
    
    
    (14.1
    )
    
    
    (10.3
    )
    
    
    (54.8
    )Change in valuation allowance
    
    
    (0.1
    )
    
    
    0.7
    
    
    
    33.7Effective tax rate
    
    
    (9.1
    )
    
    
    9.0
    
    
    
    (6.3
    )
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 11.
    
    SHAREHOLDERS EQUITYIn April 2004, the Company issued 730,000 ordinary shares at $0.00013 per share to the
Companys chief financial officer. The fair value of these
shares was $0.67 per share at
the time of the issuance. The Company recorded deferred stock compensation of approximately
$489,006 and compensation expense of $183,378, $244,503 and $61,125 in 2004, 2005 and 2006,
respectively.In October 2004, upon the Companys initial public offering, the Company offered 5,000,000
American Depositary Shares (ADS), representing 25,000,000 ordinary shares, at $13 per ADS
to the public investors. At about the same time, all of the outstanding Series A
convertible preference shares and the Series B convertible preference shares were converted
into an aggregate of 51,476,333 ordinary shares.In October 2005, the Company issued 2,000,000 ordinary shares to its American Depositary
Receipt bank and in exchange received 400,000 ADSs for purposes of future exercise of share
options by employees. As of December 31, 2006, all 400,000 ADSs had been issued to
employees who exercised their options. In January 2006, the Company issued 3,000,000
ordinary shares to its American Depositary Receipt bank and in exchange received 600,000
ADSs for purposes of future exercise of share options by employees. As of December 31,
2006, 29,900 ADSs had been issued to employees and the remaining 570,100 ADSs continued to
be held by the Company for future exercises. These 570,100 ADSs represent 2,850,500
ordinary shares of the Company, which are considered as issued and outstanding as of
December 31, 2006.Treasury sharesIn 2005, the Company repurchased 10,708,030 ordinary shares at prices ranging from $1.13 to
$1.41 per share, including brokerage commission, for a total
consideration of $13,200,394.
These shares are being held by the Company as treasury shares.12.
    
    OTHER EXPENSES (INCOME), NETOther expenses (income), net consisted of:
 2004
    
    
    2005
    
    
    2006Exchange gain, net
    
    $
    
    
    
    $
    365,965
    
    
    $
    267,302Gain on partial disposal of an
investment in Moloon (see Note 5)
    
    
    
    
    
    
    
    
    
    
    116,071Others
    
    
    (1,579
    )
    
    
    
    
    
    
    (1,498
    )$
    (1,579
    )
    
    $
    365,965
    
    
    $
    381,875
 Exchange gain is primarily derived from intercompany transactions and cash and cash
equivalents in foreign currency.
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 13.
    
    INCOME (LOSS) PER SHAREThe following table sets forth the computation of basic and diluted income (loss) per share
for the years indicated:
 Years ended December 31,2004
    
    
    2005
    
    
    2006Net income (loss) attributable to ordinary
shareholders, basic and diluted
    
    $
    4,597,341
    
    
    $
    4,624,187
    
    
    $
    (600,633
    )Weighted average ordinary shares
outstanding used in computing
basic net income per share
    
    
    38,912,491
    
    
    
    94,341,061
    
    
    
    93,650,653Plus: Weighted average preferred shares
    
    
    40,505,966
    
    
    
    
    
    
    
    Incremental shares from assumed
conversions of stock options
    
    
    10,674,211
    
    
    
    10,440,431
    
    
    
    8,311,074Weighted average ordinary shares
outstanding used in computing
diluted net income per share
    
    
    90,092,668
    
    
    
    104,781,492
    
    
    
    101,961,727Net income (loss) per share-basic
    
    $
    0.12
    
    
    $
    0.05
    
    
    $
    (0.01
    )Net income (loss) per share-diluted
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    (0.01
    )
 Ordinary share equivalents are calculated using the treasury stock method.14.
    
    MAINLAND CHINA CONTRIBUTION PLAN AND PROFIT APPROPRIATIONFull time employees of the Company in the PRC participate in a government-mandated
multi-employer defined contribution plan pursuant to which certain pension benefits, medical
care, unemployment insurance, employee housing fund and other welfare benefits are provided
to employees. Chinese labor regulations require the Company to accrue for these benefits
based on certain percentages of the employees salaries. The total provisions for such
employee benefits were $53,660, $107,552 and $270,576 for the years ended December 31, 2004,
2005 and 2006 respectively.
 F-28




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 15.
    
    COMMITMENTSThe Company leases certain office premises and purchases data
under non-cancelable leases. The office lease expires in 2011.
Rent expense under operating leases for 2004, 2005 and 2006 were $191,789, $242,765 and
$520,590, respectively.Future minimum lease payments under non-cancelable operating leases agreements were as
follows:
 Year ending2007
    
    $
    780,6372008
    
    
    670,9192009
    
    
    667,4822010
    
    
    361,2202011
    
    
    53,753Total
    
    $
    2,534,011
 16.
    
    SEGMENT AND GEOGRAPHIC INFORMATIONThe Company has one operating segment as of and for the years ended December 31, 2004, 2005
and 2006. The Companys chief operating decision maker has been identified as the Companys
Chief Executive Officer, who reviews consolidated results when making decisions about
allocating resources and assessing performance of the Company. The Company operates
primarily in the PRC and all of the Companys long-lived assets are located in the PRC.The Company derives revenue from external customers for each of the following services
during the years presented:
 Years ended December 31,2004
    
    
    2005
    
    
    2006Subscription fees
    
    $
    5,476,400
    
    
    $
    5,811,395
    
    
    $
    5,075,830Advertising revenue
    
    
    115,500
    
    
    
    996,311
    
    
    
    1,337,630Others
    
    
    424,549
    
    
    
    674,460
    
    
    
    714,618$
    6,016,449
    
    
    $
    7,482,166
    
    
    $
    7,128,078
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In U.S. dollars)
 17.
    
    RESTRICTED NET ASSETSPRC legal restrictions permit payments of dividends by China Finance Onlines PRC
subsidiaries only out of their retained earnings, if any, determined in accordance with PRC
accounting standards and regulations. The general reserve (Note 14), which requires annual
appropriations of 10% of after-tax profit should be set aside prior to the payment of
dividends. As a result of these PRC laws and regulations, the Companys PRC subsidiary and
variable interest entity are restricted in their abilities to transfer a portion of their
net assets to the Company. As of December 31, 2006, the amount of restricted net assets was
approximately $45,958,914.Pursuant to the laws applicable to the PRCs Foreign Investment Enterprises, the Companys
subsidiary in the PRC must make appropriations from after-tax profit to non-distributable
reserves as determined by the Board of Directors of the Company. These reserves include a
(i) general reserve, (ii) enterprise expansion reserve, and (iii) staff bonus and welfare
reserve. Subject to certain cumulative limits, the general reserve requires annual
appropriations of 10% of after-tax profit (as determined under PRC GAAP at each year-end);
amounts to be appropriated for the other two reserves are determined at the Board of
Directors discretion. These reserves can only be used for specific purposes and are not
distributable as cash dividends. Appropriations to the staff welfare and bonus reserve are
charged to general and administrative expenses and amounted to $24,165 and $26,889 in 2004
and 2005, respectively. Appropriation to the general reserve amounted to $674,205 and
$268,891 in 2004 and 2005, respectively. There were no appropriations to the staff welfare
and bonus reserve or the general reserve during 2006.
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 
 Schedule 1
 CHINA FINANCE ONLINE CO. LIMITED
Condensed Financial information of Parent Company
Balance sheets
 December 31,(in U.S. dollars)
    
    2005
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,782,027
    
    
    $
    5,758,063Prepaid expenses and other current assets
    
    
    37,026
    
    
    
    93,618Amounts due from subsidiaries
    
    
    
    
    
    
    64,172Dividends receivable
    
    
    
    
    
    
    2,473,269Total current assets
    
    
    2,819,053
    
    
    
    8,389,122Investments in subsidiaries
    
    
    29,111,000
    
    
    
    37,615,158Cost-method investment
    
    
    15,000,000
    
    
    
    12,606,571Loans receivable from subsidiaries
    
    
    13,990,000
    
    
    
    4,000,000Goodwill
    
    
    50,534
    
    
    
    50,534Total assets
    
    $
    60,970,587
    
    
    
    62,661,385Liabilities and shareholders equityCurrent liabilities:Accrued expenses and other current liabilities
    
    $
    121,040
    
    
    
    148,072Amounts due to a subsidiary
    
    
    18,587
    
    
    
    60,534Total current liabilities
    
    $
    139,627
    
    
    
    208,606Shareholders equityOrdinary shares ($0.00013 par value; 500,000,000 shares
authorized; shares issued and outstanding 101,329,933
in 2005 and 104,384,933 in 2006)
    
    
    13,077
    
    
    
    13,474Additional paid-in capital
    
    
    64,564,534
    
    
    
    65,756,313Treasury
shares (10,708,030 shares in 2005 and 2006)
    
    
    (13,200,394
    )
    
    
    (13,200,394
    )Deferred stock-based compensation
    
    
    (67,129
    )
    
    
    Accumulated other comprehensive income
    
    
    671,122
    
    
    
    1,634,269Retained earnings
    
    
    8,849,750
    
    
    
    8,249,117Total shareholders equity
    
    
    60,830,960
    
    
    
    62,452,779Total liabilities and shareholders equity
    
    $
    60,970,587
    
    
    
    62,661,385
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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED
 CHINA FINANCE ONLINE CO. LIMITED
Condensed Financial information of Parent Company
Statements of operations
 December 31,(in U.S. dollars)
    
    2004
    
    
    2005
    
    
    2006Operating expenses:General and administrative
    
    $
    60,094
    
    
    $
    692,453
    
    
    $
    873,496Stock-based compensation
    
    
    289,334
    
    
    
    370,781
    
    
    
    1,183,662Total operating expenses
    
    
    349,428
    
    
    
    1,063,234
    
    
    
    2,057,158Interest income
    
    
    184,836
    
    
    
    560,772
    
    
    
    202,484Equity in earnings of subsidiaries
    
    
    4,761,933
    
    
    
    5,126,649
    
    
    
    2,395,622Other income
    
    
    
    
    
    
    
    
    
    
    180,419Loss from impairment of cost method
investment
    
    
    
    
    
    
    
    
    
    
    (1,322,000
    )Net income (loss)
    
    $
    4,597,341
    
    
    $
    4,624,187
    
    
    $
    (600,633
    )
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CHINA FINANCE ONLINE CO. LIMITED
Condensed Financial information of Parent Company
Statements of cash flows
 December 31,(in U.S. dollars)
    
    2004
    
    
    2005
    
    
    2006Operating activities:Net income (loss)
    
    
    4,597,341
    
    
    
    4,624,187
    
    
    
    (600,633
    )Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:Stock-based compensation
    
    
    289,334
    
    
    
    370,781
    
    
    
    1,183,662Loss from impairment of cost method investment
    
    
    
    
    
    
    
    
    
    
    1,322,000Gain from disposal of cost method investment
    
    
    
    
    
    
    
    
    
    
    (116,071
    )Equity in earnings of subsidiaries
    
    
    (4,761,933
    )
    
    
    (5,126,649
    )
    
    
    (2,467,062
    )Changes in assets and liabilities:Dividend receivable
    
    
    
    
    
    
    
    
    
    
    (2,473,269
    )Prepaid expenses and other current assets
    
    
    (76,040
    )
    
    
    42,226
    
    
    
    (56,221
    )Amounts due from subsidiaries
    
    
    271,953
    
    
    
    
    
    
    
    (64,543
    )Accrued expenses and other current liabilities
    
    
    128,160
    
    
    
    (27,234
    )
    
    
    27,032Amounts due to subsidiaries
    
    
    496,428
    
    
    
    (477,841
    )
    
    
    41,947Net cash provided by (used in) operating activities
    
    
    945,243
    
    
    
    (594,530
    )
    
    
    (3,203,158
    )Investing activities:Net increase in loans to subsidiaries
    
    
    
    
    
    
    (13,990,000
    )
    
    
    9,990,000Proceeds from long term investment
    
    
    
    
    
    
    
    
    
    
    1,187,500Acquisition of businesses
    
    
    
    
    
    
    
    
    
    
    (6,095,151
    )Investments in subsidiaries
    
    
    (500,000
    )
    
    
    (20,500,000
    )
    
    
    Cost investment
    
    
    
    
    
    
    (15,000,000
    )
    
    
    Net cash (used in) provided by investing activities
    
    
    (500,000
    )
    
    
    (49,490,000
    )
    
    
    5,082,349Financing activities:Proceeds from stock options exercised by employees
    
    
    94
    
    
    
    276,976
    
    
    
    66,843Proceeds from exercise of options granted to non-employee
    
    
    
    
    
    
    
    
    
    
    8,800Repurchase of ordinary shares as treasury shares
    
    
    
    
    
    
    (13,200,394
    )
    
    
    Dividend from a subsidiary
    
    
    
    
    
    
    5,373,182
    
    
    
    Proceeds from initial public offering,
net of offering cost of $6,469,282
    
    
    58,530,718
    
    
    
    Dividend paid
    
    
    (502,552
    )
    
    
    
    
    
    
    Distribution to the shareholders of Fuhua
    
    
    (60,299
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    57,967,961
    
    
    
    (7,550,236
    )
    
    
    75,643Effect of exchange rate changes
    
    
    (197
    )
    
    
    671,133
    
    
    
    1,021,202Net increase (decrease) in cash and cash equivalents
    
    
    58,413,007
    
    
    
    (56,963,633
    )
    
    
    2,976,036Cash and cash equivalents, beginning of the year
    
    
    1,332,653
    
    
    
    59,745,660
    
    
    
    2,782,027Cash and cash equivalents, end of the year
    
    $
    59,745,660
    
    
    $
    2,782,027
    
    
    $
    5,758,063Supplemental disclosures of non-cash financing activities:Conversion of Series A and Series B convertible
preference shares into ordinary shares
    
    $
    6,642
    
    
    $
    
    
    
    $
    
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Basis for preparation
  F-34