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CHINA FINANCE ONLINE CO. LIMITED 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, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period
from ___________ to ___________. Commission file number: 000-50975 CHINA FINANCE ONLINE CO. LIMITED  N/A
(Translation of Registrants name into English) Hong Kong
(Jurisdiction of incorporation or organization) Room 610B, 6/F, Pingan Mansion
No. 23 Financial StreetBeijing 100032, Peoples Republic of China
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class
    
    Name of each exchange on which registeredNone
 Securities registered or to be registered pursuant to Section 12(g) of the Act. American Depositary Shares, each representing 5 ordinary shares,par value HK$0.001 per share
(Title of Class) Ordinary shares, par value HK$0.001 per share *
(Title of Class)  *

Not for trading, but only in connection with the listing on the
Nasdaq National Market of American depositary shares, each
representing 5 ordinary shares, pursuant to the requirements of the
Securities and Exchange Commission. 1




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CHINA FINANCE ONLINE CO. LIMITED   Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
(Title of Class) Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: 99,329,933 ordinary shares, par
value HK$0.001 per share. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes                    o No Indicate by check mark which financial statement item the registrant has elected to follow: o Item 17                    þ Item 18    2




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CHINA FINANCE ONLINE CO. LIMITED TABLE OF CONTENTS  
 PageINTRODUCTION
    
    
    4PART IItem 1.
    
    Identity of Directors, Senior Management and Advisers
    
    
    5Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    5Item 3.
    
    Key Information
    
    
    5Item 4.
    
    Information on the Company
    
    
    25Item 5.
    
    Operating and Financial Review and Prospects
    
    
    43Item 6.
    
    Directors, Senior Management and Employees
    
    
    57Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    64Item 8.
    
    Financial Information
    
    
    68Item 9.
    
    The Offer and Listing
    
    
    69Item 10.
    
    Additional Information
    
    
    70Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    76Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    76PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    76Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    76Item 15.
    
    Controls and Procedures
    
    
    77Item 16A.
    
    Audit Committee Financial Expert
    
    
    77Item 16B.
    
    Code of Ethics
    
    
    77Item 16C.
    
    Principal Accountant Fees and Services
    
    
    77Item 16D.
    
    Exemption from the Listing Standard for Audit Committees
    
    
    78Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    78PART IIIItem 17.
    
    Financial Statement
    
    
    78Item 18.
    
    Financial Statements
    
    
    78Item 19.
    
    Exhibits
    
    
    78EX-4.11 DOMAIN NAME LICENSING AGREEMENTEX-4.18 SECURITIES INFO DATABASE CONTRACTEX-4.20 LEASE AGREEMENTEX-12.1 CEO CERTIFICATIONEX-12.2 CFO CERTIFICATIONEX-13.1 CEO CERTIFICATION PURSUANT TO SECTION 906EX-13.2 CFO CERTIFICATION PURSUANT TO SECTION 906
 3




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CHINA FINANCE ONLINE CO. LIMITED  
 INTRODUCTION Except where the context otherwise requires and for purposes of this annual report only:  

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, and Fortune Software (Beijing) Co., Ltd., or Fortune Software, which was
incorporated under PRC law in December 2004, and, in the context of describing our
operations, also include our PRC-incorporated affiliate, Fuhua Innovation Technology
Development Co., Ltd., or Fuhua;

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. This annual report on Form 20-F includes our audited consolidated financial statements for the
years ended December 31, 2002, 2003 and 2004, and as of December 31, 2003 and 2004. We and certain selling shareholders of our company completed the initial public offering of
6,200,000 American Depositary Shares, each representing five of our ordinary shares, par value
HK$0.001 per share on October 20, 2004. On October 15, 2004, we listed our ADSs on the Nasdaq
National Market, or Nasdaq, under the symbol JRJC. FORWARD-LOOKING INFORMATION This annual report on Form 20-F contains forward-looking statements that are based on our current
expectations, assumptions, estimates and projections about us and our industry. All statements
other than statements of historical fact in this annual report are forward-looking statements.
These forward-looking statements can be identified by words or phrases such as may, will,
expect, anticipate, estimate, plan, believe, is /are likely to or other and
similar expressions. The forward-looking statements included in this annual report relate to, among
others:  

our goals and strategies, including how we use the proceeds of our initial public
offering on October 20, 2004 to effect our goals and strategies;

our future business developments, business prospects, financial condition and results of operations;

our future pricing strategies or policies;

our plans to expand our service offerings;

our plans to diversify our sources of revenues, including by expanding our online advertising business;

competition in the PRC financial data and information services industry;

performance of Chinas securities markets; 4




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CHINA FINANCE ONLINE CO. LIMITED  

the expected growth in the number of Internet users in China, growth of personal
computer penetration and developments in the ways most people in China access the Internet;

the future development of Internet consumers in China;

PRC governmental policies relating to the Internet and Internet content providers; and

PRC governmental policies relating to the distribution of content, especially the
distribution of financial content over the Internet, or to the provision of advertising
services over the Internet, including PRC governmental pronouncements concerning a proposal
by the PRC government to extend the provision of advertising services to foreign invested
enterprises. These forward-looking statements involve various risks, assumptions and uncertainties. Although we
believe that our expectations expressed in these forward-looking statements are reasonable, we
cannot assure you that our expectations will turn out to be correct. Our actual results could be
materially different from and worse than our expectations. Important risks and factors that could
cause our actual results to be materially different from our expectations are generally set forth
in Item 3.D of this annual report, Key information  Risk Factors and elsewhere in this annual
report. This annual report on Form 20-F also contains data related to the online financial data and
information services market and the Internet. This market data includes projections that are based
on a number of assumptions. The online financial data and information services market may not grow
at the rates projected by market data, or at all. The failure of these markets to grow at the
projected rates may have a material adverse effect on our business and the market price of our
ADSs. In addition, the relatively new and rapidly changing nature of the online financial data and
information services industry subjects any projections or estimates relating to the growth
prospects or future condition of our markets to significant uncertainties. Furthermore, if any one
or more of the assumptions underlying the market data turns out to be incorrect, actual results may
differ from the projections based on these assumptions. The forward-looking statements made in this annual report relate only to events or information as
of the date on which the statements are made in this annual report. You should not place undue
reliance on these forward-looking statements and you should read these statements in conjunction
with the risk factors disclosed in Item 3.D of this annual report, Key Information  Risk
Factors. We undertake no obligation to update any forward-looking statements to reflect events or
circumstances after the date on which the statements are made or to reflect the occurrence of
unanticipated events. 
 PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not Applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not Applicable. 
 ITEM 3. KEY INFORMATION A.Selected financial data. The following table presents the selected consolidated financial information for our business. You
should read the following information in conjunction with Item 5, Operating and Financial Review
and Prospects. The summary statement of operations data of the Company for the years ended
December 31, 2002, 2003 and 2004 and the summary balance sheet data of the Company as of December
31, 2003 and 2004 set forth below are derived from, and are qualified in their entirety by
reference to, the audited consolidated financial statements of the Company, including the notes
thereto, which are included in this annual report beginning on page F-1 below. The summary
statement of operations data for the years ended December 31, 2001 and the summary balance sheet
data as of December 31, 2001 and 2002 set forth below are derived from audited consolidated
financial statements of the 5




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CHINA FINANCE ONLINE CO. LIMITED Company not included herein. Our summary consolidated financial information for the year ended
December 31, 2000 has been derived from our unaudited consolidated financial statements. The
unaudited consolidated financial statements have been prepared on substantially the same basis as
our audited consolidated financial statements. Our consolidated financial statements are prepared
and presented in accordance with accounting principles generally accepted in the United States, or
U.S. GAAP. For the year ended December 31,(in thousands of U.S. dollars, except per share or per ADS data)(1)
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(unaudited)Consolidated statement of operations
and comprehensive income (loss) data:Gross revenues(2)
    
    $
    5
    
    
    $
    102
    
    
    $
    1,098
    
    
    $
    2,354
    
    
    $
    6,064Business tax
    
    
    (1
    )
    
    
    (5
    )
    
    
    (48
    )
    
    
    (83
    )
    
    
    (48
    )Net revenues
    
    
    4
    
    
    
    97
    
    
    
    1,050
    
    
    
    2,271
    
    
    
    6,016Cost of revenues
    
    
    (249
    )
    
    
    (265
    )
    
    
    (254
    )
    
    
    (298
    )
    
    
    (393
    )Gross (loss) profit
    
    
    (245
    )
    
    
    (168
    )
    
    
    796
    
    
    
    1,973
    
    
    
    5,623Operating expenses:General and administrative
    
    
    (227
    )
    
    
    (258
    )
    
    
    (253
    )
    
    
    (304
    )
    
    
    (441
    )Product development
    
    
    (116
    )
    
    
    (185
    )
    
    
    (157
    )
    
    
    (149
    )
    
    
    (172
    )Sales and marketing
    
    
    (132
    )
    
    
    (128
    )
    
    
    (275
    )
    
    
    (284
    )
    
    
    (800
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (96
    )
    
    
    (289
    )Total operating expenses
    
    
    (475
    )
    
    
    (571
    )
    
    
    (685
    )
    
    
    (833
    )
    
    
    (1,702
    )Income (loss) from operations
    
    
    (720
    )
    
    
    (738
    )
    
    
    111
    
    
    
    1,140
    
    
    
    3,921Interest income
    
    
    120
    
    
    
    100
    
    
    
    95
    
    
    
    51
    
    
    
    294Interest expenses
    
    
    (17
    )
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    Other income (expense)
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (1
    )
    
    
    (2
    )Income (loss) before income taxes
    
    
    (617
    )
    
    
    (644
    )
    
    
    203
    
    
    
    1,190
    
    
    
    4,213Income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    384Net income (loss)
    
    $
    (617
    )
    
    $
    (644
    )
    
    $
    203
    
    
    $
    1,190
    
    
    $
    4,597Dividends on preference shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (351
    )
    
    
    Income (loss) attributable to ordinary
shareholders
    
    $
    (617
    )
    
    $
    (644
    )
    
    $
    203
    
    
    $
    838
    
    
    $
    4,597Income (loss) per share-basic
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.12Income (loss) per share-diluted
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.05Income per ADS equivalent-basic(3)
    
    
    
    
    
    $
    (0.18
    )
    
    $
    0.06
    
    
    $
    0.21
    
    
    $
    0.59Income per ADS equivalent-diluted(3)
    
    
    
    
    
    $
    (0.18
    )
    
    $
    0.01
    
    
    $
    0.06
    
    
    $
    0.26Dividends declared per ordinary share or
preference shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.01
    
    
    
    
 For the year ended December 31,(in thousands of U.S. dollars)(1)
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(unaudited)Consolidated balance sheet data:Cash and cash equivalents
    
    $
    4,516
    
    
    $
    3,487
    
    
    $
    4,451
    
    
    $
    5,806
    
    
    $
    70,596Current working capital(4)
    
    
    3,979
    
    
    
    3,366
    
    
    
    3,565
    
    
    
    4,306
    
    
    
    67,590Total assets
    
    
    5,137
    
    
    
    3,994
    
    
    
    4,929
    
    
    
    6,606
    
    
    
    71,861Deferred revenue
    
    
    
    
    
    
    186
    
    
    
    934
    
    
    
    1,278
    
    
    
    3,487Total current liabilities
    
    
    749
    
    
    
    249
    
    
    
    982
    
    
    
    1,875
    
    
    
    3,773Total shareholders equity
    
    $
    4,388
    
    
    $
    3,745
    
    
    $
    3,947
    
    
    $
    4,731
    
    
    $
    68,088
   (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. For the years
ended December 31, 2000, 2001, 2002, 2003 and 2004, all translations from Renminbi to U.S.
dollars were calculated at RMB8.2784, RMB8.2770, RMB8.2770, RMB8.2770 and RMB8.2768 per
US$1.00, respectively.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, calculated by using the average of
the exchange rates on the last day of each month during the year. The exchange rates as at
December 31, 2000, 2001, 2002, 2003 and 2004 were RMB8.2774, RMB8.2766, RMB8.2800 and
RMB8.2769 and 6




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CHINA FINANCE ONLINE CO. LIMITED RMB8.2765 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.(3)
    
    Each ADS represents five ordinary shares.(4)
    
    Current working capital is the difference between total current assets and total current
liabilities. Exchange Rate Information We have published our financial statements in U.S. dollars. Our business is primarily conducted in
China and denominated in Renminbi. Periodic reports will be made to shareholders and will be
expressed in U.S. dollars using the then-current exchange rates. The conversion of Renminbi into
U.S. dollars in this annual report is based on the noon buying rate in The City of New York for
cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New
York. Unless otherwise noted, all translations from Renminbi to U.S. dollars in this annual report
were made at $1.00 to RMB8.2765, which was the prevailing rate on December 31, 2004. The prevailing
rate on March 31, 2005 was $1.00 to RMB8.2765. We make no representation that any Renminbi or U.S.
dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case
may be, at any particular rate, the rates stated below, or at all. The PRC government imposes
controls over its foreign currency reserves in part through direct regulation of the conversion of
Renminbi into foreign exchange and through restrictions on foreign trade. The following table sets forth various information concerning exchange rates between the Renminbi
and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience
and are not necessarily the exchange rates that we used in this annual report or will use in the
preparation of our periodic reports or any other information to be provided to you. The source of
these rates is the Federal Reserve Bank on New York. Average(1)
    
    
    High
    
    
    Low
    
    
    Period-end(RMB per U.S.$1.00)2000
    
    
    8.2784
    
    
    
    8.2799
    
    
    
    8.2768
    
    
    
    8.27742001
    
    
    8.2770
    
    
    
    8.2786
    
    
    
    8.2676
    
    
    
    8.27662002
    
    
    8.2770
    
    
    
    8.2800
    
    
    
    8.2669
    
    
    
    8.28002003
    
    
    8.2770
    
    
    
    8.2800
    
    
    
    8.2765
    
    
    
    8.27692004
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.2764
    
    
    
    8.2765October
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2765
    
    
    
    8.2765November
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2764
    
    
    
    8.2765December
    
    
    8.2765
    
    
    
    8.2767
    
    
    
    8.2765
    
    
    
    8.27652005January
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765February
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765March
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765April (through April 18)
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765
   (1)
    
    Annual averages are calculated from month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period. B.Capitalization and indebtedness. Not Applicable. C.Reasons for the offer and use of proceeds. Not Applicable. D.Risk factors. Risks relating to our business We have a limited operating history, which may make it difficult for you to evaluate our business. 7




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CHINA FINANCE ONLINE CO. LIMITED Our business was incorporated in November 1998, and our current operations were established in
April 2000. Our service offerings have only been commercially available since April 2001. Our
senior management and employees have worked together at our company for only a relatively short
period of time. For example, our Chief Executive Officer, Jun Ning, joined us in January 2000 and
our Chief Financial Officer and our Chief Operating Officer, Messrs. Sam Qian and Bo Wu, joined us
recently in April 2004 and June 2004, respectively. Accordingly, we have a limited operating
history upon which you can evaluate our business and prospects. 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. We are pursuing a number of growth strategies, which will require us to expand our data and
information content and service offerings through internal development efforts and through
partnerships, joint ventures and acquisitions. Some of these strategies relate to new service
offerings for which there are no established markets in China, or relate to service offerings in
which we lack experience and expertise. We cannot assure you that we will be able to deliver new
service offerings on a commercially viable basis or in a timely manner, or at all. In addition to our subscription-based service offerings, we also intend to increase our online
advertising revenue from our website by increasing the number of sponsors for some of our website
content and by developing other forms of Internet advertisement. Our current online advertising
business has been limited and, to date, we do not have significant experience with selling
Internet-based advertising. Moreover, we would need to hire additional employees and incur costs
relating to any efforts to increase our advertising revenues, which could adversely affect our
financial condition and operating results. We cannot assure you that we will be able to efficiently
or effectively implement and grow our online advertising business, or that online advertising on
our website will not detract from our users experience and thereby adversely affect our brand name
or our subscription-based service offerings. If we are unable to successfully implement our growth strategies, our revenue and profitability
will not grow as we expect, if at all, and our competitiveness may be materially and adversely
affected. Our business is substantially dependent on the level of trading activity in Chinas securities
markets. Volatility and the lack of hedging instruments in Chinas securities markets could dampen
investors interest in investing in Chinas securities markets and adversely affect our revenue and
profitability. Our business is substantially dependent on user demand for market intelligence on Chinas
securities markets. Such demand has fluctuated with the level of trading activity in Chinas
securities markets. During the past several years, Chinas securities markets have experienced
significant decline. The Shanghai Stock Exchange A-Share Index and the Shenzhen Stock Exchange
A-Share Index declined 44.3% and 55.8%, respectively, from January 2, 2001 to March 31, 2005.
During the same period, total daily trading volume of the Shanghai Stock Exchange and the Shenzhen
Stock Exchange decreased by 44.0% and 61.3%, respectively, reflecting a declining level of interest
among Chinas investors during that period. We issued an earnings warning in February 2005, in
which we reiterated the correlation of our business operations and financial conditions with the
performance of Chinas securities markets, and warned that, unless there is a fundamental
turn-around in Chinas securities market in the near future, we expect that our revenue and
profitability in the first quarter of 2005 and in the entire fiscal year 2005 will be adversely
affected. On April 25, 2005, the Shanghai Stock Exchange Index reached its lowest level since May
1999, and its average daily trading volume in January 2005 was only approximately 28% of the
average daily trading volume during the same period a year ago. If Chinas securities markets
continue to weaken, and if investors interest in Chinas securities markets continues to decline,
our business could be significantly and adversely affected. Chinas securities market is further limited by a lack of hedging instruments that would assist
investors in hedging against market volatility. For example, investors are not permitted to sell
short in Chinas securities markets. Because our business is dependent on investors interest in
Chinas securities markets, our business could be significantly and adversely affected if market
volatility and the lack of hedging instruments continue to affect Chinas securities markets and
dampen investors interest in Chinas securities markets. Potential increases in inflation in China could dampen investors interest in investing in Chinas
securities markets and adversely affect our revenue and profitability. In recent years, China has not experienced significant inflation, and thus inflation has not had a
significant effect 8




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CHINA FINANCE ONLINE CO. LIMITED on our business historically. According to the National Bureau of Statistics of China, the change
in the Consumer Price Index in China was 0.7%, (0.8)% , 1.2% and 3.9% in 2001, 2002, 2003 and 2004,
respectively. However, following a 2.8% average change in the Consumer Price Index in China in the
first quarter of 2004 and a 3.8% change in the month of April 2004, the Chinese government
announced measures to restrict lending and investment in China in order to reduce inflationary
pressures in Chinas economy. The Chinese government may introduce further measures intended to
reduce the inflation rate in China. Any such measures adopted by the Chinese government may not be
successful in reducing or slowing the increase in Chinas inflation rate. Sustained or increased
inflation in China may have an adverse impact on Chinas economy, which could lead to weak
performance of Chinas stock markets and, as a result, dampen investors interest in investing in
Chinas stock markets. Since our business is substantially dependent on investors demand for
market intelligence on Chinas securities markets, dampened investors interest in Chinas
securities markets may adversely affect our business and financial results. We rely principally on the acceptance of the Internet as a source of information and as a means to
perform investment research and analysis, and our success will depend on the continuation of this
trend. The Internet, as a source of information and as a means to perform investment research and
analysis, has only recently begun to be accepted by users and investors in China. Our future
revenues and profits are substantially dependent upon the growth in acceptance by users and
investors of our service offerings and the use of Internet-based information and investment
research tools. We cannot assure you that our service offerings or the Internet as a means to
perform investment research and analysis will continue to experience growth in user acceptance, if
at all. 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. We currently offer to our subscribers a small number of service packages with different features
and functionalities. If we introduce a new feature or a new research tool that is not favorably
received, our current subscribers may not continue to use our service as frequently as before. New
subscribers could also choose a competitive or different service offering over ours. We may also
experience difficulties that could delay or prevent us from introducing new research tools or
features. Furthermore, these research tools or features may contain errors that are discovered
after the services are introduced. We may need to significantly modify the design of these research
tools or features to correct these errors. Our business could be materially and adversely affected
if we experience difficulties or delays in introducing new features and 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 CFO Pro is not
accepted by institutional investors. We launched CFO Pro, a new service package we developed to target institutional customers such as
international financial service institutions and fund management companies, in January 2005. We
have invested significant resources into developing CFO Pro and expect to continue our efforts in
developing new editions of CFO Pro. If CFO Pro is not favorably received by institutional
customers, if other service offerings not offered by us are preferred by institutional customers
over CFO Pro, or if we experience difficulties that could delay or prevent us from introducing new
editions of CFO Pro, we may not be able to grow our business in the institutional market as we have
projected and our business could be materially and adversely affected. We face significant competition which could adversely affect our business, financial condition and
results of operations. The online financial data and information services market in China is relatively new, has few
substantial barriers to entry and is competitive and rapidly changing. More broadly, the number of
financial news and information sources competing for consumers attention and spending has
increased since we commenced operations and we expect that competition will continue to intensify.
We currently compete, directly and indirectly, for paying subscribers and viewers with companies in
the business of providing financial data and information services, including publishers and
distributors of traditional media, Internet portals providing information on business, finance and
investing, dedicated financial information websites, personal stock research software vendors and
stock brokerage companies, especially stock brokerage companies with online trading capabilities.
Some of the sponsors with which we currently maintain sponsorship arrangements could also become
our competitors in the future. 9




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CHINA FINANCE ONLINE CO. LIMITED Many of our existing competitors, as well as a number of potential new competitors, have longer
operating histories, greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we do. This may allow them to adopt our business
model and devote greater resources than we can to the development and promotion of service
offerings similar to or more advanced than our own. These competitors may also engage in more
extensive research and development, undertake more far-reaching marketing campaigns, adopt more
aggressive pricing policies and offer products and services that achieve greater market acceptance
than ours. They may also undercut us by making more attractive offers to our existing and potential
employees, content providers and sponsors. New and increased competition could result in price
reductions for our research tools, reduced margin or loss of market share, any of which could
materially and adversely affect our business, results of operations and financial condition. In addition, a number of companies in China, including us, offer stock quotes, economic and
company-specific news, historical stock performance statistics, online chatting regarding
individual securities and other features for free over the Internet. If users determine that the
information available for free over the Internet is sufficient for their investing needs, they
would be unlikely to pay for subscription to our services, thus reducing our revenues and net
income and forcing us to develop a new business model. Furthermore, the amount and quality of
information available for free over the Internet may expand in the future, reducing the
attractiveness of our services and forcing us to spend additional money to develop more
sophisticated services in order to compete. There can be no assurance that we would be successful
in developing a new business model or more advanced services in response to either of the above
challenges. Failure to do so would lead to significant declines in our number of subscribers,
revenues and net income. 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
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. We depend on the Shanghai and Shenzhen Stock Exchanges and may depend on any future securities
exchanges in China to provide us with real-time stock, bond and mutual fund quotes and other
trading related information. We have contractual arrangements with Chinas two current stock
exchanges pursuant to which we pay the stock exchanges service fees in exchange for receiving
real-time price quotes and other trading related information through satellite communication. Our
contract with the Shanghai Stock Exchange will expire in May 2008, and our contract with the
Shenzhen Stock Exchange will expire in March 2006. We also depend on other data and information
providers to supply us with historical data and information on listed companies, bonds and mutual
funds, in accordance with our specifications and requirements. The contractual arrangement we have
with our primary data provider, Shanghai Wind Information Co., Ltd., will expire in September 2005,
and our contract with Shenzhen Stock Information Co., Ltd. will expire on April 30, 2006. In
December 2004, we entered into a new raw data provision contract with Shenzhen Securities
Information Co., Ltd. as an alternative source of historical data and information. We cannot assure you that we will be able to enter into business arrangements with either of the
stock exchanges on commercially reasonable terms, or at all, after our current contracts expire. We
cannot assure you that the stock exchanges will not charge us service fees substantially higher
than the service fees we are currently paying. Our business, financial condition and results of
operations could be materially and adversely affected if either of the stock exchanges imposes on
us service fees substantially higher than the service fees we are currently paying. Even if we are
able to maintain our business arrangements with the stock exchanges on commercially reasonable
terms, either of these stock exchanges may fail to deliver us reliable price quotes or other
trading related information on a real-time basis. In either case, it would be difficult for us to
receive reliable real-time price quotes and other trading related information from a different
source, which could materially and adversely affect our business. Additionally, we cannot assure you that we will be able to enter into or maintain our business
arrangements with our current primary and backup data providers on commercially reasonable terms or
at all. In this case, it could take time for us to locate alternative providers of comprehensive
historical data and information on commercially reasonable terms, which could cause disruptions to
our operations and adversely affect our business. Even if we are able to find alternative data
providers, they may fail to deliver to us reliable and comprehensive data and information in
accordance with our specifications and requirements, which could materially and adversely affect
our business. 10




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CHINA FINANCE ONLINE CO. LIMITED We depend on establishing and maintaining sponsorship arrangements with high-traffic websites as
one of our primary means for attracting users. Our business could be adversely affected if we
cannot maintain these relationships or establish new relationships on commercially reasonable terms
or if these relationships do not result in increased use of our website. We depend on establishing and maintaining sponsorship arrangements with high-traffic Internet
portals, search engines, online stock brokerage websites, and news and financial information
websites for a significant portion of our website traffic. We have established more than 40 such
sponsorship arrangements, whereby we place our website link on our sponsors financial web pages
or, in some cases, provide our content directly on their web pages. There is intense competition
for website link placements on many of these sites, and we may not be able to enter into or
maintain such relationships on commercially reasonable terms or at all. If any of our sponsors
determines to enter into direct competition against us, we may lose its sponsorship. Even if we
enter into or are able to maintain sponsorship arrangements with these websites, these arrangements
may not attract significant numbers of users to our website. Our business could be adversely
affected if these relationships do not result in increased use of our website. Moreover, we may
have to pay significant fees to establish or maintain these relationships. Our business could be
adversely affected if we do not establish and maintain these relationships on commercially
reasonable terms. 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. We depend on the sale of our more comprehensive service packages such as Grand Reference for a
significant portion of our total revenues. For the year ended December 31, 2004, subscription fees
generated from sales of Grand Reference were $6.1 million, representing 79% of our total
subscription fees during the same period. For the year ended December 31, 2004, we had a total of
approximately 16,200 subscribers to Grand Reference, representing 50% of our total number of
subscribers during the same period. As our service packages become more comprehensive and higher
priced, we expect that our future revenues and revenue growth will increasingly depend on sales of
our more comprehensive service packages to a much greater extent than sales of our other service
packages. If we fail to attract a sufficient number of subscribers to our more comprehensive
service packages, our revenues and profits could decline. Moreover, our financial success depends
on our ability to retain our subscribers and migrate them to newer, more comprehensive and higher
priced service packages. We may not be able to continue to develop newer and more comprehensive
service packages that our subscribers will be willing to purchase. Moreover, from time to time we
may offer discounts and promotional rates. For example, we currently offer subscribers to Grand
Reference V, the most comprehensive service package we offer to non-institutional subscribers, a
one-time renewal fee of RMB480 (US$58) for a one-year non-upgraded subscription to Grand Reference
V. If we are unsuccessful at developing new service packages that are attractive to our users, or
if our users elect to renew existing service packages rather than purchase newer or more
comprehensive service offerings, our revenues and profits could decline. Our business would be adversely affected if we do not continue to expand and maintain an effective
customer support force. We market our service offerings through our website, as well as through our customer service
center, which as of March 31, 2005 has 42 full-time and trained customer support personnel. We
depend on our customer support force to explain our service offerings to our existing and potential
subscribers and resolve our subscribers technical problems. Many of our customer support personnel
have only worked for us for a short period of time, and some of them may not have received
sufficient training or gained sufficient experience to effectively serve our customers. In
addition, we will need to further increase the size of our customer support force as our business
continues to grow. We may not be able to hire, retain, integrate or motivate additional customer
support personnel without any short-term disruptions of our operations. As a result, our business
could be adversely affected if we do not continue to expand and maintain an effective customer
support force. We may face difficulties implementing our acquisition strategy, including identifying suitable
opportunities and integrating them with our existing operations, which could have a material
adverse effect on our business, financial condition and results of operations, or which could
dilute your interest in us. As part of our business strategy, we intend to use partnerships and acquisitions to facilitate the
introduction of new service offerings as well as to add capabilities that we do not currently have.
For example, we may consider 11




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CHINA FINANCE ONLINE CO. LIMITED acquiring or entering into partnerships with firms that specialize in non-exchange traded financial
products where expertise is not easily obtained. However, our ability to implement this strategy will depend on the availability of suitable
acquisition candidates at an acceptable cost, our ability to compete effectively to attract and
reach agreement with acquisition candidates or joint venture partners on commercially reasonable
terms, the availability of financing to complete larger acquisitions or joint ventures, as well as
our ability to obtain any required governmental approvals. In addition, the benefits of a
partnership, acquisition or joint venture transaction may take considerable time to develop, and we
cannot assure you that any particular partnership, acquisition or joint venture will produce the
intended benefits. For example, we may experience difficulties in integrating acquisitions with our
existing operations and personnel. The identification and completion of these transactions may
require us to expend significant management time and resources. Moreover, the partnership,
acquisition and joint venture strategies we pursue could also cause earnings or ownership dilution
to our shareholders interests, which could result in losses to investors. Our business could be materially and adversely affected if increased usage strains our server
systems or if we suffer from other system malfunctions. In the past, our website has experienced significant increases in traffic when there are
significant business developments or financial news and activities. In addition, the number of our
users has continued to increase over time and we are seeking to further increase our user base.
Therefore, our website must accommodate a high volume of traffic to meet peak user demand and
deliver frequently updated information. Our website has in the past experienced and may in the
future experience slower response time or login delays for a variety of reasons. It is essential to
our success that our website is able to accommodate our users in an efficient manner so that our
users experience with us is viewed favorably and without frequent delays. We also depend on other Internet content providers, such as other financial information websites,
to provide data and information to our website on a timely basis. Our website could experience
disruptions or interruptions in service due to the failure or delay in the transmission or receipt
of this information. In addition, our users depend on Internet service providers, online service
providers and other website operators for access to our website. Each of them has experienced
significant outages in the past, and could experience outages, delays and other difficulties due to
system failures unrelated to our systems. These types of occurrences could cause users to perceive
our website as not functioning properly and therefore cause them to use other methods to obtain the
financial data and information services they need. If we are not able to respond successfully to technological or industry developments, our business
may be materially and adversely affected. The online financial data and information services market is characterized by rapid advancements in
technology, evolving industry standards and changes in customer needs. New services or technologies
may render our existing services or technologies less competitive or obsolete. Responding and
adapting to technological developments and standard changes in our industry, the integration of new
technologies or industry standards or the upgrading of our networks may require substantial time,
effort and capital investment. In the event that we are unable to respond successfully to
technological industry developments, this may materially and adversely affect our business, results
of operations and competitiveness. 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. Due to the manner in which we obtain, collect, categorize and integrate content for our website,
and because our services, including our online bulletin boards and discussion forums, may be used
for the distribution of information and expression of opinions, claims may be filed against us for
defamation, subversion, negligence, copyright or trademark infringement or other violations due to
the nature and content of such information. For example, our bulletin boards and online forums
reflect the statements and views of persons we do not control and we cannot be assured that such
information is true and correct and is not misleading. These persons may also have conflicts of
interest in relation to their statements or views regarding securities or other financial matters.
Liability insurance for these types of claims is not currently available in the PRC. While we do
not take responsibility for statements or views presented on our website, we may incur significant
costs investigating and defending these types of claims even if they do not result in liability.
Any such claim may also damage our reputation if our users 12




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CHINA FINANCE ONLINE CO. LIMITED and subscribers do not view this content as reliable or accurate, which could adversely affect our
business. 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. We cannot be certain that our website content, online services and our research tools do not or
will not infringe upon patents, valid copyrights or other intellectual property rights held by
third parties. We may become subject to legal proceedings and claims from time to time relating to
the intellectual property of others in the ordinary course of our business. If we are found to have
violated the intellectual property rights of others, we may be enjoined from using such
intellectual property, and we may incur licensing fees or be forced to develop alternatives. In
addition, we may incur substantial expenses in defending against these third party infringement
claims, regardless of their merit. Successful infringement or licensing claims against us may
result in substantial monetary liabilities, which may materially and adversely affect our business. 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 regard our copyrights, trademarks, trade secret and other intellectual property as critical to
our success. Unauthorized use of the intellectual property used in our business may adversely
affect our business and reputation. We rely on trademark and copyright law, trade secret protection
and confidentiality agreements with our employees, customers, business partners and others to
protect our intellectual property rights. Despite our precautions, it may be possible for third
parties to obtain and use our intellectual property without authorization. The validity,
enforceability and scope of protection of intellectual property in Internet-related industries are
uncertain and still evolving. In particular, the laws and enforcement procedures in the PRC do not
protect intellectual property rights to the same extent as do the laws and enforcement procedures
in the United States. Moreover, litigation may be necessary in the future to enforce our
intellectual property rights. Future litigation could result in substantial costs and diversion of
our resources, and could disrupt our business, as well as have a material adverse effect on our
financial condition and results of operations. We depend on our key personnel and our business and growth prospects may be severely disrupted if
we lose their services. Our future success is dependent upon the continued service of our key executives and employees. We
rely on their expertise in our business operations. In particular, we rely heavily on Jun Ning, our
chairman and Chief Executive Officer, for his business vision, management skills, technological
expertise, experience in the Internet industry and working relationship with many of our key
business relationships. If one or more of our key executives, in particular, Jun Ning, were unable
or unwilling to continue in their present positions, or if they joined a competitor or formed a
competing company in violation of their employment agreements, we may not be able to replace them
easily. As a result, our business may be significantly disrupted and our financial condition and
results of operations may be materially and adversely affected. Furthermore, since our industry is characterized by high demand and intense competition for talent,
we may need to offer higher compensation and other benefits in order to attract and retain key
personnel in the future. Our employees are required to enter into one-year employment agreements
with us. We seek to enter into employment and non-competition agreements with our senior executives
for longer terms. We cannot assure you that we will be able to attract or retain the key personnel
that we will need to achieve our business objectives. We do not maintain key-man life insurance for
any of our key personnel. Undetected programming errors or defects in our research tools could materially and adversely
affect our business, financial condition and results of operations. Our research tools may contain programming errors or other defects that our internal testing did
not detect, which are commonly referred to as programming bugs. The occurrence of undetected errors
or defects in our research tools could disrupt our operations, damage our reputation and detract
from the experience of our users. As a result, such errors and defects could materially and
adversely affect our business, financial condition and results of operations. The discontinuation of any of the preferential tax treatments currently available to us in the PRC
could materially 13




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CHINA FINANCE ONLINE CO. LIMITED and adversely affect our business, financial condition and results of operations. Our PRC wholly-owned subsidiaries, CFO Beijing and Fortune Software, enjoy preferential tax
treatments, including reduced tax rates, tax holidays and tax refunds, provided by either the PRC
government or its local agencies or bureaus. For example, as a foreign invested software
development company, CFO Beijing was granted by the Beijing branch of the PRC tax bureau three tax
incentives that have the effect of:  

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, 25.5% from 2008 to 2012 and 27% for taxable years thereafter, the rate currently
applicable to wholly foreign-owned enterprises based in Beijing and not subject to other
tax holidays. Similarly, in December 2004, we established our subsidiary Fortune Software in Beijing that
was classified by the Beijing local government as a foreign invested high-technology
company. With the classification of a foreign invested high-technology
company, Fortune Software expects to receive tax incentives provided to such
companies from the Beijing branch of the PRC tax bureau that have the effect of:  

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. In the absence of these incentives, CFO Beijing and Fortune Software would be subject to the
enterprise income tax rate of 33% applicable to domestic PRC companies generally. For example, if
CFO Beijing had not received these preferential tax treatments in 2003 and 2004 and was required to
pay enterprise income tax at the same rate as a domestic PRC company, our net incomes for these two
periods would have been $1.1 million and $3.4 million, respectively, representing decreases of 5%
and 27% from the reported amounts, respectively. Our preferential tax treatments had less impact on
our net income for 2003 primarily because we had net operating losses carried forward from prior
years, which significantly reduced our taxable income for 2003. As a result, our effective tax rate
for 2003 would have been substantially lower than the statutory enterprise tax rate of 33%, even if
we had not received any preferential tax treatments in 2003. These net operating losses were fully
utilized in 2003 and, as a result, we did not have any similar reduction in our taxable income in
2004. In addition, with respect to revenue generated from the sale of certain approved software products,
including our service packages, CFO Beijing and Fortune Software both obtain value-added-tax, or
VAT, refunds to reduce their effective VAT rates from 17% to 3%. We cannot assure you that we will
continue to enjoy any of these preferential tax treatments in the future. The discontinuation of
any of these preferential tax treatments could materially and adversely affect our financial
condition. We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax
consequences to U.S. investors. Depending upon the value of our shares and ADSs and the nature of our assets and income over time,
we could be classified as a passive foreign investment company, or PFIC, by the United States
Internal Revenue Service, or IRS, for U.S. federal income tax purposes. If we are classified as a
PFIC in any taxable year in which you hold our ADSs and you are a U.S. investor, you would
generally be taxed at higher ordinary income, rather than lower capital gain rates, if you dispose
of ADSs at a gain in a later year, even if we are not a PFIC in that year. In addition, a portion
of the tax imposed on your gain would be increased by an interest charge. Moreover, if we were
classified as a PFIC in any taxable year, you would not be able to benefit from any preferential
tax rate with respect to any dividend distribution that you may receive from us in that year or in
the following year. Finally, you would also be subject to special U.S. tax reporting requirements. We have determined that we were not a PFIC for the taxable year 2004. However, there can be no
assurance that we will not be a PFIC for the taxable year 2005 and/or later taxable years, as PFIC
status is re-tested each year and depends on the facts in such year. For example, we would be a
PFIC for the taxable year 2005 if the sum of our 14




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CHINA FINANCE ONLINE CO. LIMITED average market capitalization, which is our share price multiplied by the total amount of our
outstanding shares, and our liabilities over that taxable year is not more than twice the value of
our cash, cash equivalents, and other assets that are readily converted into cash. In particular,
we currently deposit a substantial portion of our net proceeds from our initial public offering in
interest bearing bank accounts, which we book as cash and cash equivalents, but the value of our
ADSs have declined to $6.88 per ADS on April 22 from our initial public offering price of $13.00
per ADS. If the value of our outstanding stock were to continue to decrease for an extended period
of time in which we hold substantial cash and cash equivalents, we would likely become a PFIC. We
could also be a PFIC for any taxable year if the gross income that we and our subsidiaries earn
from investing the portion of the cash raised in our initial public offering last year that exceeds
the immediate capital needs of our active online business is substantial in comparison with the
gross income from our business operations. While we will continue to examine our results under the PFIC tests, we cannot assure you that we
will not be a PFIC for 2005 or any future taxable year. For more information on the U.S. tax
consequences to you that would result from our classification as a
PFIC please see Taxation 
United States federal income taxation  U.S. Holders  Passive Foreign Investment Company. 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. The insurance industry in China is still at an early stage of development. Insurance companies in
China offer limited business insurance products and do not, to our knowledge, offer business
liability insurance. While business disruption insurance is available to a limited extent in China,
we have determined that the risks of disruption, cost of such insurance and the difficulties
associated with acquiring such insurance make having such insurance impractical for us. As a
result, except for directors and officers insurance and fire insurance we do not have any other
business liability, disruption or litigation insurance coverage for our operations in China. Any
business disruption or litigation 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. The Internet infrastructure in China is not as well developed as in the United States or other more
developed countries. In particular, we depend significantly on the PRC government and fixed line
telecommunications operators in China to establish and maintain a reliable Internet infrastructure
to reach a growing base of Internet users in China. We cannot assure you that the Internet
infrastructure in China will support the demands associated with the continued growth of the
Internet industry in China. If the necessary infrastructure standards or protocols, or
complementary products, services or facilities are not developed in China on a timely basis or at
all by these enterprises, our business, financial condition and results of operations could be
materially adversely affected. 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. Although the use of personal computers in China has increased in recent years, the penetration rate
for personal computers in China is much lower than in the United States. In addition, despite a
decrease in the cost of Internet access in China due to a decrease in the cost of personal
computers and the introduction and expansion of broadband access, the cost of Internet access
remains relatively high in comparison to the average per capita income in China. The limited use of
personal computers in China and the relatively high cost of Internet access may limit the growth of
our business. Furthermore, any Internet access or telecommunications fee increase could reduce the
number of users that use our online services. Any fee or tariff increase could further decrease our
user traffic and our ability to derive revenues from transactions over the Internet, which could
have a material adverse effect on our business, financial condition and results of operations. 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. Although private Internet service providers exist in China, substantially all access to the
Internet in China is maintained through the telecommunications operators, under the administrative
control and regulatory supervision 15




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CHINA FINANCE ONLINE CO. LIMITED of the Ministry of Information Industry, or MII. In addition, local networks connect to the
Internet through a government-owned international gateway. We rely on this infrastructure and to a
lesser extent, certain other Internet data centers in China to provide data communications capacity
primarily through local telecommunications lines. In the event of a large-scale infrastructure
disruption or failure, we may not have access to alternative networks and services, on a timely
basis or at all. We may not be able to lease additional bandwidth from the telecommunications operators in China on
acceptable terms, on a timely basis or at all. In addition, we may not have means of getting access
to alternative networks and services on a timely basis or at all in the event of any disruption or
failure of the network. Unexpected network interruptions, security breaches or computer virus attacks could have a material
adverse effect on our business, financial condition and results of operations. We have limited backup systems and have previously experienced system failures, which have
disrupted our operations. Any failure to maintain the satisfactory performance, reliability,
security and availability of our network infrastructure may cause significant harm to our
reputation and our ability to attract and maintain users. Major risks involved in such network
infrastructure include:  

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
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. Our network systems are also vulnerable to damage from fire, flood, power loss, telecommunications
failures, computer virus, hackings and similar events. Any network interruption or inadequacy that
causes interruptions in the availability of our services or deterioration in the quality of access
to our services could reduce our user satisfaction and competitiveness. In addition, any security
breach caused by hackings, which involve efforts to gain unauthorized access to information or
systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or
other computer equipment, and the inadvertent transmission of computer viruses could cause our
users to question the safety or reliability of our website and our services and could have a
material adverse effect on our business, financial condition and results of operations. In
addition, unauthorized access by third parties to our network could result in theft of personal
user information, which could have an adverse effect on our reputation. 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. A significant barrier to confidential communications over the Internet has been the need for
security. To date, there have been several well-publicized compromises of security as a result of
global virus outbreaks. We may incur significant costs to protect against the threat of security
breaches or to alleviate problems caused by these breaches. If unauthorized persons are able to
penetrate our network security, they could misappropriate proprietary information, including
personal information regarding our subscribers, or cause interruptions in our services. As a
result, we may be required to incur substantial costs and divert our other resources to protect
against or to alleviate these problems. Security breaches could have a material adverse effect on
our reputation, business, financial condition and results of operations. 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, we may have to legally enforce such arrangements and our business, financial
condition and results of operations may be materially and adversely affected if these arrangements
cannot be enforced. We rely on contractual arrangements with Fuhua, our PRC-incorporated affiliate and its shareholders
for operating 16




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CHINA FINANCE ONLINE CO. LIMITED our website and conducting our advertising business. These contractual arrangements may not be as
effective in providing us with control over Fuhua as direct ownership. If we had direct ownership of Fuhua, we would be able to exercise our rights as shareholders to
effect changes in the board of directors, which in turn could effect changes, subject to any
applicable fiduciary obligations, at the management level. However, under the current contractual
arrangements, as a legal matter, if Fuhua fails to perform its obligations under these contractual
arrangements, we may have to (i) incur substantial costs and resources to enforce such
arrangements, and (ii) rely on legal remedies under PRC law, which we cannot be sure would be
effective. For example, if Jun Ning were to terminate his employment with us, he would be obligated
pursuant to these contractual arrangements to transfer his share ownership in Fuhua to us or our
designee. If he were to refuse to effect such a transfer, or if he were otherwise to act in bad
faith toward us, then we may have to take legal action to compel him to fulfill his contractual
obligations. These contractual arrangements are governed by PRC law and provide for the resolution of disputes
through either arbitration or litigation in the PRC. Accordingly, these contracts would be
interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC
legal procedures. If Fuhua fails to perform its obligations under these contractual arrangements,
we may have to rely on legal remedies under PRC law, including seeking specific performance or
injunctive relief, and claiming damages, which we cannot be sure would be effective. In addition,
the legal environment in the PRC is not as developed as in other jurisdictions, such as the United
States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these
contractual arrangements. In the event that we are unable to enforce these contractual
arrangements, our business, financial condition and results of operations could be materially and
adversely affected. 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. PRC laws require entities providing securities investment advisory services to the public to obtain
a securities advisory business permit from the China Securities Regulatory Commission, or the CSRC.
On May 30, 2002, we received a notice from the CSRC requesting that we stop promotional activities
of our service offerings involving investment advisory content and alter the relevant content of
our website and offerings so that we are no longer deemed to be providing investment advisory
related offerings. Promptly after receipt of such notice, we entered into a business cooperation
agreement with a securities advisory company licensed to provide securities advisory services,
pursuant to which we receive modeling advice and data processing advice for the development of all
of our research tools. We subsequently filed a written report with the CSRC on July 18, 2002,
explaining our business arrangements with the securities advisory company. Since that time, we have
entered into similar business cooperation agreements with five other licensed securities advisory
companies. We have not received any further notices from the CSRC since the filing and have been
providing financial data and information services under this business framework since that time. We
cannot assure you that the CSRC will not revisit this issue and take a position contrary to our
interests. If we, CFO Beijing, Fortune Software or Fuhua are found to be in violation of Chinese laws and
regulations relating to the provision of securities investment advisory services, the relevant PRC
regulatory authorities would have broad discretion in dealing with such violations, including
imposing monetary penalties on us, ordering us to shut down our website or forcing us to pursue
alternative business objectives other than offering financial data and information services. We may
alternatively seek to apply for a securities advisory permit, but we cannot be sure that we will be
able to secure one. As a result of the possible penalties imposed on us, if the CSRC were to
conclude that we provide securities investment advisory services, we could 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 or the online advertising service industry, we
could be subject to severe penalties. PRC regulations currently limit foreign ownership of companies that provide Internet content
services, which include operating financial data and information services through the Internet, to
be no more than 50%. PRC regulations also limit foreign ownership of advertising agencies that
provide online advertising services to be no more than 70%. Accordingly, foreign and wholly
foreign-owned enterprises are currently not able to apply for the 17




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CHINA FINANCE ONLINE CO. LIMITED required licenses for operating such services in China. We are a Hong Kong company. We conducted
our operations in China solely through CFO Beijing, our wholly owned subsidiary from April 2000 to
December 2004. In December 2004, we established Fortune Software as a foreign invested
high-technology company, and currently conduct our operations in China through both CFO Beijing and
Fortune Software. We are a foreign enterprise and each of CFO Beijing and Fortune Software is a
wholly foreign-owned enterprise under PRC law, and accordingly, neither we, CFO Beijing nor Fortune
Software is eligible to apply for licenses to operate our website or to provide online advertising
services. In order to comply with foreign ownership restrictions, we operate our website in China
through Fuhua, which holds the licenses required to be an Internet information content provider and
the licenses and approvals required to provide online advertising services under the relevant PRC
laws. Wu Chen, a financial manager at International Data Group China, Ltd., a PRC company
affiliated with IDG Technology Venture Investment, Inc. and IDG Technology Venture Investments, LP,
two of our principal shareholders, and Jun Ning, our chairman and Chief Executive Officer, hold 55%
and 45% of the equity interests in Fuhua, respectively. We have been and are expected to continue
to be dependent on Fuhua to host our website, www.jrj.com, and to provide online advertising
services through our website. We have entered into contractual arrangements with Fuhua, pursuant to
which we provide operational support to Fuhua. In addition, we have entered into agreements with
Fuhua and Wu Chen and Ning Jun, the shareholders of Fuhua, which provide us with the substantial
ability to control Fuhua. There are, however, substantial uncertainties regarding the interpretation and application of
current or future PRC laws and regulations. Accordingly, we cannot assure you that the PRC
regulatory authorities will not ultimately take a view that our arrangements with Fuhua comply with
PRC law. If we, CFO Beijing, Fortune Software or Fuhua are found to be in violation of any existing or
future PRC laws or regulations or fail to obtain or maintain any of the required permits or
approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such
violations, including:  

Revoking CFO Beijings, Fortune Softwares or Fuhuas business and operating licenses;

Discontinuing or restricting our, CFO Beijings, Fortune Softwares or Fuhuas operations;

Imposing conditions or requirements with which we, CFO Beijing, Fortune Software or
Fuhua may not be able to comply;

Requiring us, CFO Beijing, Fortune Software or Fuhua to restructure the relevant
ownership structure or operations;

Restricting or prohibiting our use of the proceeds of our initial public offering last
year 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. Any of these actions could cause our business, financial condition and results of operations to
suffer and the price of our ADSs to decline. 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 could face material and adverse tax consequences if the PRC tax authorities determine that the
contracts between CFO Beijing and Fuhua were not entered into based on arms-length negotiations.
Although we based these contractual arrangements on those of similar businesses, if the PRC tax
authorities determine that these contracts were not entered into on an arms-length basis, they may
adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A
transfer pricing adjustment could, among other things, result in a reduction, for PRC tax purposes,
of expense deductions recorded by CFO Beijing, which could adversely affect us by increasing the
tax liabilities of CFO Beijing without reducing the tax liabilities of Fuhua, because Fuhua
currently does not operate profitably. If we are successful in growing our online advertising
business, a transfer pricing adjustment could also result in a reduction, for PRC tax purposes, of
expense 18




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CHINA FINANCE ONLINE CO. LIMITED deductions recorded by Fuhua, which could adversely affect us by increasing the tax liabilities of
Fuhua as Fuhua derives increased revenue from advertising fees, without reducing the tax
liabilities of CFO Beijing. These increased tax liabilities could further result in late payment
fees and other penalties to CFO Beijing and Fuhua for under-paid taxes. Moreover, our corporate structure and arrangements with Fuhua result in a 5% PRC business tax being
levied on both Fuhuas revenues derived from online advertising and CFO Beijing and Fortune
Softwares revenues derived from its contractual arrangements with Fuhua. As a result, if our
advertising business were to increase, we could be subject to double taxation on our revenues from
online advertising. 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. We are a holding company, and we rely principally on dividends and other distributions on equity
paid by CFO Beijing or Fortune Software for our cash requirements, including the funds necessary to
service any debt we may incur. If CFO Beijing or Fortune Software incurs debt on its own behalf in
the future, the instruments governing the debt may restrict CFO Beijings and Fortune Softwares
ability to pay dividends or make other distributions to us. In addition, PRC tax authorities may
require us to amend the contractual arrangements CFO Beijing currently has in place with Fuhua in a
manner that would materially and adversely affect CFO Beijings ability to pay dividends and other
distributions to us. Furthermore, PRC legal restrictions permit payments of dividends by CFO
Beijing or Fortune Software only out of their net income, if any, determined in accordance with PRC
accounting standards and regulations. Under PRC law, CFO Beijing and Fortune Software are also
required to set aside a portion of their net income each year to fund specified reserve funds.
These reserves are not distributable as cash dividends. Any limitation on the ability of CFO
Beijing or Fortune Software to make dividends to us could materially and adversely limit our
ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay
dividends, or otherwise fund and conduct our business. The PRC government may prevent us from distributing, and we may be subject to liability for,
content that it believes is inappropriate. China has enacted laws and regulations governing Internet access and the distribution of news,
information or other content, as well as products and services, through the Internet. In the past,
the PRC government has stopped the distribution of information through the Internet that it
believes violates PRC law. The Ministry of Information Industry, or MII, the State Press and
Publication Administration and the Ministry of Culture recently promulgated new regulations which
prohibit information from being distributed through the Internet if it contains content that is
found to, among other things, propagate obscenity, gambling or violence, instigate crimes,
undermine public morality or the cultural traditions of the PRC, or compromise State security or
secrets. In addition, the MII has published regulations that subject website operators to potential
liability for content included on their websites and the actions of users and others using their
systems, including liability for violations of PRC laws prohibiting the distribution of content
deemed to be socially destabilizing. The PRCs Ministry of Public Security has the authority to
order any local Internet service provider, or ISP, to block any Internet website maintained outside
China at its sole discretion. Periodically, the Ministry of Public Security has stopped the
distribution over the Internet of information which it believes to be socially destabilizing. The
PRCs State Secrecy Bureau, which is directly responsible for the protection of State secrets of
the PRC government, is authorized to block any website it deems to be leaking State secrets or
failing to meet the relevant regulations relating to the protection of State secrets in the
distribution of online information. Under applicable PRC regulation, we may be held liable for any content we offer or will offer
through our website, including information posted on bulletin boards and online forums which we
host and maintain on our website. Furthermore, we are required to delete any content we transmit
through our website if such content clearly violates PRC laws and regulations. Where any content is
considered suspicious, we are required to report such content to PRC governmental authorities. It may be difficult to determine the type of content that may result in liability for us. If any
financial data and information services we offer or will offer through our website were deemed to
have violated any of such content restrictions, we would not be able to continue such offerings and
could be subject to penalties, including confiscation of income, fines, suspension of business and
revocation of licenses for operating online financial data 19




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CHINA FINANCE ONLINE CO. LIMITED and information services, which would materially and adversely affect our business, financial
condition and results of operations. Moreover, if any information posted on our bulletin boards or
online forums were deemed to have violated any of the content restrictions, we could be subject to
similar penalties that materially and adversely affect our business, financial condition and
results of operations. Risks relating to the Peoples Republic of China Substantially all of our assets are located in China and substantially all of our revenues are
derived from our operations in China. Accordingly, our business, financial condition, results of
operations and prospects are subject, to a significant extent, to economic, political and legal
developments in China. The PRCs economic, political and social conditions, as well as government policies, could affect
the financial markets in China and our business. The PRC economy differs from the economies of most developed countries in many respects, including
the amount of government involvement, level of development, growth rate, control of foreign
exchange and allocation of resources. While the PRC economy has experienced significant growth in
the past twenty years, growth has been uneven, both geographically and among various sectors of the
economy. The PRC government has implemented various measures to encourage economic growth and guide
the allocation of resources. Some of these measures benefit the overall PRC economy, but may also
have a negative effect on us. For example, our financial condition and results of operations may be
adversely affected by government control over capital investments or changes in tax regulations
that are applicable to us. The PRC economy has been transitioning from a planned economy to a more market-oriented economy.
Although the PRC government has implemented measures since the late 1970s emphasizing the
utilization of market forces for economic reform, the reduction of state ownership of productive
assets and the establishment of improved corporate governance in business enterprises, a
substantial portion of productive assets in China is still owned by the PRC government. In
addition, the PRC government continues to play a significant role in regulating industry
development by imposing industrial policies. The PRC government also exercises significant control
over Chinas economic growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to
particular industries or companies. Most recently, the PRC government implemented a number of
measures, such as raising bank reserve against deposit rates to place additional limitations on the
ability of commercial banks to make loans, in order to slow down certain segments of the Chinese
economy which it believed to be overheating. These actions, as well as future actions and policies
of the PRC government, could materially affect the financial markets in China and our business and
operations. The PRC legal system embodies uncertainties which could limit the legal protections available to
you and us. The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it
is a system in which decided legal cases have little precedential value. In 1979, the PRC
government began to promulgate a comprehensive system of laws and regulations governing economic
matters in general. The overall effect of legislation over the past 25 years has significantly
enhanced the protections afforded to various forms of foreign investment in China. Our PRC
operating subsidiaries, CFO Beijing and Fortune Software, respectively, are wholly foreign-owned
enterprises, which are enterprises incorporated in China and wholly-owned by foreign investors. CFO
Beijing and Fortune Software are subject to laws and regulations applicable to foreign investment
in China in general and laws and regulations applicable to wholly foreign-owned enterprises in
particular. However, these laws, regulations and legal requirements are constantly changing, and
their interpretation and enforcement involve uncertainties. These uncertainties could limit the
legal protections available to us and other foreign investors, including you. In addition, we
cannot predict the effect of future developments in the PRC legal system, particularly with regard
to the Internet, including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement thereof, or the preemption of local regulations by national laws. Restrictions on currency exchange may limit our ability to utilize our revenues effectively. Substantially all of our revenues and operating expenses are denominated in Renminbi. Renminbi is
currently convertible under the current account, which includes dividends, trade and service
related foreign exchange transactions, but not under the
capital account, which includes
foreign direct investment and loans. Currently, 20




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CHINA FINANCE ONLINE CO. LIMITED CFO Beijing may purchase foreign exchange for settlement of ''current account transactions,
including payment of dividends to us and payment of license fees and service fees to foreign
licensors and service providers, without the approval of the State Administration for Foreign
Exchange. CFO Beijing and Fortune Software may also retain foreign exchange in their current
accounts to satisfy foreign exchange liabilities or to pay dividends. However, we cannot assure you
that the relevant PRC governmental authorities will not limit or eliminate our ability to purchase
and retain foreign currencies in the future. Since a significant amount of our future revenues will
be in the form of Renminbi, the existing and any future restrictions on currency exchange may limit
our ability to utilize revenues generated in Renminbi to fund our business activities outside
China, if any, or expenditures denominated in foreign currencies. Fluctuations in exchange rates could result in foreign currency exchange losses. Because our earnings and cash from operations are denominated in Renminbi and that the net proceeds
from our initial public offering last year are denominated in U.S. dollars, fluctuations in
exchange rates between U.S. dollars and Renminbi will affect the relative purchasing power of these
proceeds and our balance sheet and earnings per share in U.S. dollars following our listing of ADSs
on the Nasdaq National Market. In addition, appreciation or depreciation in the value of the
Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar
terms without giving effect to any underlying change in our business or results of operations. For
example, due to the recent devaluation of the U.S. dollar against other reserve currencies, as well
as pressure from a number of other governments (including the United States), the PRC government
has indicated that it may adjust the current rate at which Renminbi-U.S. dollar exchanges are
fixed, as well as re-evaluate its decades-old policy of using a fixed-rate regime to govern foreign
currency transactions, although the PRC government has not committed itself to take any such action
currently. Fluctuations in the exchange rate will also affect the relative value of any dividend
we issue which will be exchanged into U.S. dollars and earnings from and the value of any U.S.
dollar denominated investments we make in the future. Very limited hedging transactions are available in China to reduce our exposure to exchange rate
fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our
exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions
in the future, the availability and effectiveness of these hedges may be limited and we may not be
able to successfully hedge our exposure at all. In addition, our currency exchange losses may be
magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into
foreign currency. The recurrence of SARS in China, or similar adverse public health developments, may materially and
adversely affect our business and operating results. From December 2002 to June 2003, China and certain other countries experienced an outbreak of a new
and highly contagious form of atypical pneumonia now known as severe acute respiratory syndrome, or
SARS. On July 5, 2003, the World Health Organization declared that the SARS outbreak had been
contained. Since September 2003, however, a number of isolated new cases of SARS have been
reported, most recently in central China in April 2004. During May and June of 2003, many
businesses in China were closed by the PRC government to prevent transmission of SARS. Any
recurrence of the SARS outbreak, or a development of a similar health hazard in China, may
adversely affect our business and operating results. For instance, a recurrence of SARS or any
other epidemic may reduce the level of economic activity in affected areas and negatively impact
Chinas stock markets, which may lead to dampened investors interest in the stock markets and, as
a result, have a material and adverse effect on our business. In addition, health or other
government regulations may require temporary closure of our offices, or the offices of our
advertisers, content providers or sponsors, which will severely disrupt our business operations and
have a material adverse effect on our financial condition and results of operations. 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. The trading prices of our ADSs have been volatile and could fluctuate widely in response to factors
beyond our control. Since the completion of our initial public offering in October 2004, the
trading prices of our ADSs have ranged between a high of $15.99 per ADS to a low of $5.80 per ADS.
The market prices of the securities of 21




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CHINA FINANCE ONLINE CO. LIMITED Internet-related companies have generally been especially volatile. In particular, the performance and fluctuation of the market prices of other technology companies
with business operations mainly in China that have listed their securities in the U.S. may affect
the volatility in the price of and trading volumes for our ADSs. Recently, a number of PRC
companies have listed their securities, or are in the process of preparing for listing their
securities, on U.S. stock markets. Some of these companies have experienced significant volatility,
including significant price declines in connection with their initial public offerings. The trading
performances of these Chinese companies securities at the time of or after their offerings may
affect the overall investor sentiment towards PRC companies listed in the U.S. and consequently may
impact the trading performance of our ADSs. These broad market and industry factors may
significantly affect the market price and volatility of our ADSs, regardless of our actual
operating performance. In addition to market and industry factors, the price and trading volume for our ADSs may be highly
volatile for business specific reasons. Factors such as variations in our revenue, earnings and
cash flow, announcements of new investments, cooperation arrangements or acquisitions, and
fluctuations in market prices for our services could cause the market price for our ADSs to change
substantially. Any of these factors may result in large and sudden changes in the volume and price
at which our ADSs will trade. We cannot give any assurance that these factors will not occur in the
future. The sale or availability for sale of substantial amounts of our ADSs could adversely affect their
market price. Sales of substantial amounts of our ADSs in the public market in future, or the perception that
these sales could occur, could adversely affect the market price of our ADSs and could materially
impair our future ability to raise capital through offerings of our ADSs. There were 99,329,933 of our ordinary shares and 6,320,000 ADSs (representing 31,600,000 of those
ordinary shares) outstanding as of March 31, 2005. In addition, there are outstanding options to
purchase 16,845,988 ordinary shares, including options to purchase 10,194,988 ordinary shares that
are vested and immediately exercisable. The 82,837,921 ordinary shares outstanding prior to our
initial public offering are restricted securities as defined in Rule 144 and may not be sold in
the absence of registration other than in accordance with Rule 144 under the Securities Act or
another exemption from registration. A significant percentage of our outstanding ordinary shares is held by a small number of our
existing 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. As of March 31, 2005, four of our existing shareholders, including IDG Technology Venture
Investments, LP, IDG Technology Venture Investment, Inc., Vertex Technology Fund (III) Ltd. and
Tongma Network Co. Ltd., beneficially owned, collectively, approximately 58.1% of our outstanding
ordinary shares. We believe that each of these four shareholders is currently an affiliate within
the meaning of the U.S. securities laws, due to the size of their respective shareholdings in us
after the initial public offering. As of March 31, 2005, IDG Technology Venture Investments, LP and
IDG Technology Venture Investment, Inc. together have one board representative on our five-director
board, and beneficially own, collectively, approximately 27.5% of our outstanding ordinary shares.
Accordingly, these shareholders have had, and may continue to have, significant influence in
determining the outcome of any corporate transaction or other matter submitted to the shareholders
for approval, including mergers, consolidations and the sale of all or substantially all of our
assets, election of directors and other significant corporate actions. In addition, without the
consent of these shareholders, we could be prevented from entering into transactions that could be
beneficial to us. 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, chief financial officer and chief operating
officer, may discourage our acquisition by a third party, which could limit your opportunity to
sell your shares at a premium. Our constituent documents and Hong Kong law include provisions that could limit the ability of
others to acquire control of us, modify our structure or cause us to engage in change in control
transactions, including, among other things, the following:  

Our articles of association provide for a staggered board, which means that our
directors, excluding our 22




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CHINA FINANCE ONLINE CO. LIMITED  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 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. In addition, our obligations under change in control agreements we entered into with each of our
chief executive officer, chief financial officer and chief operating officer could discourage an
acquisition by a third party that you may consider favorable. Under the change in control
agreements, if after a change in control of our company has occurred, the executive is terminated
without cause or resigns for good reason, we are obligated to provide severance benefits to that
executive. The current severance benefits under the change in control agreements amount to
approximately $6 million, which could discourage or limit the ability of potential third party
acquirers to engage in change in control transactions with us. Furthermore, in the event any of the
severance payments would be deemed to give rise to excess parachute payments under section 280G
of the U.S. Internal Revenue Code for any of our executives subject to U.S. tax, we would be
required under the change in control agreements to gross-up the payments to such executive to take
account of any such excess parachute payments. This gross-up payment obligation could further
discourage potential third-party acquirers. In addition, these executives may determine that their
severance benefits provide better economic alternatives than their continued employment with us
and, as such, they may be incentivized by these severance benefits to encourage the company to
enter into transactions involving a change in control of our company which may not be as favorable
as other strategic alternatives available to us. These provisions and obligations could have the effect of depriving you of an opportunity to sell
your ADSs at a premium over prevailing market prices by discouraging third parties from seeking to
acquire control of us in a tender offer or similar transactions. 23




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CHINA FINANCE ONLINE CO. LIMITED 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. We are a Hong Kong company and are subject to the laws of Hong Kong. The fiduciary responsibilities
of our directors, and the ability of minority shareholders to take successful legal action in Hong
Kong against us or our directors, are governed by the laws and court procedures of Hong Kong.
Shareholders of a Hong Kong company would not be able to bring class action lawsuits against that
company or its directors in a Hong Kong court in the same way that shareholders of a U.S.
corporation might be able to bring such lawsuits in a U.S. court. In addition, professional conduct
rules applicable to Hong Kong lawyers generally prohibit Hong Kong lawyers from accepting
contingency fee arrangements, where a lawyer representing the plaintiffs is paid a fee only if the
lawsuit is successful. Without contingency fee arrangements or the ability to bring class action
lawsuits, our shareholders may find it more costly and difficult to take legal action against us or
our directors in the Hong Kong courts. The Hong Kong courts are also unlikely:  

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. In addition, there is no automatic statutory recognition in Hong Kong of judgments obtained in the
United States. Moreover, Hong Kong companies may not have standing to initiate a shareholder
derivative action in a federal court of the United States. As a result of all of the above, minority public shareholders may have more difficulty in
protecting their interests in the face of actions taken by management, directors or controlling
shareholders than they would as minority public shareholders of a U.S. corporation. Moreover,
substantially all of our assets are located outside of the United States and all of our current
operations are conducted in the PRC. In addition, most of our directors and officers are nationals
and residents of countries other than the United States. All or a substantial portion of the assets
of these persons are located outside the United States. As a result, it may be difficult for you to
effect service of process within the United States upon these persons. 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. A holder of ADSs may exercise its voting rights with respect to the underlying ordinary shares only
in accordance with the provisions of the deposit agreement and the American depositary receipts. We
do not recognize holders of ADSs representing our ordinary shares as our shareholders, and instead
we recognize the ADS depositary as our shareholder. When the depositary receives from us notice of any shareholders meeting, it will distribute the
information in the meeting notice and any proxy solicitation materials to you. The depositary will
determine the record date for distributing these materials, and only ADS holders registered with
the depositary on that record data will, subject to applicable laws, be entitled to instruct the
depositary to vote the underlying ordinary shares. The depositary will also determine and inform
you of the manner for you to give your voting instructions, including instructions to give
discretionary proxies to a person designated by us. Upon receipt of voting instructions of a holder
of ADSs, the depositary will endeavor to vote the underlying ordinary shares in accordance with
these instructions. Although Hong Kong law requires us to call annual shareholders meetings by not
less than 21 days notice in writing, and all other shareholders meeting by not less than 14 days
notice in writing, these minimum notice requirements can be shortened or completely waived by the
consent of all holders of our ordinary shares entitled to attend and vote (in the case of annual
shareholders meetings) or a majority in number of the holders of our ordinary shares representing
at least 95% in nominal value of the shares giving the right to attend and vote (in the case of all
other shareholders meetings). If the minimum notice periods are shortened or waived, you may not
receive sufficient notice of a shareholders meeting for you to withdraw your ordinary shares and
cast your vote with respect to any proposed resolution, as a holder of our ordinary shares. In
addition, the depositary and its agents may not be able to 24




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CHINA FINANCE ONLINE CO. LIMITED send materials relating to the meeting and voting instruction forms to you, or to carry out your
voting instructions, in a timely manner. We cannot assure you that you will receive the voting
materials in time to ensure that you can instruct the depositary to vote your shares. The
additional time required for the depositary to receive from us and distribute to you meeting
notices and materials, and for you to give voting instructions to the depositary with respect to
the underlying ordinary shares, will result in your having less time to consider meeting notices
and materials than holders of ordinary shares who receive such notices and materials directly from
us and who vote their ordinary shares directly. If you have given your voting instructions to the
depositary and subsequently decide to change those instructions, you may not be able to do so in
time for the depositary to vote in accordance with your revised instructions. The depositary and its agents will not be responsible for any failure to carry out any instructions
to vote, for the manner in which any vote is cast or for the effect of any such vote. 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. The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions
(which may include securities or rights distributions) it or the custodian for our ADSs receives on
our ordinary shares or other deposited securities after deducting its fees and expenses. You will
receive these distributions in proportion to the number of our ordinary shares your ADSs represent.
However, the depositary is not responsible to make a distribution available to any holders of ADSs
if it decides that it is unlawful to make such distribution. For example, it would be unlawful to
make a distribution to holder of ADSs if it consisted of securities that required registration
under the Securities Act but that were not properly registered or distributed pursuant to an
applicable exemption from registration. The depositary is not responsible for making a distribution
available to any holders of ADSs if any government approval or registration required for such
distribution cannot be obtained after reasonable efforts made by the depositary. We have no
obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights
or anything else to holders of our ADSs. This means that you may not receive the distributions we
make on our ordinary shares or any value for them if it is unlawful or unreasonable from a
regulatory perspective for us to make them available to you. These restrictions may have a material
adverse effect on the value of your ADSs. You may be subject to limitations on transfer of your ADSs. Your ADSs represented by American Depositary Receipts are transferable on the books of the
depositary. However, the depositary may close its books at any time or from time to time when it
deems expedient in connection with the performance of its duties. The depositary may close its
books from time to time for a number of reasons, including in connection with corporate events such
as a rights offering, during which time the depositary needs to maintain an exact number of ADS
holders on its books for a specified period. The depositary may also close its books in
emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or
register transfers of our ADSs generally when the books of the depositary are closed, or at any
time if we or the depositary thinks it is advisable to do so because of any requirement of law or
any government or governmental body, or under any provision of the deposit agreement, or for any
other reason. 
 ITEM 4. INFORMATION ON THE COMPANY A.History and development of the company. We were incorporated in Hong Kong in November 1998. Prior to April 2000, we did not conduct any
business operations. In April 2000, we purchased all of the equity interests of Fortune Software
(Beijing) Limited and renamed it China Finance Online (Beijing) Co., Ltd., or CFO Beijing, whereby
we acquired our website, www.jrj.com.cn,and commenced our online financial and listed company data
and information operations. In October 2004, we purchased another domain name, www.jrj.com,and
commenced operating our business under this domain name in March 2005. We maintain the same content
under both domain names. Since we commercially launched our service offerings in April 2001, we have conducted substantially
all of our operations in China through our wholly-owned subsidiary, CFO Beijing. As a wholly
foreign-owned enterprise, CFO Beijing is not permitted under PRC law to provide Internet
information content, which requires special licenses from the Ministry of Information Industry or
its local branches. In order to comply with foreign ownership 25




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CHINA FINANCE ONLINE CO. LIMITED restrictions, we operate our website in China through Fuhua, which holds the licenses required to
be an Internet information content provider under the relevant PRC laws. Fuhua also holds the
licenses and approvals required to operate our online advertising service business. Wu Chen, a
financial manager of International Data Group China, Ltd., a PRC limited liability company
affiliated with IDG Technology Venture Investment, Inc. and IDG Technology Venture Investments, LP,
two of our principal shareholders, and Jun Ning, our chairman and chief executive officer, hold 55%
and 45% of the equity interests in Fuhua, respectively. We have been and are expected to continue
to be dependent on Fuhua to host our website. In addition, we recently incorporated a wholly-owned
subsidiary in Beijing, Fortune Software (Beijing) Co., Ltd., or Fortune Software, to develop
additional service offerings. In October 2004, we completed the initial public offering of our ADSs, each of which represents
five of our ordinary shares, and listed our ADSs on Nasdaq. Our principal executive offices are located at Room 610B, 6/F, Pingan Mansion, No. 23 Financial
Street, Xicheng District, Beijing 100032, Peoples Republic of China, and our telephone number is
(8610) 6621-4728. We have appointed CT Corporation System, 111 Eighth Avenue, New York, NY 10011,
as our agent for service of process in the United States. Our principal capital expenditures for 2002, 2003 and 2004 consisted of primarily purchases of
servers, workstations, computers, computer software, and other items related to our network
infrastructure for a total of approximately $98,000, $152,000 and $200,000, respectively. We have spent approximately $28,774 from January 1, 2005 to March 31, 2005, principally for work
stations and computers. Our capital expenditure plans for the remainder of 2005 have not yet been
determined, but we expect to spend approximately $250,000 primarily for purchases of additional
information technology related equipment and software. Capital expenditures in 2005 have been, and
are expected to continue to be, funded through operating cash flows and through our existing
capital resources. In March 2005, our board of directors approved a stock repurchase program pursuant to which we
expect to purchase from time to time up to $10 million worth of our American Depositary Shares, or
ADSs, over a period of six months. Under the terms of the approved stock repurchase program, we
will repurchase our ADSs through open market purchases on Nasdaq on terms deemed appropriate by us
in compliance with the anti-manipulation provisions of the Securities and Exchange Commissions
Rule 10b-18. The timing and amount of repurchase transactions under this program will depend on
market conditions as well as other corporate and regulatory considerations, and will also be
subject to Rule 10b-18 requirements. The purchases will be funded from available working capital. B.Business overview. We are one of the leading companies that specialize in providing online financial and listed
company data and information in China. We offer subscription-based services based on a single
information platform that integrates data and information from multiple sources with features and
functions such as data and information search, retrieval, delivery, storage and analysis. We
deliver these features and functions using software tools we have developed, which we refer to as
research tools. Our research tools combine:  

financial analysis tools which permit users to calculate and analyze quantitatively
financial data;

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, and, together with our screen layout and menu options, display them in a manner designed for ease
of use. The content and technology comprising our integrated information platform is also designed
to be adaptable so that as we develop new research tools and adopt new content and features, these
new research tools, content and features can be easily integrated with our existing platform. 26




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CHINA FINANCE ONLINE CO. LIMITED Our service offerings permit users to subscribe to one or more of the nine service packages we
currently offer. Each service package contains one or more research tools. Our research tools
include a number of features and functions that, we believe, are innovative and are not widely
available in financial markets outside of China. Our service offerings can be accessed using our
research tools and through our website at www.jrj.comor www.jrj.com.cn. JRJ is the abbreviation
of Jin Rong Jie, which means financial industry in Chinese. As of March 31, 2005, we had a total
of approximately 2.2 million registered users, and during the twelve months ended March 31, 2005,
we had approximately 17,700 new subscribers and 10,700 repeat subscribers. Our
registered users are Internet users who maintain a registered account with our website, and our
subscribers are our registered users who also subscribe to one of our subscription-based services
for a fee. New subscribers for a specified period are subscribers who subscribed to any of our
service packages during that period who were not subscribers at the beginning of that period.
Repeat subscribers for a specified period are subscribers who either have purchased more than one
service package from us during that period, or have purchased our service packages in the past and
have purchased at least one service package during that period. Our service offerings to users are used by and targeted at a broad range of investors in China,
from individual investors managing their own money to professional investors, which consist of
institutional investors managing large sums of money on behalf of their clients and high net worth
individuals. In addition, our service offerings are targeted at other financial professionals such
as investment bankers, stock analysts and financial reporters. For example, our institutional
service package, CFO Pro, is used by institutional users such as international financial service
institutions and fund management companies. Our research tools are designed for and tailored toward
investors in China, allowing them to make informed investment decisions with respect to all of
Chinas listed company stocks, bonds and mutual funds according to specifications and analyses
determined by them. As a result of our efforts to develop and offer more comprehensive service
packages to our subscribers, we have created a growing base of high-end subscribers, determined by
us as subscribers who pay us an annual subscription fee of RMB2,400 (US$290) or more. High-end
subscribers tend to require our more comprehensive service packages and we have increasingly
focused our product development efforts at high-end subscribers complex needs. The number of our
high-end subscribers with active subscriptions grew by approximately 104% from approximately 2,800
for the twelve months ended March 31, 2004 to approximately 5,700 for the twelve months ended March
31, 2005. Our website users are not charged for visiting our website and obtaining basic financial
information such as real-time quotes and historical financial information for all of Chinas listed
company stocks, bonds and mutual funds, financial news and research reports. Our integrated
information platform, which allows users to select from a range of downloadable and web-based
research tools, is available only through subscription. We categorize, process and, through our
subscription-based research tools and our website content, present data and research results to our
subscribers, allowing them to make informed investment decisions. Our service offerings are
designed to enhance our users and subscribers experience based on a number of factors: Comprehensive. We offer a broad range of data and information regarding Chinas listed company stocks, bonds and
mutual funds. We offer more than basic financial data such as price and trading information and
provide our subscribers with breaking economic and financial news, detailed historical data and
information, financial analysis tools, market coverage and listed company analysis and online
forums that facilitate our subscribers own investment analysis efforts. We believe we have built a
comprehensive database of historical financial data and information on Chinas listed companies,
bonds and mutual funds with data and information dating back to December 1990, when the Shanghai
and Shenzhen Stock Exchanges first opened for trading. Integrated. Our information platform integrates data and information from multiple sources with features and
functions such as data and information search, retrieval, delivery, storage and analysis. Our
platform integrates all of the research tools, data and other information we have developed or
gathered and, together with our screen layout and menu options, displays them in a manner designed
for ease of use. The content and technology comprising our integrated information platform is also
designed to be adaptable so that as we develop new research tools, content and features, these new
research tools, content and features can be easily integrated with our existing platform. Depending
on the service package chosen by the subscriber, a subscriber can have different levels of access
privileges to financial analysis tools, real-time and historical data, news, research reports and
online forums. 27




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CHINA FINANCE ONLINE CO. LIMITED Interactive. We have established online bulletin boards and discussion forums where users can share with each
other views on stocks and trends in the financial markets in China. In addition, we have introduced
stock alert services that send messages to our users mobile phones alerting them of changes in
stock prices and other trading related information of their interest, according to their pre-set
query parameters, allowing them to extend their experience with our services beyond the Internet. Timely. We provide our subscribers and users access to real-time stock quotes, breaking news and updated
research reports to allow them to stay current with the latest market developments. We receive
real-time stock, bond and mutual fund quotes and other trading related information directly from
the Shanghai and Shenzhen Stock Exchanges. During an average trading day, we update our web pages
within five seconds of receipt of new data and information from the stock exchanges. We also
receive current news headlines from financial news websites and publishers and distributors of
traditional media. Unbiased. Our website presents third-party content, analysis and commentary, and computer generated
quantitative analysis to provide our subscribers and users with a broad view of the financial
markets in China. We do not formulate or publish views on this content, analysis or commentary.
Because we are not motivated to convince them to buy or sell any securities or to invest in any
specific investments, we believe our subscribers and users view us as an unbiased provider of
financial information. Easy to use. Our research tools and our website are designed with a screen layout, menu options and displays
that we believe any user familiar with a computer will find easy to use. From our basic web page,
our users can choose a variety of financial data and information topics that interest them. Through
our research tools, our subscribers have access to a large pool of historical financial data and
information, which they can categorize and analyze as they determine. We have a product development
team directed at working closely with our customer support personnel to update and develop
information and presentation formats that our subscribers view as enhancing ease of use and
increasing the informative power of our research tools and our website. Our website is also
designed to accommodate low bandwidth access to the Internet. We attract our users and subscribers through establishing and maintaining sponsorship arrangements
with high-traffic Chinese Internet portals such as netease.com, yahoo.com.cn, 21cn.com, tfol.com,
china.comand tom.com, search engines such as baidu.comand 3721.com, online stock brokerage
websites and news and financial information websites. Through these sponsorship arrangements, we
place our website link on the financial web pages of our sponsors. In some cases, our website
content is directly presented on their web pages. When users click for additional information on
these financial web pages, they are redirected to our website. We believe that as we develop brand
awareness of our website and service offerings, we will be able to increasingly attract users
directly to our website. To assist us in the delivery of comprehensive, timely and easy to use service offerings, we have
developed a technology platform that utilizes the capabilities of the Internet. Our technology
platform allows us to retrieve real-time stock quotes from both the Shanghai and Shenzhen Stock
Exchanges, historical financial data and information on listed companies, bonds and mutual funds
from data providers, research reports from 49 securities advisory companies and 37 securities
brokerage companies licensed to provide securities advisory services, commentaries from
approximately 220 licensed individual securities advisors and news feeds from 316 news publishers
and media companies. Our non-institutional subscribers pay us annual subscription fees ranging from RMB388 (US$47) for
our most basic service package to RMB14,900 (US$1,800) for our most comprehensive service package,
depending on the service package and features selected by the subscriber. Our subscription price
for each of the eight current service packages available to our non-institutional subscribers
varies between these amounts. In January 2005, we launched our institutional service package CFO
Pro, which has an annual subscription fee of US$5,000. 28




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CHINA FINANCE ONLINE CO. LIMITED Substantially all of our revenue is derived from annual subscription fees for our service
offerings. 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
period. Growth Strategy Our goal is to become the leading provider of comprehensive financial data and information relating
to securities and other financial instruments traded on Chinas securities exchanges. We intend to:  

increase our subscriber base among high-end subscribers and further enhance the services
we provide to our retail and professional subscribers and users;

expand our present service offerings to include data and information relating to other
financial instruments such as macro economy, personal finances, currencies, futures and
commodities;

continue to encourage our subscribers to migrate to newer, more comprehensive and higher
priced service offerings; and

utilize our brand name and user base to increase our online advertising revenues. Our Services We collect, process and, through our research tools and our website content, provide to our
subscribers financial analysis tools, real-time and historical data, news, research reports and
online forums in one integrated information platform, allowing them to make informed investment
decisions with respect to all of Chinas listed company stocks, bonds and mutual funds according to
specifications and analyses determined by them. Our features Through our integrated information platform, our subscribers have access to and can make use of
each of our main content features: financial analysis tools, real-time and historical data, news,
research reports and online forums. Financial analysis tools. Our financial analysis tools are research tools that provide subscribers with the ability to
quantitatively calculate and analyze financial data, which include:  

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. These tools allow our subscribers to perform fundamental and technical analysis on companies, bonds
and mutual funds listed on the Shanghai and Shenzhen Stock Exchanges, based on current and
historical financial data and information, trading volumes and other user specifications. Real-time and historical data. Our integrated information platform offers subscribers interactive charts, quotes, reports and
indicators on over 1,300 company stocks, bonds and mutual funds listed on Chinas Shanghai and
Shenzhen Stock Exchanges. Users can search by company name or ticker symbol for real-time stock
quotes of these securities. Trading data is provided to us on a real-time basis by each of the
Shanghai and Shenzhen Stock Exchanges. We collect, categorize, organize and index trading data
provided to us to allow searches, sorting and analysis by user specification and allow our
subscribers to access and analyze the data, using our financial analysis tools and other research
tools. We also offer our subscribers detailed historical data and information on listed companies, mutual
funds and bonds. This information is available for our subscribers to download from our website and
is available on compact 29




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CHINA FINANCE ONLINE CO. LIMITED diskettes but are not accessible to general viewers. We have entered into agreements with third
parties to provide us with this historical data and information, according to specifications and
requirements set by us. For example, for each listed company, our historical data and information
providers provide us with the names of the principal shareholders and their historical trading
volume, as well as information such as biographical information of company directors and the
management team. We collect the data received from our historical data and information providers,
process this information and, through our research tools, allow our subscribers to retrieve
critical data and information they select. News. Our news feature allows users to search and view breaking economic and financial news and
information from China and around the world. We do not report news ourselves. We have a team of
editorial staff who compile on daily basis economic and financial news and information reported by
other public sources that are relevant to Chinas financial markets. Our editorial staff further
indexes them according to topics and categories for the convenience of our users. Through our
research tools and website content, our subscribers can access timely and customized financial
information and reports, categorized and integrated into topics and sub-topics that they select,
based on their investment and analysis needs. The financial data and information presented on our
website or through our research tools is gathered from other financial information content
providers and intermediaries with whom we have contractual arrangements. Research reports. Through our integrated information platform, our users can view financial news letters and
analytical reports from a number of Chinas prominent securities professionals. We draw market
research reports and commentaries from 49 securities advisory companies and 37 securities brokerage
companies, each licensed to provide securities advisory services, and approximately 220 licensed
individual securities advisors. For our subscribers, we categorize these reports and commentaries
based on topics, industry sector and other customary categorizations. Online forums. We host several online bulletin boards on our website by which Chinese licensed securities advisors
offer their views on a variety of topics ranging from macroeconomic conditions to performance of
individual stocks, bonds and mutual funds. We do not support, comment on or advocate any views
presented by any such securities advisors. We also maintain several online forums on our website,
enabling our users to participate in the discussions on specific financial topics we believe will
be of interest to them. The online forums are moderated by third party moderators approved by us.
We believe the online bulletin boards and discussion forums enhance our users experience and,
through our active monitoring, allow us to better understand our users behavior and needs. Personal portfolio tracking service. We also offer users a free personal portfolio tracking service that allows users to compile and
store personal financial information in their personal accounts maintained on our website. This
service allows our users to better manage their portfolio of investment securities through
systematic record keeping of portfolio composition and trading history, facilitating their trading
decisions. We do not provide any advice to individual customers as to the management of their
investment portfolio. Our website Our website content and our research tools are the key components of our information platform. Our
website has four primary functions:  

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 a download platform for our service offerings; and

to display online advertisements. 30




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CHINA FINANCE ONLINE CO. LIMITED   In order to attract visitors to our website, we offer a significant portion of our website content
free of charge. This free content includes real-time stock quotes, trading volumes, pricing
indicators for listed companies in China and market news from the Shanghai and Shenzhen Stock
Exchanges. Through our website, users can also participate in online forum discussions and bulletin
boards. Our website also has an important marketing function for our subscription based service
offerings. We provide examples to our visitors on our website of the various premium content and
features they can access and receive by becoming a subscriber to our service offerings. Our premium content and features are accessible through our research tools, some of which are
web-based and others are computer-based. Subscribers to our web-based research tools are required
to register and maintain personal accounts with our website. These subscribers can store important
information they viewed and analytical results they obtained in their personal accounts maintained
at our website, and later review that information and results using the same screen layouts and
menu options our website provides. Subscribers to computer-based research tools can download from our website the packages they
selected to their computers. We believe our website is designed for ease of use and to accommodate low bandwidth access to the
Internet. As our website grows in popularity and the number of visitors to our website increases, we intend
to increase our online advertising revenue by selling unobtrusive advertising space on our website.
For example, we intend to increase the number of website sponsors for some of our website content,
co-branding arrangements we have with online advertisers in China, and the number of banner
advertising and direct-link arrangements we have with mutual funds and securities brokerage
companies in China. Our research tools Subscribers to our service can elect to use a number of different research tools we have developed
to access and utilize our premium content and features. We currently offer nine different service
packages incorporating some or all of our research tools to our users. Through our research tools,
our subscribers can access and analyze our content, including our real-time and historical data,
news and research reports, in one integrated platform, allowing our subscribers to make informed
investment decisions with respect to all of Chinas listed company stocks, bonds and mutual funds
according to specifications and analyses determined by them. Some of our research tools are
web-based and others require download from our website and are computer-based. Our subscribers pay
us a subscription fee for the use of our subscription services for a one-year period. We offer subscribers a variety of research tools designed to provide information and analysis,
including financial analysis, as well as the ability to search and sort out data and information,
based on subscribers needs and preferences. For example, we make available services that permit
subscribers to analyze our content using some or all of the following research tools:  

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 31




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CHINA FINANCE ONLINE CO. LIMITED  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
market 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. We expect to provide additional research tools as our services expand. For instance, we expect that
as we introduce data and information on commodities, we would include a separate research tool for
that purpose. We view the migration of existing subscribers and the attraction of new subscribers
to our service offerings with more comprehensive research tools as one of our most important growth
strategies. Our service packages The following table outlines our service packages by research tools and access methods. Categorized
    
    
    Industry
    
    
    Fundamental
    
    
    Mutual
    
    
    TechnicalMacro
    
    
    sector
    
    
    analysis
    
    
    fund
    
    
    analysis
    
    
    AccessInformation
    
    
    analysis
    
    
    tools
    
    
    analysis
    
    
    tools
    
    
    methodCFO Pro
    
    
    Ö
    
    
    
    Ö
    
    
    
    Ö
    
    
    
    Ö
    
    
    
    Ö
    
    
    Computer-basedGrand Reference V
    
    
    Ö
    
    
    
    Ö
    
    
    
    Ö
    
    
    
    Ö
    
    
    
    Ö
    
    
    Computer-basedStorm
    
    
    Ö
    
    
    
    Ö
    
    
    
    Ö
    
    
    
    Ö
    
    
    
    
    
    
    Computer-basedStock Finder
    
    
    Ö
    
    
    
    
    
    
    
    Ö
    
    
    
    Ö
    
    
    
    Ö
    
    
    Computer-basedStock Radar
    
    
    
    
    
    
    
    
    
    
    Ö
    
    
    
    
    
    
    
    Ö
    
    
    Web-basedSidekick X
    
    
    Ö
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Web-basedAnalyst Scoreboard
    
    
    
    
    
    
    Ö
    
    
    
    Ö
    
    
    
    
    
    
    
    Ö
    
    
    Web-basedArbitrager
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ö
    
    
    Web-basedQuick Winner
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ö
    
    
    
    Ö
    
    
    Web-based
 Our subscribers can select one or more of the nine different service packages we currently
offer. Some of our service packages are available in different versions, which reflect different
levels of comprehensiveness:  

CFO Pro.CFO Pro is the first service package we developed to target sophisticated
institutional investors. It is a single service platform aggregating up-to-date financial
news, market commentaries, industry reports and comprehensive Chinese financial information
and databases. It also contains a database of macro-economic data, including industry
information and statistics such as changes in productivity levels, foreign investment
amounts, and costs of goods and services in China.

Grand Reference V.Grand Reference V is an upgrade of our previous Grand Reference
packages and is the most comprehensive service package we offer to our non-institutional
subscribers, both in terms of content and functionality. Grand Reference V includes all of
our current research tools. Content and functionality of other service packages we offer to
our non-institutional subscribers are derived from Grand Reference V. Compared to the
other Grand Reference packages, Grand Reference V has a new interface that is, we believe,
more user-friendly and an upgraded database structure that allows faster data transmission
than the other Grand Reference packages. We offer different versions of Grand Reference at
different subscription prices. Each version of Grand Reference includes all of our
research tools, but only Grand Reference V allows users to gain access to the new interface
and upgraded database structure.

Storm.Storm is designed for Chinese investors who demand up-to-date and comprehensive
news and information relating to specific topics and listed companies. Storm contains
fundamental analysis tools but not technical analysis tools. 32




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CHINA FINANCE ONLINE CO. LIMITED    

Stock Finder.Stock finder is designed for Chinese investors who favor technical
analysis tools as the primary methods to select stocks.

Stock Radar.Stock Radar is designed for Chinese investors that prefer to conduct
technical analysis as the basis for their investment research. Stock Radar is a web-based,
simplified version of Stock Finder. Stock Radars technical analysis tools are simpler to
use than the more advanced technical analysis tools offered by Stock Finder.

Sidekick X.This package, which is an upgrade of our previous package named China
Securities Reference, is for subscribers who do not necessarily have stock investment needs
but want to receive up-to-date and comprehensive news and information relating to a
specific topic or listed company.

Analyst Scoreboard.Analyst Scoreboard is designed for subscribers who desire to
research or track the performance of specific securities firms. This package provides
weekly, monthly and annual performance rankings of securities firms based on the profits or
losses of the trades they recommend.

Arbitrager.Arbitrager is designed for subscribers who desire to review the investment
returns selected by the top traders of the daily best stock market performers. Arbitrager
uses statistical analysis tools to identify top performing stocks on a daily basis, and
allows subscribers to identify the top traders of these investments. Subscribers may also
examine other investments that have been traded by such investors.

Quick Winner.Quick winner is designed for subscribers who prefer to examine top
performers by industry. Quick Winner identifies top performing stocks, by industry, and
allows subscribers to track the top traders of these investments and the other investments
made by such traders. Pricing policy We price our service packages based on the research tools included and their level of
comprehensiveness, as well as on market demand. For example, Grand Reference V, which is the most
comprehensive service package in terms of features and functionality, is the most expensive of our
non-institutional subscriber service packages. Therefore, we focus on enhancing and upgrading the
available features and functions of our research tools and continue to introduce updated versions
of our service packages. We encourage all of our users to upgrade to newer versions of our service
packages or more comprehensive service packages. We may, from time to time, offer discounts or promotions, depending on our perceived need in
accordance with our pricing policy. Any of such discounts or promotions could apply to new or
repeat subscribers as we may determine. For example, we currently offer subscribers to Grand
Reference V, the most comprehensive service package we offer to non-institutional subscribers, a
one-time renewal fee of RMB480 (US$58) for a one-year non-upgraded subscription to Grand Reference
V. After the renewal period, our subscribers are required to subscribe at the regular subscription
price then in effect. Our new service features We place significant emphasis on refining and upgrading our information platform, and on creating
new and innovative features to meet the changing needs of our customers and utilizing the latest in
technology and innovation. We believe that we are one of the few online financial information
service providers in China that have in-house software development capabilities. Our ability to
develop software internally allows us to broaden our service offerings, while keeping development
costs at a minimum. For example, our new service package, CFO Pro, which is targeted as
institutional investors, includes a new feature we developed that provides subscribers with a broad
database of macro-economic data, including industry information and statistics, such as changes in
productivity, foreign investment and costs of goods and materials. Customer support Our customer support center provides our subscribers real-time and personal support and is staffed
by a team of 42 trained full-time customer support personnel. Our customer support center currently
operates from 8:30 a.m. to 10:00 p.m. on weekdays and 9:30 a.m. to 5:30 p.m. on weekends and
holidays. Our customer support personnel, in addition to their sales and marketing functions, help
our existing and prospective subscribers to resolve any 33




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CHINA FINANCE ONLINE CO. LIMITED technical problems they may have. We have an in-house training program for our customer support
personnel, which includes training courses on Chinas securities markets, our service features and
functionalities, technical problem solving skills in respect of our research tools and general
customer service guidelines. Our content providers We draw content from the Shanghai and Shenzhen Stock Exchanges, which provide us with real-time
stock, bond and mutual fund pricing and other information, and our data providers, which provide us
with historical financial data and information on listed companies, bonds and mutual funds,
according to our parameters, specifications and requirements. We also draw content from
approximately 49 securities advisory companies and 37 securities brokerage companies each licensed
to provide securities advisory services, approximately 220 licensed individual securities advisors,
as well as 316 news publishers and media companies. Shanghai and Shenzhen Stock Exchanges We receive real-time stock, bond and mutual fund quotes and other trading related information
directly from the Shanghai and Shenzhen Stock Exchanges. We have entered into an information
service agreement with each of the stock exchanges pursuant to which we pay the stock exchanges
fixed service fees in exchange for receiving real-time price quotes and other trading related
information through satellite communication. We also have cable links to both exchanges to serve as
back-ups to satellite communication data feeds. During an average trading day, we update our web
pages within five seconds of receipt of new data and information from the stock exchanges. Our agreement with the Shanghai Stock Exchange will expire in May 2008, and our agreement with the
Shenzhen Stock Exchange will expire in March 2006. We aim to enter into a new agreement with each
of the stock exchanges under substantially the same terms prior to the expiration of the existing
agreement. Under these agreements, we may distribute the financial data and information we receive
from the exchanges to our users, but not to other vendors or distributors. Each of the exchanges
can terminate its respective agreement with us if we breach the terms of the agreement, such as a
delay in our payment of fees. Data providers We have entered into agreements with third parties to provide us with historical data and
information on listed companies, bonds and mutual funds for input into our information platform.
These data providers send information to us in accordance with our parameters, specifications and
requirements. This information includes historical financial information for listed companies,
significant corporate events such as mergers and acquisitions and significant changes in the
shareholdings of listed companies, information concerning major shareholders of listed companies,
biographical information for directors and management of listed companies, as well as financial
news and other data and information. The updates provided by our data providers range from several
times a day to once a month depending on the type of information. The data information agreement
that we have entered into with Shanghai Wind Information Co., Ltd., or Wind, our current primary
data provider, is for a fixed term and will expire in September 2005. Under our current agreement,
Wind is required to give us six months prior written notice if it is unable to meet its
obligations in the agreement. We have also entered into business agreements with one other
financial content provider to serve as an alternative source of historical data and information. In
December 2004, we entered into a new raw data provision contract with Shenzhen Securities
Information Co. Ltd. as an alternative source of historical data and information. Securities advisors and stock brokers We have entered into cooperation arrangements with 49 securities advisory companies and 37
securities brokerage companies, each licensed to provide securities advisory services. Under these
arrangements, we have the right to extract market commentary and research notes taken from their
websites, and to store, reproduce, market and deliver such information to our customers by means of
our information platforms. We upload financial content from these websites on a regular basis. In
addition, we have entered into cooperation arrangements with approximately 220 licensed individual
securities advisors to receive through email and other means their published articles and
commentaries covering a range of topics from macroeconomic conditions to performance of individual
stocks, bonds and mutual funds. Many of these individual securities advisors have dedicated columns
or bulletin boards maintained on our website for which they are responsible for maintenance. 34




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CHINA FINANCE ONLINE CO. LIMITED News and media conglomerates We also draw content in the form of breaking headlines and other news information from publishers
and distributors of traditional media. We have entered into cooperation arrangements with 316
Chinese news publishers and media companies. We are permitted under these arrangements to extract
financial news, reports and information taken from their print publication channels, and to store,
reproduce, market and deliver such information to our users through our website. We rely on our
editorial staff to compile, for publication on our website, publicly available financial news,
reports and information received from these sources that are relevant to Chinas financial markets. Sales and marketing We market our website through establishing and maintaining sponsorship arrangements with
high-traffic Internet portals such as netease.com, yahoo.com.cn, 21cn.com, tfol.com, china.comand
tom.com, search engines such as baidu.comand 3721.com, as well as websites of online stock
brokerages and news and financial information websites. We have more than 40 sponsorship
arrangements with such Internet portals, search engines and websites. Through these sponsorship
arrangements, we place our website link on the financial web pages of our sponsors, including some
of Chinas top Internet portals such as netease.com, yahoo.com.cn, 21cn.com, tfol.com, china.com
and tom.com. In some cases, our website content is directly presented on their web pages. When
users click for additional information on these financial web pages, they are redirected to our
website. We derive a significant portion of our website traffic from these sponsorships. We also
derive a portion of our website traffic through the word-of-mouth of the investing community. We market our service offerings through our website, as well as through 42 customer support
personnel at our customer service center. Our website provides detailed descriptions of our service
offerings while our customer support personnel are available to explain to callers the various
features of our offerings and to resolve our subscribers technical problems. We charge our subscribers a subscription fee for the use of our service packages for a one-year
period. Our subscribers either pay us by cash, by money order via post, by online bank transfer or
by direct wiring of cash. Upon receipt of cash payment, we promptly activate our subscribers
accounts with us. Since we accept cash as the only payment method, we do not take any credit risk
of our subscribers. We do not have a refund policy and generally do not offer refunds to our
subscribers. Online advertisement The average number of our daily user sessions increased by 45% to approximately 1.6 million during
the twelve month period ended March 31, 2005 from approximately 1.1 million during the twelve month
period ended March 31, 2004. To take advantage of this increase in the number of users accessing
our free website, we sold online advertising in 2004 by selling unobtrusive advertising space on
our website. While our online advertising business is still relatively new, we intend to increase
the number of website sponsors for some of our website content, co-branding arrangements we have
with online advertisers in China, and the number of banner advertising and direct-links
arrangements we have with companies in China. We plan to accomplish these through establishing a
direct marketing team dedicated to online advertising. Product development Our product development team of 16 personnel is responsible for the creation and upgrading of our
web pages and the design and enhancement of features contained in our service packages. Our product
development team works as an integral part of our overall service offering efforts. For example, we
require our product development team to conduct monthly meetings with our sales and marketing team
to discuss the feasibility of new service offerings and the progress of existing product
development efforts. Our product development team works closely with our customer support team to
develop features and content that are based on feedback we received from our subscribers and users. We expect product development to remain an important part of our business as the online financial
data and information services industry in China becomes increasingly sophisticated. In order to
remain competitive, we expect to continue to expand our product development efforts: 35




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CHINA FINANCE ONLINE CO. LIMITED  

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. As an example of our recent product development efforts that we believe are attractive to high-end
subscribers, in January 2005 we launched our first institutional service package, CFO Pro, which we
specifically target at institutional customers such as international financial service institutions
and fund management companies. We have also developed and recently launched other new service
packages, including Sidekick X, Analyst Scoreboard, Arbitrager and Quick Winner. Moreover, we
continue to develop and add new features to our existing service packages. Technology and infrastructure Our internally developed technology infrastructure is designed to maximize the number of concurrent
users we can serve, while minimizing information retrieval time for our users. We deliver
electronically real-time and historical financial data and analysis tools to our users through our
internally developed technology platform, which is designed specifically for our web-based and
computer-based software services. Our technology platform, which consists of web server technology,
database technology and a data aggregation engine, enables us to enhance performance, reliability
and scalability in handling bursts of high-volume data requests during peak time, allowing users to
quickly retrieve the information that they search for even during periods of high concurrent use.
We own all of our servers. Our servers are capable of accommodating three times the number of
peak-hour concurrent users and five times our required bandwidth as measured during peak hours for
the twelve months ended December 31, 2004. Web server technology. Our web server technology enables us to quickly develop and deploy information services
dynamically. Our web server technology includes features that are designed to optimize the
performance of our online services. For example, we developed a special feature that maximizes the
time during which client-server connections are kept open, based on current server load, thereby
increasing user navigation and website access speed. Database technology. We have developed database technology to address the specific requirements of our information
services. Our database design and search techniques allow for efficient data retrieval within the
unique operating parameters of the Internet. For example, our dynamic index traversal technology
utilizes users inputted search parameters to determine the appropriate database index (from among
multiple indices) in parallel, thereby efficiently locating the data requested. Further, we use an
index compression mechanism to achieve an efficient balance between disk space and
compression/decompression for various database activities. Remote data aggregation engine. Our remote data aggregation engine allows us to retrieve, process and present data as a single
virtual database result from a variety of sources, either in real-time or at predetermined
intervals. We developed a template-driven profiling system that catalogs the data on each source
site. We also store data results internally in order to reduce network traffic and deliver the
results to our users as quickly as possible. Competition The online financial data and information service market in China is relatively new, has few
substantial barriers to entry and is competitive and rapidly changing. The number of online
financial news and information sources competing for users attention and spending has increased
since we commenced operations and we expect that 36




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CHINA FINANCE ONLINE CO. LIMITED competition will continue to intensify. More broadly, we also compete, directly and indirectly, for
users and subscribers with companies in the business of providing financial data and information
services, including:  

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 and sohu.com;

financial information web pages offered by websites such as homeway.com.cn and
stockstar.com.cn;

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

stock brokerage companies, especially stock brokerage companies with online trading
capabilities, such as Haitong Securities. Our ability to compete depends on many factors, including the comprehensiveness, timeliness and
trustworthiness of our content, the market acceptance, pricing and sophistication of our analytical
tools, the ease of use of our information platform and the effectiveness of our sales and marketing
efforts. Many of our existing competitors, as well as a number of potential new competitors, have longer
operating histories, greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we do. This may allow them to adopt our business
model and devote greater resources than we can to the development and promotion of products and
services similar to or better than our own. These competitors may also engage in more extensive
research and development, undertake more far-reaching marketing campaigns, adopt more aggressive
pricing policies and offer products and services that achieve greater market acceptance than ours.
They may also undercut us by making more attractive offers to our existing and potential employees,
content providers and sponsors. New and increased competition could result in price reductions for
our service packages, reduced margin or loss of market share, any of which could materially
adversely affect our business, results of operations and financial condition. Intellectual property Our intellectual property is an essential element of our business operations. We rely on copyright,
trademark, trade secret and other intellectual property law, as well as non-competition,
confidentiality and license agreements with our employees, suppliers, business partners and others
to protect our intellectual property rights. Our employees are generally required to sign
agreements to acknowledge that all inventions, trade secrets, works of authorship, developments and
other processes generated by them on our behalf are our property, and to assign to us any ownership
rights that they may claim in those works. Despite our precautions, it may be possible for third
parties to obtain and use intellectual property that we own or license without consent. Our PRC subsidiaries, CFO Beijing and Fortune Software, are the registered owners of 12 software
copyrights, each of which has been registered with the State Copyright Bureau of the PRC. We have also registered one domain name relating to our website, www.jrj.com.cn, with the China
Internet Network Information Center, a domain name registration service in the PRC. In October,
2004, we purchased another domain name relating to our website, www.jrj.com, from a U.S. company.
We have assigned Fuhua the right to use our website domain names to enable it to host our website
on our behalf. We do not currently have any trademarks registered with the China Trademark Office, but we have
filed applications for trademark registration of ''Financial Street Fuhua in Chinese and three
other Chinese variations of Financial Street Fuhua with the Trademark Bureau of the State
Administration for Industry and Commerce of China. Regulation We operate our business in China under a legal regime that consists of the State Council, which is
the highest 37




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CHINA FINANCE ONLINE CO. LIMITED authority of the executive branch of the PRC central government, and several ministries and
agencies under its leadership, including:  

the Ministry of Information Industry;

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. The State Council and these ministries and agencies have issued a series of rules that regulate a
number of different substantive areas of our business, which are discussed below. Foreign ownership restriction on Internet content provision businesses PRC regulations currently limit foreign ownership of companies that provide Internet content
services, including our business of providing financial information and data to Internet users, to
50%. In order to comply with this foreign ownership restriction, we operate our website in China
through Fuhua, which is wholly owned by Wu Chen, a financial manager at International Data Group
China, Ltd., a PRC company affiliated with IDG Technology Venture Investment, Inc. and IDG
Technology Venture Investments, LP, two of our principal shareholders, and Jun Ning, our chairman
and chief executive officer, who are both PRC citizens. Under PRC law, we cannot hold the licenses
and approvals necessary to operate our website because those licenses and approvals can not be held
by foreign entities or majority foreign-owned entities. We, as a company incorporated in Hong Kong,
SAR, are a foreign entity for this purpose. CFO Beijing and Fortune Software cannot hold such
licenses and approvals because they are wholly foreign-owned enterprises. There are, however, substantial uncertainties regarding the interpretation and application of
current or future PRC laws and regulations. Accordingly, we cannot assure you that the PRC
regulatory authorities will not ultimately take a view that is contrary to the opinion of our
PRC legal counsel. If the PRC government finds that the agreements that establish the
structure of our operations in China do not comply with PRC government restrictions on foreign
investment in our industry, we could be subject to severe penalties. Licenses and permits There are a number of aspects of our business which require us to obtain licenses from a variety of
PRC regulatory authorities. In order to host our website, Fuhua is required to hold an Internet content provider, or ICP,
license issued by the Ministry of Information Industry or its local offices. Fuhua currently holds
an ICP license issued by Beijing Communications Administration, a local office of the Ministry of
Information Industry. Each ICP license holder that engages in supply of analysis and research information relating to
stocks and other securities must obtain a securities advisory permit from China Securities
Regulatory Commission, or the CSRC. We currently do not hold a securities advisory permit. We
receive securities analysis and research information from licensed securities advisors that hold
securities advisory permits, and we have clearly stated on our websites and in our software the
source of such information as required by the CSRC. A recent regulation issued by the Ministry of Information Industry requires short message, or SMS,
content providers to obtain an SMS license from the Ministry of Information Industry or its local
offices. We have obtained 38




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CHINA FINANCE ONLINE CO. LIMITED the required SMS license for the delivery of our financial short message content. Furthermore, the Ministry of Information Industry has promulgated rules requiring ICP license
holders that provide online bulletin board services to register with, or obtain an approval from,
the relevant telecommunications authorities. Fuhua has obtained such approval from Beijing
Communications Administration, the government agency in charge of this matter in Beijing. Regulation of Internet content The PRC government has promulgated measures relating to Internet content through a number of
ministries and agencies, including the Ministry of Information Industry, the Ministry of Culture
and the State Press and Publications Administration. These measures specifically prohibit Internet
activities, which include provision of financial information through the Internet, that result in
the publication of any content which is found to, among other things, propagate obscenity, gambling
or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or
compromise State security or secretes. If an ICP license holder violates these measures, the PRC
government may revoke its ICP license and shut down its websites. Fuhuas ICP license expressly states that it is not allowed to publish news, among other things, in
relation to its Internet content provision. Specifically, the Press Office of Beijing Peoples
Government, the government authority regulating news publication, confirmed with us that so long as
we do not provide general news on politics, society or culture, or
establish a news column, or
provide such information under express heading of news, we are not required to obtain a license
to publish financial or economic related news content. Regulation of information security Internet content in China is also regulated and restricted by the PRC government to protect State
security. The National Peoples Congress, Chinas national legislative body, has enacted a law that
may subject to criminal punishment in China any effort to: (1) gain improper entry into a computer
or system of strategic importance; (2) disseminate politically disruptive information; (3) leak
State secrets; (4) spread false commercial information; or (5) infringe intellectual property
rights. The Ministry of Public Security has promulgated measures that prohibit use of the Internet in ways
which, among other things, result in a leakage of State secrets or a spread of socially
destabilizing content. The Ministry of Public Security has supervision and inspection rights in
this regard, and we may be subject to the jurisdiction of the local security bureaus. If an ICP
license holder violates these measures, the PRC government may revoke its ICP license and shut down
its websites. Intellectual property rights The State Council and the State Copyright Bureau have promulgated various regulations and rules
relating to protection of software in China. Under these regulations and rules, software owners,
licensees and transferees should register their rights in software with the State Copyright Bureau
or its local offices and obtain software copyright registration certificates. Although such
registration is not mandatory under PRC law, software owners, licensees and transferees are
encouraged to go through the registration process and registered software rights may receive better
protections. We have registered all of our self-developed software with the State Copyright Bureau. PRC law requires owners of Internet domain names to register their domain names with qualified
domain name registration agencies approved by the Ministry of Information Industry and obtain a
registration certificate from such registration agencies. A registered domain name owner has an
exclusive use right over its domain name. Unregistered domain names may not receive proper legal protections and may be misappropriated by
unauthorized third parties. We have registered our primary domain name, www.jrj.com.cn, with CNNIC,
a domain name registration agency approved by the Ministry of Information Industry and obtained a
registration certificate for this domain name and have registered another domain name, www.jrj.com,
with the Internet Corporation for Assigned Names and Numbers, or ICANN, and obtained a certificate
for this domain name. ICANN is an internationally organized, non-profit corporation that has
responsibility for Internet Protocol (IP) address space allocation, protocol identifier assignment,
generic (gTLD) and country code (ccTLD) Top-Level Domain name system management, and root server
system management functions. These services were originally performed under U.S. 39




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CHINA FINANCE ONLINE CO. LIMITED Government contract by the Internet Assigned Numbers Authority, or IANA, and other entities. ICANN
now performs the IANA function. Website name PRC law requires entities and individuals operating commercial websites to register their website
names with the State Administration of Industry and Commerce, or the SAIC, or its local offices and
obtain a commercial website name registration certificate. If any entity or individual operates a
commercial website without obtaining such certificate, it may be charged a fine or imposed other
penalties by the SAIC or its local offices. We have registered our
website name, JRJ Investment
and Finance Network, with, and received a commercial website name registration certificate from,
Beijing municipal SAIC. Privacy protection PRC law does not prohibit Internet content providers from collecting and analyzing personal
information from their users. We require our users to accept a user agreement whereby they agree to
provide certain personal information to us. PRC law prohibits Internet content providers from
disclosing to any third parties any information transmitted by users through their networks unless
otherwise permitted by law. If an Internet content provider violates these regulations, the
Ministry of Information Industry or its local offices may impose penalties and the Internet content
provider may be liable for damages caused to its users. Advertising regulation PRC law requires entities conducting advertising activities to obtain an advertising permit from
the SAICs local offices. Entities conducting advertising activities without such permit may be
charged a fine or imposed other penalties by the SAICs local offices. Currently, foreign investors
cannot own more than 70% equity interest in an advertising agency in China. We hold our advertising
permit through Fuhua, a PRC domestic company wholly owned by Jun Ning and Wu Chen. C.Organizational structure. We conduct substantially all of our business through our wholly owned subsidiaries in China, CFO
Beijing and Fortune Software. In addition, we are dependent on Fuhua to host our website. The following table sets forth the details of our subsidiaries: Country of
    
    
    OwnershipName
    
    Incorporation
    
    
    InterestChina Finance Online (Beijing) Co., Ltd.
    
    China
    
    
    100
    %Fortune Software (Beijing) Co., Ltd.
    
    China
    
    
    100
    %
 40




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CHINA FINANCE ONLINE CO. LIMITED The following diagram illustrates our corporate and share ownership structure: (CHART)   (1)
    
    Jun Ning is our chairman and chief executive officer.(2)
    
    Wu Chen is a financial manager at International Data Group China, Ltd., a PRC company
affiliated with IDG Technology Venture Investment, Inc. and IDG Technology Venture
Investments, LP, two of our principal shareholders. PRC regulations currently limit foreign ownership of companies that provide Internet content
provider services, or ICP services, which include our business of providing financial information
and data to Internet users, to 50%. PRC regulations also limit foreign ownership of advertising
agencies that provide online advertising services to be no more than 70%. We are a Hong Kong
company and we conduct our operations solely in China through CFO Beijing and Fortune Software, our
wholly owned subsidiaries. We are a foreign enterprise and CFO Beijing and Fortune Software are
foreign invested enterprises under PRC law and accordingly, neither we, CFO Beijing or Fortune
Software is eligible for a license to operate ICP services or provide online advertising services.
In order to comply with foreign ownership restrictions, in December 2000, we formed our affiliated
Chinese entity, Fuhua, with Wu Chen and Xinzheng Wang, our former chairman who later transferred
his holdings in Fuhua to Jun Ning, our chairman and chief executive officer. Both Wu Chen and Jun
Ning are PRC citizens and own 55% and 45% of the equity interests in Fuhua, respectively. Fuhua
holds the licenses and approvals that are required to operate our website, CFO Beijing owns our
www.jrj.com.cndomain name, and we own our www.jrj.comdomain name. Fuhua also holds the
licenses and approvals required to operate our online advertising business. We and CFO Beijing have
entered into a series of contractual arrangements with Fuhua and its shareholders. As a result of
these 41




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CHINA FINANCE ONLINE CO. LIMITED contractual arrangements, we are considered the primary beneficiary of Fuhua and accordingly, we
consolidate Fuhuas results of operations in our financial statements. Pursuant to our contractual arrangements with Fuhua, we provide equipment, services and domain name
licenses to Fuhua in exchange for fees. The principal equipment lease, services and domain name
license agreements that we have 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;

a domain name licensing agreement, pursuant to which CFO Beijing licenses to Fuhua
its domain name, www.jrj.com.cn; and

a domain name licensing agreement, pursuant to which we license to Fuhua our domain
name, www.jrj.com. We made a loan to each of the shareholders of Fuhua, Wu Chen and Jun Ning, solely for the purposes
of capitalizing Fuhua. Pursuant to the loan agreements, Wu Chen and Jun Ning can only repay the
loans by transferring all of their interests in Fuhua to us or a third party designated by us.
While Hong Kong law limits the maximum interest payment chargeable under a loan to 60% of the total
principal amount per annum, we do not believe this limitation will have a material adverse effect
on our business and operations, or will result in a material amount being paid to the shareholders
of Fuhua if and when they are permitted to transfer their interests in Fuhua to us. In addition, we
have entered into agreements with Fuhua and its shareholders that provide us with the
substantial ability to control Fuhua. Pursuant to these contractual arrangements:  

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. Each of the contractual arrangement with Fuhua and its shareholders can only be amended with the
approval of our audit committee or another independent body of our board of directors. Messrs. Ning
and Chen are not deriving any material personal benefits from these arrangements and are not
expected to receive any consideration, other than cancellation of the existing loans, upon future
transfer of their entire equity interests in, or all of the assets of, Fuhua to us. 42




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CHINA FINANCE ONLINE CO. LIMITED D.Property, plants and equipment. Our principal executive offices, customer service center and principal sales, marketing and
development facilities are currently located at Room 610B, 6/F, Pingan Mansion, No. 23 Financial
Street, Beijing, Peoples Republic of China 100032, where CFO Beijing leases 971 square meters
under a lease that expires on July 3, 2005 and shares the office space with Fuhua. Fortune
Softwares offices are located at 12B11, Qingyun Dangdai Building, No. 43 North Third Ring Road
West, Hai Dian District, Beijing, where Fortune Software leases 74.4 square meters under a lease
that expires on March 31, 2006. We intend to seek additional office space as required for our
operations as needed on commercially reasonable terms. We believe that we will be able to obtain
adequate facilities, principally through the leasing of appropriate properties, to accommodate our
future expansion plans. 
 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 onForm 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. A.Overview. We are one of the leading companies that specialize in providing online financial and listed
company data and information in China. We offer subscription-based services based on a single
integrated information platform that combines financial analysis tools, real-time and historical
data, news, research reports and online forums. Our service offerings can be accessed using our
research tools and through our website at www.jrj.com. Our service offerings are used by and
targeted at a broad range of investors in China, from individual investors managing their own money
to professional investors, which consist of institutional investors managing large sums of money on
behalf of their clients and high net worth individuals. In addition, our service offerings are
targeted at other financial professionals such as investment bankers, stock analysts and financial
reporters. As a result of our efforts to develop and offer more comprehensive service packages to
our subscribers, we have created a growing base of high-end subscribers, determined by us as
subscribers who pay us an annual subscription fee of RMB2,400 (US$290) or more. High-end
subscribers tend to require our more comprehensive service packages and we have increasingly
focused our product development efforts at high-end subscribers complex needs. The number of our
high-end subscribers with active subscriptions grew significantly from approximately 2,800 for the
twelve months ended March 31, 2004 to approximately 5,700 for the twelve months ended March 31,
2005. Our net revenues increased by 165.0% to $6.0 million in 2004 from $2.3 million in 2003. Our net
income increased by 286.4% to $4.6 million in 2004 from $1.2 million in 2003. 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 period. Our deferred
revenues were $3.5 million as of December 31, 2004, representing a 172.8% increase from our
deferred revenues of $1.3 million as of December 31, 2003. Key factors affecting our operating results and financial condition Some of the key factors affecting our operating results and financial condition include the
following:  

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; 43




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CHINA FINANCE ONLINE CO. LIMITED  

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 Fortune Software being a foreign
invested high-technology company;

our cost structure, including, in particular, our cost for raw data; and

the desirability of our service packages relative to other products and offerings available in the market. We derive revenues primarily from annual subscription fees from subscribers to our financial data
and information services. Our subscription service is substantially dependent on user demand for
market intelligence on Chinas securities markets. Such demand has fluctuated with the level of
trading activity in Chinas securities markets. During the past several years, Chinas securities
markets have experienced significant decline. The Shanghai Stock Exchange A-Share Index and the
Shenzhen Stock Exchange A-Share Index declined 44.3% and 55.8%, respectively, from January 2, 2001
to March 31, 2005. During the same period, total daily trading volume of the Shanghai Stock
Exchange and the Shenzhen Stock Exchange decreased by 44.0% and 61.3%, respectively, reflecting a
declining level of interest among Chinas investors during that period. We issued an earnings
warning in February 2005, in which we reiterated the correlation of our business operations and
financial conditions with the performance of Chinas securities markets, and warned that, unless
there is a fundamental turn-around in Chinas securities market in the near future, we expect that
our revenue and profitability in the first quarter of 2005 and in the entire fiscal year 2005 will
be adversely affected. On April 25, 2005, the Shanghai Stock Exchange Index reached its lowest
level since May 1999, and its average daily trading volume in January 2005 was only approximately
28% of the average daily trading volume during the same period a year ago. If Chinas securities
markets continue to weaken, and if investors interest in Chinas securities markets continues to
decline, our business could be significantly and adversely affected. To a lesser extent, we also derive revenues through advertisement sales on our website, which
contributed $544,000 million in 2004 and accounted for less than 9% of our gross revenues in the
same year. We expect our revenues from online advertisement sales to increase in future periods as
we plan to increase our ability to place unobtrusive advertisements on our website. Our gross revenues also include the benefit of a refund from the PRC tax authorities for
value-added-taxes, or VAT, we are required to pay on the sale of subscriptions to our service
packages. We receive these refunds from the PRC tax authorities as part of the PRC governments
policy of encouraging software development in the PRC. There is generally a one-month lapse between
the time we complete a sale and pay the VAT on that sale and the time we receive the refund. We
recognized approximately $613,000 in revenue for VAT refunds in 2004. Gross revenues We generate subscription fee revenues from the sales of nine service packages we currently offer,
which are comprised of downloadable and web-based research tools. Depending on the research tools
and premium features selected by our subscribers, our subscribers pay us a subscription fee ranging
from RMB388 (US$47) for the most basic service we offer to as much as RMB14,900 (US$1,800) for our
most comprehensive service package we offer to our non-institutional subscribers, and US$5,000 for
CFO Pro, a service package we offer to institutional customers. Our subscription price for each of
our nine current service packages varies between these amounts, depending on the package. A
subscription permits the subscriber to use the selected service package for a one-year period. The most significant factors that affect our subscription revenues are:  

the number of registered users to our website;

the number of new subscribers purchasing our subscription services; 44




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CHINA FINANCE ONLINE CO. LIMITED  

the number of our repeat subscribers; and

the service packages selected by our subscribers. Although users of our website are not charged for visiting our website and obtaining basic
financial information, such as real-time stock quotes and historical financial information for all
of Chinas listed company stocks, bonds and mutual funds, financial news and research reports,
these users are our primary source of existing and potential subscribers. As users frequent our
website and rely on our offerings, we expect that a number of them will opt to purchase our
subscription services. Substantially all of our revenues are currently derived from our
subscription services. New subscribers for a specified period are subscribers who subscribed to any
of our service packages during that period who were not subscribers at the beginning of that
period. The number of new subscribers in a period is a measure of our revenue growth in that period
attributable to the expansion of our customer base. Repeat subscribers for a specified period are
subscribers who either have purchased more than one service package from us during that period, or
have purchased our service packages in the past and have purchased at least one service package
during that period. We view increases in repeat subscribers as a measure of market acceptance and
customer loyalty to our service offerings. We generally encourage our subscribers to migrate to newer, more comprehensive and higher priced
service offerings. Because we charge more for our newer and more comprehensive service packages, as
the number of subscribers for a given period selecting one of our more comprehensive service
packages increases, our average subscription fee per subscriber, or ASF, would be expected to
increase for that period. We price our service packages based on the research tools included and
their level of comprehensiveness, as well as on market demand. From time to time, we may offer
discounts to and promotional rates for our service packages, which may be offered to new
subscribers or repeat subscribers. For example, we currently offer subscribers to Grand Reference
V, the most comprehensive service package we offer to non-institutional subscribers, a one-time
renewal fee of RMB480 (US$58) for a one-year non-upgraded subscription to Grand Reference V. If
the number of repeat subscribers in a period electing to subscribe to one of our more comprehensive
service packages at discount or promotional rates increases, ASF for that period would be expected
to decrease. Net revenues Our net revenues reflect a deduction from our gross revenues for business taxes and related
surcharges incurred in connection with our China operations. Because CFO Beijing, Fortune Software
and Fuhua operate in China, their gross revenues from sales that are not subject to VAT are subject
to a business tax at a rate of 5%. We expect to pay business tax in the PRC on online advertising
revenues we expect to generate in the future. Accordingly, we expect our business tax payments to
increase in line with the increase in our advertising revenues in future periods. Revenue recognition We charge our subscribers a subscription fee for the right to use our service packages for a
one-year period. Since we accept cash as the only payment method, our subscription fee is paid in
full prior to the delivery of our service packages. Therefore, we do not take any credit risk with
respect to our subscribers. Upon receipt of payment in full, we activate our subscribers account,
marking the start of the one-year subscription period, and promptly provide the subscriber with
that accounts access code. We begin to recognize subscription fees as revenue upon activation of
the subscribers account and then ratably over the twelve month period corresponding with the
subscribers subscription period. Subscription fees that have been paid but not yet recognized are
accounted for as deferred revenue on our balance sheets. Deferred revenue is reduced
proportionately as revenue is recognized ratably over the twelve month service period. We derive advertising fees from advertising sales on our website principally for fixed periods of
time, which are generally less than one year. We recognize advertising fees ratably over the
periods during which the advertisements are displayed on our website. Cost of revenues Our cost of revenues consists of expenses directly related to the offering of our software
subscription services. Our cost of revenues primarily consists of cost of data, salary and
compensation, depreciation and rent. Cost of revenues accounted for 24%, 13% and 7% of our net
revenues in 2002, 2003 and 2004, respectively. We believe 45




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CHINA FINANCE ONLINE CO. LIMITED our relatively low ratio of cost of revenues to net revenues is primarily due to competitive labor
expenses in China and, to a less extent, the efficiency of our web content and database personnel.
We currently expect our cost of revenues will continue to account for a similar percentage of our
net revenues in 2005. Cost of data.Our cost of data consists of fees we pay to the stock exchanges and our other data
providers pursuant to our commercial agreements with those parties. These contracts are typically
for a fixed rate, without regard to the level of use, for a term, typically between one and three
years, depending on the provider. Our cost of data is the largest component of our cost of
revenues, constituting 48% of our cost of revenues in 2004, and is likely to be our most variable
element of cost of revenues. Our cost of data is expected to increase (1) 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 (2) due to rate increases we may experience in the future
upon renewal of our existing agreements. Salary and compensation.Salary and compensation expenses include wages, bonuses and other
benefits, including welfare benefits. Salary and compensation included in our cost of revenues
relate to our web content and database personnel. We expect that our salary and compensation
expenses will increase in the future as we intend to increase our customer service performance as
our business further grows and expands. Rent.Rent attributable to cost of revenues reflects that portion of our rent expense that we
believe is directly used in the provision of our web content and database services. We allocate
rent to cost of revenues to the extent the space is occupied by our web content and database
personnel. Depreciation.Depreciation consists of depreciation of property and equipment, primarily our
network and servers. We include depreciation within cost of revenues when the relevant assets are
directly related to the provision of our web content and database services. Operating expenses Our operating expenses consist of general and administrative expenses, product development
expenses, sales and marketing expenses and stock-based compensation expenses. Our operating
expenses have decreased as a percentage of net revenues for each of 2002, 2003 and 2004, due to
economies of scale we have achieved allowing us to increase our revenues without significantly
increasing our operating expenses, the majority of which are relatively fixed relative to the level
of our operations. The most significant factors affecting our operating expenses are:  

advertising expenses relating to our sponsorship arrangements with portals, search
engines and other websites; and

salary and benefits for our employees, particularly our sales and marketing personnel
and our management team. We expect our operating expenses will continue to increase for the foreseeable future, but the rate
of such increase will depend primarily on our personnel needs, our advertising needs and our
computer, network and server capacity, including efforts we may undertake to expand our online
advertising business. General and administrative expenses.General and administrative expenses primarily consist of
salary and compensation for our general management, finance and administrative personnel, rent,
professional expenses and other expenses, including travel and other general business expenses,
office supplies and general office furniture and equipment. We expect our general and
administrative expenses to increase in 2005 and for the foreseeable future as a result of expenses
associated with our becoming a public company in the U.S. Among some of the general administrative
expenses we expect to incur are additional professional expenses, costs of directors and officers
liability insurance and expenses incurred in connection with our compliance with the Sarbanes-Oxley
Act of 2002. Product development expenses.Our product development expenses primarily consist of salary and
compensation expenses of personnel engaged in the research, development and implementation of our
new service offerings, rent and depreciation of equipment attributable to our product development
efforts. We expect that our product development expenditures will remain relatively flat for at
least the next twelve months, which we believe will be 46




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CHINA FINANCE ONLINE CO. LIMITED sufficient to meet our expected product development needs during that period. Sales and marketing expenses.Our sales and marketing expenses primarily consist of salary and
compensation for our sales and marketing personnel and advertising expenses that we pay to portals,
search engines and other websites that we view as important for attracting users for our services.
In 2002, advertising expenses also included payments we made to an Internet advertising agent who
was primarily responsible for the negotiation and placement of our advertisements on other
websites. However, since November 2002, we have directly negotiated with portals, search engines
and other websites and have now fully internalized our advertising efforts. Growth in our sales and
marketing expenses will depend on the ability of our advertising department to reach agreements
with additional portals and websites and the rate such third parties will charge us to advertise on
their websites. We expect to continue to increase our sales and marketing efforts in the
foreseeable future, including our plan to hire up to ten additional sales and marketing personnel
to focus on online advertising sales for our website. Stock-based compensation expenses.In May 2003, we issued 2,666,600 ordinary shares at par value,
which were valued at $0.036 per share, to Jun Ning, our chairman and chief executive officer,
resulting in a stock-based compensation expense of $96,000. During the year ended December 31,
2004, we granted options to purchase a total of 12,517,988 of our ordinary shares to our directors,
officers and employees, and some of our consultants and advisors (including unvested options to
purchase 25,000 ordinary shares that were granted in 2004 but were returned to the pool of our
ungranted options upon resignation of two employees holding such options in December 2004), for
which we recorded $53,000 of deferred stock compensation during the year ended December 31, 2004,
of which we amortized $33,000 and incurred $73,000 of stock-based compensation expense for the same
period. In April 2004, we issued 730,000 ordinary shares at par value to Sam Qian, our president
and chief financial officer, which vest over a two year period and were valued at $0.67 per share,
resulting in deferred stock compensation of $489,000 in 2004, of which we amortized $183,000 over
the same period as stock-based compensation expense. Stock option plan and option agreements We adopted the 2004 Stock Incentive Plan, or the Plan, in January 2004, under which we could issue
share options with the right to purchase up to 5,688,488 ordinary shares to our directors,
officers, employees, individual consultants and advisors. We amended the Plan in September 2004 to
permit the issuance of options to purchase up to an additional 5,000,000 ordinary shares. We
granted options under the Plan with the right to purchase a total of 5,688,488 ordinary shares
(including 90,000 options to eligible individual consultants and advisors) in 2004. In December
2004, 25,000 of the granted but unvested options were returned to the pool of our ungranted options
as a result of two former employees resignation of employment with us. In February 2005, we
granted additional options under the Plan with the right to purchase a total of 4,353,000 ordinary
shares to selected directors, officers, employees, individual consultants and advisors. As a
result, we may in the future grant options to purchase up to an additional 672,000 ordinary shares
under the Plan. We also granted share options to purchase up to 6,829,500 ordinary shares in
January 2004, under option agreements that were independent of the Plan, to other consultants and
business advisors. We have a total number of 10,194,988 options that are vested and immediately exercisable for
ordinary shares as of March 31, 2005. All of the options we granted in January 2004 have an
exercise price of $0.16 per share and expire on March 5, 2009, the options we granted in June 2004
have an exercise price of $1.04 per share and expire on March 5, 2009 and the options we granted in
February 2005 have an exercise price of $1.31 per share and expire on February 18, 2015. All of the
options granted under the Plan to our directors and managers have a vesting period of one to four
years, while options granted under the Plan to our other employees vest over a period of five
years. The options we granted to consultants and advisers vested immediately upon grant or within
two years. Critical accounting policies We prepare our financial statements in conformity with U.S. GAAP, which requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities on the date of the financial statements and the reported amounts
of revenues and expenses during the financial reporting period. We continually evaluate these
estimates and assumptions based on the most recently available information, our own historical
experience and on various other assumptions that we believe to be reasonable under the
circumstances. Since the use of estimates is an integral component of the financial reporting
process, actual results could differ from those estimates. Some of our accounting policies require
higher degrees of judgment than others in their application. We consider the policies discussed
below to be critical to an 47




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CHINA FINANCE ONLINE CO. LIMITED understanding of our financial statements as their application places the most significant demands
on our managements judgment. Income taxes.We record a valuation allowance to reduce our deferred tax assets to the amount that
we believe is more likely than not to be realized. In the event we were to determine that we would
be able to realize our deferred tax assets in the future in excess of their recorded amount, an
adjustment to our deferred tax assets would increase income in the period such determination was
made. Likewise, should we determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to our deferred tax assets would be charged to
income in the period such determination was made. Stock-based compensation.We grant stock options to our employees and certain non-employees. For
stock option grants to our employees, we record a compensation charge for the excess of the fair
value of the stock at the grant date or any other measurement date over the amount an employee must
pay to acquire the stock, under Accounting Principles Board Opinion No. 25, or APB Opinion No. 25.
The compensation expense is recognized over the applicable service period, which is usually the
vesting period. We account for stock-based awards to non-employees by recording a charge for the
services rendered by the non-employees using the Black-Scholes option pricing model. Starting from the next fiscal year after June 15, 2005, we will be required under SFAS No. 123
(revised 2004), or SFAS No. 123(R), issued by the FASB in December 2004 to recognize all
share-based payments to employees, including grants of employee stock options, in our income
statement based on the grant-date fair values. Pro forma disclosure, as we have adopted in Note 2p
to our consolidated financial statements included elsewhere in this annual report, will no longer
be permitted. We have not quantified the effect of the future adoption of SFAS No. 123(R) on a
going forward basis. Prior to the adoption of SFAS 123(R), we will continue to utilize the
accounting methods prescribed by APB Opinion No. 25. Results of operations The following table sets forth certain information relating to our results of operations, and our
consolidated statements of operations as a percentage of net revenues, for the periods indicated: For the year ended December 31,(in thousands of U.S. dollars, except as % of net revenues)(1)
    
    2002
    
    
    2003
    
    
    2004Consolidated statement of
operations and
comprehensive income
(loss) data:Gross revenues(2)
    
    $
    1,098
    
    
    
    104.6
    %
    
    $
    2,354
    
    
    
    103.7
    %
    
    $
    6,064
    
    
    
    100.8
    %Business tax
    
    
    (48
    )
    
    
    (4.6
    )
    
    
    (83
    )
    
    
    (3.7
    )
    
    
    (48
    )
    
    
    (0.8
    )Net revenues
    
    
    1,050
    
    
    
    100
    %
    
    
    2,271
    
    
    
    100
    %
    
    
    6,016
    
    
    
    100
    %Cost of revenues
    
    
    (254
    )
    
    
    (24.2
    )
    
    
    (298
    )
    
    
    (13.1
    )
    
    
    (393
    )
    
    
    (6.5
    )Gross profit
    
    
    796
    
    
    
    75.8
    
    
    
    1,973
    
    
    
    86.9
    
    
    
    5,623
    
    
    
    93.5Operating expenses:General and administrative
    
    
    (253
    )
    
    
    (24.1
    )
    
    
    (304
    )
    
    
    (13.4
    )
    
    
    (441
    )
    
    
    (7.3
    )Product development
    
    
    (157
    )
    
    
    (14.9
    )
    
    
    (149
    )
    
    
    (6.6
    )
    
    
    (172
    )
    
    
    (2.9
    )Sales and marketing
    
    
    (275
    )
    
    
    (26.2
    )
    
    
    (284
    )
    
    
    (12.5
    )
    
    
    (800
    )
    
    
    (13.3
    )Stock-based compensation
    
    
    
    
    
    
    0.0
    
    
    
    (96
    )
    
    
    (4.2
    )
    
    
    (289
    )
    
    
    (4.8
    )Total operating expenses
    
    
    (685
    )
    
    
    (65.3
    )
    
    
    (833
    )
    
    
    (36.7
    )
    
    
    (1,702
    )
    
    
    (28.3
    )Income from operations
    
    
    111
    
    
    
    10.6
    
    
    
    1,140
    
    
    
    50.2
    
    
    
    3,921
    
    
    
    65.2Interest income
    
    
    95
    
    
    
    9.1
    
    
    
    51
    
    
    
    2.3
    
    
    
    294
    
    
    
    4.9Interest expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other expense, net
    
    
    (4
    )
    
    
    (0.3
    )
    
    
    (1
    )
    
    
    (0.1
    )
    
    
    (2
    )
    
    
    Income before income taxes
    
    
    203
    
    
    
    19.3
    
    
    
    1,190
    
    
    
    52.4
    
    
    
    4,213
    
    
    
    70.1Income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    384
    
    
    
    6.4Net income
    
    $
    203
    
    
    
    19.3
    %
    
    $
    1,190
    
    
    
    52.4
    %
    
    $
    4,597
    
    
    
    76.4
    %
   (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, 2002, 2003 and 2004, all translations from Renminbi to U.S. dollars were
calculated at RMB8.2770, RMB8.2770 and RMB8.2768 per US$1.00, respectively. 48




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CHINA FINANCE ONLINE CO. LIMITED  (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, 2004 compared to year ended December 31, 2003 Revenues Our gross revenues increased by 157.6% from $2.4 million in 2003 to $6.1 million in 2004. This
increase is primarily due to growth in revenues from our subscription services. Our new subscribers
increased by 54.9% to 26,800 new subscribers for the twelve months ended December 31, 2004 from
17,300 new subscribers during the same period in 2003, and our average subscription fee per
subscriber, or ASF, for new subscribers increased by 90.3% to $177 for the twelve months ended
December 31, 2004 from $93 for the same period in 2003. Our repeat subscribers increased by 22.8%
to 12,400 for the twelve months ended December 31, 2004 from 10,100 for the same period in 2003,
and our ASF for repeat subscribers increased by 118.9% to $243 for the twelve months ended December
31, 2004 from $111 for the same period in 2003. The increase in our ASF for both new and repeat
subscribers reflects price increases associated with our continued efforts to provide more
comprehensive and higher priced service offerings. The increase in our ASF for repeat subscribers
reflects the successful migration of a number of repeat subscribers to our more comprehensive and
higher priced service offerings. Our revenues derived from online advertising sales increased to $544,000 in 2004 from an
insignificant amount in 2003. This increase is primarily due to our increased efforts in 2004 to
market our advertising services to online advertisers. Our business taxes attributable to our gross revenues decreased from $83,000 in 2003 to $48,000 in
2004, primarily because seven of our products received certificates from the PRC government
qualifying them as software products and revenues from these software products became subject to
VAT in lieu of business tax. After taking into account business taxes attributable to our gross
revenues, our net revenues increased by 165.0% to $6.0 million in 2004 from $2.3 million in 2003. Cost of revenues Our cost of revenues in 2004 increased by 32.0% to $393,000 from $298,000 in 2003 primarily because
our cost of data increased by 84.7% to $190,000 in 2004 from $103,000 in 2003, as we increased the
number of our content and data providers to increase the amount of data and information available
to our subscribers and users. Gross profit As a result of the foregoing, our gross profit increased by 185.0% to $5.6 million in 2004 from
$2.0 million in 2003. Operating expenses Our operating expenses increased by 104.3% to $1.7 million in 2004 from $833,000 in 2003. The
increase in our operating expenses was primarily the result of an increase in our sales and
marketing expenses, an increase in our stock-based compensation expenses and, to a lesser extent,
increases in our general and administrative expenses and in our product development expenses.
Operating expenses as a percentage of net revenues decreased to 28.3% in 2004 from 36.7% in 2003
because our net revenues grew at a faster rate than the rate of increase in our operating expenses. General and administrative.Our general and administrative expenses increased by 45.2% to $441,000
in 2004 from $304,000 in 2003 due primarily to an increase in our employee headcount, which
resulted in an increase in salary expenses of $98,000, as well as an increase in bank finance
charges for online payments made by some of our subscribers in the amount of $24,000, partially
offset by reductions in other general office expenses. In addition, the increase in our general and
administrative expenses reflected increased compliance costs associated with our becoming a public
company in the U.S. Our general and administrative expenses as a percentage of net revenues
decreased to 7.3% in 2004 from 13.4% in 2003. Product development.Our product development expenses increased by 15.6% to $172,000 in 2004 from
$149,000 49




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CHINA FINANCE ONLINE CO. LIMITED in 2003 due primarily to employee salaries. However, our product development expenses decreased as
a percentage of net revenues to 2.9% in 2004 from 6.6% in 2003, as our net revenues increased at a
faster rate than the rate of increase in our product development expenses. Sales and marketingOur sales and marketing expenses increased by 181.7% to $800,000 in 2004 from
$284,000 in 2003. This increase is largely attributable to an increase in our advertising
expenditures and an increase in our customer service and sales personnel to address increased
subscription demand. Our advertising expenditures increased substantially to $415,000 in 2004 from
$71,000 in 2003, primarily reflecting increases in our sponsorship arrangements with portals,
search engines and other websites and, to a lesser extent, an increase in the advertising fee we
pay to one of our sponsors. Salary and compensation expenses attributable to our sales and
marketing personnel increased by 74.7% to $211,000 in 2004 from $121,000 in 2003, reflecting an
increase in headcount. Our sales and marketing expenses as a percentage of net revenues increased
slightly to 13.3% in 2004 from 12.5% in 2003. Our acquisition cost per new subscriber increased by
81.7% to $29.8 in 2004 from $16.4 in 2003, primarily due to increases in sales and marketing
expenses as we expanded advertising efforts to increase the number of our sponsorship arrangements
and as we increased the size of our sales and marketing team in 2004. Stock-based compensation.Our stock-based compensation expense increased by 200.4% to $289,000 in
2004 from $96,000 in 2003. We incurred stock-based compensation expense of $289,000 in 2004 from
our grant of 12,197,988 stock options to our directors, officers, employees, consultants and
advisors in 2004, and from our sale of 730,000 restricted shares in April 2004 to our chief
financial officer in connection with his initial employment. We incurred stock-based compensation
expense of $96,000 in 2003 from our sale of 2,666,600 ordinary shares to our chairman and chief
executive officer. Income from operations As a result of the foregoing, we had income from operations of $3.9 million in 2004, increased by
243.9% compared to income from operations of $1.1 million in 2003, and our operating margin
increased to 65.2% in 2004 from 50.2% in 2003. Interest income Our interest income increased by 473.7% to $294,000 in 2004 from $51,000 in 2003, due to a
significant increase in our cash balances derived primarily from net proceeds of our initial public
offering in October 2004 which amounted to $58.5 million. Income tax benefit Our income tax benefit increased to $384,000 in 2004 from nil in 2003, attributable to deferred tax
assets we recognized in 2004. Our wholly-owned subsidiary, CFO Beijing, enjoys preferential tax
treatments in China, including exemption from enterprise income tax for 2003 and 2004 and a
preferential enterprise income tax rate of 12% from 2005 to 2007. We did not record deferred tax
assets in 2003 because such deferred tax assets were expected to reverse in full during the
exemption period. Since our exemption period ends on December 31, 2004 and we are subject to a
preferential enterprise income tax rate of 12% in 2005, we recognized deferred tax assets of
$386,000 in 2004, accounting for 12% of the accumulated effect of revenue recognition of $3.2
million, which is expected to reverse in 2005 at the preferential enterprise income tax rate of
12%. Net income As a result of the foregoing, our net income increased by 286.3% to $4.6 million in 2004 from $1.2
million in 2003. Our net margin increased to 76.4% in 2004 from 52.4% in 2003. Year ended December 31, 2003 compared to year ended December 31, 2002 Revenues Our gross revenues increased by 114.4% to $2.4 million in 2003 from $1.1 million in 2002. This
increase resulted primarily from growth in revenues from our subscription services. Our new
subscribers increased by 5.6% to 17,300 new subscribers for the year ended December 31, 2003 from
16,400 new subscribers during the same 50




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CHINA FINANCE ONLINE CO. LIMITED period in 2002, and our average subscription fee per subscriber, or ASF, for new subscribers
increased by 34.4% to $93 for the year ended December 31, 2003 from $69 for the same period in
2002. Our repeat subscribers increased by 41.4% to 10,100 repeat subscribers for the year ended
December 31, 2003 from 7,100 repeat subscribers during the same period in 2002, and our ASF for
repeat subscribers for 2003 and 2002 remained approximately the same at $111. The increase in our
ASF for new subscribers reflects price increases associated with our continued efforts to provide
more comprehensive and higher priced service packages, such as the introduction of Grand Reference
v.3, Stock Finder and Storm. Our ASF for repeat subscribers in 2002 and 2003 remained relatively
flat because we introduced discounts to existing subscribers for some of our service packages
during 2003 when Chinas stock markets were experiencing weak performance. These discounts had the
effect of partially offsetting our efforts to introduce more comprehensive service packages at
higher prices and to migrate subscribers to these new packages. After taking into account business
taxes attributable to our revenues, our net revenues increased by 116.3% to $2.3 million in 2003
from $1.0 million in 2002. Cost of revenues Our cost of revenues increased by 17.3% to $298,000 in 2003 from $254,000 in 2002. This increase
was primarily due to increases in our cost of data and our depreciation expense. Our cost of data
increased by 40.9% to $103,000 in 2003 from $73,000 in 2002, due to an increase in the number of
vendors from which we acquired data and from rate increases with some of our vendors. Our
depreciation expense included in cost of revenues increased by 33.6% to $65,000 in 2003 from
$48,000 in 2002, as we expanded our network and server capacity in 2003 in connection with the
growth of our business. Our salary and compensation attributable to cost of revenues remained
relatively unchanged increasing by 3.1% to $87,000 in 2003 from $85,000 in 2002. As a percentage of
our net revenues, cost of services decreased from 24.2% in 2002 to 13.1% in 2003 as our revenues
grew at a faster rate than the rate of increase in our cost of revenues. Gross profit As a result of the foregoing, our gross profit increased 147.9% to $2.0 million in 2003 from
$796,000 in 2002. Operating expenses Our operating expenses increased by 21.6% to $833,000 in 2003 from $685,000 in 2002. The increase
in our operating expenses was principally a result of increases in our general and administrative
expenses, sales and marketing expenses and stock-based compensation expense, while our product
development expenses decreased slightly. Operating expenses as a percentage of net revenues
decreased to 36.7% in 2003 from 65.3% in 2002, primarily due to the economies of scale we have
achieved allowing us to increase revenues without significantly increasing expenses. General and administrative.General and administrative expenses increased by 19.9% to $304,000 in
2003 from $253,000 in 2002. This increase resulted from increases in salary and compensation
expenses and professional fees for audit and legal services work performed for us, which were
partially offset by decreases in rent, depreciation and other expenses. Salary and compensation
expenses increased to $176,000 in 2003 from $134,000 in 2002 primarily because we paid a one-time
directors fee to our former chairman in 2003 for his services rendered to our board of directors
and also because our welfare payments increased in 2003 as a result of change in government welfare
policy in 2002, which allowed us to use the overfunded portion of our employment contribution in
2001 to cover our welfare contribution obligations in 2002. In 2003, we were required to make
ordinary welfare payments as they became due. Professional expenses for audit and legal services
increased to $25,000 in 2003 from $9,000 in 2002 primarily because of expenses incurred in
connection with our fund raising efforts in 2003. Our general and administrative expenses as a
percentage of net revenues decreased to 13.4% in 2003 from 24.1% in 2002, because our general and
administrative expenses remained relatively fixed while our revenues increased. Product development.Our product development expenses decreased by 4.9% to $149,000 in 2003 from
$157,000 in 2002. This decrease was primarily attributable to the reduction in headcount of one of
our more highly compensated employees, partially offset by an increase in our depreciation
expenses. Our product development expenses as a percentage of net revenues decreased to 6.6% in
2003 from 14.9% in 2002, because our product development expenses remained relatively fixed while
our revenues increased. Sales and marketing.Our sales and marketing expenses increased by 3.3% to $284,000 in 2003 from
$275,000 in 51




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CHINA FINANCE ONLINE CO. LIMITED 2002, primarily due to the expansion of our internal sales and marketing department. Our salary and
compensation, depreciation and rent expenses increased as a result of an increase in the number of
our sales and marketing personnel from 15 as of December 31, 2002 to 25 as of December 31, 2003,
largely offset by reduced advertising costs to third parties resulting from our decision not to
renew our contract with a third party Internet advertising agent in November 2002 and to directly
place advertisements with portals, search engines and other websites. Our sales and marketing
expenses as a percentage of net revenues decreased to 12.5% in 2003 from 26.2% in 2002, as the
aggregate amount of our sales and marketing expenses remained relatively fixed even after we
increased our internal advertising efforts while our revenues increased. Our acquisition cost per
new subscriber decreased by 1.8% to $16.4 in 2003 from $16.7 in 2002. Stock-based compensation.Our stock-based compensation expenses increased to $96,000 in 2003,
resulting from our sale of 2,666,600 shares to our chairman and chief executive officer in May
2003. We did not incur any stock-based compensation expense in 2002. Income from operations As a result of the foregoing, we had income from operations of $1.1 million in 2003 compared to
income from operations of $111,000 in 2002. Our operating margin increased to 50.2% for 2003 from
10.6% for 2002, because our revenues grow at a faster rate than the rate of increase in our cost of
revenues and operating expenses. Interest income We had interest income of $51,000 and $95,000 in 2003 and 2002, respectively, reflecting a decrease
in the interest income we earned on our cash deposits due to a decrease on the deposit interest
rates in China during the two-year period, partially offset by an increase in our cash balances
during the periods. Net income As a result of the foregoing, our net income increased 487.6% to $1.2 million in 2003 from $203,000
in 2002. Our net margin increased to 52.4% in 2003 from 19.3% in 2002. B.Liquidity and capital resources. Cash flows and working capital As of December 31, 2004, we had approximately $70.6 million in cash and cash equivalents. As of the
same date, we did not have any outstanding debt. Our cash and cash equivalents primarily consist
of cash on hand and liquid investments with original maturities of three months or less that are
deposited with banks and other financial institutions. We generally deposit our excess cash in
interest bearing bank accounts. The following table shows our cash flows with respect to operating activities, investing activities
and financing activities in 2002, 2003 and 2004: For the year ended December 31,(in thousands of U.S. dollars)
    
    2002
    
    
    2003
    
    
    2004Net cash provided by operating activities
    
    $
    1,062
    
    
    $
    1,506
    
    
    $
    7,023Net cash used in investing activities
    
    
    (98
    )
    
    
    (152
    )
    
    
    (200
    )Net cash provided by financing activities
    
    
    
    
    
    
    
    
    
    
    57,968Net increase in cash and cash equivalents
    
    
    964
    
    
    
    1,355
    
    
    
    64,791Cash and cash equivalents at beginning of period
    
    
    3,487
    
    
    
    4,451
    
    
    
    5,806Cash and cash equivalents at end of period
    
    $
    4,451
    
    
    $
    5,806
    
    
    $
    70,596
 52




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CHINA FINANCE ONLINE CO. LIMITED Net cash provided by operating activities was $7.0 million in 2004 compared to $1.5 million in
2003. This increase was primarily due to increases in our net income and deferred revenue to $4.6
million and $3.5 million in 2004 from $1.2 million and $1.3 million in 2003, respectively. Net cash
provided by operating activities was $1.5 million in 2003 compared to $1.1 million for 2002. This
increase was primarily due to increases in our net income and deferred revenue from the growth in
our subscription services business. Net cash used in investing activities was $200,000 in 2004, compared to net cash used in investing
activities of $152,000 in 2003. This increase was due to purchases of property and equipment
consisting primarily of computer, network equipment and bandwidth for our network system. Net cash
used in investing activities was $152,000 in 2003, compared to net cash used in investing
activities of $98,000 in 2002. This increase was due to purchases of property and equipment which
primarily consisted of office space, computer, network equipment and bandwidth for our network
system. We had net cash provided by financing activities of $58.0 million in 2004, mainly due to our
initial public offering in October 2004 of 5,000,000 American Depositary Shares, representing
25,000,000 ordinary shares, which raised net proceeds of $58.5 million. We declared a dividend of
$503,000 in the first quarter of 2004 in respect of the financial year ended December 31, 2003.
This dividend was payable pro rata to our registered shareholders as of December 31, 2003, of which
$450,000 was paid in the first quarter of 2004 and the balance was paid in July 2004. We currently
intend to retain all available funds and any future earnings for use in the operation and expansion
of our business and do not anticipate paying any cash dividends on our ordinary shares, or
indirectly on our ADSs, for the foreseeable future. In May 2004, we repaid $60,000 to the
shareholders of Fuhua for funds advanced by them, on our behalf, to capitalize Fuhua when Fuhua was
initially incorporated in December 2000. This was a one-time payment and the payment amount
constitutes the entire amount advanced by Fuhuas shareholders when Fuhua was initially capitalized
in December 2000. Capital resources Our principal capital expenditures for 2002, 2003 and 2004 consisted of primarily purchases of
servers, workstations, computers, computer software, and other items related to our network
infrastructure for a total of approximately $98,000, $152,000 and $200,000, respectively. We have spent approximately $29,000 from January 1, 2005 to March 31, 2005, principally for
purchases of work stations and computers. Our capital expenditure plans for the remainder of 2005
have not yet been determined, but we expect to spend approximately $250,000 in total primarily for
purchases of additional information technology related equipment and software. Capital expenditures
in 2005 have been, and are expected to continue to be, funded through operating cash flows and
through our existing capital resources. We believe that our current cash and cash equivalents, and cash flow from operations and proceeds
from our initial public offering last year will be sufficient to meet our anticipated cash needs,
including for our working capital and capital expenditure needs, for the foreseeable future. We
may, however, require additional cash resources due to changes in business conditions or other
future developments. If these sources are insufficient to satisfy our cash requirements, we may
seek to sell debt securities or additional equity securities or obtain a credit facility. The sale
of convertible debt securities or additional equity securities could result in additional dilution
to our shareholders. The incurrence of indebtedness would result in debt service obligations and
could result in operating and financial covenants that would restrict our operations. We cannot
assure you that financing will be available in amounts or on terms acceptable to us, if at all. In March 2005, we received approval from PRC government authorities to make additional capital
contributions of $9 million and $11.5 million to CFO Beijing and Fortune Software, respectively. In
April 2005, we received further approval from PRC government authorities to make shareholder loans
of $16.8 million and $18.0 million to CFO Beijing and Fortune Software, respectively. We are
making these additional capital contributions and shareholder loans solely for purposes of
capitalizing CFO Beijing and Fortune Software. We intend to apply a portion of the net proceeds of
our initial public offering in October 2004 to fund these additional capital contributions and
shareholder loans, and to use these additional capital to fund the operations of CFO Beijing and
Fortune Software. In the event that CFO Beijing, Fortune Software or Fuhua require additional capital to fund their
operations or to acquire additional businesses or assets, we may need to make loans or additional
capital contributions to CFO Beijing, Fortune Software or Fuhua. Any loans to CFO Beijing, Fortune
Software or Fuhua are subject to PRC 53




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CHINA FINANCE ONLINE CO. LIMITED regulations and approvals. For example:  

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 Fortune Software, a foreign invested enterprise, to finance its
activities, cannot in the aggregate exceed the difference between Fortune 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 Fortune Software, given Fortune
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 Fortune
Software, and CFO Beijing or Fortune Software could in separate transactions make loans to
Fuhua through financial or Fortune Software, intermediaries, without approval from any PRC
governmental agencies. We may also determine to finance CFO Beijing or Fortune Software by means of additional capital
contributions. These additional capital contributions must be approved by the PRC Ministry of
Commerce. Because Fuhua is a domestic PRC enterprise, we are not likely to finance its activities
by means of a capital contribution due to regulatory issues relating to foreign investment in
domestic PRC enterprises, as well as the licensing and other regulatory issues. We cannot assure
you that we can obtain these government registrations or approvals on a timely basis, if at all,
with respect to future loans or capital contributions by us to CFO Beijing, Fortune Software or
Fuhua. As we have recently received approvals from PRC government authorities to make additional
capital contributions of $9 million and $11.5 million, and to make shareholder loans of $16.8
million and $18.0 million to CFO Beijing and Fortune Software respectively, we do not anticipate
needing to make any additional loans or additional capital contributions in the near future to CFO
Beijing, Fortune Software or Fuhua to fund their current operations. From time to time, we also evaluate possible investments, acquisitions or divestments and may, if a
suitable opportunity arises, make an investment or acquisition or conduct a divestment. We
currently do not have any agreements or understandings relating to any such transaction. In March 2005, our board of directors approved a stock repurchase program pursuant to which we
expect to purchase from time to time up to $10 million worth of our ADSs over a period of six
months. Under the terms of the approved stock repurchase program, we will repurchase our ADSs
through open market purchases on Nasdaq on terms deemed appropriate by us in compliance with the
anti-manipulation provisions of the Securities and Exchange Commissions Rule 10b-18. The timing
and amount of repurchase transactions under this program will depend on market conditions as well
as other corporate and regulatory considerations, and will also be subject to Rule 10b-18
requirements. The purchases will be funded from available working capital. Restricted net assets Relevant PRC laws and regulations permit payments of dividends by our PRC subsidiary and affiliate
only out of their retained earnings, if any, as determined in accordance with PRC accounting
standards and regulations. In addition, the statutory general reserve fund, which requires annual
appropriations of 10% of net after-tax income should be set aside prior to payment of any
dividends. As a result of these and other restrictions under PRC laws and regulations, our PRC
subsidiary and affiliate are restricted in their ability to transfer a portion of their net assets
to us either in the form of dividends, loans or advances, which restricted portion amounted to
approximately $5.0 million, or 7.4%, of our total consolidated net assets as of December 31, 2004.
Since we plan to make additional capital contributions and shareholder loans to CFO Beijing and
Fortune Software, we expect the portion of our consolidated net assets subject to this restriction
to increase, both in amount and as a percentage of our total consolidated net assets. 54




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CHINA FINANCE ONLINE CO. LIMITED Even though we currently do not require any such dividends, loans or advances from our PRC
subsidiary and affiliate, we may in the future require additional cash resources from our PRC
subsidiary and affiliate due to changes in business conditions, to fund future acquisitions or
developments, or merely to declare and pay dividends or distributions to our shareholders, although
we currently have no intention to do so. C.Research and development. Our research and development efforts consist of continuing to:  

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. For example, we are developing our information platform to include data and information regarding
the personal finances of our users, which will contain information as to investment returns, news,
research reports and financial analysis tools specific to our users. D.Trend information. Other than as disclosed elsewhere in this annual report, we are not aware of any trends,
uncertainties, demands, commitments or events for the period from January 1, 2002 to December 31,
2004 that are reasonably likely to have a material effect on our net revenues, income,
profitability, liquidity or capital resources, or that caused the disclosed financial information
to be not necessarily indicative of future operating results or financial conditions. E.Off-balance sheet arrangements. We do not have any outstanding derivative financial instruments, off-balance sheet guarantees,
interest rate swap transactions or foreign currency forward contracts. We do not engage in trading
activities involving non-exchange traded contracts. F.Tabular disclosure of contractual obligations. We have entered into leasing arrangements relating to office premises, equipment and others that
are classified as operating leases. The following sets forth our known contractual obligations as
of December 31, 2004 and as of the types that are specified below: EquipmentOffice Premises
    
    
    and Others
    
    
    Total(in U.S. dollars)Less than 1 year
    
    
    157,081
    
    
    
    
    
    
    
    157,0811 - 3 years
    
    
    
    
    
    
    
    
    
    
    3 - 5 years
    
    
    
    
    
    
    
    
    
    
    More than 5 years
    
    
    
    
    
    
    
    
    
    
    
 We have entered into certain leasing arrangements relating to our offices premises. Our rental
expenses under these leases were $192,000 in 2004. Apart from such rental expenses, as of December
31, 2004, we did not have any long-term debt obligations, capital (finance) lease obligations,
operating lease obligations, purchase obligations or any other long-term liabilities reflected on
our balance sheets with durations to maturity as are set forth in the chart directly above. As of December 31, 2004, we did not have any indebtedness and we did not have any material debt
securities, material contingent liabilities, or material mortgages or liens. We intend to meet our
future funding needs through net cash provided from operating activities and the proceeds of our
initial public offering last year. Therefore we 55




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CHINA FINANCE ONLINE CO. LIMITED intend to keep our cash and cash equivalents in short-term bank deposits and short-term bonds to
maintain safety and liquidity of our cash. G.Quantitative and qualitative disclosures about market risk. Interest rate risk Our exposure to market rate risk for changes in interest rates relates primarily to the interest
income generated by excess cash invested in short term money market accounts and certificates of
deposit. We have not used derivative financial instruments in our investment portfolio. Interest
earning instruments carry a degree of interest rate risk. We have not been exposed nor do we
anticipate being exposed to material risks due to changes in interest rates. However, our future
interest income may fall short of expectations due to changes in interest rates. Foreign currency risk Substantially all our revenues and expenses are denominated in Renminbi, but as noted above, a
substantial portion of our cash is kept in U.S. dollars. Although we believe that, in general, our
exposure to foreign exchange risks should be limited, the value of our American Depositary Shares,
or ADSs, will be affected by the foreign exchange rate between U.S. dollars and Renminbi. For
example, to the extent that we need to convert U.S. dollars into Renminbi for our operational needs
and the Renminbi appreciates against the U.S. dollar at that time, our financial position and the
price of our ADSs may be adversely affected. Conversely, if we decide to convert our Renminbi
(which amount has grown as a result of our improved cash flows in 2003 and 2004) into U.S. dollars
for the purpose of declaring dividends on our ADSs or otherwise and the U.S. dollar appreciates
against the Renminbi, the U.S. dollar equivalent of our earnings from our subsidiaries and
controlled entities in China would be reduced. We have not had any material foreign exchange gains or losses to date. However, due to the recent
devaluation of the U.S. dollar against other reserve currencies, as well as pressure from a number
of other governments (including the United States), the PRC government has indicated that it may
adjust the current rate at which Renminbi-U.S. dollar exchanges are fixed, as well as re-evaluate
its decades-old policy of using a fixed-rate regime to govern foreign currency transactions,
although the PRC government has not committed itself to take any such action currently. Since we
have not engaged in any hedging activities, we may experience economic loss as a result of any
foreign currency exchange rate fluctuations. H.Recent accounting pronouncements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), or SFAS No. 123(R). Share-Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No.
123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Generally, the
approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS
No. 123(R) requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on the grant-date fair values. Pro forma
disclosure previously permitted under SFAS 123 is no longer an alternative. The new standard will
be effective for the Company at the beginning of its next fiscal year after June 15, 2005. Under
SFAS 123(R), the Company could elect the modified prospective or modified retroactive option for
transition on the adoption of this new standard. Under the modified retroactive option, prior
periods are adjusted on a basis consistent with the pro forma disclosures previously required for
those periods by SFAS 123. Under the modified prospective option, compensation expense for all
unvested stock options must be recognized on or after the required effective date based on the
grant-date fair value of those stock options. We have not quantified the effect of the future
adoption of SFAS No. 123(R) on a going forward basis. Prior to the adoption of SFAS 123(R), the
Company will continue to utilize the accounting methods prescribed by APB Opinion No. 25 and has
adopted the disclosure requirements of SFAS No. 148 as of December 31, 2004 as allowed by SFAS No.
123. In January 2003, FASB issued FIN 46. FIN 46 clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements and provides guidance on the identification
of entities for which control is achieved through means other than
voting rights, called variable
interest entities or VIEs and how to determine when and which business enterprise should
consolidate the VIEs. This new model for consolidation applies to an entity in which either: (1)
the equity investors (if any) lack one or more characteristics deemed 56




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CHINA FINANCE ONLINE CO. LIMITED essential to a controlling financial interest or (2) the equity investment at risk is insufficient
to finance that entitys activities without receiving additional subordinated financial support
from other parties. FIN 46 was applicable for periods ending December 15, 2003. In December 2003,
FASB issued FIN 46 (revised) which provides for the deferral of the implementation date to the end
of the first reporting period after December 15, 2004 unless we have a special purpose entity, in
which case the provisions must be applied for fiscal years ended December 31, 2003. However, we
have retroactively adopted the provisions from the inception of the VIE. 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A.Directors and senior management. The following table sets forth the name, age and position of each director and executive officer of
our company as of March 31, 2005. Name
    
    Age
    
    
    PositionJun Ning
    
    
    47
    
    
    Chairman and Chief Executive OfficerHugo Shong
    
    
    49
    
    
    DirectorKheng Nam Lee(1)
    
    
    57
    
    
    DirectorLing Wang(1)(2)(3)
    
    
    42
    
    
    DirectorFansheng Guo(1)(2)(3)
    
    
    49
    
    
    DirectorSam Qian
    
    
    41
    
    
    President and Chief Financial OfficerBo Wu
    
    
    35
    
    
    Vice president and Chief Operating Officer
   (1)
    
    Member, audit committee(2)
    
    Member, compensation committee(3)
    
    Member, nominations committee The address of each of our executive officers and directors is Room 610B, 6/F, Pingan
Mansion, No. 23 Financial Street, Xicheng District, Beijing, Peoples Republic of China. Jun Ning will at all times be a director, and will not retire as a director, so long as he remains
as the Chief Executive Officer. Ling Wang and Hugo Shong will stand for re-election as directors
in the upcoming annual general meeting of shareholders in June 2005. Kheng Nam Lee and Fansheng
Guo will hold office until the next annual general meeting of shareholders and until such
directors successor is elected and duly qualified, or until such directors earlier death,
bankruptcy, insanity, resignation or removal. There are no family relationships among any of the
directors or executive officers of our company. Biographical Information Jun Ninghas served as the Chairman of our board of directors since May 2004 and our Chief
Executive Officer since 2000. From 1997 to 1999, Mr. Ning was the chief executive of Dalian Yaqi
Computer Company, a corporation engaged in the business of producing and distributing computer
software. From 1982 to 1997, Mr. Ning was a professor at the Dalian Military Medical College. Mr.
Ning graduated from the Nanchang Institute of Aerospace Technology with a Bachelor of Science
degree in Aero-mechanics. Hugo Shonghas served as our director since May 2004. Mr. Shong has been a senior vice president of
International Data Group, Inc., or IDG, since 2001, the president of IDG Asia since 1995, a
director of IDG Technology Venture Investment, Inc., or IDGVC, since 1994, and a member of IDG
Technology Venture Investments, LLC, the general partner of IDG Technology Venture Investments, LP,
since 2000. Mr. Shong has headed a number of operations for IDG including in information
technology, publishing, market research and tradeshows in the Asia Pacific region. Mr. Shong
graduated from Hunan University with a Bachelor of Arts degree in English, followed by a Master of
Science degree from the Boston University College of Communications. 57




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CHINA FINANCE ONLINE CO. LIMITED Kheng Nam Leehas served as our director since May 2004. Mr. Lee was the president of Vertex
Management Pte Ltd, a management company for a venture capital fund, from March 1995 to February
2004 and was also a director of Vertex Venture Holdings Ltd., both of which are affiliates of
Vertex Technology Fund (III) Ltd. Mr. Lee is a director of Creative Technology Ltd and United Test
and Assembly Centre Ltd, and has served as a director of ActivCard Corp, Centillium Communications
Inc., Creative Lab Inc., GRIC Communications Inc., Gemplus International SA and Semiconductor
Manufacturing International Corporation. Mr. Lee holds a Bachelor of Science degree in mechanical
engineering, with first class honors, from Queens University, Canada and a Master of Science
degree in operations research and systems analysis from the U.S. Naval Postgraduate School. Ling Wanghas served as our director since May 2004. Mr. Wang is the chairman and chief executive
officer of GCTech Company Limited, a company that provides systems integration and software
development services to the telecommunications industry, which he founded in 1994. Since 2003, he
has been a director of Tiantian Online Co., Ltd., a provider of broadband Internet audio-visual
programs (or Internet TV) in the PRC. Mr. Wang graduated with a Bachelor of Science degree in
Mathematics from the University of Science and Technology of China, and also has a Master of
Science degree in automation control from the Beijing Institute of Information Control. Fansheng Guohas served as our director since May 2004. Mr. Guo is the chairman, chief executive
officer and president of HC International, Inc., a Hong Kong listed company that provides business
information services in the PRC, which he founded in 1990. Mr. Guo obtained a Bachelor of Arts
degree in Industrial Economics from Renmin University of China. Sam Qianhas served as our President since February 2005 and has served as our Chief Financial
Officer since April 2004. Mr. Qian was a vice president of Sohu.com Inc., a Chinese Internet
portal, from March 2000 to March 2004. From July 1996 to February 2000, Mr. Qian was an associate
director in the risk finance group of Barclays Capital, a financial services corporation. Mr. Qian
graduated with a Bachelor of Arts degree in Physics from the University of Science and Technology
of China, and holds a Ph. D. degree in Astrophysics from Columbia University. He was a Bakhmeteff
fellow in fluid dynamics at Columbia University. Bo Wuhas served as our Vice President and Chief Operating Officer since May 2004. Mr. Wu was a
senior manager at Yum! Restaurants, a franchisor of quick-service restaurants, in Shanghai, from
July 2003 to May 2004. Mr. Wu was the general manager of Beijing Origus Food and Beverage Company,
a chain restaurant operator in the PRC, from May 2002 to June 2003. Mr. Wu was a director of global
corporate development with Dun & Bradstreet Corporation, a business information and commercial
credit ratings provider, from October 1999 to January 2002. He was an associate analyst with
Moodys Investor Services, a credit rating services corporation, from August 1998 to January 2002.
Mr. Wu has a Bachelor of Science degree in Material Science from the University of Science and
Technology in Hefei, China, a Master of Science degree in Chemistry and a Master of Business
Administration degree from Rutgers University. B.Compensation of directors and executive officers. In 2004, we granted our non-executive directors, in the aggregate, options representing the right
to purchase 400,000 ordinary shares. Other than the foregoing option grants, we did not pay any
other compensation to our non-executive directors in 2004. In 2004, we paid aggregate cash compensation of approximately $126,870 to our directors and
executive officers as a group. In 2004, we granted to selected directors, officers, employees and
individual consultants and advisors options to acquire an aggregate of 5,688,488 ordinary shares,
and we granted additional options to purchase an aggregate of 4,353,000 ordinary shares in February
2005. Unvested options to purchase 25,000 ordinary shares were returned to the pool of our
ungranted options upon resignation of two employees holding such options in December 2004. We have
no service contracts with any of our directors or executive officers that provide benefits to them
upon termination, except for change in control agreements we entered into with each of our chief
executive officer, chief financial officer and chief operating officer. The change in control
agreements provide that if after a change-of-control of our company has occurred, the executive is
terminated without cause or resigns for good reason, we are obligated to provide severance benefits
to that executive. All of our current directors have entered into indemnification agreements in which we agree to
indemnify, to the fullest extent allowed by Hong Kong law, our charter documents or other
applicable law, our directors from any liability or expenses, unless the liability or expense
arises from the directors own willful negligence, intentional 58




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CHINA FINANCE ONLINE CO. LIMITED malfeasance, bad faith act, or other transactions from which the director may not be relieved of
liability under applicable law. The indemnification agreements also specify the procedures to be
followed with respect to indemnification. Directors and officers liability insurance We have purchased directors and officers liability insurance on behalf of our directors and
officers that will expire in January 2006. Employees stock option plan We adopted the 2004 Stock Incentive Plan, or the Plan, in January 2004. The Plan is intended to
promote our success and to increase shareholder value by providing an additional means to attract,
motivate, retain and reward selected directors, officers, employees and other eligible persons. An
aggregate of 5,688,488 ordinary shares were reserved for issuance under the Plan in January 2004.
We amended the Plan in September 2004 to increase the total number of ordinary shares issuable
under the Plan to 10,688,488 or 10.8% of our issued share capital. We have issued options under the Plan to purchase a total of 10,016,488 ordinary shares to selected
directors, officers, employees and individual consultants and advisors. The exercise price for the
5,368,488 stock options granted in January 2004 under the Plan is $0.16 per share, the exercise
price for the 320,000 options granted in June 2004 is $1.04 per share and the exercise price for
the 4,353,000 options granted in February 2005 is $1.31 per share. Unvested options to purchase
25,000 ordinary shares were returned to the pool of our ungranted options upon resignation of the
employees holding such options in December 2004. With the exception of the options granted to our
directors and our management, which vest over a period of one to four years, our options granted to
employees generally vest over a period of three to five years. Together with options we granted
under option agreements that were independent of the Plan, we have a total number of 10,194,988
options that are currently vested and exercisable for ordinary shares. Options granted under the Plan generally do not vest unless the grantee remains under our
employment or in service with us on the given vesting date. However, in circumstances where there
is a death or disability of the grantee, or a change in the control of our company, the vesting of
options will be accelerated to permit immediate exercise of all options granted to a grantee.
Generally, to the extent an outstanding option granted under the Plan has not vested by the date
the grantees employment or service with us terminates, the option will terminate and become
unexercisable. Our board of directors may amend, alter, suspend, or terminate the Plan at any time,
provided, however, that our board of directors must first seek the approval of our shareholders
and, if such amendment, alteration, suspension or termination would adversely affect the rights of
an optionee under any option granted prior to that date, the approval of such optionee. Without
further action by our board of directors, the Plan will terminate in January 2014. The table below sets forth the option grants made to our directors and executive officers pursuant
to the Plan: Number ofordinary Shares tobe issued upon
    
    
    Exercise price perExercise of options
    
    
    ordinary share
    
    
    Date of grant
    
    
    Date of expirationJun Ning
    
    
    1,295,000
    
    
    $
    0.16
    
    
    January 5, 2004
    
    March 5, 2009430,000
    
    
    $
    1.314
    
    
    February 18, 2005
    
    February 18, 2015Bo Wu
    
    
    *
    
    
    $
    0.16
    
    
    January 5, 2004
    
    March 5, 2009*
    
    
    $
    1.314
    
    
    February 18, 2005
    
    February 18, 2015Hugo Shong
    
    
    *
    
    
    $
    0.16
    
    
    January 5, 2004
    
    March 5, 2009*
    
    
    $
    1.04
    
    
    June 15, 2004
    
    March 5, 2009*
    
    
    $
    1.314
    
    
    February 18, 2005
    
    February 18, 2015Kheng Nam Lee
    
    
    *
    
    
    $
    0.16
    
    
    January 5, 2004
    
    March 5, 2009*
    
    
    $
    1.04
    
    
    June 15, 2004
    
    March 5, 2009*
    
    
    $
    1.314
    
    
    February 18, 2005
    
    February 18, 2015Fansheng Guo
    
    
    *
    
    
    $
    0.16
    
    
    January 5, 2004
    
    March 5, 2009*
    
    
    $
    1.04
    
    
    June 15, 2004
    
    March 5, 2009*
    
    
    $
    1.314
    
    
    February 18, 2005
    
    February 18, 2015Ling Wang
    
    
    *
    
    
    $
    0.16
    
    
    January 5, 2004
    
    March 5, 2009*
    
    
    $
    1.04
    
    
    June 15, 2004
    
    March 5, 2009
 59




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CHINA FINANCE ONLINE CO. LIMITED Number ofordinary Shares tobe issued upon
    
    
    Exercise price perExercise of options
    
    
    ordinary share
    
    
    Date of grant
    
    
    Date of expiration*
    
    
    $
    1.314
    
    
    February 18, 2005
    
    February 18, 2015Sam 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. In 2004, our directors met in person or passed resolutions by unanimous written consent eight
times. No director attended fewer than 75% of all the meetings of our board and its committees on
which he served after becoming a member of our board. No director is entitled to any severance
benefits upon termination of his directorship with us. Our board of directors has also concluded
that Mr. Kheng Nam Lee meets the criteria for an audit committee financial expert as established
by the U.S. Securities and Exchange Commission (SEC). Board committees Our board of directors has established an audit committee, a compensation committee and a
nominations committee. Audit committee.Our audit committee currently consists of Kheng Nam Lee, Ling Wang and Fansheng
Guo. Our board of directors has determined that all of our audit committee members are
independent directors within the meaning of Nasdaq Marketplace Rule 4200(a)(15) and meet the
criteria for independence set forth in Section 10A(m)(3) of the U.S. Securities Exchange Act of
1934, or the Exchange Act. Our audit committee is responsible for, among other things:  

recommending to our shareholders, if appropriate, the annual re-appointment of our
independent auditors and pre-approving all auditing and non-auditing services permitted to
be performed by the independent auditors;

annually reviewing an independent auditors report describing the auditing firms
internal quality-control procedures, any material issues raised by the most recent internal
quality control review, or peer review, of the independent auditors and all relationships
between the independent auditors and our company;

setting clear hiring policies for employees or former employees of the independent auditors;

reviewing with the independent auditors 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
auditors;

discussing with management and the independent auditors 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 auditors 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 auditors 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; 60




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CHINA FINANCE ONLINE CO. LIMITED    

timely reviewing reports from the independent auditors regarding all critical accounting
policies and practices to be used 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 auditors and management;

establishing procedures for the receipt, retention and treatment of complaints received
from our employees regarding accounting, internal accounting controls or auditing 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, the internal auditors and the
independent auditors; and

reporting regularly to the full board of directors. Compensation committee.Our current compensation committee consists of Ling Wang and Fansheng Guo.
Our board of directors has determined that all of our compensation committee members are
independent directors within the meaning of Nasdaq Marketplace Rule 4200(a)(15). Our
compensation committee is responsible for:  

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.Our current nominations committee consists of Ling Wang and Fansheng Guo.
Our board of directors has determined that all of our nominations committee members are
independent directors within the meaning of Nasdaq Marketplace Rule 4200(a)(15). Our
nominations committee is responsible for, among other things, selecting and recommending the
appointment of new directors to our board of directors. Corporate governance Our board of directors has adopted a code of ethics, which is applicable to our senior executive
and financial officers. In addition, our board of directors has adopted a code of conduct, which is
applicable to all of our directors, officers and employees. Our code of ethics and our code of
conduct are publicly available on our website. In addition, our board of directors has adopted a set of corporate governance guidelines. The
guidelines reflect certain guiding principles with respect to our boards structure, procedures and
committees. The guidelines are not intended to change or interpret any law, or our memorandum and
articles of association. Duties of directors Under Hong Kong law, our directors have a duty of loyalty to act honestly in good faith with a view
to our best interests. Our directors also have a duty to exercise the care, diligence and skills
that a reasonable person with that directors qualifications and experience would exercise in
comparable circumstances. In fulfilling their duty of care to us, our directors must ensure
compliance with our memorandum and articles of association. 61




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CHINA FINANCE ONLINE CO. LIMITED The functions and powers of our board of directors include, among others:  

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 We have a staggered board, which means 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 be a director, and will
not retire as a director, so long as he remains as the Chief Executive Officer. Accordingly, our
directors, excluding our Chief Executive Officer, hold office until the second annual meeting of
shareholders following their election, or until their successors have been duly elected and
qualified. Our board has adopted a policy providing that no director may be nominated for
re-election or re-appointment to our board after reaching 70 years of age, unless our board
concludes that such persons continued service as our director is in our best interest. Officers
are elected by and serve at the discretion of the board of directors. D.Employees. As of March 31, 2005 we had 94 full-time employees. We currently anticipate hiring an additional 10
employees over the next year, most of whom will be located in Beijing. Of our current employees, 3
are executive officers, 10 are administrative, 48 form our sales, marketing and customer support
staff, 14 form our editorial department, and 19 are dedicated to our technology department. None of our employees are represented by a labor union. We believe we maintain a good working
relationship with our employees. E.Share ownership. As of April 14, 2005, 99,329,933 of our ordinary shares were outstanding, excluding shares issuable
upon exercise of outstanding options. On that date, a total of 6,320,000 of our ADSs were
outstanding. The following table sets forth information with respect to the beneficial ownership, within the
meaning of Section 13(d)(3) of the U.S. Securities Exchange Act of 1934, as amended, or the
Exchange Act, of our ordinary shares by:  

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. Beneficial ownership includes voting or investment power with respect to the securities. Except as
indicated below, and subject to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all ordinary shares shown as beneficially
owned by them. Percentage of beneficial ownership 62




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CHINA FINANCE ONLINE CO. LIMITED is based on 99,329,933 ordinary shares outstanding. Number of Shares Beneficially OwnedName
    
    Number
    
    
    Percent5% ShareholderIDG Technology Venture
Investment, Inc.(1)
    
    
    20,580,652
    
    
    
    20.7
    %IDG Technology Venture
Investments, LP (2)
    
    
    6,723,115
    
    
    
    6.8
    %Vertex Technology Fund (III)
Ltd. (3)
    
    
    14,481,319
    
    
    
    14.6
    %Tongma Network Co. Ltd. (4)
    
    
    15,902,491
    
    
    
    16.0
    %Trafelet & Company, LLC (5)
    
    
    6,967,000
    
    
    
    7.01
    %Directors and executive officersJun Ning(6)
    
    
    6,509,600
    
    
    
    6.6
    %Hugo Shong
    
    
    *
    
    
    
    *Kheng Nam Lee
    
    
    *
    
    
    
    *Ling Wang
    
    
    *
    
    
    
    *Fansheng Guo
    
    
    *
    
    
    
    *Sam Qian
    
    
    *
    
    
    
    *Wu Bo
    
    
    *
    
    
    
    *All current directors and
executive officers as a group
(7 persons)
    
    
    7,589,600
    
    
    
    7.6
    %
   *
    
    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
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.. Vertex
Technology Fund (III) Ltd is 100% owned by Vertex Venture Holdings Ltd. Vertex Venture
Holdings Ltd is 100% owned by Ellensburg Holding Pte Ltd; and Ellensburg Holding Pte Ltd is
100% owned by Singapore Technologies Pte Ltd. Vertex Management (II) Pte Ltd is the fund
manager of Vertex Technology Fund (III) Ltd, and as such, exercises voting and dispositive
power over our shares held by Vertex Technology Fund (III) Ltd. The president of Vertex
Management (II) Pte Ltd is Mui Hong Tan. Ms. Tan disclaims beneficial ownership of our shares
held by Vertex Technology Fund (III) Ltd. The address of Vertex Technology Fund (III) Ltd. is
77 Science Park Drive, #02-15 Cintech III, Singapore Science Park, Singapore 118256.(4)
    
    Includes (i) 8,951,458 ordinary shares held by Cast Technology, Inc.; and (ii) 6,951,033
ordinary shares held by Fanasia Capital Limited. Both Cast Technology, Inc. and Fanasia
Capital Limited are wholly-owned subsidiaries of Tongma Network Co. Ltd. Jianping Lu and Ling
Zhang hold 45% and 55%, respectively of Tongma Network Co. Ltd. The address of Tongma Network
Co. Ltd. is 47 Yongan Road, Changping District Technology Park, Beijing 102200, China.(5)
    
    Includes 6,967,000 ordinary shares held by Trafelet & Company, LLC as filed by it on Schedule
13G with the SEC on February 17, 2005. 63




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CHINA FINANCE ONLINE CO. LIMITED  (6)
    
    Includes 1,295,000 ordinary shares issuable upon exercise of options currently exercisable or
vesting within 60 days of the date of this annual report and 5,214,600 ordinary shares owned
by Mastery Corporate Limited. Jun Ning controls Mastery Corporate Limited. None of our existing shareholders has voting rights that differ from the voting rights of
other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a
change in control of our company. Other than shares held by IDG Technology Venture Investment, Inc.
and IDG Technology Venture Investments, LP, each of which is a United States corporation or limited
partnership, in each case as set forth in the table above, and shares held by our President and
Chief Financial Officer Sam Qian, who is a U.S. citizen, none of our outstanding ordinary shares or
preference shares is held in the United States, nor do we have any record holders of our voting
securities in the United States. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A.Major shareholders. Please refer to Item 6.
Directors, Senior Management and Employees  Share Ownership B.Related party transactions. CFO Beijing/Fuhua arrangements In order to comply with PRC regulations, we operate our online business in China through Fuhua, a
company wholly owned by Wu Chen, a financial manager at International Data Group China, Ltd., a PRC
company affiliated with IDG Technology Venture Investment Inc., and IDG Technology Venture
Investments, LP, two of our principal shareholders, and Jun Ning, our chairman and Chief Executive
Officer, who are both PRC citizens. We have entered into a series of contractual arrangements with
Fuhua and its shareholders, including contracts relating to the leasing of equipment, the licensing
of our domain name, the provision of services and certain shareholder rights and corporate
governance matters. Each of our contractual arrangements with Fuhua and its shareholders may only be amended with the
approval of our audit committee or another independent body of our board of directors. The
following is a summary of the material provisions of these agreements. Leasing of equipment Equipment Leasing Agreement, dated May 27, 2004, between CFO Beijing and Fuhua. CFO Beijing leases to Fuhua equipment necessary for Fuhuas operation and requested by Fuhua from
time to time for a monthly lease payment calculated based on the actual value of the leased
equipment. Without CFO Beijings written consent, Fuhua may not lease any equipment from any other
parties. The term of the lease is ten years, which will be automatically renewed for another one
year term upon the expiration of each term unless CFO Beijing notifies Fuhua of its intention not
to renew 30 days before the relevant term expires. Provision of services Technical Support Agreement, dated May 27, 2004, between CFO Beijing and Fuhua. CFO Beijing provides Fuhua with exclusive technical support services for the maintenance of Fuhuas
servers, networks and other equipment, software and systems. Fuhua pays a quarterly service fee to
CFO Beijing which is based on the actual labor cost of CFO Beijing during the relevant period. In
addition, Fuhua reimburses CFO Beijing for out of pocket costs CFO Beijing incurs in connection
with providing the services under this agreement. The term of this agreement is ten years, which
will be automatically renewed for another one year term upon the expiration of each term unless CFO
Beijing notifies Fuhua of its intention not to renew 30 days before the relevant term expires. 64




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CHINA FINANCE ONLINE CO. LIMITED Amended and Restated Strategic Consulting Service Agreement, dated May 27, 2004, between CFO
Beijing and Fuhua. CFO Beijing provides Fuhua with strategic consulting and related services for Fuhuas business,
including (1) valuation of new products; (2) industry investigation and survey; (3) marketing and
promotion strategies; and (4) other services relating to Fuhuas business, including its online
advertising business. The fee for these services will be calculated quarterly based on the actual
time of services provided by CFO Beijing. The term of this agreement is 20 years, which will be
automatically renewed for another one year term upon the expiration of each term unless CFO Beijing
notifies Fuhua of its intention not to renew 30 days before the relevant term expires. Domain Name Licensing Agreement, dated May 27, 2004, between CFO Beijing and Fuhua. CFO Beijing has granted to Fuhua a non-exclusive license to use its domain name www.jrj.com.cn.
Without CFO Beijings consent, Fuhua cannot transfer, pledge or sublicense its interest in the
domain name. CFO Beijing reserves the right to either use the domain name by itself or license the
domain name to other parties. Fuhua will not pay a separate licensing fee to CFO Beijing for such
license but will bear CFO Beijings costs relating to registration and maintenance of the domain
name. The term of the license equals the term of the Amended and Restated Strategic Consulting
Service Agreement between CFO Beijing and Fuhua. Before the terms expires, CFO Beijing may
unilaterally terminate the license by delivering a written notice to Fuhua. Domain Name Licensing Agreement, dated March 20, 2005, among CFO Beijing, Fuhua and us. We have granted to Fuhua a non-exclusive license to use our domain name www.jrj.com. Without our
consent, Fuhua cannot sublicense the domain name to any third party. We reserve the right to use
the domain name by ourselves, but are not permitted to transfer or license the domain name. In
consideration of the Amended and Restated Strategic Consulting Service Agreement between CFO
Beijing and Fuhua, Fuhua will not pay a separate licensing fee to us for such license but will bear
our costs relating to registration and maintenance of the domain name. CFO Beijing will act as the
administrator for the domain name licensed to Fuhua. The term of the license equals the term of
the Amended and Restated Strategic Consulting Service Agreement between CFO Beijing and Fuhua. Loans to Jun Ning and Wu Chen We entered into a loan agreement with each of Jun Ning and Wu Chen, the shareholders of Fuhua, on
May 27, 2004 to extend each of Jun Ning and Wu Chen a loan with the amount of $163,000 and
$199,000, respectively, for the sole purpose of investing in Fuhua as Fuhuas registered capital.
The initial term of these loans in each case is 10 years which may be extended upon the parties
agreement. Jun Ning and Wu Chen can only repay the loans by transferring all of their interest in
Fuhua to us or a third party designated by us. When Jun Ning and Wu Chen transfer their interest in
Fuhua to us or our designee, if the actual transfer price is higher than the principal amount of
the loans, the amount exceeding the principal amount of the loans will be deemed as interest
accrued on such loans and repaid by Jun Ning and Wu Chen to us. While Hong Kong law limits the
maximum interest payment chargeable under a loan to 60% of the outstanding principal amount per
annum, this limitation would only be relevant if, at the time of a future transfer to us of the
interests in Fuhua held by Jun Ning and Wu Chen, the actual value of Fuhua were to have increased
at an average annual rate greater than 60%. Fuhuas assets currently consist primarily of
registered capital and licenses to provide Internet content and advertising related services, and
its operations are primarily limited to operating our free website and providing advertising
related services on behalf of CFO Beijing. In addition, we do not expect Fuhua to continue to
provide advertising related services once CFO Beijing is permitted under PRC law to engage in these
advertising related services directly, which may be as soon as 2006 according to recent PRC
government announcements related to Chinas World Trade Organization compliance schedule.
Accordingly, we do not believe this limitation will have a material effect on our business and
operations, or will result in a material amount being paid to the shareholders of Fuhua if and when
they are permitted to transfer their interests in Fuhua to us. In May 2004, we repaid $60,000 to Jun Ning and Wu Chen for funds advanced by Jun Ning and Wu Chen,
on our behalf, to capitalize Fuhua when Fuhua was initially incorporated in December 2000. 65




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CHINA FINANCE ONLINE CO. LIMITED Loans to CFO Beijing and Fortune Software In March 2005, we received approval from PRC government authorities to make additional capital
contributions of $9 million and $11.5 million to CFO Beijing and Fortune Software, respectively. In
April 2005, we received further approval from PRC government authorities to make shareholder loans
of $16.8 million and $18.0 million to CFO Beijing and Fortune Software, respectively. We are
making these additional capital contributions and shareholder loans solely for purposes of
capitalizing CFO Beijing and Fortune Software. Funding for these additional capital contributions
and shareholder loans will come from net proceeds of our initial public offering in October 2004.
We intend to use these additional capital to fund the operations of CFO Beijing and Fortune
Software. Shareholder rights and corporate governance Transfer of ownership when permitted by law Pursuant to a purchase option and cooperation agreement, or the purchase option agreement, entered
into among us, CFO Beijing, Jun Ning, Wu Chen and Fuhua on May 27, 2004, Jun Ning and Wu Chen
jointly granted us an exclusive option to purchase all of their equity interest in Fuhua, and Fuhua
granted us an exclusive option to purchase all of its assets if and when (1) such purchase is
permitted under applicable PRC law, or (2) to the extent permitted by law, with respect to Jun
Nings or Wu Chens individual interest, as the case may be, when Jun Ning ceases to be a director
or employee of Fuhua, Wu Chen ceases to be affiliated with IDG Technology Venture Investment, Inc.
or IDG Technology Venture Investments, LP or neither entity continues to be our shareholder, or
either Jun Ning or Wu Chen desires to transfer his equity interest in Fuhua to a third party. We
may purchase such interest or assets ourselves or designate another party to purchase such interest
or assets. The exercise price of the option will equal the total principal amount of the loans lent by us to
Jun Ning and Wu Chen under the loan agreements dated May 27, 2004 between us and Jun Ning and Wu
Chen, respectively, or the price required by relevant PRC law or government approval authority if
such required price is higher than the total principal amount of the loans lent by us to Jun Ning
and Wu Chen. We may choose to pay the purchase price payable to Jun Ning and Wu Chen by canceling
our loans to Jun Ning and Wu Chen. Following any exercise of the option, the parties will enter into a definitive share or asset
purchase agreement and other related transfer documents within 30 days after written notice of
exercise is delivered by us. Pursuant to the purchase option agreement, at all times before we or
any party designated by us acquire 100% of Fuhuas shares or assets, Fuhua may not (1) sell,
transfer, assign, dispose of in any manner or create any encumbrance in any form on any of its
assets unless such sale, transfer, assignment, disposal or encumbrance is related to the daily
operation of Fuhua or has been disclosed to and consented to in writing by us; (2) enter into any
transaction which may have a material effect on Fuhuas assets, liabilities, operations, equity or
other legal interests unless such transaction relates to the daily operation of Fuhua or has been
disclosed to and consented to in writing by us; or (3) distribute any dividends to its shareholders
in any manner, and Jun Ning and Wu Chen may not cause Fuhua to amend its articles of association to
the extent such amendment may have a material effect on Fuhuas assets, liabilities, operations,
equity or other legal interests except for pro rataincreases of registered capital required by
law. Voting arrangement Pursuant to two proxies executed and delivered by Jun Ning and Wu Chen to Ling Hai Ma and Jian
Feng, respectively, each an employee of CFO Beijing, on May 27, 2004, Jun Ning and Wu Chen have
granted Ling Hai Ma and Jian Feng the power to exercise all their voting rights as shareholders of
Fuhua, including the right to appoint directors, the general manager and other senior managers of
Fuhua. The term of the proxies is 20 years which will be automatically renewed for another one year
term upon the expiration of each term unless we notify Jun Ning and Wu Chen of our intention not to
renew 30 days before the relevant term expires. Under the purchase option agreement, Jun Ning and
Wu Chen have agreed that (1) they will only revoke the proxies granted to Ling Hai Ma and Jian Feng
when either Ling Hai Ma or Jian Feng ceases to be an employee of CFO Beijing or we deliver a
written notice to Jun Ning and Wu Chen requesting such revocation, and (2) they, or either of them,
as the case may be, will execute and deliver another proxy in the same format as the one dated May
27, 2004 to any other individuals as instructed by us. 66




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CHINA FINANCE ONLINE CO. LIMITED Share Pledge Agreement Pursuant to a share pledge agreement, dated May 27, 2004, Jun Ning and Wu Chen have pledged all of
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. Under this agreement, Jun Ning and Wu Chen have
agreed not to transfer, assign, pledge or in any other manner dispose of their interests in Fuhua
or create any other encumbrance on their interest in Fuhua which may have a material effect on CFO
Beijings interest without the written consent of CFO Beijing, except the transfer of their
interest in Fuhua to us or the third party assignee designated by us according to the purchase
option agreement. Financing support Pursuant to the purchase option agreement, we have agreed to provide or designate one of our
affiliates to provide financing to Fuhua in a way permitted by relevant laws in case Fuhua needs
such financing. If Fuhua is unable to repay the financing due to its losses, we agree to waive or
cause other relevant parties to waive all recourse against Fuhua with respect to the financing. Indemnifications Pursuant to the purchase option agreement, CFO Beijing has agreed to provide necessary support to
and to indemnify Jun Ning and Wu Chen to the extent that they are subject to any legal or economic
liabilities as a result of performing their obligations pursuant to their agreements with us or CFO
Beijing. Other related party transactions Shareholders Agreement Our investors under the shareholders agreement are IDG Technology Venture Investment, Inc. and
Vertex Technology Fund (III) Ltd. Investors to the shareholders agreement or their permitted
assignees that hold at least 15% of our registrable securities may require us to effect a
registration statement on Form F-3 (or any successor form or any comparable form for a registration
in a jurisdiction other than the United States) for a public offering of registrable securities so
long as the reasonably anticipated aggregate price to the public (net of selling expenses) would be
at least $1 million and we are entitled to use Form F-3 (or a comparable form) for such offering. Holders of registrable securities may demand a registration on Form F-3 on unlimited occasions,
although we are not obligated to effect more than two such registration in any twelve month period.
Holders of registrable securities are also entitled to ''piggyback registration rights, which may
require us to register all or any part of the registrable securities then held by such holders when
we register any of our ordinary shares. Registrable securities are ordinary shares not previously sold to the public and issued or issuable
to IDG Technology Venture Investment, Inc. and Vertex Technology Fund (III) Ltd., who are holders
of our preference shares, including (1) ordinary shares issued upon conversion of our preferred
shares, (2) ordinary shares issued or issuable upon exercise of their options or warrants to
purchase ordinary shares, and (3) ordinary shares issued pursuant to stock splits, stock dividends
and similar distributions to holders of our preference shares. Under certain circumstances, such
demand registration may also include ordinary shares other than registrable securities. If any of the offerings involves an underwriting, the managing underwriter of any such offering has
certain rights to limit the number of shares included in such registration. However, the number of
registrable securities included in an underwritten public offering subsequent to our initial public
offering pursuant to ''piggyback registration rights may not be reduced to less than 10% of the
aggregate securities included in such offering without the consent of a majority of the holders of
registrable securities who have requested their shares to be included in the registration and
underwriting. We are generally required to bear all of the registration expenses incurred in
connection with one demand registration on a form other than Form F-3, and unlimited Form F-3 and
piggyback registrations. The foregoing demand, Form F-3 and piggyback registration rights will
terminate, with respect to any holder of registrable securities, on the earliest of:  

the fifth anniversary of the consummation of our initial public offering; 67




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CHINA FINANCE ONLINE CO. LIMITED    

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. C.Interests of experts and counsel. Not applicable 
 ITEM 8. FINANCIAL INFORMATION A.Consolidated statements and other financial information. We have appended consolidated financial statements filed as part of this annual report. Legal Proceedings We are party to pending legal actions that we believe are incidental to the operation of our
business. We believe that the outcome of these pending, incidental legal proceedings will not have
a material adverse effect on our financial condition or results of operations. On May 19, 2004, four former employees of CFO Beijing filed claims with the Labor Arbitration
Committee of Xi Cheng District in Beijing, against CFO Beijing alleging that we owed them unpaid
overtime incurred while they were employed by CFO Beijing. The claims were dismissed on July 28,
2004 for lack of evidence. All four claimants then filed lawsuits against us in the Beijing Xicheng
District Peoples Court to recover the alleged unpaid overtime. These claims were dismissed on
December 28, 2004 for lack of evidence. We cannot assure you that the plaintiffs filing the
lawsuits against us will not bring other claims against us in other forums. We believe these claims
will not result in any material liability for us. Dividend Policy We declared a dividend of $500,000 in the first quarter of 2004 in respect of the financial year
ended December 31, 2003. This dividend was payable pro rata to our registered shareholders as of
December 31, 2003, of which $450,000 was paid in the first quarter of 2004 and the balance was paid
in July 2004. In May 2004, we repaid $60,000 to the shareholders of Fuhua for funds advanced by the
shareholders of Fuhua, on our behalf, to capitalize Fuhua when Fuhua was initially incorporated in
December 2000. We currently intend to retain all available funds and any future earnings for use in
the operation and expansion of our business and do not anticipate paying any cash dividends on our
ordinary shares, or indirectly on our ADSs, for the foreseeable future. Investors seeking cash
dividends should not purchase our ADSs. Future cash dividends, if any, will be at the discretion of
our board of directors and will depend upon our future operations and earnings, capital
requirements and surplus, general financial condition, contractual restrictions and other factors
as our board of directors may deem relevant. In addition, we can pay dividends only out of our
profit or other distributable reserves. Any dividend we declare will be paid to the holders of
ADSs, subject to the terms of the deposit agreement, to the same extent as holders of our ordinary
shares, less the fees and expenses payable under the deposit agreement. Other distributions, if
any, will be paid by the depositary to holders of our ADSs in any means it deems legal, fair and
practical. Any dividend will be distributed by the depositary, in the form of cash or additional
ADSs, to the holders of our ADSs. Cash dividends on our ADSs, if any, will be paid in U.S. dollars.
See Description of American Depositary Shares. B.Significant changes since December 31, 2004. We derive revenues primarily from annual subscription fees from subscribers to our financial data
and information services. Our subscription service is substantially dependent on user demand for
market intelligence on Chinas securities markets. Such demand has fluctuated with the level of
trading activity in Chinas securities markets. During the past several years, Chinas securities
markets have experienced significant decline. The Shanghai Stock Exchange A-Share Index and the
Shenzhen Stock Exchange A-Share Index declined 44.3% and 55.8%, 68




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CHINA FINANCE ONLINE CO. LIMITED respectively, from January 2, 2001 to March 31, 2005. During the same period, total daily trading
volume of the Shanghai Stock Exchange and the Shenzhen Stock Exchange decreased by 44.0% and 61.3%,
respectively, reflecting a declining level of interest among Chinas investors during that period.
We issued an earnings warning in February 2005, in which we reiterated the correlation of our
business operations and financial conditions with the performance of Chinas securities markets,
and warned that, unless there is a fundamental turn-around in Chinas securities market in the near
future, we expect that our revenue and profitability in the first quarter of 2005 and in the entire
fiscal year 2005 will be adversely affected. On April 25, 2005, the Shanghai Stock Exchange Index
reached its lowest level since May 1999, and its average daily trading volume in January 2005 was
only approximately 28% of the average daily trading volume during the same period a year ago. If
Chinas securities markets continue to weaken, and if investors interest in Chinas securities
markets continues to decline, our business could be significantly and adversely affected. In March 2005, our board of directors approved a stock repurchase program pursuant to which we
expect to purchase from time to time up to $10 million worth of our American Depositary Shares, or
ADSs, over a period of six months. Under the terms of the approved stock repurchase program, we
will repurchase our ADSs through open market purchases on Nasdaq on terms deemed appropriate by us
in compliance with the anti-manipulation provisions of the Securities and Exchange Commissions
Rule 10b-18. The timing and amount of repurchase transactions under this program will depend on
market conditions as well as other corporate and regulatory considerations, and will also be
subject to Rule 10b-18 requirements. The purchases will be funded from available working capital. 
 ITEM 9. THE OFFER AND LISTING A.Offering and listing details. American depositary shares, or ADSs, each representing five of our ordinary shares, have been
listed on the Nasdaq National Market since October 15, 2004. Our ADSs trade under the symbol
JRJC. The following table provides the high and low trading prices for our ADSs on the Nasdaq National
Market for (1) the forth quarter in 2004 and (2) each of the months since our initial public
offering. Sales
PriceHigh
    
    
    LowQuarterly
highs and lowsFourth Quarter 2004 (from October 15, 2004)
    
    $
    15.99
    
    
    $
    8.30Monthly
highs and lowsOctober 2004 (from October 15, 2004)
    
    $
    15.99
    
    
    $
    8.31November 2004
    
    $
    13.25
    
    
    $
    8.30December 2004
    
    $
    14.35
    
    
    $
    10.00January 2005
    
    $
    11.14
    
    
    $
    8.13February 2005
    
    $
    10.43
    
    
    $
    6.11March 2005
    
    $
    7.45
    
    
    $
    5.80
 B.Plan of distribution. Not applicable C.Markets. See Item 9.A. above. D.Selling shareholders. Not applicable 69




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CHINA FINANCE ONLINE CO. LIMITED E.Dilution. Not applicable F.Expenses of the issue. Not applicable 
 ITEM 10. ADDITIONAL INFORMATION A.Share capital. Not applicable. B.Memorandum and articles of association. We incorporate by reference into this Annual Report the description of our amended and restated
memorandum of association contained in our registration statement on Form F-1 (File No. 333-119166)
filed with the Commission on October 14, 2004. Our shareholders adopted our amended and restated
memorandum and articles of association at an extraordinary shareholder meeting on October 14,
2004. C.Material contracts. We have not entered into any material contracts other than in the ordinary course of business and
other than those described in Item 4, Information on the Company or elsewhere in this annual
report on Form 20-F. D.Exchange controls. Chinas government imposes control over the convertibility of RMB into foreign currencies. Under
the current unified floating exchange rate system, the Peoples Bank of China publishes a daily
exchange rate for RMB, or the PBOC Exchange Rate, based on the previous days dealings in the
inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an authorized range above or
below the PBOC Exchange Rate according to market conditions. Pursuant to the Foreign Exchange Control Regulations issued by the State Council on January 29,
1996 and effective as of April 1, 1996 (and amended on January 14, 1997) and the Administration of
Settlement, Sale and Payment of Foreign Exchange Regulations which came into effect on July 1, 1996
regarding foreign exchange control, or the Regulations, conversion of Renminbi into foreign
exchange by foreign investment enterprises for current account items, including the distribution of
dividends and profits to foreign investors of joint ventures, is permissible upon the proper
production of qualified commercial vouchers or legal documents as required by the Regulations.
Foreign investment enterprises are permitted to remit foreign exchange from their foreign exchange
bank account in China upon the proper production of, inter alia, the board resolutions declaring
the distribution of the dividend and payment of profits. Conversion of RMB into foreign currencies
and remittance of foreign currencies for capital account items, including direct investment, loans,
security investment, is still subject to the approval of the State Administration of Foreign
Exchange, or SAFE, in each such transaction. On January 14, 1997, the State Council amended the
Foreign Exchange Control Regulations and added, among other things, an important provision, as
Article 5 provides that the State shall not impose restrictions on recurring international payments
and transfers. Under the Regulations, foreign investment enterprises are required to open and maintain separate
foreign exchange accounts for capital account items (but not for other items). In addition, foreign
investment enterprises may only buy, sell and/or remit foreign currencies at those banks authorized
to conduct foreign exchange business upon the production of valid commercial documents and, in the
case of capital account item transactions, document approval from SAFE. Currently, foreign investment enterprises are required to apply to SAFE for foreign exchange
registration certificates for foreign investment enterprises. With such foreign exchange
registration certificates (which are granted to foreign investment enterprises, upon fulfilling
specified conditions and which are subject to review and 70




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CHINA FINANCE ONLINE CO. LIMITED renewal by SAFE on an annual basis) or with the foreign exchange sales notices from the SAFE (which
are obtained on a transaction-by-transaction basis), foreign-invested enterprises may enter into
foreign exchange transactions at banks authorized to conduct foreign exchange business to obtain
foreign exchange for their needs. E.Taxation. Hong Kong taxation Profits tax.No tax is imposed in Hong Kong in respect of capital gains from the sale of property,
such as the ordinary shares underlying our ADSs. However, trading gains from the sale of property
by persons carrying on a trade, profession or business in Hong Kong where such gains are derived
from or arise in Hong Kong from such trade, profession or business will be chargeable to Hong Kong
profit tax. Liability for Hong Kong profits tax would therefore arise in respect of trading gains
from the sale of ADSs or the underlying ordinary shares realized by persons in the course of
carrying on a business of trading or dealing in securities in Hong Kong. For the current year of
assessment 2005/2006, the charging rate for profits tax is 17.5% for corporations and 16% for
unincorporated businesses. In addition, Hong Kong does not impose withholding tax on gains derived from the sale of stock in
Hong Kong companies and does not impose withholding tax on dividends paid outside of Hong Kong by
Hong Kong companies. Accordingly, investors will not be subject to Hong Kong withholding tax with
respect to a disposition of their ADSs or with respect to the receipt of dividends on their ADSs,
if any. No income tax treaty relevant to the acquiring, withholding or dealing in the ADSs or the
ordinary shares underlying our ADSs exists between Hong Kong and the U.S. Estate duty.Estate duties are imposed upon the value of properties situated or deemed to be
situated in Hong Kong that pass to a persons estate upon his or her death. Our ordinary shares are
Hong Kong property under Hong Kong law, and accordingly may be subject to estate duty on the death
of the beneficial owner of such ordinary shares, regardless of the place of the owners residence,
citizenship or domicile. We cannot assure you that the Hong Kong Inland Revenue Department will not
treat the ADSs as Hong Kong property that may be subject to estate duty on the death of the
beneficial owner of the ADSs, notwithstanding that the ADRs representing such ADSs may be situated
outside Hong Kong at the date of such death. Hong Kong estate duty is currently imposed on a
progressive scale from 5% to 15%, which rate and threshold has been adjusted on a fairly regular
basis in the past. No estate duty is payable when the aggregate value of the dutiable estate does
not exceed HK$7.5 million, and the maximum rate of 15% applies when the aggregate value of the
dutiable estate exceeds HK$10.5 million. The Hong Kong Financial Secretary proposed in his
2005/2006 Budget to abolish estate duty, but the necessary legislative changes have not yet been
made as at the date of this document. Stamp duty.Hong Kong stamp duty is generally payable on the transfer of shares in companies
incorporated in Hong Kong. The stamp duty is payable both by the purchaser on every purchase and by
the seller on every sale of such shares at the ad valorem rate of HK$1.00 per HK$1,000 or part
thereof, on the higher of the consideration for or the value of the shares transferred. In
addition, a fixed duty, currently of HK$5, is payable on an instrument of transfer of such shares.
Where one party to the sale is a non-resident of Hong Kong and does not pay the required stamp
duty, the stamp duty not paid will be assessed on the instrument of transfer of such shares (if
any), and the purchaser will be liable for payment of such stamp duty. A withdrawal of ordinary
shares upon the surrender of ADSs, and the issuance of ADSs upon the deposit of ordinary shares,
will also require payment of Hong Kong stamp duty at the rate described above for sale and purchase
transactions, unless such withdrawal or deposit does not result in a change in the beneficial
ownership of shares under Hong Kong law. The issuance of the ADSs upon the deposit of ordinary
shares issued directly to the depositary or for the account of the depositary does not require
payment of stamp duty. In addition, no Hong Kong stamp duty is payable upon the transfer of ADSs
effected outside Hong Kong. United States federal income taxation This discussion describes the material U.S. federal income tax consequences of the purchase,
ownership and disposition of our ADSs. This discussion does not address any aspect of U.S. federal
gift or estate tax, or the state, local or foreign tax consequences of an investment in our ADSs.
This discussion applies to you only if you hold and beneficially own our ADSs as capital assets for
tax purposes. This discussion does not apply to you if you are a member of a class of holders
subject to special rules, such as: 71




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CHINA FINANCE ONLINE CO. LIMITED  

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. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, which we refer to
in this discussion as the Code, its legislative history, existing and proposed regulations
promulgated thereunder, published rulings and court decisions, all as currently in effect. These
laws are subject to change, possibly on a retroactive basis. In addition, this discussion relies on
our assumptions regarding the value of our shares and the nature of our business over time.
Finally, this discussion is based in part upon the representations of the depositary and the
assumption that each obligation in the deposit agreement and any related agreement will be
performed in accordance with its terms. For U.S. federal income tax purposes, as a holder of ADSs,
you are treated as the owner of the underlying ordinary shares represented by such ADSs. You should consult your own tax advisor concerning the particular U.S. federal income tax
consequences to you of the purchase, ownership and disposition of our ADSs, as well as the
consequences to you arising under the laws of any other taxing jurisdiction. For purposes of the U.S. federal income tax discussion below, you are a U.S. Holder if you
beneficially own ADSs and are:  

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
substantial decisions of the trust, or (b) the trust has a valid election in effect to be
treated as a U.S. person. If you are not a U.S. person, please refer to the discussion below under Non-U.S. Holders. For U.S. federal income tax purposes, income earned through a foreign or domestic partnership or
other flow-through entity is attributed to its owners. Accordingly, if a partnership or other
flow-through entity holds ADSs, the tax treatment of the holder will generally depend on the status
of the partner or other owner and the activities of the partnership or other flow-through entity. 72




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CHINA FINANCE ONLINE CO. LIMITED U.S. Holders Dividends on ADSs We do not anticipate paying dividends on our ordinary shares or indirectly on our ADSs, in the
foreseeable future. See Dividend policy. Subject to the Passive Foreign Investment Company discussion below, if we do make distributions
and you are a U.S. Holder, the gross amount of any distributions you receive on your ADSs will
generally be treated as dividend income if the distributions are made from our current or
accumulated earnings and profits, calculated according to U.S. federal income tax principles.
Dividends will generally be subject to U.S. federal income tax as ordinary income on the day you
actually or constructively receive such income. However, if you are an individual and have held
your ADSs for a sufficient period of time, dividend distributions on our ADSs will generally
constitute qualified dividend income taxed at a preferential rate (generally 15% for dividend
distributions before January 1, 2009) as long as our ADSs continue to be readily tradable on the
Nasdaq National Market and certain other conditions apply. You should consult your own tax adviser
as to the rate of tax that will apply to you with respect to dividend distributions, if any, you
receive from us. We do not intend to calculate our earnings and profits according to U.S. tax accounting principles.
Accordingly, distributions on our ADSs, if any, will generally be taxed to you as dividend
distributions for U.S. tax purposes. Even if you are a corporation, you will not be entitled to
claim a dividends-received deduction with respect to distributions you receive from us. Dividends
generally will constitute foreign source passive income for U.S. foreign tax credit limitation
purposes. Sales and other dispositions of ADSs Subject to the Passive Foreign Investment Company discussion below, when you sell or otherwise
dispose of ADSs, you will generally recognize capital gain or loss in an amount equal to the
difference between the amount realized on the sale or other disposition and your adjusted tax basis
in the ADSs, both as determined in U.S. dollars. Your adjusted tax basis will generally equal the
amount you paid for the ADSs. Any gain or loss you recognize will be long-term capital gain or loss
if your holding period in our ADSs is more than one year at the time of disposition. If you are an
individual, any such long-term capital gain will be taxed at preferential rates. Your ability to
deduct capital losses will be subject to various limitations. Passive Foreign Investment Company If we were a Passive Foreign Investment Company or PFIC in any taxable year in which you hold our
ADSs, as a U.S. Holder, you would generally be subject to adverse U.S. tax consequences, in the
form of increased tax liabilities and special U.S. tax reporting requirements. We will be classified as a PFIC in any taxable year if either: (1) the average percentage value of
our gross assets during the taxable year that produce passive income or are held for the production
of passive income is at least 50% of the value of our total gross assets or (2) 75% or more of our
gross income for the taxable year is passive income (such as certain dividends, interest or
royalties). For purposes of the first test: (1) any cash, cash equivalents, and cash invested in
short-term, interest bearing, debt instruments, or bank deposits that is readily convertible into
cash, will generally count as producing passive income or held for the production of passive income
and (2) the average value of our gross assets is calculated based on our market capitalization. We have determined that we were not a PFIC for the taxable year 2004. However, there can be no
assurance that we will not be a PFIC for the taxable year 2005 and/or later taxable years, as PFIC
status is re-tested each year and depends on the facts in such year. For example, we would be a
PFIC for the taxable year 2005 if the sum of our average market capitalization, which is our share
price multiplied by the total amount of our outstanding shares, and our liabilities over that
taxable year is not more than twice the value of our cash, cash equivalents, and other assets that
are readily converted into cash. In particular, we currently deposit a substantial portion of our
net proceeds from our initial public offering in interest bearing bank accounts, which we book as
cash and cash equivalents, but the value of our ADSs have declined to $6.88 per ADS on April 22
from our initial public offering price of $13.00 per ADS. If the value of our outstanding stock
were to continue to decrease for an extended period of time in which we hold substantial cash and
cash equivalents, we would likely become a PFIC. We could also be 73




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CHINA FINANCE ONLINE CO. LIMITED a PFIC for any taxable year if the gross income that we and our subsidiaries earn from investing
the portion of the cash raised in our initial public offering last year that exceeds the immediate
capital needs of our active online business is substantial in comparison with the gross income from
our business operations. If we were a PFIC, you would generally be subject to additional taxes and interest charges on
certain excess distributions we make and on any gain realized on the disposition or deemed
disposition of your ADSs, regardless of whether we continue to be a PFIC in the year in which you
receive an excess distribution or dispose of or are deemed to dispose of your ADSs. Distributions
in respect of your ADSs during a taxable year would generally constitute excess distributions if,
in the aggregate, they exceed 125% of the average amount of distributions in respect of your ADSs
over the three preceding taxable years or, if shorter, the portion of your holding period before
such taxable year. To compute the tax on excess distributions or any gain, (1) the excess distribution or the gain
would be allocated ratably to each day in your holding period, (2) the amount allocated to the
current year and any tax year before we became a PFIC would be taxed as ordinary income in the
current year, (3) the amount allocated to other taxable years would be taxable at the highest
applicable marginal rate in effect for that year, and (4) an interest charge at the rate for
underpayment of taxes for any period described under (3) above would be imposed with respect to any
portion of the excess distribution or gain that is allocated to such period. In addition, if we
were a PFIC, no distribution that you receive from us would qualify for taxation at the
preferential rate discussed in the Dividends on ADSs section above. If we were a PFIC in any year, as a U.S. Holder, you would be required to make an annual return on
IRS Form 8621 regarding your ADSs. However, we do not intend to generate, or share with you,
information that you might need to properly complete IRS Form 8621. You should consult with your
own tax adviser regarding reporting requirements with regard to your ADSs. If we were a PFIC in any year, you would generally be able to avoid the excess distribution rules
described above by making a timely so-called mark-to-market election with respect to your ADSs
provided our ADSs are marketable. Our ADSs will be marketable as long as they remain regularly
traded on a national securities exchange, such as the Nasdaq National Market. If you made this
election in a timely fashion, you would generally recognize as ordinary income or ordinary loss the
difference between the fair market value of your ADSs on the first day of any taxable year and
their value on the last day of that taxable year. Any ordinary income resulting from this election
would generally be taxed at ordinary income rates and would not be eligible for the reduced rate of
tax applicable to qualified dividend income. Any ordinary losses would be limited to the extent of
the net amount of previously included income as a result of the mark-to-market election, if any.
Your basis in the ADSs would be adjusted to reflect any such income or loss. You should consult
with your own tax adviser regarding potential advantages and disadvantages to you of making a
mark-to-market election with respect to your ADSs. Separately, if we were a PFIC in any year, you
would be able to avoid the excess distribution rules by making a timely election to treat us as a
so-called Qualified Electing Fund or QEF. You would then generally be required to include in
gross income for any taxable year (1) as ordinary income, your pro rata share of our ordinary
earnings for the taxable year, and (2) as long-term capital gain, your pro rata share of our net
capital gain for the taxable year. However, we do not intend to provide you with the information
you would need to make or maintain a QEF election and you will, therefore, not be able to make or
maintain such an election with respect to your ADSs. Non-U.S. Holders If you beneficially own ADSs and are not a U.S. Holder for U.S. federal income tax purposes (a
Non-U.S. Holder), you generally will not be subject to U.S. federal income tax or withholding on
dividends received from us with respect to ADSs unless that income is considered effectively
connected with your 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 dividends are attributable to a permanent establishment that you maintain in
the United States. You generally will not be subject to U.S. federal income tax, including
withholding tax, on any gain realized upon the sale or exchange of ADSs, unless:  

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 74




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CHINA FINANCE ONLINE CO. LIMITED  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. If you are engaged in a U.S. trade or business, unless an applicable tax treaty provides otherwise,
the income from your ADSs, including dividends and the gain from the disposition of ADSs, that is
effectively connected with the conduct of that trade or business will generally be subject to the
rules applicable to U.S. Holders discussed above. In addition, if you are a corporation, you may be
subject to an additional branch profits tax at a rate of 30% or any lower rate under an applicable
tax treaty. U.S. information reporting and backup withholding rules In general, dividend payments with respect to the ADSs and the proceeds received on the sale or
other disposition of those ADSs may be subject to information reporting to the IRS and to backup
withholding (currently imposed at a rate of 28%). Backup withholding will not apply, however, if
you (1) are a corporation or come within certain other exempt categories and, when required, can
demonstrate that fact or (2) provide a taxpayer identification number, certify as to no loss of
exemption from backup withholding and otherwise comply with the applicable backup withholding
rules. To establish your status as an exempt person, you will generally be required to provide
certification on IRS Form W-9, W-8BEN or W-8ECI, as applicable. Any amounts withheld from payments
to you under the backup withholding rules will be allowed as a refund or a credit against your U.S.
federal income tax liability, provide that you furnish the required information to the IRS. HOLDERS OF OUR ADSS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF
THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES
RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF THE ADSS, INCLUDING THE APPLICABILITY AND
EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION AND INCLUDING ESTATE, GIFT, AND
INHERITANCE LAWS. F.Dividends and paying agents. Not applicable. G.Statement by experts. Not applicable. H.Documents on display. We have previously filed with the Commission our registration statement on Form F-1, as amended,
and our prospectus under the Securities Act of 1933, with respect to our ordinary shares. We are subject to the periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are required to
file reports and other information with the Securities and Exchange Commission. Specifically, we
are required to file annually a Form 20-F no later than six months after the close of each fiscal
year, which is December 31. Copies of reports and other information, when so filed, may be
inspected without charge and may be obtained at prescribed rates at the public reference facilities
maintained by the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional office of the Securities and Exchange Commission
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
public may obtain information regarding the Washington, D.C. Public Reference Room by calling the
Commission at 1-800-SEC-0330. The SEC also maintains a Web site at www.sec.govthat contains
reports, proxy and information statements, and other information regarding registrants that make
electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt
from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports
and proxy statements, and officers, directors and principal shareholders are exempt from the
reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. 75




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CHINA FINANCE ONLINE CO. LIMITED Our financial statements have been prepared in accordance with U.S. GAAP. We will furnish our shareholders with annual reports, which will include a review of operations and
annual audited consolidated financial statements prepared in conformity with U.S. GAAP. I.Subsidiaries information. Not Applicable. 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Please refer to Item 5, Operating and Financial Review and Prospects; Quantitative and qualitative
disclosures about market risk. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not Applicable. 
 PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES Not Applicable. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS The following Use of Proceeds information relates to the registration statement on Form F-1 (File
No. 333-119166), or Registration Statement, for our initial public offering and sale of 6,200,000
American Depositary Shares, each representing five of our ordinary shares, for an aggregate
offering price of US$80.6 million. Our Registration Statement was declared effective by the
Commission on October 14, 2005 and we began offering and selling American Depositary Shares, on
October 15, 2004. In the offering we sold 5,000,000 ADSs and the participating selling
shareholders sold 1,200,000 ADSs. We received net proceeds of approximately US$58.5 million from our initial public offering (after
deducting underwriting discounts and other expenses related to the offering). We did not receive
any of the proceeds from sales by the selling shareholders. JPMorgan Securities Inc; Jefferies
Broadview, a division of Jefferies & Company, Inc; and WR Hambrecht + Co, LLC were the underwriters
for our initial public offering. In March 2005, we received approval from PRC government authorities to make additional capital
contributions of $9 million and $11.5 million to CFO Beijing and Fortune Software, respectively. In
April 2005, we received further approval from PRC government authorities to make shareholder loans
of $16.8 million and $18.0 million to CFO Beijing and Fortune Software, respectively. We are
making these additional capital contributions and shareholder loans solely for purposes of
capitalizing CFO Beijing and Fortune Software. We intend to fund these additional capital
contributions and shareholder loans from the net proceeds of our initial public offering. We
intend to use the additional capital to fund the operations of CFO Beijing and Fortune Software. In March 2005, our board of directors approved a stock repurchase program pursuant to which we
expect to purchase from time to time up to $10 million worth of our American Depositary Shares, or
ADSs, over a period of six months. Under the terms of the approved stock repurchase program, we
will repurchase our ADSs through open market purchases on Nasdaq on terms deemed appropriate by us
in compliance with the anti-manipulation provisions of the Securities and Exchange Commissions
Rule 10b-18. The timing and amount of repurchase transactions under this program will depend on
market conditions as well as other corporate and regulatory considerations, and will also be
subject to Rule 10b-18 requirements. The purchases will be funded from available working capital. 76




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CHINA FINANCE ONLINE CO. LIMITED 
 ITEM 15. CONTROLS AND PROCEDURES Our management, with the participation of Jun Ning, our chief executive officer, and Sam Qian, our
chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended, or Exchange Act, as of the end of the fiscal year covered by this report. Based
on such evaluation, our chief executive officer and chief financial officer have concluded that, as
of the end of the fiscal year covered by this report, our disclosure controls and procedures were
effective in recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by us in the reports that we file or submit under the Exchange Act. There have not been any change in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal year covered by
this report that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT See Item 6.C. of this annual report, Directors, Senior Management and Employees  Board
Practices. Our board of directors has concluded that Mr. Kheng Nam Lee, a member of our audit committee, meets
the criteria for an audit committee financial expert as established by the U.S. Securities and
Exchange Commission. Mr. Kheng Nam Lee will not be deemed an expert for any purpose, including, without limitation,
for purposes of section 11 of the U.S. Securities Act of 1933, as amended, as a result of being
designated or identified as an audit committee financial expert. The designation or identification
of Mr. Kheng Nam Lee as an audit committee financial expert does not impose on him any duties,
obligations or liability that are greater than the duties, obligations and liability imposed on him
as a member of the audit committee and board of directors in the absence of such designation or
identification. The designation or identification of Mr. Kheng Nam Lee as an audit committee
financial expert does not affect the duties, obligations or liability of any other member of the
audit committee or board of directors. 
 ITEM 16B. CODE OF ETHICS. See Item 6.C. of this annual report, Directors, Senior Management and Employees  Board
Practices. Our board of directors has adopted a code of ethics, which is applicable to our senior executive
and financial officers and any other persons who perform similar functions for us. We have posted
the text of our code of ethics on our Internet website at
www.chinafinanceonline.com/investor/governance.asp. 
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table sets forth the aggregate fees by category specified below
in connection with certain professional services rendered by Deloitte Touche
Tohmatsu CPA Ltd., our principal external auditors, for the periods indicated.
We did not pay any other fees to our auditors during the periods indicated
below. For the Year Ended December 31,2003
    
    
    2004Audit fees(1)
    
    US$
    18,100
    
    
    US$
    347,500
   (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. 77




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CHINA FINANCE ONLINE CO. LIMITED 
 ITEM 16D. EXEMPTION FROM THE LISTING STANDARD FOR AUDIT COMMITTEES Not Applicable. 
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS In March 2005, our board of directors approved a stock repurchase program pursuant to which we
expect to purchase from time to time up to $10 million worth of our American Depositary Shares, or
ADSs, over a period of six months. Under the terms of the approved stock repurchase program, we
will repurchase our ADSs through open market purchases on Nasdaq on terms deemed appropriate by us
in compliance with the anti-manipulation provisions of the Securities and Exchange Commissions
Rule 10b-18. The timing and amount of repurchase transactions under this program will depend on
market conditions as well as other corporate and regulatory considerations, and will also be
subject to Rule 10b-18 requirements. The purchases will be funded from available working capital.
As of the date of this report, no purchases have been made by us or any affiliated purchaser, or on
our or any affiliated purchasers behalf, of shares or other units of any class of our equity
securities that is registered pursuant to section 12 of the Exchange Act. 
 PART III 
 ITEM 17. FINANCIAL STATEMENT We have elected to provide financial statements pursuant to Item 18. 
 ITEM 18. FINANCIAL STATEMENTS The consolidated financial statements for China Finance Online Co., Limited and its subsidiaries
are included at the end of this annual report. 
 ITEM 19. EXHIBITS 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, 2004.4.1
    
    
    Incentive Stock Option Plan and form of option 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 September 21, 2004)4.2
    
    
    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 among China Finance Online Co. Limited, Jun Ning, Wu Chen and
Fuhua Innovation Technology Development Co., Ltd. dated May 27, 2004 (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 among Jun Ning, Wu Chen and China Finance Online (Beijing) Co., Ltd. dated May 27,
2004 (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
    
    
    Proxy from Jun Ning to Linhai Ma dated May 27, 2004 (incorporated by reference to Exhibit 10.5 from our
Registration Statement on Form F-1 (file no. 333-119166) filed with the Securities and Exchange Commission
on September 21, 2004)
 78




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CHINA FINANCE ONLINE CO. LIMITED ExhibitNumber
    
    Description4.6
    
    
    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
    
    
    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)4.8
    
    
    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)4.9
    
    
    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)4.10
    
    
    Domain Name Licensing Agreement between China Finance Online (Beijing) Co., Ltd. and Fuhua Innovative
Technology Development Co., Ltd. dated May 27, 2004 (incorporated by reference to Exhibit 10.10 from our
Registration Statement on Form F-1 (file no. 333-119166) filed with the Securities and Exchange Commission
on September 21, 2004)4.11
    *
    
    Domain Name Licensing Agreement among China Finance Online (Beijing) Co., Ltd., Fuhua Innovative
Technology Development Co., Ltd. and China Finance Online Co. Limited dated March 20, 2005.4.12
    
    
    Loan Agreement between China Finance Online Co. Limited and Jun Ning dated May 27, 2004 (incorporated by
reference to Exhibit 10.11 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
    
    
    Loan Agreement between China Finance Online Co. Limited and Wu Chen dated May 27, 2004 (incorporated by
reference to Exhibit 10.12 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
    
    
    Information Service Contract between China Finance Online (Beijing) Co., Ltd. and Shanghai Securities
Information Co., Ltd. dated April 10, 2002 (incorporated by reference to Exhibit 10.13 from our
Registration Statement on Form F-1 (file no. 333-119166) filed with the Securities and Exchange Commission
on October 13, 2004)4.15
    
    
    Information Service Contract between China Finance Online (Beijing) Co., Ltd. and Shanghai Securities
Information Co., Ltd. dated July 20, 2004 (incorporated by reference to Exhibit 10.13 from our
Registration Statement on Form F-1 (file no. 333-119166) filed with the Securities and Exchange Commission
on October 13, 2004)4.16
    
    
    Exclusive Information Business License Contract between China Finance Online (Beijing) Co., Ltd. and
Shenzhen Securities Information Co., Ltd. dated March 1, 2004 (incorporated by reference to Exhibit 10.15
from our Registration Statement on Form F-1 (file no. 333-119166) filed with the Securities and Exchange
Commission on October 13, 2004)4.17
    
    
    Securities Information Database Service Contract (China Finance Online (Beijing) Co., Ltd. and Shanghai
Wind Information Co., Ltd.) (incorporated by reference to Exhibit 10.16 from our Registration Statement on
Form F-1 (file no. 333-119166) filed with the Securities and Exchange Commission on October 13, 2004)4.18
    *
    
    Securities Information Database Service Contract between China Finance Online (Beijing) Co., Ltd. and
Shenzhen Securities Information Co., Ltd. dated December 9, 2004, and as amended on January 31, 2005.4.19
    
    
    Lease Agreement between Pingan Real Estate Development Co., Ltd. and China Finance Online (Beijing) Co.,
Ltd. dated June 30, 2003 (incorporated by reference to Exhibit 10.17 from our Registration Statement on
Form F-1 (file no. 333-119166) filed with the Securities and Exchange Commission on September 21, 2004).4.20
    *
    
    Lease Agreement between Fortune Software (Beijing) Co., Ltd. and Li Jihong dated March 22, 2005.4.21
    
    
    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)4.22
    
    
    Form of labor contract of China Finance Online (Beijing) Co., Ltd. (incorporated by reference to Exhibit
10.19 from our Registration Statement on Form F-1 (file no. 333-119166) filed with the Securities and
Exchange Commission on September 21, 2004)4.23
    
    
    Amended and Restated Labor Contract of Jun Ning dated September 30, 2004 (incorporated by reference to
Exhibit 10.20 from our Registration Statement on Form F-1 (file no. 333-119166) filed with the Securities
and Exchange Commission on October 4, 2004)4.24
    
    
    Labor Contract of Sam Qian dated March 31, 2004 (incorporated by reference to Exhibit 10.21 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
    
    
    Intellectual Property Rights, Confidentiality and Non-Competition Agreement of Jun Ning dated December 31,
1999 (incorporated by reference to Exhibit 10.22 from our Registration Statement on Form F-1 (file no.
333-119166) filed with the Securities and Exchange Commission on October 4, 2004)
 79




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CHINA FINANCE ONLINE CO. LIMITED ExhibitNumber
    
    Description4.26
    
    
    Intellectual Property Rights, Confidentiality and Non-Competition Agreement of Sam Qian dated March 31,
2004 (incorporated by reference to Exhibit 10.23 from our Registration Statement on Form F-1 (file no.
333-119166) filed with the Securities and Exchange Commission on September 21, 2004)4.27
    
    
    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)4.28
    
    
    Labor Contract of Bo Wu dated May 17, 2004 and Intellectual Property Rights, Confidentiality and
Non-Competition Agreement of Bo Wu dated May 17, 2004 (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)8.1
    
    
    List of subsidiaries (incorporated by reference to Exhibit 21.1 from our Registration Statement on Form
F-1 (file no. 333-119166) filed with the Securities and Exchange Commission on September 21, 2004)10.1
    
    
    Consents of Deloitte Touche Tohmatsu CPA Ltd (incorporated by reference to Exhibit 23.1 from our
Registration Statement on Form F-1 (file no. 333-119166) filed with the Securities and Exchange Commission
on September 21, 2004, October 4, 2004 and October 13, 2004)10.2
    
    
    Consent of Jincheng and Tongda Law Firm (included in Exhibit 5.2) (incorporated by reference to Exhibit
23.2 from our Registration Statement on Form F-1 (file no. 333-119166) filed with the Securities and
Exchange Commission on September 21, 2004)10.3
    
    
    Consent of Taylor Nelson Sofres (incorporated by reference to Exhibit 23.8 from our Registration Statement
on Form F-1 (file no. 333-119166) filed with the Securities and Exchange Commission on September 21, 2004)12.1*
    
    
    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
   *
    
    Filed as an exhibit to this Form 20-F
    
    Confidential treatment granted with respect to redacted portions 80




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CHINA FINANCE ONLINE CO. LIMITED SIGNATURE The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf. Date: April 28, 2005
    CHINA FINANCE ONLINE CO. LIMITED/s/ Jun NingName:
    Jun NingTitle:
    Chief Executive Officer 81




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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, 2003 and 2004
    
    
    F - 3Consolidated Statements of Operations for the years ended December 31,
2002, 2003 and 2004
    
    
    F - 4Consolidated Statements of Shareholders Equity and
Comprehensive Income (Loss) for the years ended December 31, 2002, 2003 and 2004
    
    
    F - 5Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2003 and 2004
    
    
    F - 6Notes to the Consolidated Financial Statements
    
    
    F - 7Schedule 1
    
    
    F - 24
 F-1




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CHINA FINANCE ONLINE CO. LIMITED REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OFCHINA FINANCE ONLINE CO. LIMITED We have audited the accompanying consolidated balance sheets of China Finance Online Co.
Limited and its subsidiaries (the Company) as of December 31, 2003 and 2004 and the
related consolidated statements of operations, shareholders equity and comprehensive income
(loss), and cash flows for the years ended December 31, 2002, 2003 and 2004, and related
financial statement schedule included in Schedule 1. These financial statements and related
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements and
related financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (PCAOB) in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2003 and 2004 and the
results of its operations and its cash flows for each of the three years ended December 31,
2004 in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein. Deloitte Touche Tohmatsu CPA Ltd.
Beijing, China
February 28, 2005 F-2




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CHINA FINANCE ONLINE CO. LIMITED CONSOLIDATED BALANCE SHEETS
(In U.S. dollars, except share data) December 31,2003
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,805,670
    
    
    $
    70,596,197Accounts receivable
    
    
    
    
    
    
    33,921Income tax recoverable
    
    
    283,284
    
    
    
    14,573Prepaid expenses and other current assets
    
    
    92,430
    
    
    
    331,943Deferred tax assets
    
    
    
    
    
    
    386,325Total current assets
    
    
    6,181,384
    
    
    
    71,362,959Property and equipment, net
    
    
    350,816
    
    
    
    417,002Rental deposits
    
    
    23,575
    
    
    
    30,736Goodwill, net
    
    
    50,534
    
    
    
    50,534Total assets
    
    $
    6,606,309
    
    
    $
    71,861,231Liabilities and shareholders equityCurrent liabilities:Deferred revenue
    
    $
    1,278,103
    
    
    $
    3,487,258Accrued expenses and other current liabilities
    
    
    94,368
    
    
    
    285,696Dividend payable
    
    
    502,552
    
    
    
    Total current liabilities
    
    $
    1,875,023
    
    
    $
    3,772,954Commitments (Note 12)Shareholders equityConvertible preference shares ($0.00013 par value,
65,000,000 shares authorized)Series A convertible preference shares (30,643,000
shares issued and outstanding in 2003 and nil in 2004)
(liquidation value $3,954 in 2003 and nil in 2004)
    
    
    3,954
    
    
    
    Series B convertible preference shares (20,833,333 shares issued and
outstanding in 2003 and nil in 2004) (liquidation value
$5,000,000 in 2003 and nil in 2004)
    
    
    2,688
    
    
    
    Ordinary shares ($0.00013 par value; 36,000,000 shares authorized;
shares issued and outstanding 22,123,600 in 2003 and 99,329,933
in 2004)
    
    
    2,852
    
    
    
    12,814Additional paid-in capital
    
    
    5,093,384
    
    
    
    64,175,132Deferred stock compensation
    
    
    
    
    
    
    (325,221
    )Accumulated other comprehensive income (loss)
    
    
    186
    
    
    
    (11
    )(Accumulated deficit) retained earnings
    
    
    (371,778
    )
    
    
    4,225,563Total shareholders equity
    
    
    4,731,286
    
    
    
    68,088,277Total liabilities and shareholders equity
    
    $
    6,606,309
    
    
    $
    71,861,231
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In U.S. dollars, except share data) Year ended December 31,2002
    
    
    2003
    
    
    2004Gross revenues
    
    $
    1,098,051
    
    
    $
    2,354,225
    
    
    $
    6,064,363Business tax
    
    
    (48,397
    )
    
    
    (83,448
    )
    
    
    (47,914
    )Net revenues
    
    
    1,049,654
    
    
    
    2,270,777
    
    
    
    6,016,449Cost of revenues
    
    
    253,829
    
    
    
    297,719
    
    
    
    393,016Gross profit
    
    
    795,825
    
    
    
    1,973,058
    
    
    
    5,623,433Operating expenses:General and administrative
    
    
    253,459
    
    
    
    303,959
    
    
    
    441,260Product development
    
    
    156,557
    
    
    
    148,871
    
    
    
    172,077Sales and marketing
    
    
    274,961
    
    
    
    283,964
    
    
    
    799,981Stock-based compensation
    
    
    
    
    
    
    96,311
    
    
    
    289,334Total operating expenses
    
    
    684,977
    
    
    
    833,105
    
    
    
    1,702,652Income from operations
    
    
    110,848
    
    
    
    1,139,953
    
    
    
    3,920,781Interest income
    
    
    95,208
    
    
    
    51,220
    
    
    
    293,862Other expense
    
    
    (3,553
    )
    
    
    (1,243
    )
    
    
    (1,579
    )Income before income tax benefit
    
    
    202,503
    
    
    
    1,189,930
    
    
    
    4,213,064Income tax benefit
    
    
    
    
    
    
    
    
    
    
    384,277Net income
    
    
    202,503
    
    
    
    1,189,930
    
    
    
    4,597,341Dividends on preference shares
    
    
    
    
    
    
    (351,489
    )
    
    
    Income attributable to ordinary shareholders
    
    $
    202,503
    
    
    $
    838,441
    
    
    $
    4,597,341Income per share-basic
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.12Income per share-diluted
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.05Shares used in calculating basic net income per share
    
    
    17,784,900
    
    
    
    20,124,153
    
    
    
    38,912,491Shares used in calculating diluted net income per share
    
    
    70,933,333
    
    
    
    72,562,516
    
    
    
    90,092,668*Stock based compensation related to:Cost of revenue
    
    $
    
    
    
    $
    
    
    
    $
    825General and administrative
    
    
    
    
    
    
    96,311
    
    
    
    286,089Product development
    
    
    
    
    
    
    
    
    
    
    920Sales and marketing
    
    
    
    
    
    
    
    
    
    
    1,500$
    
    
    
    $
    96,311
    
    
    $
    289,334
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)
(In U.S. dollars, except share data) Accumulated
    
    
    RetainedSeries A convertible
    
    
    Series B convertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    other
    
    
    earnings
    
    
    Totalpreference shares
    
    
    preference shares
    
    
    Ordinary shares
    
    
    paid-in
    
    
    Deferred stock
    
    
    comprehensive
    
    
    (accumulated
    
    
    shareholders
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    compensation
    
    
    income (loss)
    
    
    deficit)
    
    
    equity
    
    
    incomeBalance as of January 1, 2002
    
    
    32,315,100
    
    
    $
    4,170
    
    
    
    20,833,333
    
    
    $
    2,688
    
    
    
    17,784,900
    
    
    $
    2,295
    
    
    $
    4,997,073
    
    
    $
    
    
    
    $
    179
    
    
    $
    (1,261,659
    )
    
    $
    3,744,746
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (321
    )
    
    
    
    
    
    
    (321
    )
    
    
    (321
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202,503
    
    
    
    202,503
    
    
    
    202,503Balance as of December 31, 2002
    
    
    32,315,100
    
    
    
    4,170
    
    
    
    20,833,333
    
    
    
    2,688
    
    
    
    17,784,900
    
    
    
    2,295
    
    
    
    4,997,073
    
    
    
    
    
    
    
    (142
    )
    
    
    (1,059,156
    )
    
    
    3,946,928
    
    
    $
    202,182Issuance of ordinary shares to an employee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,666,600
    
    
    
    341
    
    
    
    96,311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,652
    
    
    
    Conversion of Series A convertible preference
shares into ordinary shares
    
    
    (1,672,100
    )
    
    
    (216
    )
    
    
    
    
    
    
    
    
    
    
    1,672,100
    
    
    
    216
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    328
    
    
    
    
    
    
    
    328
    
    
    
    328Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,189,930
    
    
    
    1,189,930
    
    
    
    1,189,930Dividends on preference shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (351,489
    )
    
    
    (351,489
    )
    
    
    Dividends on ordinary shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151,063
    )
    
    
    (151,063
    )
    
    
    Balance as of December 31, 2003
    
    
    30,643,000
    
    
    
    3,954
    
    
    
    20,833,333
    
    
    
    2,688
    
    
    
    22,123,600
    
    
    
    2,852
    
    
    
    5,093,384
    
    
    
    
    
    
    
    186
    
    
    
    (371,778
    )
    
    
    4,731,286
    
    
    $
    1,190,258Issuance of ordinary shares to an employee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    730,000
    
    
    
    94
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    Stock options issued to non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,764
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,764
    
    
    
    Deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    541,791
    
    
    
    (541,791
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    216,570
    
    
    
    
    
    
    
    
    
    
    
    216,570
    
    
    
    Issuance of ordinary shares upon the initial public offering
(net of offering costs of $6,469,282)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000,000
    
    
    
    3,226
    
    
    
    58,527,492
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,530,718
    
    
    
    Conversion 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
    
    
    $
    4,597,144
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars) Year ended December 31,2002
    
    
    2003
    
    
    2004Operating activities:Income attributable to ordinary shareholders
    
    $
    202,503
    
    
    $
    838,441
    
    
    $
    4,597,341Dividends on preference shares
    
    
    
    
    
    
    351,489
    
    
    
    Net income
    
    
    202,503
    
    
    
    1,189,930
    
    
    
    4,597,341Adjustments to reconcile net income to net cash
provided by operating activities:Stock based compensation
    
    
    
    
    
    
    96,311
    
    
    
    289,334Depreciation
    
    
    81,894
    
    
    
    105,478
    
    
    
    133,208Loss on disposal of property and equipment
    
    
    16,701
    
    
    
    1,339
    
    
    
    463Changes in assets and liabilities:Accounts receivable
    
    
    
    
    
    
    
    
    
    
    (33,921
    )Income tax recoverable
    
    
    
    
    
    
    (283,284
    )
    
    
    268,711Prepaid expenses and other current assets
    
    
    32,526
    
    
    
    3,768
    
    
    
    (239,513
    )Rental deposits
    
    
    (4,003
    )
    
    
    1,491
    
    
    
    (7,161
    )Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    (386,325
    )Deferred revenue
    
    
    748,632
    
    
    
    343,778
    
    
    
    2,209,155Accrued expenses and other current liabilities
    
    
    (16,027
    )
    
    
    46,952
    
    
    
    191,328Net cash provided by operating activities
    
    
    1,062,226
    
    
    
    1,505,763
    
    
    
    7,022,620Investing activities:Purchase of property and equipment
    
    
    (97,692
    )
    
    
    (151,522
    )
    
    
    (199,857
    )Financing activities:Proceeds from initial public offering, net of offering costs
of $6,469,282
    
    
    
    
    
    
    
    
    
    
    58,530,718Issuance of ordinary shares to an employee
    
    
    
    
    
    
    
    
    
    
    94Dividend paid
    
    
    
    
    
    
    
    
    
    
    (502,552
    )Distribution to the shareholders of Fuhua
    
    
    
    
    
    
    
    
    
    
    (60,299
    )Proceeds from stock based compensation
    
    
    
    
    
    
    341
    
    
    
    Net cash provided by financing activities
    
    
    
    
    
    
    341
    
    
    
    57,967,961Effect of exchange rate changes
    
    
    (321
    )
    
    
    328
    
    
    
    (197
    )Net increase in cash and cash equivalents
    
    
    964,213
    
    
    
    1,354,910
    
    
    
    64,790,527Cash and cash equivalents, beginning of year
    
    
    3,486,547
    
    
    
    4,450,760
    
    
    
    5,805,670Cash and cash equivalents, end of year
    
    $
    4,450,760
    
    
    $
    5,805,670
    
    
    $
    70,596,197Supplemental disclosure of cash flow informationIncome taxes paid
    
    $
    
    
    
    $
    283,284
    
    
    $
    16,621Interest paid
    
    $
    
    
    
    $
    
    
    
    $
    Supplemental disclosures of non-cash financing activities:Conversion of Series A and/or Series B convertible
preference shares into ordinary shares
    
    $
    
    
    
    $
    216
    
    
    $
    6,642Deferred stock compensation
    
    $
    
    
    
    $
    
    
    
    $
    325,221
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  1.

ORGANIZATION AND PRINCIPAL ACTIVITIESChina Finance Online Co. Limited (the Company) was incorporated in Hong Kong on November
2, 1998. The Company and its subsidiaries including its variable interest entity are
principally engaged in the sale of online financial services analyzing financial and listed
company information in China. The services are provided through downloadable proprietary
software research tools on their website www.jrj.com.Details of the Companys subsidiary and variable interest entity are as follows: Place of
    
    
    Date of
    
    
    OwnershipCompany name
    
    incorporation
    
    
    incorporation
    
    
    interestChina Finance Online (Beijing) Co.,
Ltd. (formerly known as Fortune
Software (Beijing) Ltd.) (CFO Beijing)
    
    Beijing, China
    
    July 9, 1998
    
    
    100
    %Fortune Software (Beijing) Co., Ltd.
    
    Beijing, China
    
    December 7, 2004
    
    
    100
    %Beijing Fuhua Innovation TechnologyInvestment Co., Ltd. (Fuhua)*
    
    Beijing, China
    
    December 13, 2000
    
    
    100
    %
  *
    
    Represents a variable interest entity
  PRC regulations prohibit direct foreign ownership of business entities providing internet
content services or ICP services in the PRC which included the Companys business of
providing financial information and data to Internet users as certain licenses are required
for the provision of such services. The Company 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, the Company
established Beijing Fuhua Innovation Technology Investment Co., Ltd. (Fuhua), a variable
interest entity, through two designated shareholders who are PRC citizens and legally owned
Fuhua. There was a trust and pledge agreement between the shareholders of Fuhua and the
Company which provides that the shareholders of Fuhua hold the equity interests of Fuhua in
trust for the Company and that all benefits, rights, and power arising from the equity
interests in Fuhua accrue to the Company. In addition, the corporate management and business
operation of Fuhua is to be conducted by the Company. Upon the establishment of Fuhua, Mr.
Chen Wu, an employee of an entity affiliated with the majority shareholder of the Company
and Mr. Wang Xinzheng, one of the founding employees and existing employee and shareholder
of the Company were designated as the shareholders of Fuhua and held 55% and 45%,
respectively, of Fuhua equity interests on behalf of the Company. On January 21, 2003, Mr.
Ning Jun, Chief Executive Officer of the Company, replaced Mr. Wang Xinzheng as the 45%
registered shareholder of Fuhua as Mr. Wang Xinzheng was no longer an employee of the
Company.In May 2004, the Company replaced the trust and pledge agreement with the shareholders of
Fuhua and entered into a series of contractual arrangements with Fuhua and its shareholders.
Pursuant to these agreements, Fuhua has the exclusive right to use certain domain names of
the CFO Beijing, Fuhua leases a substantial majority of its operating assets from CFO
Beijing and CFO Beijing is the exclusive provider of technical support and other services to
Fuhua. In return, Fuhua is required to pay licensing and service fees for the use of the
domain name, operating leases and technical support and other services received. F-7




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  1.

ORGANIZATION AND PRINCIPAL ACTIVITIES  continuedIn May 2004, the Company made a loan to each of the shareholders of Fuhua to capitalize
Fuhua. Principal terms of the loan agreement and affiliated agreements provide that the
loans can only be repaid by transferring all of their interests in Fuhua to the Company or
to a third party designated by the Company.In addition, the Company has entered into an option agreement with Fuhua and its
shareholders that provide the Company with the substantial ability to control Fuhua.
Pursuant to these contractual agreements:  

The shareholders of Fuhua have granted the Company or someone designated by the
Company an irrevocable proxy to exercise all their 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 transactions that may materially affect its assets,
liabilities, equity or operations without prior written consent;

Fuhua cannot distribute any dividends;

The Company can purchase the entire equity interest in, or all of 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 all of the contractual agreements
between CFO Beijing and Fuhua; and

The shareholders of Fuhua will not transfer, sell, pledge, dispose of or create any
encumbrance on their equity interests in Fuhua without prior written consent of CFO
Beijing.  Each of the contractual agreements with Fuhua and its shareholders can only be amended with
the approval of our audit committee or another independent body appointed by the Companys
Board of Directors.In January 2003, the Financial Accounting Standards Board (FASB) issued Financial
Interpretation (FIN) No. 46 which requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the ownership interest held by the
equity investors in the entity does not have characteristics of a controlling financial
interest or does not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46 was effective
for all new variable interest entities created or acquired after December 15, 2003, the FASB
issued FIN 46 (revised), which provides for the deferral of the implementation date to the
end of the first reporting period after March 15, 2004, unless the Company has a special
purpose entity, in which case the provisions must be applied for fiscal years ending
December 31, 2003. However, the Company has elected to retroactively apply FIN 46 (revised)
and has consolidated Fuhua as its variable interest entity from its inception. F-8




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  1.

ORGANIZATION AND PRINCIPAL ACTIVITIES  continuedThe Company is the primary beneficiary of the Fuhua because the Company holds all of the
variable interests in Fuhua through related parties. The only variable interests in Fuhua
not directly held by the Company are the shares held by the registered shareholders Mr. Chen
Wu (55%) and Mr. Ning Jun (45%). Each of these individuals is a related party as described
in FIN 46 (revised) either because they are management or acting as a defacto agent of the
Company. The defacto relationship is established through the contractual relationships
described above under which the individuals assign all their rights as shareholders of Fuhua
to the Company.2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of presentationThe consolidated financial statements of the Company have been prepared in accordance with
the accounting principles generally accepted in the United States of America (U.S. GAAP).Basis of consolidationThe consolidated financial statements include the financial statements of the Company, its
subsidiary, CFO Beijing, and a variable interest entity, Fuhua. 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 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 useful lives
for property and equipment, valuation allowance for deferred tax assets and goodwill
impairment valuation.Significant risks and uncertaintiesThe Company participates in a dynamic high-technology industry and believes that changes in
any of the following areas could have a material adverse effect on the Companys future
financial position, results of operations, or cash flows: advances and trends in new
technologies and industry standards; stock market performance and public interest in the
Chinese stock market; competition from other competitors; changes in key suppliers; changes
in certain strategic relationships; regulatory or other factors; and risks associated with
the Companys ability to attract and retain employees necessary to support its growth. F-9




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedProperty and equipment, netProperty and equipment 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 years
  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.GoodwillEffective January 1, 2002, the Company adopted Statement of Financial Accounting Standards
(SFAS) No.142, Goodwill and Other Intangible Assets, which establishes new standards for
goodwill acquired in a business combination and other intangible assets, eliminates
amortization of existing goodwill and other indefinite life intangible assets, and requires
annual evaluation of goodwill and other indefinite life intangible assets for impairment or
more frequently if events or charges in circumstances indicate that it may be impaired.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 the revenue to the various elements of the arrangement, the Company recognizes
revenue ratably over the life of the arrangement. F-10




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedRevenue recognition  continuedSubscription-based revenue includes the benefit of the rebate of value added taxes on sale
of the downloaded software received from the Chinese tax authorities as part of the PRC
government policy of encouraging software development in the PRC. In 2002, 2003 and 2004,
the Company recognized $nil, $40,260 and $613,050, respectively in value added tax refunds.The 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 records the net amount of revenues received from the intermediary
company after deducting service and network fees. 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. Currently, the Company records the net amount billed to its
customers since the Company is the agent in these 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 specifications.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.Foreign currency translationThe functional currency of the Companys subsidiary is Renminbi (RMB). Transactions
denominated in currencies other than RMB are translated into RMB at the exchange rates
quoted by the Peoples Bank of China (the PBOC) prevailing at the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies are
translated into RMB using the applicable exchange rates quoted by the PBOC at the balance
sheet dates. The resulting exchange differences are included in the statement of operations.The Company has determined that the U.S. dollar as its functional and reporting currency.
Accordingly assets and liabilities are translated using exchange rates in effect at each
year end and average exchange rates are used for the consolidated statements of operations.
Translation adjustments resulting from translation of these consolidated financial
statements are reflected as accumulated other comprehensive income (loss) in the
shareholders equity.Foreign 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. The cash and cash equivalents of
the Company included aggregate amounts of $2,826,338 at December 31, 2003 and $10,200,804 at
December 31, 2004 which were denominated in RMB. F-11




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedForeign currency risk  continuedThe PRC subsidiaries conduct their business substantially in the PRC, and their financial
performance and position are measured in terms of RMB. Any devaluation of the RMB against
the United States dollar would consequently have an adverse effect on the financial
performance and asset values of the Company when measured in terms of United States dollar.
The PRC subsidiaries products and services are primarily sold and delivered in the PRC for
RMB. Thus, their revenues and profits are predominantly denominated in RMB, and will have to
be converted by the Company to pay dividends to the Company in Hong Kong or United States
dollar, Should the RMB devalue against the Hong Kong or United States dollar, such
devaluation could have a material adverse effect on the Companys profits and the foreign
currency equivalent of such profits repatriated by the PRC subsidiaries to the Company.Product development expensesThese costs 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.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 income (loss)Comprehensive income (loss) includes foreign currency translation adjustments. Comprehensive
income (loss) is reported in the statements of shareholders equity.Fair value of financial instrumentsFinancial instruments include cash and cash equivalents. The carrying values of cash and
cash equivalents, approximate their fair values due to their short-term maturities. F-12




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedStock-based compensationThe Company grants stock options to its employees and certain non-employees. The Company
records a compensation charge for the excess of the fair value of the stock at the grant
date or any other measurement date over the amount an employee must pay to acquire the
stock. The compensation expense is recognized over the applicable service period, which is
usually the vesting period. The Company accounts for stock-based awards to non-employees by
recording a charge for the services rendered by the non-employees using the Black-Scholes
option pricing model.Had compensation cost for options granted to employees under the Companys stock option plan
(the Plan) been determined based on the fair value at the grant dates, the Companys pro
forma net income would have been as follows: December 31,2002
    
    
    2003
    
    
    2004Income attributable to ordinary shareholders
as reported:
    
    $
    202,503
    
    
    $
    838,441
    
    
    $
    4,597,341Add: Stock compensation as reported
    
    
    
    
    
    
    
    
    
    
    33,192Less: Stock compensation determined
using the fair value method
    
    
    
    
    
    
    
    
    
    
    (256,947
    )Pro forma income attributable
to ordinary shareholders
    
    $
    202,503
    
    
    $
    838,441
    
    
    $
    4,373,586Basic income per share:As reported
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.12Pro forma
    
    
    0.01
    
    
    
    0.04
    
    
    
    0.11Diluted income per share:As reported
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.05Pro forma
    
    
    0.00
    
    
    
    0.01
    
    
    
    0.05
  The 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. December 31,2002
    
    
    2003
    
    
    2004Option grantsAverage risk-free rate of return
    
    
    
    
    
    
    
    
    
    
    1.87
    %Weighted average expected option life
    
    
    
    
    
    
    
    
    
    2.41 yearsVolatility rate
    
    
    
    
    
    
    
    
    
    
    73.78Dividend yield
    
    
    
    
    
    
    
    
    
    
    0
    %
 F-13




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedIncome per shareBasic income per share is computed by dividing net income by the weighted average number of
ordinary shares outstanding during the period. Diluted income 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.Recently issued accounting standardsIn December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123(R)).
Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees. Generally, the approach in SFAS No. 123(R) is similar to the approach
described in SFAS No. 123, However, SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the income
statement based on the grant-date fair values. Pro forma disclosure previously permitted
under SFAS 123 is no longer an alternative. The new standard, as recently amended, will be
effective for the Company in the first annual reporting period beginning after June 15,
2005. Under SFAS 123(R), the Company could elect the modified prospective or modified
retroactive option for transition on the adoption of this new standard. Under the modified
retroactive option, prior periods are adjusted on a basis consistent with the pro forma
disclosures previously required for those periods by SFAS 123. Under the modified
prospective option, compensation expense for all unvested stock options must be recognized
on or after the required effective date based on the grant-date fair value of those stock
options. The Company has not yet quantified the effect of the future adoption of SFAS 123(R)
on a going forward basis. Prior to the adoption of SFAS 123(R), the Company will continue to
utilize the accounting method prescribed by APB Opinion No. 25 and has adopted the
disclosure requirements of SFAS No. 148 as of December 31, 2003 as allowed by SFAS No. 123.In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. The Statement establishes standards
for how an issuer classifies and measures certain financial instruments. This Statement is
effective for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning after June 15,
2003. The Statement requires that certain financial instruments that, under previous
guidance, issuers could account for as equity and be classified as liabilities (or assets in
some circumstances) in statement of positions or consolidated balance sheets, as
appropriate. The financial instruments within the scope of this Statement are: (i)
mandatorily redeemable shares that an issuer is obligated to buy back in exchange for cash
or other assets; (ii) financial instruments that do or may require the issuer to buy back
some of its shares in exchange for cash or other assets; and (iii) financial instruments
that embodies an obligation that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or varies
inversely with the value of the issuers shares (excluding certain financial instruments
indexed partly to the issuers equity shares and partly, but not predominantly, to something
else). This Statement does not apply to features embedded in a financial instrument that is
not a derivative in its entirety. The Statement also requires disclosures about alternative
ways of settling the instruments and the capital structure of entities, all of whose shares
are mandatorily redeemable. The adoption of SFAS No. 150 did not have a material impact on
the Companys financial position, cash flows or results of operations. F-14




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continuedRecently issued accounting standards  continuedIn January 2003, the FASB issued FIN 46. FIN 46 clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements and provides guidance on the
identification of entities for which control is achieved through means other than voting
rights (variable interest entities or VIEs) and how to determine when and which business
enterprise should consolidate the VIEs. This new model for consolidation applies to an
entity in which either: (1) the equity investors (if any) lack one or more characteristics
deemed essential to a controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entitys activities without receiving additional subordinated
financial support from other parties. FIN 46 was applicable for periods ending December 15,
2003. In December 2003 the FASB issued FIN 46 (revised) which provides for the deferral of
the implementation date to the end of the first reporting period
after December 15, 2004
unless the Company has a special purpose entity, in which case the provisions must be
applied for fiscal years ending December 31, 2003. However, the Company has retroactively
adopted the provisions from the inception of the VIE.3.

PREPAID EXPENSES AND OTHER CURRENT ASSETSPrepaid expenses and other current assets consists of: 2003
    
    
    2004Staff advances and other receivables
    
    $
    9,258
    
    
    $
    6,803Advances to suppliers
    
    
    14,015
    
    
    
    109,871Prepaid expenses
    
    
    46,860
    
    
    
    123,156Interest receivable
    
    
    22,297
    
    
    
    92,113$
    92,430
    
    
    $
    331,943
  4.

GOODWILL, NETGoodwill, net consists of: 2003
    
    
    2004Goodwill
    
    $
    60,641
    
    
    $
    60,641Less: accumulated amortization
    
    
    (10,107
    )
    
    
    (10,107
    )Goodwill, net
    
    $
    50,534
    
    
    $
    50,534
  Upon the acquisition of CFO Beijing in 2000 the Company generated goodwill of $60,641. F-15




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  4.

GOODWILL, NET  continuedBeginning fiscal 2002, with the adoption of SFAS 142 Goodwill and Other Intangible Assets,
goodwill was no longer amortized, but instead tested for impairment at least on an annual
basis or more frequently if events or changes in circumstances indicate that it may be
impaired.5.

PROPERTY AND EQUIPMENT, NETProperty and equipment, net, consists of: 2003
    
    
    2004Technology infrastructure
    
    $
    439,355
    
    
    $
    569,065Computer equipment
    
    
    105,030
    
    
    
    136,207Furniture, fixtures and equipment
    
    
    97,742
    
    
    
    132,015642,127
    
    
    
    837,287Less: accumulated depreciation
    
    
    (291,311
    )
    
    
    (420,285
    )$
    350,816
    
    
    $
    417,002
  6.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIESAccrued expenses and other current liabilities consists of: 2003
    
    
    2004Accrued expenses
    
    $
    46,829
    
    
    $
    189,726Value added tax payable
    
    
    36,007
    
    
    
    90,715Accrued welfare benefits
    
    
    6,451
    
    
    
    4,592Other taxes payable
    
    
    5,081
    
    
    
    663$
    94,368
    
    
    $
    285,696
  7.

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 of the Company. Options to purchase 5,688,488 ordinary shares are
authorized under the Plan. Under the terms of the Plan, options are generally granted at
prices equal to the fair market value as determined by the Board of Directors and expire 10
years from the date of grant and generally vest over 5 years. F-16




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  7.

STOCK OPTIONS  continuedPrior to 2004 the Company did not grant stock options to employees, consultants or external
service providers.In January 2004, the Company granted 5,278,488 ordinary shares to directors, officers and
employees. The Company recorded deferred compensation of approximately $52,785 in 2004 and
compensation expense of $33,192 for the year ended December 31, 2004 related to these grants
for the difference between the exercise price and the deemed fair value of the ordinary
shares. The fair value of the ordinary shares in January 2004 was determined by a valuation
analysis conducted by an independent appraiser.On June 15, 2004, the Company granted 320,000 ordinary shares to directors at an exercise
price of $1.04 which approximated fair value. As a result, no deferred compensation was
recorded. The fair value of the ordinary shares in June 2004 was determined based on a
contemporaneous sale of preference shares by one of he Companys shareholders to an
unrelated third party at a price of $1.04 per share.In September 2004, the Company increased the total number of ordinary shares that are
available for issuance under the Plan by an additional 5,000,000 shares.A summary of the stock option activity is follows: Ordinary sharesWeightedNumber
    
    
    averageof options
    
    
    exercise priceOptions outstanding at December 31, 2003
    
    
    
    
    
    
    Granted
    
    
    12,517,988
    
    
    $
    0.183Cancelled
    
    
    (25,000
    )
    
    
    Options outstanding at December 31, 2004
    
    
    12,492,988
  The weighted average per share fair value of options as of the grant date was as follows: December 31,2004Ordinary shares
    
    $
    0.011
 F-17




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  7.

STOCK OPTIONS  continuedThe following table summarizes information with respect to stock options outstanding at
December 31, 2004: Options outstanding
    
    
    Options exercisableWeightedaverage
    
    
    Weighted
    
    
    
    
    
    
    Weightedremaining
    
    
    average
    
    
    
    
    
    
    averageNumber of
    
    
    contractual
    
    
    exercise
    
    
    Number
    
    
    exerciseoutstanding
    
    
    life
    
    
    price
    
    
    exercisable
    
    
    priceOrdinary shares:$0.16
    
    
    12,172,988
    
    
    5.17 years
    
    $
    0.16
    
    
    
    8,482,988
    
    
    $
    0.16$1.04
    
    
    320,000
    
    
    4.72 years
    
    $
    1.04
    
    
    
    
    
    
    $
    1.0412,492,988
    
    
    
    
    
    
    
    
    
    
    
    8,482,988
  In February 2005, the Company granted 4,353,000 options to purchase 4,353,000 ordinary
shares to certain directors, officers and employees at an exercise price that equate the
trading price of the stock upon the stock option grant.Options to non-employeesThe Company also granted stock options to purchase up to 6,829,500 ordinary shares outside
of the stock option plan and 90,000 options to purchase ordinary shares under the plan to
consultants and strategic advisors. The Company recorded a compensation expense of
approximately $72,764 in 2004 estimated using the Black-Scholes option pricing model as such
method provided a more accurate estimate of the fair value of services received by the
consultants and strategic advisers.The following assumptions were used in the option pricing model: December 31,2002
    
    
    2003
    
    
    2004Options to non-employees:Average risk-free rate of return
    
    
    
    
    
    
    
    
    
    
    2
    %Weighted average expected option life
    
    
    
    
    
    
    
    
    
    2 yearsVolatility rate
    
    
    
    
    
    
    
    
    
    
    73.78
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
  As of December 31, 2004, options to purchase 5,025,000 ordinary shares were available for
future grant. F-18




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  8.

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.The subsidiary of the Company, 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, the subsidiary is exempted from PRC state income tax for
2001, 2002, 2003 and 2004 and entitled to a 50% tax relief commencing from 2005 to 2007; and
is entitled to exemption from PRC local income tax from 2003 to 2007 and 50% tax relief
commencing from 2008 to 2012. The income tax paid by CFO Beijing in 2003 before the notice
of tax exemption was received is recorded as income tax recoverable in the balance sheet.The variable interest entity, Fuhua, is subject to PRC income tax at a rate of 33%. For the
years ended December 31, 2002, 2003 and 2004, income tax expense of Fuhua is nil, nil and
$2,048.The principal components of the deferred income tax assets are as follows: 2002
    
    
    2003
    
    
    2004Deferred tax assets:Revenue recognition
    
    $
    
    
    
    $
    
    
    
    $
    386,325Net operating loss carryforwards
    
    
    55,359
    
    
    
    15,185
    
    
    
    10,217Deferred tax assets
    
    
    55,359
    
    
    
    15,185
    
    
    
    396,542Valuation allowance
    
    
    (55,359
    )
    
    
    (15,185
    )
    
    
    (10,217
    )Deferred tax assets net
    
    $
    
    
    
    $
    
    
    
    $
    386,325
  No deferred tax assets related to revenue recognition and net operating loss for both 2002
and 2003 have been recorded, as they are expected to reverse during the tax exemption
period. As of December 31, 2004, the accumulated effect of revenue recognition is $3,219,377
which is expected to reverse in 2005 at the income tax rate of 12%. As a result, the Company
recognized deferred tax assets of $386,325 for the year ended December 31, 2004. In 2004,
the Company has not recognized deferred tax assets on the net operating loss which is
related to the Company since it is more likely than not that the deferred tax assets will
not be realized.There are no deferred tax liability components for 2002, 2003 and 2004.As of December 31, 2004, the Company had loss carryforwards of approximately $58,381 with no
expiration date.During the years ended December 31, 2002, 2003 and 2004, if the Company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 nil,
$60,175 and $1,230,873 respectively, the Companys net income would have been decreased by
nil, $85,336 and $1,981,183, and basic and diluted income per share would have been
decreased to $0.01, $0.04 and $0.09 and $0.00, $0.01 and $0.04 for the years ended December
31, 2002, 2003 and 2004, respectively. F-19




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  8.

INCOME TAXES  continuedA reconciliation between the provision for income tax computed by applying the PRC
enterprise income rate of 27% to income before income taxes and the actual provision for
income taxes is as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004PRC enterprise income tax
    
    
    27.0
    %
    
    
    27.0
    %
    
    
    27.0
    %Expenses not deductible for tax purposes
    
    
    2.5
    %
    
    
    
    
    
    
    Tax exemption and tax relief granted to
PRC subsidiaries
    
    
    (29.5
    %)
    
    
    (27.0
    %)
    
    
    (35.8
    %)
    
    
    
    
    
    
    
    (8.8
    %)
  9.

SHAREHOLDERS EQUITYIn May 2003, the Company sold 2,666,600 shares of fully vested common stock to its chief
executive officer, which were valued at $0.036 per share. The Company has recorded a
compensation expense of $96,311 which was excluded from general and administrative expenses
and was presented as a separate item in the consolidated statements of operations.On July 30, 2003, 1,672,100 series A preference shares were converted into 1,672,100
ordinary shares at an aggregate conversion price of $216 on a one-for-one basis.On January 3, 2004, the Company increased the number of ordinary shares authorized from
25,000,000 ordinary shares to 36,000,000 ordinary shares.In April 2004 the Company issued 730,000 ordinary shares for $0.00013 per share which were
valued at $0.67 per share to the Companys chief financial officer. The Company recorded
deferred stock compensation of approximately $489,006 and compensation expense of $183,378
in 2004. The fair value of the ordinary shares in April 2004 was determined based on the
Companys internally developed valuation methodology with reference to the valuation
analysis conducted by an independent appraiser for the value of the ordinary shares in
January 2004, the sale of preference shares by one of the Companys shareholders to an
unrelated third party in June 2004, and the business developments of the Company during the
intervening period.In May 2004, the Company paid $60,299 to the shareholders of Fuhua to return the same amount
of funds advanced by the shareholders of Funhua in order to capitalize Fuhua when Fuhua was
initially incorporated. This payment was recorded as a reduction to additional paid-in
capital.In October 2004, the Company offered 5,000,000 American Depositary Shares (ADS),
representing 25,000,000 ordinary shares, at $13 per ADS to the public. 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, 2002, 2003 AND 2004
(In U.S. dollars)  9.

SHAREHOLDERS EQUITY  continuedUpon the Companys initial public offering in October of 2004, 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 of the Company.ConversionThe holders of the preference shares shall have the right, at their sole discretion, to
convert all or any portion of the preference shares into ordinary shares at any time after
such preference shares have been issued. The initial conversion rate for the conversion of
preference shares into ordinary shares shall be one for one.Voting rightsEach preference share shall carry a number of votes equal to the number of ordinary shares
then issuable upon its conversion into ordinary shares. The preference shares shall
generally vote together with the ordinary shares and not as a separate class, except as
provided below under the heading protective provisions.DividendsNo dividend, whether in cash, in property or in shares of the capital of the Company, shall
be allowed to be paid on any other class or series of shares of the Company unless and until
a dividend in like amount was first paid in full on the preference shares on an as-converted
basis. As of December 31, 2003, the board of directors declared a dividend of US$0.0068 per
share, amounting to US$502,552 of which was paid in 2004. The total declared dividend of
US$502,552 comprises $351,489 preference share dividends and $151,063 ordinary share
dividends.Liquidation preferenceIn the event of any liquidation, dissolution or winding up of the Company, the holders of
the preference shares shall be entitled to receive, prior to any distribution to the holders
of the ordinary shares or any other class or series of shares, an amount per preference
share equal to the purchase price of such preference share plus all declared but unpaid
dividends thereon (the Preference Amount). After the full payment of the preference amount
on all outstanding preference shares has been paid, any remaining funds and assets of the
Company legally available for distribution to shareholders shall be distributed as follows:
(i) first, to the holders of the preference shares, amount for each preference share equal
to 50% of the purchase price of such preference share, and (ii) then any remaining funds and
assets of the Company legally available for distribution to shareholders shall be
distributed pro rata among the holders of the ordinary shares. If the Company had
insufficient funds or assets to permit payment of the preference amount in full to all
holders of preference shares, then such funds and assets of the Company shall be distributed
ratably to the holders of the preference shares in proportion to the preference amount each
such holder of preference shares shall otherwise be entitled to receive. A sale of all or
substantially all the Companys assets or business or a merger of the Company with or into
another company (except for a merger to reincorporate the Company in another jurisdiction)
shall each be deemed a liquidation, dissolution or winding up of the Company. F-21




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  10.

INCOME PER SHAREThe following table sets forth the computation of basic and diluted income per share for the
years indicated: Year ended December 31,2002
    
    
    2003
    
    
    2004Income attributable to ordinary
shareholders (numerator), basic and diluted
    
    $
    202,503
    
    
    $
    838,441
    
    
    $
    4,597,341Shares (denominator):Weighted average ordinary shares outstanding
used in computing basic income per share
    
    
    17,784,900
    
    
    
    20,124,153
    
    
    
    38,912,491Plus: Weighted average preference shares
    
    
    53,148,433
    
    
    
    52,438,363
    
    
    
    40,505,966Incremental shares from assumed
conversions of stock option
    
    
    
    
    
    
    
    
    
    
    10,674,211Weighted average ordinary shares outstanding
used in computing diluted income per share
    
    
    70,933,333
    
    
    
    72,562,516
    
    
    
    90,092,668Income per share-basic
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.12Income per share-diluted
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.05
  Ordinary share equivalents are calculated using the treasury stock method. Under the
treasury stock method, the proceeds from the assumed conversion of options are used to
repurchase ordinary shares using the average fair value for the years.11.

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 $8,792, $13,931 and $53,660 for the years ended December 31, 2002,
2003 and 2004, respectively.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
reserve funds as determined by the Board of Directors of the Company. These reserves include
a (i) general reserve, (ii) enterprise expansion fund and (iii) staff bonus and welfare
fund. Subject to certain cumulative limits, the general reserve fund requires annual
appropriations of 10% of after-tax profit (as determined under PRC GAAP at each year-end);
the other fund appropriations are at the Companys discretion. These reserve funds can only
be used for specific purposes and are not distributable as cash dividends. Appropriations to
the staff welfare and bonus fund are charged to general and administrative expenses and
amounted to $6,450 and $24,165 in 2003 and 2004, respectively. Appropriation to general
reserve amounted to $64,503 and $674,205 in 2003 and 2004, respectively. F-22




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(In U.S. dollars)  12.

COMMITMENTSThe Company leases certain office premises under non-cancelable leases, which expire in
2005. Rent expense under operating leases for 2002, 2003 and 2004 were $140,129, $159,152
and $191,789, respectively.Future minimum lease payments under non-cancelable operating leases agreements were as
follows: Year ending2005
    
    $
    157,081
  13.

SEGMENT AND GEOGRAPHIC INFORMATIONThe Companys chief operating decision maker has been identified as the Chief Executive
Officer, who reviews consolidated results when making decisions about allocating resources
and assessing performance of the Company. The Company believes it operates in one segment
and all financial segment information can be found in the consolidated financial statements.Geographic InformationThe Company operates in the PRC and all of the Companys long lived assets are located in
the PRC.14.

RESTRICTED NET ASSETSPRC legal restrictions permit payments of dividends by the Companys PRC subsidiaries only
out of their retained earnings, if any, determined in accordance with PRC accounting
standards and regulations. The general reserve fund, which requires annual appropriations of
10% of after-tax profit should be set aside prior to 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, 2004, the amount of restricted net assets was approximately $5,021,579.   F-23




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED Schedule 1 This financial information has been prepared in conformity with accounting principles generally
accepted in United States. CHINA FINANCE ONLINE CO. LIMITED
Financial information of Parent Company
Balance sheets December 31,(in U.S. dollars)
    
    2003
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,332,653
    
    
    $
    59,745,660Prepaid expenses and other current assets
    
    
    3,212
    
    
    
    79,252Total current assets
    
    
    1,335,865
    
    
    
    59,824,912Investment in a subsidiary
    
    
    3,867,553
    
    
    
    8,857,533Goodwill
    
    
    50,534
    
    
    
    50,534Total assets
    
    $
    5,253,952
    
    
    $
    68,732,979Liabilities and shareholders equityCurrent liabilities:Accrued expenses and other current liabilities
    
    $
    20,114
    
    
    $
    148,274Dividend payable
    
    
    502,552
    
    
    
    Amount due to a subsidiary
    
    
    
    
    
    
    496,428Total current liabilities
    
    $
    522,666
    
    
    $
    644,702Shareholders equityConvertible preference shares ($0.00013 par value, 65,000,000
shares authorized)Series A convertible preference shares (30,643,000 shares
issued and outstanding in 2003 and nil in 2004)
(liquidation value $3,954 in 2003 and nil in 2004)
    
    
    3,954
    
    
    
    Series B convertible preference shares (20,833,333 shares
issued and outstanding in 2003 and nil in 2004)
(liquidation value $5,000,000 in 2003 and nil in 2004)
    
    
    2,688
    
    
    
    Ordinary shares ($0.00013 par value; 36,000,000 shares
authorized; shares issued and outstanding 22,123,600 in 2003
and 99,329,933 in 2004)
    
    
    2,852
    
    
    
    12,814Additional paid-in capital
    
    
    5,093,384
    
    
    
    64,175,132Deferred stock compensation
    
    
    
    
    
    
    (325,221
    )Accumulated other comprehensive income (loss)
    
    
    186
    
    
    
    (11
    )(Accumulated deficit) retained earnings
    
    
    (371,778
    )
    
    
    4,225,563Total shareholders equity
    
    
    4,731,286
    
    
    
    68,088,277Total liabilities and shareholders equity
    
    $
    5,253,952
    
    
    $
    68,732,979
 F-24




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED CHINA FINANCE ONLINE CO. LIMITED
Financial information of Parent Company
Statements of operations December 31,(in U.S. dollars)
    
    2002
    
    
    2003
    
    
    2004Operating expenses:General and administrative
    
    $
    5,005
    
    
    $
    33,815
    
    
    $
    60,094Stock based Compensation
    
    
    
    
    
    
    96,311
    
    
    
    289,334Total operating expenses
    
    
    5,005
    
    
    
    130,126
    
    
    
    349,428Loss from operations
    
    
    (5,005
    )
    
    
    (130,126
    )
    
    
    (349,428
    )Interest income
    
    
    
    
    
    
    
    
    
    
    184,836Equity in earnings of subsidiaries
    
    
    207,673
    
    
    
    1,320,056
    
    
    
    4,761,933Income before income taxes
    
    
    202,503
    
    
    
    1,189,930
    
    
    
    4,597,341Income tax expense
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    202,503
    
    
    
    1,189,930
    
    
    
    4,597,341Dividends on preference shares
    
    
    
    
    
    
    (351,489
    )
    
    
    Income attributable to ordinary shareholders
    
    $
    202,503
    
    
    $
    838,441
    
    
    $
    4,597,341
 F-25




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED CHINA FINANCE ONLINE CO. LIMITED
Financial information of Parent Company
Statements of shareholders equity and other comprehensive income (loss) Accumulated
    
    
    RetainedSeries A convertible
    
    
    Series B convertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    other
    
    
    earnings
    
    
    Totalpreference shares
    
    
    preference shares
    
    
    Ordinary shares
    
    
    paid-in
    
    
    Deferred stock
    
    
    comprehensive
    
    
    (accumulated
    
    
    shareholders'
    
    
    Comprehensive(in U.S. dollars)
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    compensation
    
    
    income (loss)
    
    
    deficit)
    
    
    equity
    
    
    income (loss)Balance as of January 1, 2002
    
    
    32,315,100
    
    
    
    4,170
    
    
    
    20,833,333
    
    
    
    2,688
    
    
    
    17,784,900
    
    
    
    2,295
    
    
    
    4,997,073
    
    
    
    
    
    
    
    179
    
    
    
    (1,261,659
    )
    
    
    3,744,746Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (321
    )
    
    
    
    
    
    
    (321
    )
    
    
    (321
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202,503
    
    
    
    202,503
    
    
    
    202,503Balance as of December 31, 2002
    
    
    32,315,100
    
    
    
    4,170
    
    
    
    20,833,333
    
    
    
    2,688
    
    
    
    17,784,900
    
    
    
    2,295
    
    
    
    4,997,073
    
    
    
    
    
    
    
    (142
    )
    
    
    (1,059,156
    )
    
    
    3,946,928
    
    
    $
    202,182Issuance of ordinary shares to an employee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,666,600
    
    
    
    341
    
    
    
    96,311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,652
    
    
    
    Conversion of Series A convertible preference
shares into ordinary shares
    
    
    (1,672,100
    )
    
    
    (216
    )
    
    
    
    
    
    
    
    
    
    
    1,672,100
    
    
    
    216
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    328
    
    
    
    
    
    
    
    328
    
    
    
    328Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,189,930
    
    
    
    1,189,930
    
    
    
    1,189,930Dividends on preference shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (351,489
    )
    
    
    (351,489
    )
    
    
    Dividends on ordinary shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151,063
    )
    
    
    (151,063
    )
    
    
    Balance as of December 31, 2003
    
    
    30,643,000
    
    
    
    3,954
    
    
    
    20,833,333
    
    
    
    2,688
    
    
    
    22,123,600
    
    
    
    2,852
    
    
    
    5,093,384
    
    
    
    
    
    
    
    186
    
    
    
    (371,778
    )
    
    
    4,731,286
    
    
    
    1,190,258Issuance of ordinary shares to an employee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    730,000
    
    
    
    94
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94Stock options issued to non-employee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    $
    4,597,144
 F-26




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##### Table of Contents



CHINA FINANCE ONLINE CO. LIMITED CHINA FINANCE ONLINE CO. LIMITED
Financial information of Parent Company
Statements of cash flows December 31,(in U.S. dollars)
    
    2002
    
    
    2003
    
    
    2004Operating activities:Income attributable to ordinary shareholders
    
    $
    202,503
    
    
    $
    838,441
    
    
    $
    4,597,341Dividends on preference shares
    
    
    
    
    
    
    351,489
    
    
    
    Net income
    
    
    202,503
    
    
    
    1,189,930
    
    
    
    4,597,341Adjustments to reconcile net income to net
cash (used in) provided by operating activities:Stock based compensation
    
    
    
    
    
    
    96,311
    
    
    
    289,334Equity in earnings of subsidiaries
    
    
    (207,508
    )
    
    
    (1,320,056
    )
    
    
    (4,761,933
    )Changes in assets and liabilities:Prepaid expenses and other current assets
    
    
    
    
    
    
    229
    
    
    
    (76,040
    )Amount due from a subsidiary
    
    
    
    
    
    
    1,150,000
    
    
    
    271,953Accrued expenses and other current liabilities
    
    
    901
    
    
    
    18,277
    
    
    
    128,160Amount due to a subsidiary
    
    
    
    
    
    
    
    
    
    
    496,428Net cash (used in) provided by operating activities
    
    
    (4,104
    )
    
    
    1,134,921
    
    
    
    945,243Investing activities:Investment in a subsidiary
    
    
    
    
    
    
    
    
    
    
    (500,000
    )Financing activities:Proceeds from initial public offering,
net of offering cost of 6,469,282
    
    
    
    
    
    
    
    
    
    
    58,530,718Issuance of ordinary shares to an employee
    
    
    
    
    
    
    
    
    
    
    94Dividend paid
    
    
    
    
    
    
    
    
    
    
    (502,552
    )Distribution to the shareholders of Fuhua
    
    
    
    
    
    
    
    
    
    
    (60,299
    )Proceeds from stock-based compensation
    
    
    
    
    
    
    341
    
    
    
    Net cash provided by financing activities
    
    
    
    
    
    
    341
    
    
    
    57,967,961Effect of exchange rate changes
    
    
    321
    
    
    
    328
    
    
    
    (197
    )Net (decrease) increase in cash and cash equivalents
    
    
    (4,425
    )
    
    
    1,135,360
    
    
    
    58,413,007Cash and cash equivalents, beginning of the year
    
    
    201,718
    
    
    
    197,293
    
    
    
    1,332,653Cash and cash equivalents, end of the year
    
    $
    197,293
    
    
    $
    1,332,653
    
    
    $
    59,745,660Supplemental disclosures of non-cash
financing activities:Conversion of Series A and/or Series B convertible preference
shares into ordinary shares
    
    $
    
    
    
    $
    216
    
    
    $
    6,642Deferred stock compensation
    
    $
    
    
    
    $
    
    
    
    $
    325,221
 F-27