<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934

                                       OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

                        COMMISSION FILE NUMBER: 001-12126

                            CHINA ENTERPRISES LIMITED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                                     BERMUDA
                 (JURISDICTION OF INCORPORATION OR ORGANIZATION)

   8TH FLOOR, PAUL Y. CENTRE, 51 HUNG TO ROAD, KWUN TONG, KOWLOON, HONG KONG.
                     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

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

                                                    NAME OF EACH EXCHANGE ON
    TITLE OF EACH CLASS                                  WHICH REGISTERED
    -------------------                                  ----------------
           N/A                                                  N/A

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

                     COMMON STOCK, PAR VALUE $0.01 PER SHARE
                     ---------------------------------------
                                (Title of Class)

Securities for which there is a reporting obligation pursuant to section l5(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.

                   Supervoting Common Stock: 3,000,000 shares
                         Common Stock: 6,017,310 shares

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or l5(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.
                                                                   [X] Yes [ ]No

Indicate by check mark which financial statement item the registrant has elected
to follow.
                                                          [ ]Item 17 [X] Item 18

                                       1
<PAGE>

                           FORWARD-LOOKING STATEMENTS

This annual report contains certain forward-looking statements within the
meaning of Section 21E of the Securities Act of 1934, as amended. These
forward-looking statements are, by their nature, subject to significant risks
and uncertainties, and include, without limitation, statements relating to:

-   our business strategy;

-   our ability to finance out business strategy;

-   the planned re-engineering of our tire plants and related applications;

-   future developments in the tire industry in China and changes in government
    policies;

-   future developments in the Asian travel industry; and

-   other statements relating to our future business development and financial
    performance.

The words "anticipate", "believe", "estimate", "expect", "intend", "plan",
"may", "will" and similar expressions, as they relate to us, are intended to
identify certain of such forward-looking statements. We do not intend to update
these forward-looking statements except as required by the U.S. securities laws.

These forward-looking statements reflect our current views with respect to
future events and are not a guarantee of future performance. They are based upon
various assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, management's examination of historical operating
trends, data contained in the Company's records and other data available from
third parties. Although the Company believes that these assumptions were
reasonable when made, because these assumptions are inherently subject to
significant uncertainties and contingencies which are difficult or impossible to
predict and are beyond the Company's control, there can be no assurance that the
company will achieve or accomplish these expectations or beliefs.

      In addition to these important factors and matters discussed elsewhere
herein, there are a number of important factors that, in the Company's view,
could cause actual results to differ materially from those discussed in the
forward-looking statements, including without limitation, the strength of world
economies and currencies, general market conditions, changes in general domestic
and international political conditions, and other matters described in the "Risk
Factors" included in this annual report or otherwise described from time to time
in the reports the Company files with the Securities and Exchange Commission.

                                       2
<PAGE>

                            EXCHANGE RATE INFORMATION

Unless otherwise specified, all references in this document to "U.S. Dollars",
"Dollars", "US$" or "$" are to United States dollars; all references to
"Renminbi" or "Rmb" are to Renminbi, which is the legal tender currency of the
People's Republic of China (the "PRC" or "China"); all references to "HK$" are
to Hong Kong dollars, which is the legal tender currency of the Hong Kong
Special Administrative Region ("Hong Kong"). Translation of amounts from
Renminbi to U.S. Dollars for the convenience of the reader has been made in this
document at US$1.00 to Rmb8.28, the exchange rate quoted by the People's Bank of
China on December 31, 2003. No representation is made that the Renminbi amounts
could have been, or could be, converted into U.S. Dollars at that or at any
other rate. See section "Exchange Control" under "Item 10. Additional
Information" in this annual report for more details.

References and statements contained in this document regarding China do not
apply to Taiwan nor the Republic of China.

                                       3
<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                           Page
<S>                                                                                        <C>
PART I
Item 1    Identity of Directors, Senior Management and Advisers                              5
Item 2    Offer Statistics and Expected Timetable                                            6
Item 3    Key Information                                                                    7
Item 4    Information on the Company                                                        14
Item 5    Operating and Financial Review and Prospects                                      22
Item 6    Directors, Senior Management and Employees                                        31
Item 7    Major Shareholders and Related Party Transactions                                 34
Item 8    Financial Information                                                             37
Item 9    The Offer and Listing                                                             39
Item 10   Additional Information                                                            40
Item 11   Quantitative and Qualitative Disclosure about Market Risk                         44
Item 12   Description of Securities Other than Equity Securities                            45

PART II
Item 13   Defaults, Dividend Arrearages and Delinquencies                                   46
Item 14   Material Modifications to the Rights of Security Holders and Use of Proceeds      47
Item 15   Controls and Procedures                                                           48
Item 16   Reserved                                                                          49
Item 16A  Audit Committee Financial Expert                                                  50
Item 16B  Code of Ethics                                                                    51
Item 16C  Principal Accountant Fees and Services                                            52
Item 16D  Exemptions from the Listing Standards for Audit Committees                        53
Item 16E  Purchases of Equity Securities by the Issuer and Affiliated Purchasers            54

PART III
Item 17   Financial Statements                                                              55
Item 18   Financial Statements                                                             147
Item 19   Exhibits                                                                         194

SIGNATURES                                                                                 195

EXHIBIT INDEX                                                                              196
</TABLE>

                                       4
<PAGE>

                                     PART I
                ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
                                  AND ADVISERS

As China Enterprises Limited (the "Company", which term shall include, when the
context so requires, the subsidiaries of the Company during the applicable
period) is filing this Form as its annual report under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the information called for by Part
I, Item 1 of Form 20-F is not applicable.

                                       5
<PAGE>

                 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

As the Company is filing this Form as an annual report under the Exchange Act,
the information called for by Part I, Item 2 of the Form 20-F is not applicable.

                                       6
<PAGE>

                             ITEM 3. KEY INFORMATION

The Company together with all its subsidiaries are collectively referred to as
the "Group" for the purpose of this annual report. For the purpose of this
annual report, the latest practicable date with respect to share and certain
exchange rate information is July 2, 2004.

SELECTED FINANCIAL DATA

The following table represents the selected consolidated financial information
of the Company as of and for the years ended December 31, 1999, 2000, 2001, 2002
and 2003.

The Consolidated Statements of Operating Data for each of the three years in the
period ended December 31, 2003 and the Consolidated Balance Sheet Data as of
December 31, 2002 and 2003 has been derived from the audited consolidated
financial statements (the "Consolidated Financial Statements") included in Item
18 "Financial Statements" of this annual report. The Consolidated Statements of
Operations Data for the years ended December 31, 1999 and 2000 and the
Consolidated Balance Sheet Data as of December 31, 1999, 2000 and 2001, as set
forth below, have been derived from audited consolidated financial statements
not included in this annual report. The selected financial information should be
read in conjunction with, and is qualified in its entirety by reference to, the
respective consolidated financial statements and their accompanying notes
thereto.

SELECTED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, THEIR PAR VALUES AND PER SHARE
DATA)

<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                   1999           2000          2001         2002                 2003
                                                  (a)(b)         (a)(b)        (a)(b)       (a)(b)              (a)(b)(c)
                                                    Rmb           Rmb           Rmb           Rmb           Rmb           US$
<S>                                              <C>           <C>           <C>           <C>           <C>             <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

Revenues                                         1,360,298     1,605,842     2,087,885     2,610,076     2,808,369       339,175
Income from operations                               7,267         8,269        89,461       172,096       100,746        12,167
(Loss) profit from continuing operations           (53,651)      (33,803)       36,425       (62,943)      (99,550)      (12,023)
Loss from discontinued operations (a)              (99,545)      (45,581)     (171,784)     (199,838)       (7,760)         (937)
Net loss                                          (153,196)      (79,384)     (135,359)     (262,781)     (107,310)      (12,960)
Net income from operations per share                  0.80          0.91          9.92         19.09         11.17          1.35
Basic and diluted (loss) earnings from
   continuing operations per common share (b)        (5.89)        (3.73)         4.04         (6.98)       (11.04)        (1.33)
Basic and diluted loss from discontinued
   operations per common share (a) & (b)            (10.94)        (5.02)       (19.05)       (22.16)        (0.86)        (0.10)
Basic and diluted loss per common share (b)         (16.83)        (8.75)       (15.01)       (29.14)       (11.90)        (1.43)
Weighted-average number of common share
   outstanding (b)                               9,100,000     9,069,956     9,017,310     9,017,310     9,017,310     9,017,310
Dividend declared per common share
 - in Rmb                                             0.66          0.66          0.17             -             -             -
 - in US$                                             0.08          0.08          0.02             -             -             -

CONSOLIDATED BALANCE SHEETS DATA :

Total assets                                     3,316,944     3,326,983     2,978,965     2,880,680       466,897        56,389
Shareholders' equity                             1,041,662       952,627       804,197       535,206       430,056        51,940
Supervoting common stock - par value US$0.01
   per share                                           244           244           244           244           244            29
Common stock - par value US$0.01 per share             532           526           526           526           526            64
</TABLE>

Notes:

(a)   The bias tire factory of Double Happiness Tyre Industries Corporation
Limited ("Double Happiness") was disposed of during 2001, Yantai C.S.I. Rubber
Co., Limited ("Yantai CSI") and Shandong C.S.I. Synthetic Fiber Co., Limited
("Shandong Synthetic") were disposed of during 2002, the radial tire factory of
Double Happiness, Yinchuan C.S.I. (Greatwall) Rubber Co. Limited ("Yinchuan
CSI") and CSI Rubber Industries Limited ("CSI Rubber") were disposed of during

                                       7
<PAGE>


2003. The Company has thus recorded the operating result of Double Happiness,
Yantai CSI, Shandong Synthetic, Yinchuan CSI and CSI Rubber separately from
continued operations as loss from discontinued operations retrospectively for
all years presented.

(b)   The calculation of basic and diluted (loss) earnings from continuing
operations per common share, basic and diluted loss from discontinued operations
per common share and basic and diluted loss per common share from 1999 to 2003
is based on the weighted-average number of common stock outstanding during the
years ended December 31, from 1999 to 2003. The weighted-average number of
common stock outstanding for 1999 was 9,100,000, for 2000 was 9,069,956 and for
2001, 2002 and 2003 was 9,017,310. There were no dilutive securities.

(c)   The Company sold a 25% interest in Hangzhou Zhongce Rubber Co., Limited
("Hangzhou Zhongce") during 2003, leaving the Company with a minority interest
in Hangzhou Zhongce as of October 1, 2003. The Company accounted for the results
of operations of Hangzhou Zhongce for the nine months period end September 30,
2003 and shared equity earnings of Hangzhou Zhongce for the period from October
1, 2003 to December 31, 2003.

EXCHANGE RATE INFORMATION

The Consolidated Financial Statements are published and denominated in Renminbi.
Translation of amounts from Renminbi to U.S. Dollars for the convenience of the
reader has been made in this document at US$1.00 to Rmb8.28, the exchange rate
quoted by the People's Bank of China on December 31, 2003. As of July 2, 2004,
the exchange rate quoted by the People's Bank of China remained at US$1.00 to
Rmb8.28. No representation is made that the Renminbi amounts could have been, or
could be, converted into U.S. Dollars at that or at any other rate.

The following table sets forth the average unified exchange rates as of and
during the years ended December 31, 1999, 2000, 2001, 2002 and 2003.

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                       ----------------------------------------------
                                                       1999       2000      2001       2002      2003
(Rmb equivalent of US$1.00)                             RMB       RMB        RMB       RMB        RMB
<S>                                                    <C>        <C>       <C>        <C>       <C>
At unified exchange rate
      - average rate calculated by using the
      average of the exchange rates on the last
      day of each month during each period             8.28       8.28      8.28       8.28      8.28
</TABLE>

The following table sets forth the high and low exchange rates as of and during
the previous six months were as follows:

<TABLE>
<CAPTION>
                                 AT UNIFIED EXCHANGE RATE
                                 ------------------------
(Rmb equivalent of US$1.00)       HIGH                LOW
                                  ----               ----
<S>                               <C>                <C>
June 30, 2004                     8.28               8.28
May 31, 2004                      8.28               8.28
April 30, 2004                    8.28               8.28
March 31, 2004                    8.28               8.28
February 29, 2004                 8.28               8.28
January 31, 2004                  8.28               8.28
</TABLE>

See "Exchange Control" under "Item 10. Additional Information" of this annual
report for more details.

                                       8
<PAGE>

RISK FACTORS

The Company Has Incurred Net Losses in Recent Periods and May Not Be Able to
Return to Profitability

During financial years 2001, 2002 and 2003, the Company incurred substantial net
losses. For the year ended December 31, 2003, the Company incurred net losses of
approximately US$13.0 million. The Company has also accumulated a deficit of
approximately US$73.1 million as at December 31, 2003. Under the current
economic environment, there is no guarantee that the Company will be able to
turn around its business and return to profitability.

The Company May Not Be Able to Implement Successfully Its Business Strategy in
which Case Its Business, Operating Results and Financial Condition Would Suffer

During the past few years, the Company has diversified its operations into
businesses outside of tire manufacturing. In addition, the Company has disposed
of operations it deemed underperforming. Further, during 2003, the Company
reduced its interest in Hangzhou Zhongce from a majority to a minority position.
The Company is actively seeking new investment opportunities. In June 2004, the
Company entered into a conditional agreement to acquire certain properties under
construction in Shanghai, China, for investment and rental purposes. However,
there can be no assurance that the Company will be able to identify and
consummate new investments and implement successfully its business plan.

      A key part of the Company's business strategy is to expand its operations
through acquiring new businesses and business lines. The acquisition of new
businesses and business lines carries substantial risk and uncertainties.
Depending on the specific acquisition, there may be risks relating to the
acquired business itself, risks relating to the industry in which the business
operates, and risks relating to the Company itself, such as diversion of and
strains on management and infrastructure resources, inability to successfully
integrate the acquired business and incompatibility of business culture.

The Company May Not Be Able to Finance Acquisitions, Strategic Investments or
Other Expansions of Operations or May Incur Financial Obligations or Liabilities
in Connection with Any Acquisition or Expansion

Due to the limitation of the Company's existing financial resources, the Company
may experience difficulty in funding acquisitions, investments or expansion of
existing operations. The Company anticipates that it would fund any such
activities through advance of bank loans. The Company could incur an increase in
debt or other liabilities in connection with any acquisition or other similar
matter. In addition, any such acquisition or activity could result in an
increase in expenses and working capital requirements, among other potential
financial demands on the Company.

The Voting Power of the Company's Major Shareholder May Make it Difficult for
the Other Holders to Exercise Influence on Corporate Matters or for the Company
to Engage in Business Combinations that the Public Shareholders May Deem
Desirable

China Strategic Holdings Limited ("CSH") directly and beneficially holds all
3,000,000 shares of supervoting common stock and 1,629,200 shares of common
stock and also has an indirect interest equivalent to 349,630 shares of common
stock in the Company. As a result, CSH controls 88.8% of the voting rights of
the outstanding capital stock of the Company and CSH is able to elect a majority
of the Company's board of directors and will have sufficient voting control to
affect corporate transactions without the concurrence of the Company's minority
shareholders. In addition, CSH's voting rights tend to preclude any corporate
action by shareholders or a change in control of the Company unless it is
initiated or supported by CSH.

                                       9
<PAGE>

The Company's Business Focus on the Greater China Region Subjects the Company
and Its Business to the Political, Economic and Other Developments in the Region

As a result of the Company's traditional business focus on the Greater China
Region, the Company's business and its financial and operating results may be
affected by significant political, economic, social and cultural developments in
the region.

A substantial portion of the Company's results is derived from its affiliates,
major businesses of which are located in China. These businesses are dependent
in large part on the performance of the Chinese economy, as well as Chinese
government policy. As a result, the future financial condition and results of
operations of the Company could be adversely affected by slowdowns in the
Chinese economy, Chinese macroeconomic policy that de-emphasize the development
of industries which utilize products or services of the Company's affiliates or
other governmental policies, including changes in laws, regulations or the
interpretation thereof; confiscatory taxation; restrictions on currency
conversion, imports or sources of supplies; or the expropriation or
nationalization of private enterprises.

Although the Chinese government has been pursuing economic reform policies for
approximately two decades, the Chinese government has recently announced that it
is considering introducing measures in certain sectors to avoid overheating of
the economy, including tightening bank lending policies and increases in bank
interest rates. Any measures or actions taken by the Chinese government to
control industries that utilize products or services of the Company's affiliates
could restrict their business operations and adversely affect the financial
positions of the Company and its affiliates.

Although the Company believes that the economic reforms and macroeconomic
policies and measures adopted by the Chinese government will continue to have a
positive effect on economic development in China and that the Company and its
affiliates will continue to benefit from these policies and measures, there is
no assurance that the government will continue to pursue such policies or that
such policies may not be significantly altered, especially in the event of a
change in leadership, social or political disruption, or other circumstances
affecting China's political, economic and social life.

In addition, the Company's financial results are significantly dependent on the
economy in the region. The economy of the Greater China Region differs
significantly from the economies of the United States and Western Europe in such
respects as structure, level of development, growth rate, capital reinvestment,
resource allocation, self-sufficiency, rate of inflation and balance of payments
position, among others. Adverse changes in economic in China, in the policies of
the Chinese government, could have a material adverse effect on the overall
economic growth of China. These developments could adversely affect the
financial condition, results of operations and business of the Company and its
affiliates, by reducing the demand for the products and services of the
Company's affiliates.

As a member of the World Trade Organization, China's economic activity is
expected to become more and more export driven and China's internal market is
expected to see more competition through imports. The expected change in
economic activity in China and the Greater China Region and a greater
interdependence of the Chinese economy on the general world economy as a result
of such changes could also impact the Company's financial results.

In addition, the operation of affiliates of the Company may be affected by the
adequacy of supply of, and demand for electricity in, the Greater China Region.
Demand for resources such as electricity continues to increase. In early 2004,
the demand for electricity in the Greater China Region exceeded the available
supply. Limitations on, or shortages in, available resources, such as
electricity, could result in lower production of products than anticipated and
could, accordingly, affect the growth of sales and profitability thereof.

                                       10
<PAGE>

Government Control of Currency Conversion and Exchange Rate Risks in the Region
May Cause Obstacles to the Company's Business Development

China's central government imposes controls over its foreign currency reserves
through organizing imports and through direct regulation of the conversion of
its national currency into foreign currencies.

The Company's PRC entities conduct substantially all of their business in China,
and their financial performance and condition are measured in terms of Rmb. Any
devaluation of Rmb against US$ would consequently have an adverse effect on the
financial performance and asset values of the Company when measured in terms of
US$.

Under current policies, Rmb paid as dividends, trade and service-related foreign
exchange transactions can be readily converted to US$ and other foreign
currencies. However, payments related to capital nature transactions such as
direct investment outside China are still subject to further government approval
before they can be converted into foreign currencies.

Currently, there are few means and/or financial tools available in the open
market for the Company to hedge its exchange risk against any possible
devaluation of Rmb.

Limited Liquidity in the Company's Securities May Make It Difficult to Sell
Shares

As a foreign private issuer whose business is substantially in the China and
Asian market, the Company has less exposure in the U.S. capital markets than
comparable U.S. issuers. In addition, the Company has a relative small public
float of its securities. These and other general economic, industry or Company
factors may result in low trading volumes or prices of the Company's securities.
Accordingly, shareholders of the Company bear risks regarding the liquidity of
the Company's shares and may not be able to sell shares in desired quantities,
at desired times or desired prices or a combination thereof.

Changes in Composition of the Company's Assets Could Result in the Company Being
Deemed a "Passive Foreign Investment Company" Which Could Have a Negative Impact
on U.S. Holders

Special U.S. federal income tax rules apply to U.S. holders of shares of a
non-U.S. corporation that is classified as a passive foreign investment company
("PFIC"), for U.S. federal income tax purposes. The determination of the PFIC
status of the Company principally depends upon the composition of the Company's
assets, including goodwill, and the amount and nature of the income of the
Company, from time to time. The Company disposed of most of its operating
subsidiaries, or its majority interest therein, during the past three years.
There can be no assurance that the Company will not be considered as a PFIC for
any taxable year. If the Company is treated as a PFIC during any year of a U.S.
holder's holding period with respect to the Company's common stock, the U.S.
holder will generally be required to treat certain excess distributions and any
gain on the sale or other disposition of the Company's stock as ordinary income
and in some cases an interest charge will also apply, unless the U.S. holder
makes a mark-to market election.

As a result of changes in the Company's assets and sources of income, the
Company could become an investment company for purposes of the United States
Investment Company Act of 1940

While the Company believes that through its subsidiaries and affiliates it is
actively engaged in operating businesses, and does not meet the definition of an
investment company for purposes of the United States Investment Company Act of
1940 (the "1940 Act"), depending on the composition and valuation of the
Company's assets and the sources of the Company's income from time to time, the
Company could fall within the technical definition of the term "investment
company" for purposes of the 1940 Act. If the Company were to become subject to
the requirements of the 1940 Act, the Company's operations and results would be
negatively impacted, including among other possible effects, the inability of
the Company to raise capital through the offer and sale of its securities in the
United States. The Company's business strategy is to continue to engage in one

                                       11
<PAGE>



or more operating businesses through one or more majority-owned and/or primarily
controlled subsidiaries. However, there can be no assurance that as a result of
an unexpected shift in the composition and valuation of the Company's assets or
in the sources of the Company's income, the Company would inadvertently become
an investment company for purposes of the 1940 Act.

Weaknesses or Deficiencies in the Company's Internal Controls Could Have a
Negative Impact on the Company's Operations and Financial Position

The Company has not completed a review of its internal control over financial
reporting so as to enable it to complete a report of management on such internal
control in accordance with rules of the Securities and Exchange Commission which
will first be required as part of the Company's Form 20-F for the fiscal year
ending December 31, 2005. While the Company believes it has adequate internal
controls, there can be no assurance given the current status of the Company's
review that the completion of the review will not disclose a weakness or
deficiency in the controls. Any such weakness or deficiency could have a
negative effect on the Company's operations and financial position and could
require increased costs to remediate.

Increased Demand on Corporate Management Time May Have Potential Distortion on
Overall Group Performance

As more investment opportunities arise, a significant portion of management time
will be allocated to overseeing and monitoring the operations of each of the
Company's newly acquired subsidiaries and affiliates some of which may be in
industries completely different from the traditional core business of the
Company. This could result in inefficient allocation of managerial resources in
the Company. Moreover, the operation of businesses different from the core
business may require different managerial skills and business acumen. The
Company may not be able to successfully run newly acquired businesses in diverse
industries.

Diversification May Result in Lowered Responsiveness to Cyclical Changes of
Different Businesses

Diversification of the Company's businesses will result in assets, resources and
management being committed or allocated to businesses in different fields. As a
result, the Company's flexibility in responding to seasonal changes or periodic
fluctuations in the business cycle in a particular business operation may be
limited.

The Company is Dependent upon Key Personnel, the Loss of Which Could Harm the
Company's Prospects

The Company depends, to a large extent, on the abilities and participation of
its current management team, including Dr. Chan Kwok Keung, Charles and Dr.
Allan Yap (collectively referred to as the "Key Personnel"). The loss of the
services of any of the Key Personnel, for any reason, may have a materially
adverse effect on the Company's prospects. The Company does not have employment
agreements with the Key Personnel nor does the Company carry key man life
insurance for the Key Personnel. If the Company were to lose the services of
either of the Key Personnel, there can be no assurance that the Company would be
able to find a suitable replacement for such person.

Natural disasters in the Greater China Region Could Cause Significant Damage to
the Company's Business and Financial Results

The products of the Company's affiliates are manufactured at the factories
located in the PRC. During the past years, the PRC has experienced natural
disasters, including floods and fires. A disaster could cause significant damage
to manufacturing factories which may not be adequately covered by insurance
proceeds and could materially and adversely affect our business and financial
results. The disaster relief and assistance in the PRC is not well developed and
there can be no assurance that adequate government assistance would be available
in the absence of sufficient insurance coverage. In addition, any natural
disaster in the region would adversely impact the travel business of an
affiliate of the Company which is focused on the Asia Pacific region.

                                       12
<PAGE>

Possible Volatility of Share Prices Worldwide May Have Significant Effects on
the Company's Share Price

The trading price of the Company's shares has been and may continue to be
subject to wide fluctuations. Capital markets worldwide have generally
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of the listed companies
themselves. There can be no assurance that trading prices and price earnings
ratios previously experienced by the Company's common shares will be matched and
maintained. Broad market and industry factors may adversely affect the market
price of shares in the Company, regardless of its operating performance.
Shareholders and potential investors of the Company are advised to exercise
caution when dealing in the securities of the Company.

Legal System Differences between the Greater China Region and the United States
of America Could Impact Investors

Unlike common law systems in the western world, China has a civil law system
based on written statutes and, therefore, decided legal cases are without
binding legal effect, although they are often followed by judges as guidance. As
the Chinese legal system develops, the promulgation of new laws, changes to
existing laws and the preemption of local regulations by national laws may
adversely affect the interests of foreign investors.

                                       13
<PAGE>

                       ITEM 4. INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT OF THE COMPANY

The Company was incorporated under the laws of Bermuda on January 28, 1993. From
July 15, 1993 to late 2002, the Company's shares were listed on the New York
Stock Exchange, Inc. (the "NYSE"). On November 26, 2002, the Company's shares
began trading on the OTCBB in the United States. The Company is registered in
Hong Kong under the commercial name of "China Tire Holdings Limited" due to
local company registration considerations.

The principal place of business of the Company is located at 8th Floor, Paul Y.
Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong and its telephone number
is (852) 2372 0130.

IMPORTANT EVENTS OF THE COMPANY'S BUSINESS SINCE THE BEGINNING OF 2004

On January 13, 2004, Wing On Travel (Holdings) Limited ("Wing On") entered into
agreements (as subsequently amended on March 17 and May 4, 2004) with the
Company and another holder of its convertible notes in relation to the issuance
of new convertible notes. Under the agreements Wing On would issue new
convertible notes to the Company or its nominee for a consideration of HK$155.0
million (Rmb165.2 million), of which HK$84.8 million (Rmb90.0 million) would be
settled by the cancellation of the Company's current convertible notes of Wing
On and the remaining balance would be satisfied in cash by the Company. The new
convertible notes provide the Company rights to convert the notes into new
shares of Wing On during a period of three years from the date of issue, at the
Company's discretion, at an initial conversion price of HK$0.02 per share of
Wing On, subject to adjustments. On June 8, 2004, the agreements were approved
by Wing On's shareholders that do not have any interest in Wing On's current
convertible notes and the transaction was completed on June 14, 2004.

On June 16, 2004, the Company, through an indirect wholly-owned subsidiary,
entered into a conditional sale and purchase agreement with an independent third
party, Shanghai Jiu Sheng Investment Company Limited, for the proposed
acquisition by the Company of a parcel of land (the "Land") and a 24-story
building under construction on the Land (the "Building") located in Shanghai,
the PRC (the Land and the Building together referred to as the "Properties").
The estimated total gross floor space of the Building is approximately 37,000
square meters, on a parcel of an estimated approximately 5,500 square meters of
Land. Subject to zoning approvals, which are a condition to the acquisition, the
Company expects that the first four floors of the Building will be rented for
commercial purposes and the remaining 20 floors will be developed and rented as
service apartments.

The aggregate consideration for the Property is Rmb450 million. The Company paid
the first deposit of Rmb50 million in cash upon signing of the agreement. Rmb380
million of the consideration will be payable upon the grant and drawdown of
loans to be granted by PRC banks or financial institutions and secured by the
Properties. The remaining Rmb20 million will be financed by internal resources
of the Company and will be due upon completion of the transfer of the ownership
of the Properties from the seller to the Company.

The Properties are in the development stage; the seller has agreed to procure
competition of the development within 180 days from the date of the agreement.
The effectiveness of the agreement is subject to certain conditions. The
subsequent closing of the sale is subject to additional closing conditions. A
copy of the agreement is included as Exhibit 4(a)4 to this annual report.

                                       14
<PAGE>

PRINCIPAL CAPITAL EXPENDITURES

Principal capital expenditures, investment and divestitures over the last three
years include the following:

<TABLE>
<CAPTION>
                                                                 2001               2002               2003
                                                               RMB'000            RMB'000            RMB'000
<S>                                                           <C>                <C>                <C>
Purchase of property, plant and equipment                     (135,212)          (287,536)          (256,872)
Proceeds from disposal of property, plant and equipment          2,267             77,320              4,601
Acquisition of a subsidiary, net of cash acquired                4,120                  -                  -
Investments in and advances to affiliates, net                     929           (180,612)          (197,358)
Proceeds from disposal of a business component, net              1,734                833           (104,128)
</TABLE>

The Company conducts its businesses through subsidiaries and affiliates.
Accordingly, much of the expenditures described above have been made at the
subsidiary level. For a description of the Company's subsidiaries, please refer
to the section "ORGANIZATION STRUCTURE" below.

BUSINESS OVERVIEW

For the three years ended December 31, 2003, the Group principally engaged in
the tire manufacturing and trading business. The Group's tire business was
primarily conducted through Hangzhou Zhongce, which, through September 2003, was
a majority-owned subsidiary of the Company. The Company's consolidated operating
results for 2003 were derived substantially from the performance of Hangzhou
Zhongce. Also, in 2002, the Company began to diversify its business and acquired
a significant interest in Wing On, a Hong Kong based travel company. As
described above, in the middle of 2004, the Company continued its
diversification by entering into the sale and purchase agreement for the
Properties.

Since the Company does not have any other operating subsidiary up to the date of
this report, the financial results of the Company in fiscal 2004 may be greatly
depended on the share of results of its affiliates, including the tire business
and the travel business.

TIRE BUSINESS

During the years 2001 through 2003, the group was principally engaged in the
tire manufacturing and trading business, through Hangzhou Zhongce. For the year
ended December 31, 2003, Hangzhou Zhongce contributed approximately 96.8% of the
Company's total revenues. Hangzhou Zhongce is mainly engaged in the manufacture
and sale of bias and radial tires. Besides, Hangzhou Zhongce vertically acquired
Fu Chun Jiang in 1999 which manufactures a number of raw materials including
tire rubbers and carbon black. During 2003, the Company disposed of a 25%
interest in Hangzhou Zhongce and ceased to consolidate the results of Hangzhou
Zhongce and Fu Chun Jiang (collectively referred to as "Hangzhou Zhongce Group")
as of October 1, 2003, following the completion of the disposal. At that time,
the Hangzhou Zhongce Group became one of the major affiliates of the Company.

PRINCIPAL PRODUCTS

Hangzhou Zhongce manufactures and sells a broad line of tire products,
consisting of motor vehicle (bias and radial tire for truck, tractor, passenger
car and motorcycle), bicycle and wheelbarrow tires. This breadth of products
enables Hangzhou Zhongce to serve its diverse customer base in Zhejiang Province
and along the heavily populated and economically prosperous eastern coastal
region of China.

                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                             HANGZHOU ZHONGCE SALES IN UNITS
                                  JAN TO DEC 2001                      JAN TO DEC 2002                      JAN TO SEPT 2003
                         ----------------------------------  ----------------------------------  -----------------------------------
                                                  CHANGE                              CHANGE                               CHANGE
                                                   FROM                                FROM                                 FROM
TYPE OF TIRES              UNITS     % OF TOTAL  PRIOR YEAR    UNITS     % OF TOTAL  PRIOR YEAR    UNITS     % OF TOTAL   PRIOR YEAR
                         ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------   ----------
<S>                      <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>           <C>
Motor Vehicle Tires
  Passenger Car             789,092    16.90%     -14.32%     1,018,277     19.30%     29.04%     1,374,624     25.83%      35.00%
  Truck and Light Truck   3,582,291    76.71%      42.61%     3,879,185     73.52%      8.29%     3,633,721     68.27%      -6.33%
  Tractor                   265,219     5.68%      -0.67%       348,890      6.61%     31.55%       266,575      5.01%     -23.59%
  Others                     33,492     0.71%     -91.02%        30,282      0.57%     -9.58%        47,458      0.89%      56.72%
                         ----------   ------                 ----------    ------                ----------    ------
Total                     4,670,094   100.00%      14.66%     5,276,634    100.00%     12.99%     5,322,378    100.00%       0.87%
                         ==========   ======                 ==========    ======                ==========    ======
Bicycle Tires            35,625,601                 7.64%    40,651,193                14.11%    34,965,304                -13.99%
Wheelbarrow Tires         2,501,244                54.78%     2,723,131                 8.87%     2,318,035                -14.88%
</TABLE>

<TABLE>
<CAPTION>
                                                      HANGZHOU ZHONGCE SALES (SALES TAX EXCLUDED)
                                    JAN TO DEC 2001               JAN TO DEC 2002                  JAN TO SEPT 2003
                              ---------------------------   ---------------------------     ----------------------------
                                 SALES                        SALES                           SALES
                              ---------                     --------                        ---------
TYPE OF MOTOR VEHICLE TIRES     RMB'000        % OF TOTAL    RMB'000         % OF TOTAL      RMB'000          % OF TOTAL
                              ---------        ----------   ---------        ----------     ---------         ----------
<S>                           <C>              <C>          <C>              <C>            <C>               <C>
  Bias Tires                    978,430          66.22%     1,053,238           55.66%        811,003           39.68%
  Radial Tires                  499,072          33.78%       839,017           44.34%      1,232,646           60.32%
                              ---------         ------      ---------          ------       ---------          ------
Total                         1,477,502         100.00%     1,892,255          100.00%      2,043,649          100.00%
                              =========         ======      =========          ======       =========          ======
</TABLE>

TRUCK AND PASSENGER VEHICLE TIRES. The rise in commercial activities in China,
improvement in living standard of the Chinese population and change in
governmental policy of China supported the recent increased demand for
commercial vehicles and road transportation in China. These factors stimulated
the sales of motor vehicle tires for Hangzhou Zhongce, especially for passenger
vehicle tires. Unit sales of passenger tires increased by 35% for the nine-month
period of 2003 as compared to the whole year 2002. Truck and light truck tires
continue to be the major products of Hangzhou Zhongce and accounted for over 68%
of its total sales unit of motor vehicle tires in 2003.

BICYCLE TIRES. Since "Chao Yang" tire, Hangzhou Zhongce's brand name, is well
known in the PRC, Hangzhou Zhongce sold approximately 35 million units of
bicycle tires for the nine-month period ended September 30, 2003, and attained a
leading position in the domestic market. Bicycle remains one of the major modes
of transportation in China and hence the sales of bicycle tires were stable and
provided a steady source of operating income.

MARKETS

MOTOR VEHICLE TIRES. Hangzhou Zhongce distributes its motor vehicle tires
regionally to a large customer base - Zhejiang Province. Other major commercial
and industrial centers along the eastern coastal region to which Hangzhou
Zhongce sells its products include the city of Shanghai, the provinces of
Jiangsu and Anhui and the provinces of Fujian and Jiangxi. As a result of the
increase in productive capacity, Hangzhou Zhongce has successfully increased its
business in Northern China. During 2001 to 2003, Hangzhou Zhongce started to
expand its sales to other districts of China, primarily, as a result of decrease
in percentage of sales in Eastern China and export sales.

                                       16
<PAGE>

   GEOGRAPHICAL SALES DISTRIBUTION OF MOTOR VEHICLE TIRE - 2001, 2002 AND 2003

<TABLE>
<CAPTION>
                                                   % OF REVENUE
                                   ----------------------------------------------
                                      2001              2002              2003
REGION                             JAN ~ DEC         JAN ~ DEC         JAN ~ SEPT
<S>                                <C>               <C>               <C>
Eastern China (1)                     42.7%             33.5%             32.9%
Northern China (2)                    17.6%             21.5%             22.0%
Western China (3)                      3.5%              5.3%              5.8%
Southwestern China (4)                 6.0%              6.3%              6.1%
Southern China (5)                     8.2%             11.9%             12.2%
Export(6)                             22.0%             21.5%             21.0%
                                     -----             -----             -----
Total                                100.0%            100.0%            100.0%
                                     =====             =====             =====
</TABLE>

(1)   Eastern China refers to the provinces of Shandong, Jiangsu, Anhui,
      Zhejiang, Jiangxi, Fujian and Shanghai.

(2)   Northern China refers to the provinces of Heilongjiang, Jilin, Liaoning,
      Hebei, Shanxi, Henan, Inner Mongolia, Beijing and Tianjin.

(3)   Western China refers to the provinces of Gansu, Qinghai, Shannxi, Xinjiang
      and Ningxia.

(4)   Southwestern China refers the provinces of Sichuan, Yunnan, Guizhou and
      Tibet.

(5)   Southern China refers to the provinces of Taiwan, Hubei, Hunan, Guangxi
      and Guangdong.

(6)   Export sales are primarily to the Middle East, Philippines, Singapore, the
      United States and Canada.

The primary market for Hangzhou Zhongce's products is the replacement tire
market which accounted for over 95% of the domestic sales of Hangzhou Zhongce in
2003. The Company estimates that, on average, tires are replaced more frequently
in China than in any other developed country because of poor road conditions,
frequent overloading of vehicles and the high daily usage rate of vehicles. As
is typical in the China tire market, Hangzhou Zhongce does not have long term
supply contracts with its customers, who customarily place orders for the
following year at the end of each year. Accordingly, Hangzhou Zhongce focuses
much of its marketing effort on developing new distribution opportunities in the
replacement market and strengthening existing relationships with large customers
and distributors.

Hangzhou Zhongce sells its motor vehicle tires and bicycle tires under its brand
name "Chao Yang" and in 2003 had five primary channels for distributing its
motor vehicle tires: (a) direct sales to Original Equipment Manufacturer
customers, (b) sales through an authorized wholesaler, (c) auto repair shops,
(d) Hangzhou Zhongce's retail sales offices, and (e) exports. The enterprise has
3 retail sales offices in 3 provinces and central municipalities, primarily
situated in cities adjacent to the Zhejiang province.

Sino-foreign equity joint venture enterprises are free to set prices for their
products without government control. Hangzhou Zhongce adjusts its prices in
response to market conditions. Based on quality and type of tire, radial tires
are sold for prices higher than those for bias tires of comparable size.

Hangzhou Zhongce offers a "Triple Coverage" warranty for its tires, guaranteeing
repair, return or replacement of defective tires. In 2003, Hangzhou Zhongce's
tire manufacturing defect rate was 0.91%, compared to the national average of
0.50% and the customer return rate was 1.67%.

BICYCLE TIRES. Hangzhou Zhongce sells bicycle tires primarily in the Zhejiang
Province, Shanghai and surrounding provinces. Its customer base is mainly in the
replacement market. Hangzhou Zhongce believes that it has strong relationships
with its customers. As with the motor vehicle tire market, Hangzhou Zhongce does
not have long term supply contracts with customers, who customarily place orders
for the following year at the end of each year.

      The Company does not believe that seasonality has a significant impact on
its tire business.

                                       17
<PAGE>

RAW MATERIALS

A typical bias tire is manufactured, on cost basis, from a mix of approximately
25% natural rubber, 12% synthetic rubber, 31% nylon cord, 10% carbon black, 4%
steel thread and 18% other materials. A typical radial tire is manufactured, on
cost basis, from a mix of approximately 22% natural rubber, 5% synthetic rubber,
9% carbon black, 43% steel cord and 21% other materials. As indicated below,
prices of key raw materials increased during 2003.

                          RAW MATERIAL COSTS: 2001-2003

<TABLE>
<CAPTION>
                                2001                2002                2003
                                ----                ----                ----
                               AVERAGE             AVERAGE             AVERAGE
                                 COST                COST                COST
                             PER TON(1)          PER TON(1)          PER TON(1)
<S>                          <C>                 <C>                 <C>
Natural Rubber                  6,730               6,450               9,180
Synthetic Rubber                6,730               7,450              10,150
Carbon Black                    3,850               3,560               3,680
Nylon Cord                     21,400              18,250              19,850
Steel Thread                    7,730               3,760               4,180
Steel Cord                     18,760              17,570              16,540
</TABLE>

------------------
(1)   In thousands Rmb.

Hangzhou Zhongce Group currently pays for their imported raw materials with
Renminbi by purchasing such materials through large Chinese import-export
companies. Imports sourced directly from foreign suppliers are subject to import
duties and must be purchased with foreign currency. However, by exporting its
tires, Hangzhou Zhongce Group is exempted from paying import duties and earns
foreign currency in an amount sufficient to balance the amount expended on raw
material imports. Because of the lower prices generally quoted by export
agencies and international tire distributors, domestic sales usually provide
higher margins than export sales.

Part of the rubber and carbon black consumed during the year was supplied by Fu
Chun Jiang. However, the volume was insignificant as compared to those
outsourced from other suppliers and importers.

ENVIRONMENTAL ISSUES

In China, the local provincial and municipal governments enforce pollution
control regulations. If a company was found to be in violation of such
regulations, it would be given a period of time to remedy the problem. Should it
fail to do so, the government could force a shutdown of the operations until
such time as that company is in compliance of the regulations.

Hangzhou Zhongce Group believes that their products and manufacturing and other
operations are in compliance, in all material respects, with existing applicable
laws relating to air, water and noise pollution.

TRAVEL BUSINESS

      In 2002, the Company diversified into the travel business through an
investment in Wing On. The travel industry in the Asia Pacific region had a
difficult time in the first half of 2003. The global travel in the region was
affected by, among other factors, hostilities such as the Iraqi war, concerns
over terrorism and the Severe Acute Respiratory Syndrome ("SARS"). The
unemployment rate of Hong Kong was persistently high. Wing On's tour operations
and transportation business were harshly attenuated for several months.

      In response to the issues facing the industry, Wing On shifted its
business focus. An increased emphasis was placed on local tours. Special
promotions and initiatives were launched to rebuild public confidence in travel

                                       18
<PAGE>



in the region. In addition, Wing On introduced new targeted adventure,
photography tours and other tours. At the same time, in order to achieve greater
operational efficiencies and cost savings, Wing On implemented restructuring
changes during the year. Several of its less profitable local branches and
overseas offices were closed and its loss-making transportation business was
sold.

Despite these adverse factors, the industry recovered rapidly during the second
half of the year following the control of epidemic, the subsequent lifting of
various World Health Organization travel advisories, the launch of the
Individual Visit Scheme by the Chinese government, pursuant to which Chinese
citizens in selected cities can more easily travel to Hong Kong, and the
implementation of the Closer Economic Partnership Arrangement by the Chinese
government. Wing On improved its results in the second half of year 2003.

During 2003, Wing On continued to report a loss. The net loss of Wing On for the
year was HK$371.0 million (equivalent to Rmb395.0 million). The loss was mainly
due to an impairment loss recognized and allowances made of HK$61.4 million
(equivalent to Rmb65.4 million), loss on disposal of investments, affiliates and
discontinued operation of approximately HK$107.3 million (equivalent to Rmb114.2
million) and equity losses in affiliates of HK$114.8 million (equivalent to
Rmb122.2 million). The Company's portion of the net loss based on its ownership
interest in Wing On was HK$119.5 million (equivalent to Rmb127.2 million).

                                       19
<PAGE>

ORGANIZATIONAL STRUCTURE

The Company is part of a group of companies whose ultimate parent company is CSH
(the "CSH Group"). See "Major Shareholders" in "Item 7. Major Shareholders and
Related Party Transactions" of this annual report for more details.

The chart below illustrates the simplified position of the Company within the
CSH Group at December 31, 2003.

                       ---------------------------------
                       |             CSH               |
                       |     (Listed in Hong Kong)     |
                       |  (Incorporated in Hong Kong)  |
                       |      (Investment Holding)     |
                       ---------------------------------
                                  |
                                  |  55.22%
                                  |
                       ---------------------------------
                       |          The Company          |
                       |       (Traded on OTCBB)       |
                       |   (Incorporated in Bermuda)   |
                       ---------------------------------
                                      |
                                      |
             ----------------------------------------------
             |                                            |
             |  26.0%                                     |  32.21%
             |                                            |
----------------------------                 ---------------------------------
|     Hangzhou Zhongce     |                 |           Wing On             |
|   (Incorporated in PRC)  |                 |     (Listed in Hong Kong)     |
|   (Tire Manufacturing)   |                 |   (Incorporated in Bermuda)   |
|                          |                 |     (Investment Holding)      |
----------------------------                 ---------------------------------


The Company itself is a holding company, which has majority interests in a
number of subsidiaries and international entities as of December 31, 2003. The
principal subsidiaries of the Company are Container Limited, Century Lead
Limited ("Century Lead"), Capital Canton Limited ("Capital Canton"), Leading
Returns Limited ("Leading Returns"), Sincere Ocean Limited ("Sincere Ocean"),
Ventures Kingdom Limited ("Ventures Kingdom"), Million Good Limited ("Million
Good"), Honest Map Limited ("Honest Map"), the British Virgin Islands ("BVI")
incorporated companies.

           CONSOLIDATED PRINCIPAL SUBSIDIARIES AS OF DECEMBER 31, 2003

<TABLE>
<CAPTION>
                                                                                             COMPANY'S
                               COUNTRY OF                                                OWNERSHIP INTEREST
CONSOLIDATED SUBSIDIARY      INCORPORATION              PRINCIPAL ACTIVITIES           DIRECTLY   INDIRECTLY
<S>                          <C>                 <C>                                   <C>        <C>
Container Limited                 BVI            Investment holding                      100%          -
Century Lead                      BVI            Investment holding                      100%          -
Capital Canton                    BVI            Investment holding                      100%          -
Sincere Ocean                     BVI            Investment holding                      100%          -
Million Good                      BVI            Investment holding                      100%          -
Ventures Kingdom                  BVI            Investment holding and financing        100%          -
Honest Map                        BVI            Investment holding and financing        100%          -
Leading Returns                   BVI            Investment holding and financing        100%          -
</TABLE>

Through September 20, 2003, Hangzhou Zhongce, a PRC incorporated company, was

                                       20
<PAGE>
also a majority-owned subsidiary of the Company. Please see Exhibit Number 8
for all subsidiaries of the Company.

PROPERTY, PLANT AND EQUIPMENT

BERMUDA

The registered office of the Company is located at Clarendon House, 2 Church
Street, Hamilton, HM11, Bermuda. Only corporate administrative matters are
conducted at this office, through the Company's agent, Butterfield Corporate
Services Limited. The Company neither owns nor leases property in Bermuda.

HONG KONG

The Company's principal executive office is located at 8th Floor, Paul Y.
Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong. The Company shares the
office with CSH and the Company has agreed to reimburse CSH for administrative
services rendered on behalf of the Company on a cost plus 5% basis. See "Item 7.
Major Shareholders and Related Party Transactions" in this annual report for
more details.

                                       21
<PAGE>

              ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

OPERATING RESULTS

OVERVIEW

The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto contained in "Item 18.
Financial Statements" of this Annual Report.

The forward-looking statements in this Item 5 are not guarantees of future
performance. They involve both risk and uncertainty. Several important factors
could cause our actual results to differ materially from those anticipated by
these statements. Many of those factors are macroeconomic in nature and are,
therefore, beyond the control of our management. Please see the "Forward-Looking
Information" in this Annual Report for more details.

The Company has historically been engaged in the tire manufacturing and trading
and related business. During 2001, the Company decided to reengineer its
operations to improve its financial performance. The Company began to dispose of
loss-making subsidiaries and tried to diversify its business.

In early 2002, the Company acquired a substantive stake in Wing On, diversifying
its business into the travel industry. In fiscal 2003, the Company further
completed its disposals of three loss-making subsidiaries, Yinchuan CSI and the
Company's remaining interests in Double Happiness and ceased to account for the
results of operations and the assets and liabilities of these subsidiaries from
their respective disposal dates.

In June 2003, in order to realize part of its investment, the Company entered
into a contract to sell a 25% interest in Hangzhou Zhongce on June 15, 2003. The
sale was completed in September 2003 and Hangzhou Zhongce became an affiliate of
the Group at that time. The Company's Directors considered the disposal as an
attractive opportunity for the Company to realize part of its investment. The
Company also considered the introduction of an investor in Hangzhou Zhongce to
be beneficial to both its future development in the PRC and hence its future
value to the Company. The Company consolidated the results of operations of
Hangzhou Zhongce for the nine months period end September 30, 2003 and shared
equity earnings of Hangzhou Zhongce for the period from October 1, 2003 to
December 31, 2003.

After the completion of the above-mentioned restructuring activities, the
Company is concentrating on its investments in major affiliates, Hangzhou
Zhongce and Wing On.

The Company has continued to seek investment opportunities, particularly in the
PRC. Since the signing of the Closer Economic Partnership Arrangement, economic
exchanges between Hong Kong and the Mainland China have gained in momentum. The
Company believes that, in part as a result of this development, the economy of
the PRC will grow at an increased rate.

TIRE BUSINESS

During the year 2003, Hangzhou Zhongce continued to benefit from the growth in
tire market in the PRC and recorded significant improvement in turnover.
However, the results of Hangzhou Zhongce improved to a lesser extent as compared
to turnover due to the significant increase in the price of raw materials.
Nevertheless, Hangzhou Zhongce recorded an operating income of over Rmb130
million during fiscal 2003.

                                       22
<PAGE>

TRAVEL BUSINESS

Wing On was mainly engaged in the business of providing package tours, travel
and other related services in Hong Kong. Its major affiliates are engaged in the
operation of hotels. Over 90% of Wing On's operations were derived from Hong
Kong whereas the majority of its assets are located in Hong Kong and the PRC.

In order to achieve greater operational efficiencies and cost savings, Wing On
implemented restructuring changes during the year. Several of its less
profitable local branches and overseas offices were closed and its loss-making
transportation business was disposed of during the year. However, Wing On's
business faced challenges during the year. In the first half of 2003, the travel
industry in the Asia Pacific region was adversely affected by, among other
factors, hostilities such as the Iraqi war, concerns over terrorism, SARS as
well as the high unemployment rate in Hong Kong. In response to these
challenges, Wing On shifted its business focus to increase emphasis on local
tours in Hong Kong. Special promotions and initiatives were launched to boost
public confidence in travel in the region. In addition, Wing On introduced new
adventure, photography and other tours to attract customers.

As a result of the measures taken by Wing On and the recovery of economy in the
second half of 2003 due in part to the control of SARS, the launch of the
Individual Visit Scheme and the implementation of the Closer Economic
Partnership Arrangement by the Chinese government, Wing On's results picked up
in the second half of 2003.

Even so, Wing On continued to report a net loss of HK$371.0 million (equivalent
to Rmb395.0 million) during fiscal 2003. The loss was mainly due to an
impairment loss recognized and allowances made, as well as loss on disposal of
investments, affiliates and discontinued operation and equity in losses of
affiliates. Despite the Company's equity loss in Wing On in fiscal 2003, the
Company is confident that Wing On's operations will improve as a result of the
measures taken to restructure its business and the increasing spending power of
the Chinese population.

POTENTIAL NEW BUSINESS

Consistent with the Company's belief in the rapid growth of the Chinese economy
and the increasing number of international events held in Shanghai, the PRC,
such as the Formula One car racing and other international exhibitions and
conferences, the Company expects strong demand in hotel and commercial
properties in Shanghai. As a result, on June 16, 2004, the Company entered into
a conditional agreement for the proposed acquisition of the Properties for a
total consideration of Rmb450 million. Rmb70 million of this consideration will
be settled by the Company's internally generated fund whereas the remaining
consideration will be financed by bank borrowings. It is anticipated that the
Properties will be used for commercial and service apartment rental purposes.

With the increasing number of international events, such as Formula 1 racing and
other international exhibitions and conferences being held in Shanghai on a
regular basis, the Company believes that demand for short-term/long-term
residential accommodations will continue to increase. The Company is optimistic
that the acquisition could broaden the sources of income for the Company and
strengthen its asset base. However, as the Properties are currently in the
development stage and the acquisition remains subject to the satisfaction of
various conditions, the financial result of the Company for at least the year
2004 will depend primarily on the Company's share of the earnings and financial
results of its affiliates in the tire and travel businesses.

CRITICAL ACCOUNTING POLICIES

The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. On an on-going basis, the Company evaluates its estimates and judgments,

                                       23
<PAGE>

including those related to bad and doubtful debts, inventories, warranty, income
taxes and derivatives embedded in debt securities. The Company bases its
estimates and judgments on historical experience and on various other factors
that the Company believes are reasonable. Actual results may differ from these
estimates under different assumptions or conditions.

The following critical accounting policies affect the more significant judgments
and estimates used in the preparation of the Company's consolidated financial
statements.

BAD AND DOUBTFUL DEBTS

The Company maintains allowances for its bad and doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
Estimates are used in determining the allowance for bad debts and are based on
the historical collection experience, current trends, credit policy and a
percentage of the accounts receivable by aging category. In determining these
percentages, the Company looks at historical write-offs of account receivables.
The Company also looks at current trends in the credit quality of its customer
base as well as changes in its credit policies. If the financial condition of
its customers changes, changes to these allowances may be required, which would
impact the Company's future operating results.

INVENTORY

Inventories, consisting of finished goods, work in progress, raw materials and
supplies, are stated at the lower of cost, on an average cost basis, or market
value. The Company makes certain obsolescence and other assumptions to adjust
inventory based on historical experience and current information. The Company
writes down inventory for estimated obsolete or unmarketable inventory equal to
the difference between the costs of inventory and estimated market value, based
upon assumptions about future demand and market conditions. These assumptions,
although consistently applied, can have a significant impact on current and
future operating results and financial position.

WARRANTY

The Company has established a tire warranty reserve based on the Company's best
estimate of the amounts necessary to settle future and existing claims on
products sold as of the balance sheet date. While the Company believes that the
warranty reserve is adequate and that the judgment applied is appropriate, such
amounts estimated to be due and payable could differ materially from what will
actually transpire in the future.

INCOME TAXES

The Company records a valuation allowance to reduce its deferred tax assets to
the amount that the Company believes is more likely than not to be realized. In
the event the Company was to determine that it would be able to realize its
deferred tax assets in the future in excess of its recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should the Company determine that it would not
be able to realize all or part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.

DERIVATIVES EMBEDDED IN CERTAIN DEBT SECURITIES

Convertible notes of Wing On held by the Company contain features that enable
the Company to, at its discretion, make cash payments to Wing On to convert the
debt securities into common stock of Wing On. These features represent embedded
derivatives which are required to be accounted for separately from the related
debt securities. The estimated fair value of these features is valued using a
simulation model that incorporates factors such as the current price of common
stock of Wing On, its volatility, and time to expiration. Changes in the
estimated fair value of the assets represented by these factors are adjusted to
the consolidated statements of operations. The adjustments will be required
until the features are either triggered or expire. The recorded value

                                       24
<PAGE>

of these assets can fluctuate significantly based on changes in the value of the
common stock of Wing On.

ACCOUNTING PRONOUNCEMENTS

A detailed discussion of accounting policies adopted and recent accounting
pronouncements not yet adopted by the Company can be found in "Note 2. Summary
of Significant Accounting Policies" of the Consolidated Financial Statements
included in "Item 18. Financial Statements" of this annual report.

RESULTS OF OPERATION

The operating results of Double Happiness, Yinchuan CSI, Yantai CSI and Shandong
Synthetic have been segregated from continuing operations and reported as a
separate line item, discontinued operations, on the consolidated statement of
operations. See "Note 4. Discontinued Operations" of the Consolidated Financial
Statements included in "Item 18. Financial Statements" in this annual report for
more details.

Selected Consolidated Statement of Income Data as a Percentage of Revenue

<TABLE>
<CAPTION>
                                                    2001      2002       2003
<S>                                               <C>        <C>        <C>
Revenues:                                         100.00%    100.00%    100.00%
Cost of revenues                                  (87.98%)   (86.23%)   (89.11%)
Gross Profit                                       12.02%     13.77%     10.89%
Selling, general and administrative expenses       (6.44%)    (7.36%)    (7.31%)
Interest income                                     0.56%      1.55%      0.33%
Interest expenses                                  (1.90%)    (2.07%)    (1.18%)
Provision for income taxes                         (0.12%)    (0.68%)    (0.38%)
Net loss                                           (6.48%)   (10.07%)    (3.82%)
</TABLE>

2003 compared to 2002

On September 30, 2003, the Company completed the sale of a 25% equity interest
in a major operating subsidiary, Hangzhou Zhongce. As a result of this
transaction, the Company's equity interest in Hangzhou Zhongce was reduced from
51% to 26%, and Hangzhou Zhongce became an equity method affiliate of the
Company. The Company consolidated results of the operations of Hangzhou Zhongce
up to September 30, 2003 in its consolidated financial statements for the year
ended December 31, 2003, and accounted for Hangzhou Zhongce's results thereafter
using the equity method of accounting.

The Company completed its disposal of most of its operating subsidiaries during
2003 and as a result, the operating performance of the Company for the year was
mainly generated through those subsidiaries before their disposition during the
nine-month period ended September 30, 2003.

Consolidated revenues arising from continuing operations amounted to Rmb2.81
billion, representing a 7.7% increase over the fiscal year 2002 revenues of
Rmb2.61 billion. This was mainly due to an increase in sales volume, especially
in the radial tire market. The demand for radial tire has remained high since
2001 and Hangzhou Zhongce continued to increase its productive volume of radial
tires. The sales amount of radial tires increased by 47% in nine-month period
ended September 30, 2003 as compared to that of the whole year 2002. The group
sold a total of 5.3 million units of vehicle tires, 35.0 million units of
bicycle tires and 2.3 million units of wheelbarrow tires in the nine-month
period ended September 30, 2003. This nine-month period represents the period of
2003 during which Hangzhou Zhongce was part of the Company's consolidated group.

The Company's gross margin from continuing operations decreased from 13.8% for
the year 2002 to 10.9% for the year 2003. The decrease was mainly due to the
increase in cost of raw materials, such as synthetic rubber and natural rubber.

                                       25
<PAGE>

The Company's gross profit decreased by 14.8% from Rmb359.3 million for the year
2002 to Rmb306.0 million for the year 2003. The decrease was due to the increase
in cost of raw materials and increase in warranty claims and sales rebates. It
also related to the deconsolidation effect of Hangzhou Zhongce for the period of
October 1, 2003 to December 31, 2003.

The selling and administrative expenses increased to Rmb205.2 million in 2003
versus Rmb192.2 million in fiscal year 2002 due to an increase in amount of
sales and sales related expenses, e.g., cost of delivery.

Operating income from continuing operations decreased to Rmb100.7 million in
fiscal year 2003 as compared with Rmb172.1 million in fiscal year 2002. It
represented the operating income of Hangzhou Zhongce for a nine-month period in
2003 instead of a whole year in 2002.

Interest expense decreased by 38.8% from Rmb54.0 million for the year 2002 to
Rmb33.0 million for the year 2003. This decrease was mainly due to the decrease
in loans obtained from third parties during the year and a lower interest rates
in 2003.

Loss from continuing operations increased to Rmb99.6 million in 2003 compared to
Rmb62.9 million in 2002. This increase resulted mainly from an increase of the
equity in losses of Wing On amounting to Rmb132.7 million which was partly
offset by the share of earnings of Hangzhou Sunrise for the nine-month period
ended September 30, 2003 and by the share of earnings of the Hangzhou Zhongce
Group amounting to Rmb3.4 million for the period from October to December 2003.

Loss from discontinued operations decreased to Rmb7.8 million in the fiscal year
2003 from Rmb199.8 million in fiscal year 2002 and was mainly contributed by the
loss on disposal of Yinchuan CSI and CSI Rubber. The decrease in such loss was
due to an impairment write down for long-lived assets of Yinchuan CSI of
Rmb174.4 million in 2002 but no similar loss was recognized for the discontinued
operations in 2003.

For the year ended December 31, 2003, the Company recorded a consolidated net
loss of Rmb107.3 million. The consolidated net loss decreased by 59.2% compared
with Rmb262.8 million in 2002. This improvement resulted mainly from
divestitures of non-performing assets and businesses in 2002 and early 2003.

2002 compared to 2001

Consolidated revenues arising from continuing operations amounted to Rmb2.61
billion, representing a 25% increase over the fiscal year 2001 revenues of
Rmb2.09 billion. This was mainly due to an increase in sales volume and tire
prices. Export sales constituted approximately 20.9% of the total turnover in
fiscal year 2002 as compared with 21.8% of total turnover in fiscal year 2001,
representing an increase of 19.6% over the monetary amount in fiscal year 2001.
The Company sold a total of 5.3 million units of vehicle tires, 40.7 million
units of bicycle tires and 2.7 million units of wheelbarrow tires in fiscal year
2002.

The Company's gross margin from continuing operations rose from 12.0% for the
year 2001 to 13.8% for the year 2002. The increase was substantially due to rise
in margin of Hangzhou Zhongce to 13.5% in fiscal year 2002 compared to 11.8% for
the previous year. The improved margin was mainly achieved through increase in
sales volume, higher selling prices and the resulting economies of scale. The
demand for radial tires remained high since 2001 and thus Hangzhou Zhongce
continued to increase its productive volume of radial tires.

The Company was able to generate Rmb359.3 million of gross profit from
continuing operations in fiscal year 2002 versus Rmb250.9 million in fiscal year
2001 due to an increase in revenues.

Selling, general and administrative expenses increased 43.0% to Rmb192.2 million
in fiscal year 2002 as compared with Rmb134.4 million in fiscal year 2001. The
increase was mainly due to increase in amount of sales and sales related
expenses, such as selling expenses and staff costs, in year 2002. The increase
in staff costs primarily resulted from Hangzhou Zhongce increasing its number of
staff during the year 2002 in order to support its

                                       26
<PAGE>

increase in production and distribution.

Operating income from continuing operations increased to Rmb172.1 million in
fiscal year 2002 as compared with Rmb89.5 million in fiscal year 2001. This was
mainly due to the increase in gross profit and the implementation of more
efficient and effective marketing strategies. Further, there was a net recovery
of amounts due from related companies amounting to Rmb5.0 million during fiscal
2002.

Interest expenses increased from Rmb39.8 million in fiscal year 2001 to Rmb54.0
million in fiscal year 2002. The increase was due to the increase in notes
payable.

The increase in sales of Hangzhou Zhongce, which resulted in an increase in
operating income from continuing operations, caused the increase in provision
for income taxes from Rmb2.5 million in year 2001 to Rmb17.7 million in year
2002. Loss from continuing operations increased to Rmb62.9 million compared to a
profit of Rmb36.4 million last year. This amount consisted primarily of a loss
upon a decrease in fair value of the call option associated with the convertible
note of Wing On totaling Rmb45.3 million and the Company's share of losses of
Wing On in an amount of Rmb93.1 million since its acquisition on April 19, 2002.
Due in part to the global concern about terrorism and the deflationary economy
in Hong Kong, appetite for international travel dampened. The travel business of
Wing On was in turn affected by the sharp fall in the long-haul tours while
short-haul tours to Asia were only slowly recovering.

Loss from discontinued operations increased to Rmb199.8 million in the fiscal
year 2002 from Rmb171.8 million in fiscal year 2001 which was mainly due to the
impairment loss on Yinchuan CSI. Although the Company decided to reengineer the
operation of Yinchuan CSI during 2002 and engaged in negotiations with its
Chinese joint venture partner to formulate different alternatives for the future
operations of Yinchuan CSI, the operating results of Yinchuan CSI remained poor.
The Company recognized an impairment loss for the long-lived assets of Yinchuan
CSI of Rmb174.4 million in first half of 2002 and subsequently initiated a
process to sell Yinchuan CSI. An additional impairment charge of Rmb74.8 million
was recognized for fiscal year 2002 representing management's best estimate of
the loss to be recognized upon the sale of the Company's entire interest in
Yinchuan CSI.

For the year ended December 31, 2002, the Company recorded a consolidated net
loss of Rmb262.8 million, or Rmb29.14 per share. By comparison, net loss in 2001
was Rmb135.4 million and net loss per share was Rmb15.01.

IMPACT OF INFLATION

The Chinese economy experienced an increase in the general price levels in
fiscal year 2003. The general deflation rate in China was approximately - 3.0%,
- 0.4% and - 0.8% per annum in 1999, 2000 and 2002 respectively, while the
inflation rate in China was approximately 0.7% and 1.2% in 2001 and 2003
respectively. As a result of the inflation rate, the Company suffered from the
general increase in cost of locally sourced raw materials and operating
expenses.

According to the figures of Hong Kong Census and Statistics Department, Hong
Kong's economy experienced an slightly increase in the general price levels in
fiscal year 2003 when compared with that of fiscal year 2002. The general
deflation rate in Hong Kong was approximately -1.6%, -3.0% and -2.6% in 2001,
2002 and 2003 respectively. The deflation rates reflected the impact of consumer
price change. As a result of the deflation rate, the Company's business suffered
from the decrease in consumer spending but benefited from the general decrease
in cost of operating expenses.

TAX REGULATIONS

Hangzhou Zhongce Group's products are subject to value-added tax ("VAT") and
consumption tax ("CT") generally calculated at 17.0% and 10.0% respectively.
However, the 10% CT in radial tire products was abolished on January 1, 2001.

                                       27
<PAGE>

Hangzhou Zhongce was granted approval by the local tax bureau for the
application of a reduced tax rate. It was subject to a 15% rate on the
applicable Chinese State unified income tax in fiscal year 2003. On the other
hand, Fu Chun Jiang was subject to a 30% rate on the applicable Chinese State
unified income tax in fiscal year 2003.

For the impact of tax regulations on the Company, see Note 13 to the
Consolidated Financial Statements of the Company included in "Item 18. Financial
Statements".

LIQUIDITY AND CAPITAL RESOURCES

In 2003, net cash provided by operating activities and financing activities was
approximately Rmb104.8 million and Rmb305.3 million, respectively. Net cash used
in investing activities was approximately Rmb591.1 million, which resulted in a
net decrease in cash and cash equivalents of Rmb181.0 million.

The Company primarily used its cash and cash equivalents, bank loans and the
cash flows from operating activities to fund its capital expenditures,
investment in and advances to affiliates and subscription of note receivables.
Other than the subscription of a new convertible note from Wing On described in
Item 4 of this Form 20-F, no transactions, arrangements and other relationships
with unconsolidated entities or other persons that are reasonably likely to
affect materially the liquidity or the availability of or requirement for
capital resources of the Group had been entered into during the year. In
management's opinion, the working capital is sufficient for the Company's
present requirements.

The Company's working capital requirements for continuing operations
dramatically decreased in 2003 due to the disposal of the Hangzhou Zhongce
Group. From December 31, 2002 to December 31, 2003, net accounts receivable from
continuing operations decreased from Rmb314.2 million to RmbNil, short-term bank
loans of continuing operations decreased from Rmb659.4 million to RmbNil, and
long-term bank loans (including current portion) of continuing operations
decreased from Rmb116.6 million to RmbNil. Total bank borrowings as of December
31, 2003 amounted to RmbNil, representing a decrease of 100.0% over total
borrowings of Rmb776.0 million as of December 31, 2002.

For the year ended December 31, 2003, the Company had expenditures for the
purchase of property, plant and equipment of Rmb256.9 million, representing a
decrease of approximately 10.6% from those of Rmb287.5 million for the year
ended December 31, 2002. The Company financed these expenditures by the cash
flows from operations, short-term bank loans and cash on hand. The Company also
decreased the amount of pledged deposits by 100.0% to RmbNil in 2003, compared
to Rmb26.2 million in 2002.

In addition, cash and cash equivalents of the Company, including continuing and
discontinued operations, decreased from Rmb244.6 million at December 31, 2002 to
Rmb63.6 million at December 31, 2003 of which Rmb1.2 million (US$0.14 million)
were U.S. dollar deposit.

There are no material restrictions, including foreign exchange controls, on the
ability of the Company's subsidiaries to transfer funds to the Company in the
form of cash dividends, loans, advances or product/material purchases. With
respect to Hangzhou Zhongce, there are restrictions on the payment of dividends
and the removal of dividends from China due to the Company's reinvestment
program for tax purposes. In the event that dividends are paid by Hangzhou
Zhongce, they would reduce the amount available for the reinvestment program and
accordingly taxes would be payable on the profits not reinvested. The Company
believes such restrictions will not have a material effect on the Company's
liquidity or cash flows.

For related party information, please see "Item 7. Major Shareholders and
Related Party Transactions" in this annual report. In the opinion of management,
these related party transactions have no material effect on the Company's
liquidity or cash flows.

                                       28
<PAGE>

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

<TABLE>
<CAPTION>
                                                                    PAYMENTS DUE BY PERIOD
                                                                                                                  2010
CONTRACTUAL OBLIGATIONS OF                    TOTAL           2004            2005 - 2007     2008 - 2009      AND BEYOND
   CONTINUING OPERATIONS                     -------         -------          -----------     -----------      ----------
                                             Rmb'000         Rmb'000            Rmb'000         Rmb'000         Rmb'000
<S>                                          <C>             <C>              <C>             <C>              <C>
Short-Term Debt                               27,708          27,708               -               -               -
                                              ------          ------            ----            ----            ----
Total Contractual Cash Obligations            27,708          27,708               -               -               -
                                              ======          ======            ====            ====            ====
</TABLE>

Over the last few years, cash flow financing the operations of the Company was
principally obtained from internally generated funds and bank borrowings. The
Company had working capital of Rmb81.5 million and Rmb41.3 million as of
December 31, 2003 and 2002, respectively.

On June 16, 2004, the Company entered into a conditional agreement with an
independent third party in relation for the proposed acquisition of the
Properties for a total consideration of Rmb450 million. The Company paid the
deposit of Rmb50 million in cash by internal resources upon signing of the
agreement. Rmb380 million of the consideration will be payable upon the grant
and drawdown of loans to be granted by PRC banks or financial institutions and
secured by the Properties. The remaining Rmb20 million will be financed by
internal resources of the Company and will be due upon completion of the
transfer of the ownership of the Properties from the sellers to the Company.

The Company did not undertake any guarantee as of December 31, 2003. During
2003, the Company did not enter into any off-balance sheet arrangement.

On January 13, 2004, Wing On entered into agreements (as subsequently amended on
March 17 and May 4, 2004) with the Company and another holder of its convertible
notes in relation to the issuance of new convertible notes, whereby Wing On
would issue new convertible notes to the Company or its nominee for a
consideration of HK$155.0 million (Rmb165.2 million), of which HK$84.8 million
(Rmb90.0 million) was settled by the cancellation of the Company's current
convertible notes of Wing On and the remaining balance was satisfied in cash by
the Company's internal resources. The new convertible notes provide the Company
rights to convert into new shares of Wing On during a period of three years from
the date of issue, at the Company's discretion, at an initial conversion price
of HK$0.02 per share of Wing On, subject to adjustments.

                                       29
<PAGE>

TREND INFORMATION

GENERAL

Following its sale of a portion of its interest in Hangzhou Zhongce in 2003, the
Company does not have a majority-owned operating subsidiary as of the date of
this report, except the entity investing in the Properties. The Company
continues to seek new investment opportunities, such as the Properties, and
expects to continue to diversify its operations into new business lines. For at
least the year 2004, the Company expects its financial results to be largely
dependent on its portion of the earnings and other results of affiliated
companies, such as Hangzhou Zhongce and Wing On.

A substantial portion of the Company's results for the fourth quarter of 2003
was and for the year 2004 is expected to be derived from its affiliates, major
businesses of which are located in China. These businesses are dependent in
large part on the performance of the Chinese economy, as well as Chinese
government policy. As a result, the future financial condition and results of
operations of the Company could be adversely affected by slowdowns in the
Chinese economy, as well as Chinese macroeconomic policy that de-emphasize the
development of industries which utilize products or services of the Company's
affiliates. See "Item 3. Key Information" ~ "Risk Factors".

TRENDS RELATED TO THE TIRE BUSINESS INDUSTRY

As a result of the Group's ongoing strategy of investing in China, the Company's
operations and financial performance has historically been somewhat mitigated
from the negative external effects on economics outside of the Greater China
Region. During 2003, the economy in China remained strong.

The growing economy and the relatively stable society in China during 2003
brought about strong internal demands in all sectors that, in turn, created a
relatively favorable environment for the Group's tire business. The PRC tire
market continued to experience strong growth during 2003 as, among other
factors, the construction of "five vertical and seven horizontal" National
Trunks System accelerated and resulted in increased demand for motor vehicles
and vehicle-related components, including tires.

During 2003, sales of radial tires showed strong growth and are expected to
continue to grow compared to sales of bias tires. Most new motor vehicles are
specifically designed for use with more durable radial tires. At the same time,
sales of bias tires for the year 2003 continued to grow as heavy transportation
vehicles continued to install less expensive bias tires. The Company anticipates
that demand will increase for radial tires in 2004 and thus increase the equity
shared by the Company.

TRENDS IN THE TRAVEL BUSINESS INDUSTRY

The travel industry in Asia experienced a very difficult year in 2003. However,
the Company anticipates that the travel industry will begin to rebound in 2004.
Since the signing of the Closer Economic Partnership Arrangement, economic
exchanges between Hong Kong and the Mainland China have gained in momentum. The
"Individual Visit Scheme" implemented by the Chinese government in late 2003
brought in more than a million new visitors to Hong Kong. The scheme was
extended to all Guangdong cities by May 2004 and may be extended to other
provinces. In part as a result of the Individual Visit Scheme, the prospects for
the travel industry, including hotel business as well as local tour operations,
are expected to improve for 2004.

The hotel chain, indirectly owned by an affiliate, Wing On, became a subsidiary
of Wing On effective January 2004. Wing On is preparing to market its hotel
products more aggressively by combining them with its package tour products. It
is expected that Wing On's hotel operation will contribute an improvement to the
Group in the future.

                                       30
<PAGE>

               ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

The directors, executive officers and senior management of the Company as of
December 31, 2003 are identified below.

DIRECTORS AND SENIOR MANAGEMENT
<TABLE>
<CAPTION>
                                                                                                                    EMPLOYED
        NAME                       AGE                               POSITION                                         SINCE
<S>                                <C>        <C>                                                                   <C>
Chan Kwok Keung, Charles            49        Chairman and Director of the Company                                   2000(1)
Allan Yap                           48        Vice Chairman and Director of the Company                              2001(1)
Dorothy Law                         34        Director                                                               2000
Richard Whittall                    45        Independent Director and Audit Committee Member of the Company         2000
David Edwin Bussmann                50        Independent Director and Audit Committee Member of the Company         2000(2)
Lien Kait Long                      56        Director                                                               1999
Chow Chun Man, Jimmy                35        Chief Financial Officer                                                2003
</TABLE>

--------------------
(1)   Dr. Chan Kwok Keung, Charles and Dr. Allan Yap are also executive
      directors of CSH

(2)   Mr. David Edwin Bussmann is also an independent non-executive director of
      CSH

BRIEF BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT

Dr. Chan Kwok Keung, Charles, aged 49, is the chairman and director of the
Company. Dr. Chan holds an honorary degree of Doctor of Laws and a bachelor's
degree in civil engineering and has over 24 years' international corporate
management experience in the construction and property sectors as well as in
strategic investments. Dr. Chan is also the chairman and chief executive officer
of CSH and the chairman of ITC Corporation Limited ("ITC"), Paul Y. - ITC
Construction Holdings Limited ("Paul Y.") and Hanny Holdings Limited ("Hanny"),
companies whose shares are listed on The Stock Exchange of Hong Kong Limited. He
is also an executive director of Wing On and a non-executive director of Downer
EDI Limited, a company whose shares are listed on the Australian Stock Exchange
and the New Zealand Stock Exchange.

Dr. Yap, Allan, aged 48, is the vice chairman and director of the Company. He
obtained the honorary degree of Doctor of Laws and has over 22 years' experience
in finance, investment and banking. Dr. Yap is the managing director of Hanny
and the vice chairman of CSH and an executive director of Wing On. Dr. Yap is
also the chairman and chief executive officer of Burcon NutraScience Corporation
("Burcon"), a company whose shares are listed on the TSX Venture Exchange and
the Frankfurt Stock Exchange, and an executive chairman of PSC Corporation
Limited and Intraco Limited, both public listed companies in Singapore. He is
also a director of MRI Holdings Limited, a company whose shares are listed on
Australian Stock Exchange.

Ms. Law, Dorothy, aged 34, is a director of the Company. She received her
Bachelor of Commerce and Bachelor of Laws degrees from the University of British
Columbia in Canada. Ms. Law is a Barrister and Solicitor licensed to practice
law in British Columbia and has also been admitted as a Solicitor of the High
Court of Hong Kong. Ms. Law is also a director of Burcon and corporate counsel
of Hanny.

Mr. David Edwin Bussmann, aged 50, is an independent director and an audit
committee member of the Company and an independent non-executive director of
CSH. Mr. Bussmann has more than 22 years' experience in the investment and
finance field, and is very familiar with investment issues related to China, as
well as sectors such as technology, real estate, and direct investment. He
previously worked at Salomon Brothers, Citibank, Bank of America and Prudential
Asia.

Mr. Richard Whittall, aged 45, is an independent director and the chairman of
the audit committee of the Company. He is the President of Watershed Capital
Partners Inc., an investment banking firm, based in Vancouver, British Columbia,
Canada. Mr. Whittall has 19 years' experience in investment banking advising

                                       31
<PAGE>
domestic and international companies in the areas of fund raising, mergers,
acquisitions, divestitures and strategic business alliances. Mr. Whittall
currently serves as a president of Watershed Capital Partners Inc. and director
of a number of public and private companies, including, Maximizer Software Inc.,
Glacier Ventures International Corp., Canadian General Investments Limited and
Canadian World Fund Limited.

Mr. Lien Kait Long, aged 56, is a director of the Company. Mr. Lien holds a
bachelor's degree in commerce and is a member of Institute of Certified Public
Accounts of Singapore and the CPA Australia. He has over 33 years' experience in
finance, accounting, investment and banking. He is also a director of MRI
Holdings Limited, a company whose shares are listed on the Australian Stock
Exchange. Mr. Lien is also director of Jishan Holdings Limited, Mediastream
Limited, 8Telecom International Holdings Co. Ltd, companies listed on the
Singapore Exchange Securities Trading Limited.

Mr. Chow Chun Man, Jimmy, aged 35, has been appointed as the Chief Financial
Officer on September 24, 2003. Mr. Chow holds a Bachelor Degree in Accountancy
and is a member for both of the Australian Society of Certified Practicing
Accountants and the Hong Kong Society of Accountants. He has over 11 years' of
experiences in auditing, financial reporting and corporate finance. Mr. Chow is
also a Vice President of Hanny.

There is no family relationship between any director or executive officer listed
above and any other director or executive officer listed above. None of the
directors or executive officers was elected or appointed pursuant to an
arrangement or understanding with any third party.

COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT

For the year ended December 31, 2003, the aggregate amount of compensation and
bonuses paid by the Company and its subsidiaries as a compensation to all
directors and executive officers, for service in all capacities, was
approximately Rmb0.5 million (US$0.06 million). The grant of bonuses is
determined at the discretion of the board of directors.

BOARD PRACTICES

All directors of the Company will hold office until the next annual meeting of
the shareholders and their successors are elected and qualified. During the
annual general meeting of the Company held on June 29, 2004, all six existing
members were re-appointed to the board of directors of the Company.

No director of the Company entered into any service contract nor entitled to any
benefits upon termination of employment with the Company.

The audit committee of the board of directors reviews, acts on and reports to
the board of directors with respect to various auditing and accounting matters,
including the selection of our auditors, the scope of the annual audits, fees to
be paid to the auditors, the performance of the auditors and our accounting
practices. As of July 2, 2004, the audit committee of the Company consists of
Mr. Richard Whittall and Mr. David Edwin Bussmann.

EMPLOYEES

The Company disposed of Yinchuan CSI during 2003 and Hangzhou Zhongce became an
affiliate of the Company in September 2003. As of December 31, 2003, there were
no employees in the Company. Pursuant to a management and administrative
services agreement between the Company and CSH in 1993 and renewed for a term of
three years in 1997 and 2000, CSH provides certain management and administrative
services to the Company. See Note 18(c) to Consolidated Financial Statements in
"Item 18 Financial Statements" for more details.

                                       32
<PAGE>

SHARE OWNERSHIP

<TABLE>
<CAPTION>
NAME                                           POSITION             PERCENT OF SHARES OWNED
<S>                                            <C>                  <C>
Dr. Chan Kwok Keung, Charles (1)               Chairman                       55.2%
</TABLE>

Note:

(1) Dr. Chan's interest represents 3,000,000 super-voting shares and 1,978,830
common shares, representing 55.2% effective equity interest and 88.8% effective
voting rights, of the Company beneficially held by CSH directly and indirectly.
Dr. Chan is the Chairman of CSH. Through indirect wholly owned subsidiaries, Dr.
Chan owns 33.6% of ITC, of which he is also a Chairman. As of July 2, 2004, ITC
indirectly owns 24.6% interest in Hanny, which owns 29.4% of CSH. ITC, through
wholly owned direct and indirect subsidiaries, also owns 55.1% of Paul Y., which
indirectly owns 29.4% of CSH. Although Dr. Chan may be deemed a beneficial owner
of the shares of the Company held by CSH pursuant to Rule 13d-3, he disclaims
beneficial ownership of such shares.

No other director or member of senior management of the Company beneficially
owns one percent or more of the shares of the Company.

SUMMARY OF THE OPTION SCHEME

The Company's shareholders approved an Executive Share Option Scheme (the
"Option Scheme") at the 1994 Annual General Meeting. The Option Scheme
authorized the granting of options to purchase up to 910,000 shares of the
Company's common stock to officers, directors who are also full-time employees
and other key full or part-time employees of the Company and its subsidiaries.
The Option Scheme terminated on June 6, 2004 pursuant to its terms. At that
time, there were no options outstanding under the Option Scheme.

A summary of movements of share options under the Company's options scheme
during the year is as follows:

<TABLE>
<CAPTION>
                                         EXERCISE PRICE       OUTSTANDING AT      SURRENDERED/LAPSED       OUTSTANDING AT
EXERCISABLE PERIOD                           (US$)             1.1.2003            DURING THE YEAR           12.31.2003
<S>                                      <C>                  <C>                 <C>                      <C>
2.3.2000 to 2.2.2010                        9.9375              20,000                 (20,000)                    -
                                                                ------                 -------                  ----
                                                                20,000                 (20,000)                    -
                                                                ======                 =======                  ====
</TABLE>

As of December 31, 2003, none of the Company's directors, officers or their
associates had any personal, family, corporate or other interests in any shares
of the Company or any of its associated corporations, except as described above.
Mr. Sheng Yu, the vice president and deputy chief operating officer of the
Company, tendered his resignation to the Company in February 2003 and the option
granted to him expired one month from the date of his resignation.

                                       33
<PAGE>

            ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

MAJOR SHAREHOLDERS

Based on filings on Schedule 13G under the Exchange Act, as of July 2, 2004, the
following persons beneficially owned shares representing 5% or more of the
issued share capital of the Company.

<TABLE>
<CAPTION>
NAME OF HOLDER                                NUMBER OF SHARES HELD                   PERCENTAGE OF CLASS
<S>                                           <C>                                     <C>
CSH(1)                                              4,978,830                                 55.2%
Forstmann-Leff Associates, LLC(2)                   1,337,295                                 14.8%
</TABLE>

(1)   Includes 3,000,000 shares of supervoting common stock, each share having
10 votes on resolutions of shareholders, and 1,978,830 shares of common stock,
each share having 1 vote on resolutions of shareholders. There has been no
change in the percentage ownership of CSH during the past three years. Dr. Chan
Kwok Keung, Charles is deemed to be the beneficial owner of the interest in
shares held by CSH as defined by General Instructions F for preparing the Form
20-F. Dr. Chan's interest represents 3,000,000 super-voting shares and 1,978,830
common shares, representing 55.2% effective equity interest and 88.8% effective
voting rights, of the Company beneficially held by CSH directly and indirectly.
Dr. Chan is the Chairman of CSH. Through indirect wholly owned subsidiaries, Dr.
Chan owns 33.6% of ITC, of which he is also a Chairman. As of July 2, 2004, ITC
indirectly owns 24.6% interest in Hanny, which owns 29.4% of CSH. ITC, through
wholly owned direct and indirect subsidiaries, also owns 55.1% of Paul Y. which
indirectly owns 29.4% of CSH.

(2)   Represents shares of common stock; includes 489,400 shares of common stock
held by FLA International Fund, Ltd., representing 5.4% of the outstanding
capital stock of the Company. According to the disclosure in the Schedule 13G
and amendments thereto, Forstmann-Leff Associates, LLC, is a registered
investment advisor under the Investment Advisers Act of 1940. FLA Advisers
L.L.C., which also reported beneficial ownership of the 1,337,295 shares, is
also a registered investment adviser under such Act. The members of
Forstmann-Leff Associates, LLC's Investment Committee, are the managers of FLA
Advisers L.L.C. FLA Advisers L.L.C. is the investment advisor to FLA
International Fund, Ltd. The entities reported that various of their clients
have the right to receive, or the power to direct the receipt of dividends from
or the proceeds from the sale of, the common stock. According to the Schedule
13G and amendments thereto, no client held interests greater than 5% other than
FLA International Fund, Ltd.

For the years ended December 31, 2002 and 2001, Forstmann-Leff Associates, LLC,
FLA Asset Management LLC, FLA Advisers L.L.C. and FLA International Fund, Ltd
reported jointly on Schedule 13G, reporting in the aggregate beneficial
ownership of 1,439,495 and 1,459,095 shares, respectively, as of the end of such
years.

According to the shareholders list, dated April 8, 2004, provided to the Company
by its transfer agent, there are 90 shareholders (representing all issued common
stock of 6,017,310 shares) of record of the Company's common stock. Among them,
88 holders of the Company's common stock (holding 6,017,110 common shares) are
resident in the United States. All issued supervoting common stock is held by
CSH, the major shareholder of the Company which was incorporated in Hong Kong.

RELATED PARTY TRANSACTIONS

DUE FROM/TO RELATED COMPANIES

      The amounts due from related companies primarily arise from sales of tires
and are unsecured, non-interest bearing and repayable at the end of credit
periods granted ranging from 90 days to 180 days. Historically, the Company has
not experienced losses related to these receivables with the exception of an
allowance for doubtful accounts amounting to Rmb27,000,000 charged to the
consolidated statement of operations during fiscal 2001. The management reviewed
the recoverability of these receivables during fiscal 2002 and recognized a net

                                       34
<PAGE>



recovery of Rmb5,016,000 in the consolidated statement of operations for fiscal
2002.

As of December 31, 2002, the loans from related companies represented funds
advanced to the Company and were unsecured, non-interest bearing and had no
fixed repayment terms. As of December 31, 2003, as a result of the disposition
of its subsidiaries in the PRC, the Company had no amounts due from/to related
companies.

LAND USE RIGHT

The Taiyuan municipal government granted its approval for Taiyuan Rubber
Factory, the Chinese joint venture partner of Double Happiness, to use the
parcel of land on which Double Happiness' bias tire factory is located, but had
not issued any land use right certificate prior to the disposition by the
Company of its entire interest in the factory. Prior to that time, Double
Happiness and Taiyuan Rubber Factory had agreed in principle that Double
Happiness would the land for the 50-year term of the joint venture, subject to
agreed upon annual fees. A lease contract was signed between the parties prior
to the Company's disposition, and such lease would have been subject to the
prior formal transfer of the land use right to Taiyuan Rubber Factory from the
Taiyuan municipal government. Taiyuan Rubber Factory had undertaken to bear any
cost associated with the arrangements to be made for the transfer and to bear
any loss which Double Happiness may suffer as a result of the failure to effect
the transfer. The agreement ceased upon the disposition of the Company of its
interest in the bias tire factory of Double Happiness to a third party during
fiscal 2001.

MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT

Pursuant to a management and administrative services agreement between the
Company and CSH in 1993 and renewed in 1997 and 2000, in each case for a term of
three years, CSH provides certain management services to the Company for an
annual fee of US$30,000 (Rmb248,000). In addition, the Company has agreed to
reimburse CSH for administrative services not covered by the management and
administrative services agreement rendered on behalf of the Company on a cost
plus 5% basis, in the aggregate amount of approximately Rmb4,127,000,
Rmb4,731,000 and Rmb5,708,000 for the years ended December 31, 2001, 2002 and
2003, respectively.

SALES TO/PURCHASES FROM RELATED PARTIES

Hangzhou Zhongce recorded sales to related companies of approximately
Rmb184,202,000, Rmb209,112,000 and Rmb194,971,000 that have been reflected in
the Company's consolidated financial statements for the years ended December 31,
2001, 2002 and the nine months ended September 30, 2003, respectively.

Hangzhou Zhongce paid subcontracting charges to an affiliate of approximately
Rmb127,989,000, Rmb199,373,000 and Rmb277,470,000 for tire processing that have
been reflected in the Company's consolidated financial statements for the years
ended December 31, 2001, 2002 and the nine months ended September 30, 2003,
respectively.

These transactions were carried out after negotiations between Hangzhou Zhongce
and the respective related companies in the ordinary course of business and on
the basis of the estimated market value as determined by the management of
Hangzhou Zhongce.

INDEMNIFICATION FROM A CHINESE JOINT VENTURE PARTNER OF ACCOUNTS RECEIVABLE
BALANCE

The Chinese joint venture partner of Double Happiness agreed to indemnify Double
Happiness against any financial losses resulting from any uncollectible trade
and other receivable balance transferred into Double Happiness by the
predecessor state-owned enterprise upon the establishment of the joint venture.
As of December 31, 2000, the Chinese joint venture partner of Double Happiness
agreed to indemnify Rmb4,403,000 of these receivable balances. The arrangement
ceased upon disposition of the Company's entire interest in the bias tire

                                       35
<PAGE>

factory of Double Happiness to a third party during fiscal 2001.

RELATED PARTY GUARANTEES

During 2002, Hangzhou Zhongce undertook to guarantee, without charge, certain
bank loan facilities of approximately Rmb160,000,000 and Rmb7,900,000 granted by
certain banks to an affiliate in the PRC and a related party respectively. The
guarantees remain outstanding, although Hangzhou Zhongce has not been called to
perform under them.

Certain parties guaranteed certain of the Group's bank borrowings at no cost to
the Company as of December 31, 2002. Details of the borrowings are shown in Note
12 of the Consolidated Financial Statements in "Item 18. Financial Statements"
of this annual report.

                                       36
<PAGE>

                          ITEM 8. FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

See the Consolidated Financial Statements included in "Item 18. Financial
Statements" of this annual report. See also "Item 17. Financial Statements" of
this annual report for financial statements of Wing On and Hangzhou Zhongce.

DIVIDEND POLICY

On July 3, 2001, the board of directors of the Company announced that the
Company would suspend the declaration and payment of any quarterly dividend
until the profitability of the Company and its subsidiaries reached an
acceptable level. During 2002 and 2003, no dividend was declared or paid by the
Company. Any future determination to pay a dividend to shareholders of the
Company will also depend on the Company's results of operations and financial
condition, and other factors deemed relevant by its board of directors.

Applicable Chinese laws and regulations require that, before a Sino-foreign
equity joint venture enterprise (such as each PRC Subsidiary) distributes
profits to investors, it must: (1) satisfy all tax liabilities; (2) provide for
losses in previous years; and (3) make allocations, in proportions determined at
the sole discretion of the board of directors, to a general reserve fund, an
enterprise expansion fund and a staff welfare and incentive bonus fund.

During 2002, no distribution of dividends was made from any subsidiary.

The board of directors of Hangzhou Zhongce declared a dividend of Rmb39,220,000
for the year ended 2002, which was paid in June 2003. As a result of its
percentage ownership interest in Hangzhou Zhongce, the Company received a
dividend payment of Rmb20,002,200.

SIGNIFICANT CHANGES

On January 13, 2004, Wing On entered into agreements (as subsequently amended on
March 17 and May 4, 2004) with the Company and another holder of its convertible
notes pursuant to which Wing On would issue new convertible notes to the Company
or its nominee for a consideration of HK$155.0 million (Rmb165.2 million), of
which HK$84.8 million (Rmb90.0 million) would be settled by the cancellation of
the Company's existing convertible note of Wing On and the remaining balance
would be satisfied in cash by the Company. The new convertible note would
entitle the Company to convert the note into new shares of Wing On during a
period of three years from the date of issue, at the Company's discretion, at an
initial conversion price of HK$0.02 per share of Wing On, subject to
adjustments. On June 8, 2004, the agreements were approved by Wing On's
shareholders that do not have any interest in Wing On's current convertible
notes and the transaction was completed on June 14, 2004.

On June 16, 2004, the Company, through an indirect wholly-owned subsidiary,
entered into a conditional sale and purchase agreement with an independent third
party, Shanghai Jiu Sheng Investment Company Limited, for the proposed
acquisition by the Company of the Properties. The estimated total gross floor
space of the Building is approximately 37,000 square meters, on a parcel of an
estimated approximately 5,500 square meters of Land. Subject to zoning
approvals, which are a condition to the acquisition, the Company expects that
the first four floors of the Building will be rented for commercial purposes and
the remaining 20 floors will be developed and rented as service apartments.

The aggregate consideration for the Property is Rmb450 million. The Company paid
the first deposit of Rmb50 million in cash upon signing of the agreement. Rmb380
million of the consideration will be payable upon the grant and drawdown of
loans to be granted by PRC banks or financial institutions and secured by the
Properties.

                                       37
<PAGE>

The remaining Rmb20 million will be financed by internal resources of the
Company and will be due upon completion of the transfer of the ownership of the
Properties from the seller to the Company.

The Properties are in the development stage; the seller has agreed to procure
competition of the development within 180 days from the date of the agreement.
The effectiveness of the agreement is subject to certain conditions. The
subsequent closing of the sale is subject to additional closing conditions. A
copy of the agreement is included as Exhibit 4(a)4 to this annual report.

                                       38
<PAGE>

                               ITEM 9. THE LISTING

Shares of the Company's common stock traded on the NYSE under the symbol "CSH"
from 1993 to late 2002. However, the trading was suspended on September 27, 2002
by the NYSE for the failure of the Company to meet the NYSE's continuing listing
standards. Effective December 30, 2002, the common stock of the Company was
removed from listing on the NYSE.

Since November 26, 2002, the Company's common stock has traded on the OTCBB
under the stock symbol "CSHEF". The OTCBB is a regulated quotation service that
displays real-time quotes, last sale prices and volume information in OTC equity
securities for companies which are registrants with the SEC.

The following table set forth, for the periods indicated the high and low
closing sale prices of the common stock as reported by NYSE from January 1, 1998
to September 27, 2002 and by the OTCBB from November 26, 2002 to December 31,
2003.

<TABLE>
<CAPTION>
YEAR ENDED                       HIGH                               LOW
                                 ----                               ---
<S>                             <C>                                <C>
December 31, 2003                3.50                              0.25
December 31, 2002                2.00                              0.20
December 31, 2001                2.90                              0.71
December 31, 2000                9.38                              2.00
December 31, 1999               10.62                              3.56
</TABLE>

The following table sets forth the high and low closing sale prices for the
common stock as reported during each of the quarters in the two-year period
ended December 31, 2003.

<TABLE>
<CAPTION>
QUARTER ENDED                    HIGH                               LOW
                                 ----                               ---
<S>                              <C>                               <C>
June 30, 2004                    3.55                              2.20
March 31, 2004                   6.90                              2.55
December 31, 2003                3.50                              1.70
September 30, 2003               2.00                              1.35
June 30, 2003                    2.35                              0.30
March 31, 2003                   0.55                              0.25
December 31, 2002                0.74                              0.20
September 30, 2002               1.40                              0.28
June 30, 2002                    1.75                              1.00
</TABLE>

The following table sets forth the high and low closing sale prices for the
common stock as reported during each of the most recent six months.

<TABLE>
<CAPTION>
MONTH ENDED                      HIGH                               LOW
                                 ----                               ---
<S>                              <C>                               <C>
June 30, 2004                    2.90                              2.20
May 31, 2004                     3.40                              2.30
April 30, 2004                   3.55                              2.25
March 31, 2004                   4.30                              2.55
February 29, 2004                4.50                              4.25
January 31, 2004                 6.90                              3.40
</TABLE>

                                       39
<PAGE>

                         ITEM 10. ADDITIONAL INFORMATION

MEMORANDUM AND ARTICLES OF ASSOCIATION

For a summary of the Company's Memorandum and Articles of Association see Item
10 of the Company's Form 20-F for the year ended 2001 to which specific
reference is made.

MATERIAL CONTRACTS

The following is a summary of material contracts, other than contracts entered
into in the ordinary course of business, to which the Company or any subsidiary
of the Company is a party, for the two years immediately preceding the filing of
this report.

Contract for disposal dated January 8, 2003 between Ningxia Yinchuan Rubber
Manufacturing, the Chinese joint venture partner of Yinchuan CSI, as a buyer and
the Company as a seller for the sale of seller's interest in Yinchuan CSI, a 51%
owned subsidiary of the seller, for cash consideration of Rmb35,000,000.

Contract for disposal dated June 15, 2003 between Hangzhou Industrial &
Commercial Trust & Investment Co. Ltd., an independent third party not connected
with any directors, substantial shareholders or chief executive of the Company
or any of its subsidiaries, as a buyer and the Company as a seller for the sale
a 25% interest in Hangzhou Zhongce for cash consideration of Rmb164,659,657.

Contract for subscription of 2% convertible note dated January 13, 2004 between
Wing On and the Company for the issue of 2% convertible note to the Company or
its nominee for a consideration of HK$155,000,000 by Wing On, of which HK$84.8
million will be settled by the cancellation of the Company's current convertible
note issued by Wing On and the remaining balance will be satisfied in cash by
the Company. The new convertible note entitles the Company to convert into new
shares of Wing On during a period from the date of issue of the new convertible
note at an initial conversation price of HK$0.02 per share of Wing On, subject
to adjustment.

Contract for acquisition dated June 16, 2004 between Shanghui Jiu Sheng
Investment Company Limited, an independent third party, as a seller and the
Company as a buyer for the acquisition of seller's interest in the Properties,
for cash consideration of Rmb450,000,000.

EXCHANGE CONTROLS

CERTAIN FOREIGN ISSUER CONSIDERATIONS

The Company has been designated as a non-resident for exchange control purposes
by the Bermuda Monetary Authority, Foreign Exchange Control, whose permission
for the issue of shares of common stock of the Company has been obtained.

The transfer of shares between persons regarded as resident outside Bermuda for
exchange control purposes and the issue of shares to or by such persons may be
effected without specific consent under the Exchange Control Act of 1972 and
regulations thereunder. Issues and transfers of shares involving any person
regarded as resident in Bermuda for exchange control purposes require specific
prior approval under the Exchange Control Act of 1972.

There are no limitations on the rights of non-Bermuda owners of the Company's
common stock to hold or vote their shares. Because the Company has been
designated as a non-resident for Bermuda exchange control purposes, there are no
restrictions on its ability to transfer funds in and out of Bermuda or to pay
dividends to United States residents who are holders of the Company's common
stock, other than in respect of local Bermuda currency.

In accordance with Bermuda law, share certificates are only issued in the names
of corporations or individuals. In the case of an applicant acting in a special
capacity (for example, as an executor or trustee), certificates may, at the

                                       40
<PAGE>

request of the applicant, record the capacity in which the applicant is acting.
Notwithstanding the recording of any such special capacity, the Company is not
bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust.

The Company will take no notice of any trust applicable to any of its shares
whether or not it had notice of such trust.

As an exempted company, the Company is exempt from Bermuda laws which restrict
the percentage of share capital that may be held by non-Bermudan, but as an
exempted company the Company may not participate in certain business
transactions, including: (1) the acquisition or holding of land in Bermuda
(except that required for business and held by way of lease or tenancy for terms
of not more than 21 years) without the express authorization of the Bermuda
legislature; (2) the taking of mortgages on land in Bermuda to secure an amount
in excess of US$50,000 without the consent of the Minister of Finance of
Bermuda; (3) the acquisition of securities created or issued by, or any interest
in, any local company or business, other than certain types of Bermuda
government securities or securities of another exempted company, partnership or
other corporation resident in Bermuda but incorporated abroad; or (4) the
carrying on of business of any kind in Bermuda, except in furtherance of the
business of the Company carried on outside Bermuda or under a license granted by
the Minister of Finance of Bermuda.

The Bermuda government actively encourages foreign investment in exempted
entities like the Company that are based in Bermuda but do not operate in
competition with local business. In addition to having no restrictions on the
degree of foreign ownership, the Company is subject neither to taxes on its
income or dividends nor to any foreign controls in Bermuda. In addition, there
is no capital gains tax in Bermuda, and profits can be accumulated by the
Company, as required, without limitation.

TAXATION

The following discussion is a summary of certain anticipated tax consequences of
an investment in the Company's common stock under Bermuda tax laws and United
States Federal income tax laws. The discussion does not deal with all possible
tax consequences relating to an investment in the common stock and does not
purport to deal with the tax consequences applicable to all categories of
investors, some of which (such as dealers in securities, insurance companies and
tax-exempt entities) may be subject to special rules. In particular, the
discussion does not address the tax consequences under State, local and other
laws (e.g., non-Bermuda, non-United States Federal tax laws). This discussion is
based upon laws and relevant interpretations thereof in effect as of the date of
this Annual Report, all of which are subject to change.

BERMUDA TAXATION

The Company is incorporated in Bermuda. Under current Bermuda law, the Company
is not subject to tax on income or capital gains, and no Bermuda withholding tax
will be imposed upon payments of dividends by the Company to its shareholders.
Furthermore, the Company has received from the Minister of Finance of Bermuda
under the Exempted Undertakings Tax Protection Act of 1966, as amended, an
undertaking that, in the event that Bermuda enacts any legislation imposing any
tax computed on profits or income, including any dividend or capital gains
withholding tax, or computed on any capital assets appreciation thereof, or any
tax in the nature of an estate, duty or inheritance tax, the imposition of such
tax will not be applicable to the Company or any of its operations, nor to the
shares, debentures or other obligations of the Company, until March 28, 2016.
This undertaking does not, however, prevent the imposition of property taxes on
Company-owned real property or leasehold interests in Bermuda.

The United States does not have a comprehensive income tax treaty with Bermuda.

As an exempted company, the Company is liable to pay to the Bermuda government
an annual registration fee calculated on a sliding-scale basis by reference to
its assessable capital, that is, its authorized capital plus any share

                                       41
<PAGE>

premium.

UNITED STATES FEDERAL INCOME TAXATION

Taxation of Shareholders

The following discussion addresses the United States Federal income taxation of
a United States person (i.e., a United States citizen or resident, corporation
or partnership organized under the laws of the United States or any state
thereof, or an estate or trust subject to United States tax on all of its income
regardless of source) (a "U.S. Investor") making an investment in the common
stock. The summary does not address the United States tax treatment of certain
types of investors (e.g., individual retirement and other tax deferred accounts,
life insurance companies and tax-exempt organizations) or of persons other than
a U.S. Investor, all of whom may be subject to tax rules that differ
significantly from those summarized below. If the U.S. investor holds its common
stock through a foreign branch or other foreign business unit, the following
discussion may not be accurate in all respects as to such investor. Investors
are advised to consult their own tax advisors with respect to their particular
circumstances and with respect to the effects of State, local or foreign tax
laws to which they may be subject. In addition, future changes to United States
tax laws could have an effect on the United States Federal income tax
consequences of the purchase, ownership and disposition of common stock.

A U.S. Investor receiving a distribution in respect of the common stock will be
required to include such distribution in gross income as a taxable dividend to
the extent such distribution is paid from earnings and profits of the Company as
determined under United States Federal income tax principles. Distributions in
excess of the earnings and profits of the Company first will be treated, for
United States Federal income tax purposes, as a nontaxable return on capital to
the extent of the U.S. investor's tax basis in the common stock and then as gain
from the sale or exchange of a capital asset, provided that the common stock
constitutes a capital asset in the hands of the U.S. investor. Dividends
received on the common stock will not be eligible for the corporate
dividends-received deduction. Any amount treated as a dividend for United States
Federal income tax purposes generally will constitute foreign source "passive
income" (or, in the case of certain holders, "financial services income") and
will not be eligible for the dividends received deduction generally allowed to
corporate shareholders for dividends received from United States domestic
corporations. Except for corporations that own 10% or more of the common stock
of the Company, no shareholder will be entitled to claim a foreign tax credit
against United States Federal income tax for any tax paid by the Company or any
entity in which the Company invests, directly or indirectly. For reporting
purposes, any dividends that are paid in any currency other than U.S. dollars
must be translated into U.S. dollars at the spot rate on the date the dividends
are accrued or received by the U.S. Investor, regardless of whether the dividend
receipt is in fact converted into U.S. dollars.

With certain exceptions, gain or loss on the sale or exchange of the common
stock will be treated as capital gain or loss (if the common stock is held as a
capital asset). Such capital gain or loss will be long-term capital gain or loss
if the U.S. Investor has held the common stock for more than one year at the
time of the sale or exchange. Gains realized upon the disposition of common
stock will be domestic source gain for purposes of the United States foreign tax
credit limitation. Under existing authorities, the source of any loss on the
sale of common stock is not clear in all cases. While the source of a loss
arguably would be domestic source, the United States Internal Revenue Service
might contend that the loss should be treated as foreign source. U.S. Investors
should consult their own tax advisors regarding the foreign tax credit
limitation consequences of selling Common Stock at a loss.

The "personal holding company" ("PHC"), "foreign personal holding company"
("FPHC"), "controlled foreign corporation" ("CFC"), and "passive foreign
investment company" ("PFIC") rules under United States Federal income tax law
could apply to the Company and U.S. investors who own Common Stock. However,
based on the current and anticipated ownership of the Company and the Company's
current and anticipated ownership of assets, the Company believes that neither
the taxation of the Company nor any of its shareholders will be affected by any
of those rules. However, no assurances can be given as to the company's future
PHC, FPHC, CFC or PFIC status.


                                       42
<PAGE>



UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING

The receipt of dividends on the common stock by a holder of the common stock (a)
made by mail or wire transfer to an address in the United States, (b) made by a
paying agent, broker or other intermediary in the United States or (c) made by a
United States broker or a "United States-related" broker to such holder outside
the United States may be subject to United States information reporting
requirements. Holders of common stock who are not United States persons
("Non-U.S. Holders") generally would be exempt from these reporting
requirements, but may be required to comply with certification and
identification procedures in order to prove their exemption. Treasury
regulations currently in effect do not require backup withholding with respect
to dividends paid by a foreign corporation such as the Company. The United
States Treasury Department is considering, however, whether to extend the backup
withholding rules to dividends from foreign corporations.

The payment of the proceeds of the disposition of common stock by a holder to or
through the United States office of a broker generally will be subject to
information reporting and backup withholding at a rate of 28% unless the holder
either certifies its status as a non-U.S. holder under penalties of perjury or
otherwise establishes an exemption. The payment of the proceeds of the
disposition by a holder of common stock to or through a non-U.S. office of a
broker will generally not be subject to backup withholding and information
reporting. Information reporting (but not "backup" withholding) may apply,
however, to such a holder who sells a beneficial interests in Common Stock
through a non-United States branch of a United States broker, or through a
non-United States office of a "United States-related" broker, in either case
unless the holder establishes an exemption or the broker has documentary
evidence in its files of the holder's status as a non-U.S. holder. For purposes
of these rules, a "United States-related" broker is a broker or other
intermediary that is a controlled foreign corporation for United States Federal
income tax purposes or that is a person 50% or more of the gross income from all
sources of which, over a specified three-year period, is effectively connected
with a United States trade or business.

Any amounts withheld under the backup withholding rules from a payment to a
holder should be refunded (or credited against the holder's United States
Federal income tax liability, if any), provided that the required information is
furnished to the United States Internal Revenue Service.

DOCUMENTS ON DISPLAY

The Company is subject to certain of the information reporting requirements of
the Exchange Act. The Company, as a "foreign private issuer", is exempt from the
rules and regulations under the Exchange Act prescribing the furnishing and
content of proxy statements, and the officers, directors and principal
shareholders of the Company are exempt from the reporting and "short-swing"
profit recovery provisions contained in Section 16 of the Exchange Act, with
respect to their purchase and sale of the Company's shares. In addition, the
Company is not required to file reports and financial statements with the SEC as
frequently or as promptly as U.S. companies whose securities are registered
under the Exchange Act. However, the Company does file with the SEC an annual
report on Form 20-F containing consolidated financial statements audited by an
independent accounting firm. The Company also furnishes as an interim report on
Form 6-K containing unaudited financial information after the end of a six-month
period in a year.

You may read and copy any document the Company files with the SEC at its public
reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
also obtain copies of the documents at prescribed rates by writing to the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549.
The SEC also maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of this web site is http://www.sec.gov. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference facilities.

                                       43
<PAGE>

       ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to fluctuations in interest rates and currency exchange
rates primarily with respect to borrowings. Under its current policies, the
Company does not use interest rate derivative instruments to manage exposure to
interest rate changes.

EXCHANGE RATE INFORMATION

The Consolidated Financial Statements are prepared in Rmb. The financial
statements of foreign subsidiaries are translated into Rmb in accordance with
Statement of Financial Accounting Standards No. 52.

The Hong Kong dollar is tied to and allowed to fluctuate within a narrow range
against the value of the U.S. dollar. Historically, there has been no material
fluctuation in the exchange rate between the Rmb and the U.S. dollar. There are
currently restrictions on the flow of Rmb between the PRC and the United States.

Fluctuations in the value of foreign currencies cause U.S. dollar translated
amounts to change in comparison with previous periods. However, the fluctuation
in exchange rates did not have material effect on the financial position of the
Company in the past three years.

FOREIGN CURRENCY RISK

As of December 31, 2003, the Company had no open forward contracts or option
contracts. The Company's cash on hand as of December 31, 2003 was Rmb63.6
million of which Rmb1.2 million equivalent (US$0.14 million) was held in U.S.
dollar deposit.

INTEREST RATE FLUCTUATIONS

The Company's interest income is sensitive to change in interest rates. The
Company had a short-term payable of Rmb27.7 million as of December 31, 2003. The
borrowing bore floating rate of interest. As the borrowing is immaterial to the
Company, any fluctuation in the interest rate will not have material impact on
the Company's interest expenses.

The Company did not have any long-term debt as of December 31, 2003.

The Company will be exposed to interest rate fluctuations on any new borrowings
under the various loan facilities and any change in interest rate could affect
its results of operations and cash flows.

                                       44
<PAGE>

         ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

As the Company is filing this Form as its annual report under the Exchange Act,
the information called for by Part I, Item 12 of Form 20-F is not applicable.

                                       45
<PAGE>

                                     PART II
            ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

There has been no material default in the payment of principal or interest or
other material default requiring disclosure pursuant to this item. There has
been no arrears in the payment of dividends or other material delinquency
requiring disclosure pursuant to this item.

                                       46
<PAGE>

  ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                                    PROCEEDS

There has been no material modification to the rights of security holders
required to be disclosed pursuant to this item.

                                       47
<PAGE>

                        ITEM 15. CONTROLS AND PROCEDURES

Our Chief Executive Officer and our Chief Financial Officer, after evaluating
the effectiveness of the Company's disclosure controls and procedures, as
defined in Exchange Act Rule 13a-14(c), 13a-15(e) and 15d-15(e), as of the end
of the period covered by this Form 20-F, have concluded that, as of such date,
the Company's disclosure controls and procedures were effective.

During 2003, there were no changes in the Company's internal control, over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.

                                       48
<PAGE>

                                ITEM 16. RESERVED

                                       49
<PAGE>

                   ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

As the Company's common stock is not currently listed on a U.S. national
securities exchange, the Company is not obligated to have an audit committee of
the board of directors. The Company has, however, had an Audit Committee for
many years and continues to do so. The Company's Board of Directors has
determined that the two members of the Audit Committee, Mr. Richard Whittall and
Mr. David Edwin Bussmann, do not qualify as "audit committee financial experts"
as defined by Item 401(h) of Regulation S-K adopted pursuant to the Exchange
Act. The Company is currently in the process of seeking a qualified financial
expert for the audit committee. Each of Mr. Whittall and Mr. Bussmann are
independent directors of the Company.

                                       50
<PAGE>

                             ITEM 16B CODE OF ETHICS

      The Company has adopted a Code of Ethics for the Chief Executive and
Senior Financial Officers, which applies to the Company's principal executive
officer and to its principal financial and accounting officers. A copy of the
Code of Ethics is attached as Exhibit 14.1 to this Annual Report on Form 20-F.

                                       51
<PAGE>

                ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES

      Deloitte Touche Tohmatsu has served as our independent public accountants
for each of the fiscal years in the year ended December 31, 2002 and 2003, for
the auditing of the audit of the financial statements appearing in this annual
report.

      The following table presents the aggregate fees for professional services
and other services rendered by Deloitte Touche Tohmatsu in 2003 and 2002.

<TABLE>
<CAPTION>
                       2003      2002
                     US$'000   US$'000
                     -------   -------
<S>                  <C>       <C>
Audit Fees             306       327
Audit-Related Fees       -         -
Tax Fees (1)             2         4
All Other Fees           -         -
                       ---       ---
Total                  308       331
                       ===       ===
</TABLE>

(1) Tax Fees include fees billed for tax compliance services, including the
    preparation and submission of tax returns and the supporting tax
    computation to the Inland Revenue Department of Hong Kong.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

      The Audit Committee members are responsible for the review on the quality
and performance of external auditors. The Audit Committee has adopted a policy
regarding pre-approval of audit and permissible non-audit services provided by
our independent auditors.

      Under the Policy, the Audit Committee pre-approves all auditing services.
The engagement of Deloitte Touche Tohmatsu as independent accountants has been
approved by the audit committee. If the Audit Committee approves an audit
service within the scope of the engagement of the audit service, such audit
service is deemed to have been pre-approved.

The aggregate amounts of all tax services provided to the Company by Deloitte
Touche Tohmatsu in 2003 and 2002 that were approved by the audit committee where
pre-approval was not required (de minimis exception) represent 0.007% and 0.014%
of total amounts of revenues paid by the Company to Deloitte Touche Tohmatsu in
2003 and 2002, respectively.

                                       52
<PAGE>

      ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

As the Company's common stock is not listed on a U.S. national securities
exchange, the information called for by Part II, Item 16D of the Form 20-F is
not applicable.

                                       53
<PAGE>

ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

The Company has not made any repurchases of its equity securities during the
period covered by this report.

                                       54
<PAGE>

                                    PART III
                         ITEM 17. FINANCIAL STATEMENTS

See "Item 18. Financial Statements" of this annual report for the Company's
Consolidated Financial Statements.

Pursuant to Article 3-09 of Regulation S-X of the Exchange Act, separate
financial statements of significant unconsolidated companies of the Company
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") or reconciled to U.S. GAAP must be filed
as part of the Company's Form 20-F. For the year ended December 31, 2002 and
2003, Wing On was a significant affiliate of the Company in accordance with
Article 3-09 of Regulation S-X and for the year ended December 31, 2003,
Hangzhou Zhongce changed from a subsidiary to a significant affiliate of the
Company under Article 3-09 of Regulation S-X. Wing On prepared its financial
statements in accordance with accounting principles generally accepted in Hong
Kong ("Wing On Statements") and Hangzhou Zhongce prepared its statutory
financial statements in accordance with the accounting principles and the
relevant financial regulations as established by the Ministry of Finance of the
PRC ; however, for the purposes of complying with Article 3-09 of Regulation
S-X, Hangzhou Zhongce prepared a separate financial statements in accordance
with U.S. GAAP ("Hangzhou Zhongce Statements").

Pursuant to Article 3-09 of Regulation S-X, Wing On Statements for the period
from April 1, 2002 (date approximating the date that the Company's initial
investment in Wing On occurred) to December 31, 2002 and for the year ended
December 31, 2003, including a reconciliation to U.S. GAAP, are set out as
follows.

                                       55
<PAGE>

                       WING ON TRAVEL (HOLDINGS) LIMITED
                       (FORMERLY KNOWN AS ANANDA WING ON
                           TRAVEL (HOLDINGS) LIMITED)
                (incorporated in Bermuda with limited liability)

                        Report and Financial Statements
                      For the year ended 31 December 2003

                                       56
<PAGE>

REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003

<TABLE>
<CAPTION>
CONTENTS                                            PAGE(S)
--------                                            -------
<S>                                                 <C>
INDEPENDENT AUDITORS' REPORT                           58

CONSOLIDATED INCOME STATEMENT                          59

CONSOLIDATED BALANCE SHEET                             60

CONSOLIDATED STATEMENT OF CHANGES IN
  SHAREHOLDERS' EQUITY                                 62

CONSOLIDATED CASH FLOW STATEMENT                       63

NOTES TO THE FINANCIAL STATEMENTS                      65
</TABLE>

                                       57
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS OF WING ON TRAVEL (HOLDINGS) LIMITED
(FORMERLY KNOWN AS ANANDA WING ON TRAVEL (HOLDINGS) LIMITED)
(incorporated in Bermuda with limited liability)

We have audited the accompanying consolidated balance sheets of Wing On Travel
(Holdings) Limited and its subsidiaries as of 31 December 2003 and 2002 and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the year ended 31 December 2003 and the nine-month period ended
31 December 2002, all expressed in Hong Kong dollars. These financial
statements, which have been prepared for the special purpose disclosed in note
1, are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Wing On Travel (Holdings) Limited
and its subsidiaries as of 31 December 2003 and 2002 and the results of their
operations and their cash flows for the year ended 31 December 2003 and the
nine-month period ended 31 December 2002 in conformity with accounting
principles generally accepted in Hong Kong.

Accounting principles generally accepted in Hong Kong vary in certain
significant respects from accounting principles generally accepted in the United
States of America. The application of the latter would have affected the
determination of net loss for the year ended 31 December 2003 and the nine-month
period ended 31 December 2002 and the determination of shareholders' equity and
financial position at 31 December 2003 and 2002, to the extent summarized in
note 52.

Deloitte Touche Tohmatsu

Certified Public Accountants
Hong Kong, 23 April 2004 (8 June 2004 as to Note 49 (b))

                                       58
<PAGE>

CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2003

<TABLE>
<CAPTION>
                                                                     1.1.2003         1.4.2002
                                                                        to               to
                                                        NOTES       31.12.2003       31.12.2002
                                                        -----       ----------       ----------
                                                                      HK$'000          HK$'000
                                                                                     (Restated)
<S>                                                     <C>        <C>              <C>
Turnover                                                  4           1,416,235        1,323,286
Direct operating costs                                               (1,258,481)      (1,170,593)
                                                                   ------------     ------------
Gross profit                                                            157,754          152,693
Other operating income                                    6              22,536           16,925
Distribution costs                                                      (38,809)         (30,974)
Administrative expenses                                                (202,699)        (172,800)
Loss on disposal of investment securities                               (30,633)               -
Loss on disposal of interest in a co-operative
  joint venture                                          20             (20,000)               -
Loss on disposal of other investments                                      (465)               -
Net unrealized holding loss on other investments                         (2,849)            (733)
Amortization of goodwill arising on acquisition
  of subsidiaries                                        22                (496)            (165)
Impairment loss recognized in respect of
  investments in securities                              21             (26,974)               -
Impairment loss recognized in respect of
  properties under construction                          15              (2,400)          (1,000)
Impairment loss recognized in respect of leasehold
  land and buildings                                     15                (301)         (12,281)
Surplus arising from revaluation of investment
  property                                               16                   7                -
Allowance for short term investment deposit                                   -          (23,000)
Allowance for advances to service suppliers               7                   -         (162,122)
Allowance for irrecoverable trade debts                                       -          (22,813)
                                                                   ------------     ------------
Loss from operations                                      8            (145,329)        (256,270)
Finance costs                                            10             (25,045)         (12,708)
Share of results of associates                                         (114,788)         (33,463)
Impairment loss recognized in respect of
  interest in an associate                               17             (31,717)               -
Loss on disposal of discontinued operation               39             (32,697)               -
Loss on disposal of associates                                          (23,471)               -
Loss on deemed disposal/disposal of subsidiaries         40                   -           (1,712)
                                                                   ------------     ------------
Loss before taxation                                                   (373,047)        (304,153)
Taxation credit                                          12               2,075              669
                                                                   ------------     ------------
Loss before minority interests                                         (370,972)        (303,484)
Minority interests                                                            -            1,236
                                                                   ------------     ------------
Net loss for the year/period                                           (370,972)        (302,248)
                                                                   ============     ============
Dividends                                                13                   -                -
                                                                   ============     ============
Loss per share
  Basic and diluted                                      14        (2.03) cents     (1.83) cents
                                                                   ============     ============
</TABLE>

See notes to consolidated financial statements.

                                       59
<PAGE>

CONSOLIDATED BALANCE SHEET
AT 31 DECEMBER 2003

<TABLE>
<CAPTION>
                                                        NOTES       2003               2002
                                                        -----       ----               ----
                                                                   HK$'000            HK$'000
                                                                                    (Restated)
<S>                                                     <C>        <C>              <C>
Non-current assets
  Property, plant and equipment                          15         70,213             237,611
  Investment property                                    16          1,400               1,230
  Interest in associates                                 17        221,467             489,357
  Other long term investment                             19         70,500              70,500
  Long term investment deposits                          20              -              60,000
  Investments in securities                              21         99,258              22,626
  Goodwill                                               22              -              13,067
                                                                   -------             -------
                                                                   462,838             894,391
                                                                   -------             -------
Current assets
  Inventories                                            23            667               1,263
  Amounts due from related companies                     24          2,928                 956
  Amounts due from associates                            25         11,732               4,450
  Trade and other receivables                            26        350,838             338,097
  Consideration receivable on disposal of an
    associate and interest in a co-operative
    joint venture                                                  108,000                   -
  Loan receivables                                       27         54,950             122,472
  Investments in securities                              21          2,847               5,450
  Tax recoverable                                                       36                 760
  Pledged bank deposits                                                390                 802
  Trading cash balances                                  28            416               1,163
  Bank balances and cash                                           111,709              61,510
                                                                   -------             -------
                                                                   644,513             536,923
                                                                   -------             -------
Current liabilities
  Trade and other payables                               29        239,191             241,560
  Loans from related companies                           30          8,000               6,474
  Amounts due to associates                              25         12,134              25,488
  Amounts due to related companies                       31         13,009              11,669
  Tax payable                                                            -                  61
  Obligations under finance leases and sale and lease
    back arrangements - amount due within one year       32              -               8,764
  Borrowings - amount due within one year                33         28,230             184,474
  Convertible notes                                      34        254,125                   -
                                                                   -------             -------
                                                                   554,689             478,490
                                                                   -------             -------
Net current assets                                                  89,824              58,433
                                                                   -------             -------
Total assets less current liabilities c/f                          552,662             952,824
                                                                   -------             -------
</TABLE>

                                       60
<PAGE>

<TABLE>
<CAPTION>
                                                        NOTES       2003               2002
                                                        -----       ----               ----
                                                                   HK$'000            HK$'000
                                                                                    (Restated)
<S>                                                     <C>        <C>              <C>
Total assets less current liabilities b/f                           552,662            952,824
                                                                    -------            -------
Minority interests                                                   29,778                  -
                                                                    -------            -------
Non-current liabilities
  Loans from related companies                           30         223,312                  -
  Borrowings - amount due after one year                 33           6,251             21,689
  Convertible notes                                      34               -            254,125
  Obligations under finance leases and sale and
    lease back arrangements - amount due after
    one year                                             32               -             14,384
  Deferred taxation                                      35               -              8,050
                                                                    -------            -------
                                                                    229,563            298,248
                                                                    -------            -------
Net assets                                                          293,321            654,576
                                                                    =======            =======
Capital and reserves
  Share capital                                          36         183,167            183,167
  Reserves                                               38         110,154            471,409
                                                                    -------            -------
Shareholders' funds                                                 293,321            654,576
                                                                    =======            =======
</TABLE>

See notes to consolidated financial statements.

                                       61
<PAGE>

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2003

<TABLE>
<CAPTION>
                                                                                Total equity
                                                                                ------------
                                                                                   HK$'000
<S>                                                                             <C>
At 1 April 2002

  - as previously reported                                                         647,334
  - adjustment on adoption of the Statement of Standard Accounting
       Practice 12 (Revised)                                                        (7,325)
                                                                                   -------
  - as restated                                                                    640,009
                                                                                   -------
Exchange difference arising on translation of financial statements of
  operations outside Hong Kong                                                        (322)
Share of translation reserve of an associate                                           (65)
                                                                                   -------
Amount of loss not recognized in the income statement                                 (387)
                                                                                   -------
                                                                                   639,622
Issue of shares                                                                    322,560
Repurchase of shares                                                                (5,896)
Reserves released on deemed disposal/disposal of subsidiaries                          538
Net loss for the period                                                           (302,248)
                                                                                   -------
At 31 December 2002 and 1 January 2003                                             654,576
                                                                                   -------
Exchange difference arising on translation of financial statements of
  operations outside Hong Kong                                                        (286)
Surplus arising from revaluation of investment property                                163
Share of translation reserve of an associate                                            73
                                                                                   -------
Amount of loss not recognized in the income statement                                  (50)
                                                                                   -------
                                                                                   654,526
Transfer of goodwill reserve to investments in securities on
  reclassification of investments                                                    9,767
Net loss for the year                                                             (370,972)
                                                                                   -------
At 31 December 2003                                                                293,321
                                                                                   =======
</TABLE>

See notes to consolidated financial statements.

                                       62
<PAGE>

CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2003

<TABLE>
<CAPTION>
                                                                                 1.1.2003       1.4.2002
                                                                                    to             to
                                                                                31.12.2003     31.12.2002
                                                                                ----------     ----------
                                                                                  HK$'000        HK$'000
<S>                                                                             <C>            <C>
Cash flows from operating activities
  Loss before taxation                                                           (373,047)      (304,153)
  Adjustments for:
    Share of results of associates                                                114,788         33,463
    Depreciation and amortization of property, plant and equipment                 24,575         18,575
    Interest income                                                                (1,150)       (10,679)
    Interest expenses                                                              22,586         11,858
    Finance lease charges                                                           2,459            850
    Loss on disposal of discontinued operations                                    32,697              -
    Loss on disposal of property, plant and equipment                              28,587          2,042
    Loss on disposal of associates                                                 23,471              -
    Loss on disposal of interest in a co-operative joint venture                   20,000              -
    Loss on disposal of investment securities                                      30,633              -
    Loss on disposal of other investments                                             465              -
    Impairment loss recognized in respect of investments in securities             26,974              -
    Impairment loss recognized in respect of interest in an associate              31,717              -
    Impairment loss recognized in respect of properties under
      construction                                                                  2,400          1,000
    Impairment loss recognized in respect of leasehold land
      and buildings                                                                   301         12,281
    Amortization of goodwill arising on acquisition of subsidiaries                   496            165
    Surplus arising from revaluation of investment property                            (7)            -
    Net unrealized holding loss on other investments                                2,849            733
    Loss on deemed disposal/disposal of subsidiaries                                    -          1,712
    Allowance for short term investment deposit                                         -         23,000
    Allowance for advances to service suppliers                                         -        162,122
    Allowance for irrecoverable trade debts                                             -         22,813
                                                                                  -------        -------
Operating cash flows before movement in working capital                            (9,206)       (24,218)
                                                                                  -------        -------
Movement in working capital
  Decrease in inventories                                                             540            254
  Increase in amounts due from related companies                                   (1,972)       (11,989)
  Increase in amounts due from associates                                          (7,282)        (1,267)
  Increase in trade and other receivables                                         (46,582)        (9,153)
  Decrease (increase) in trading cash balances                                        747           (469)
  Increase (decrease) in trade and other payables                                  26,950         (6,305)
  (Decrease) increase in amounts due to associates                                (13,354)         7,372
  Increase in amounts due to related companies                                      1,340          4,443
                                                                                  -------        -------
                                                                                  (39,613)       (17,114)
                                                                                  -------        -------
Cash used in operations                                                           (48,819)       (41,332)
Interest paid                                                                     (12,429)        (8,616)
Finance lease charges paid                                                         (2,459)          (850)
Taxation in other jurisdictions refunded                                              724             99
                                                                                  -------        -------
Net cash used in operating activities                                             (62,983)       (50,699)
                                                                                  -------        -------
</TABLE>

                                       63
<PAGE>

<TABLE>
<CAPTION>
                                                                                 1.1.2003        1.4.2002
                                                                                    to              to
                                                                   NOTES        31.12.2003      31.12.2002
                                                                   -----        ----------      ----------
                                                                                  HK$'000         HK$'000
<S>                                                                <C>          <C>             <C>
Cash flows from investing activities
  Purchase of property, plant and equipment                                       (23,028)         (3,489)
  Purchase of other investments                                                    (5,571)         (6,008)
  Investment in an associate                                                          (82)       (300,217)
  Proceeds from disposal of property, plant and
    equipment                                                                      41,611             900
  Disposal of discontinued operation (net of
    cash and cash equivalents disposed of)                          39             26,911               -
  Proceeds from disposal of associates                                             13,219               -
  Proceeds from disposal of other investments                                       4,860               -
  Repayment of loan receivables                                                         -          10,000
  Interest received                                                                 1,150           6,368
  Bank deposits released                                                              412           1,217
  Long term investment deposits paid                                                    -         (99,400)
  Net cash outflow to loans advanced to certain
    overseas companies and individuals                                             (9,678)        (22,272)
  Acquisition of additional interest in a subsidiary                                    -         (10,169)
  Deemed disposal/disposal of subsidiaries
    (net of cash and cash equivalents disposed of)                  40                  -          (1,448)
  Short term investment deposits refunded                                               -           5,000
                                                                                  -------         -------
Net cash from (used in) investing activities                                       49,804        (419,518)
                                                                                  -------         -------
Cash flows from financing activities
  Net cash inflow from loans from related
    companies                                                                     224,838           6,474
  Net cash inflow from other borrowings                                            61,096         150,000
  Repayment of bank loans and other loans                                        (209,909)       (139,024)
  Repayment of obligations under finance
    leases and sale and lease back arrangements                                    (4,619)         (7,376)
  Proceeds from issue of convertible notes                                              -         370,000
  Proceeds from issue of new shares for cash,
    net of expenses of HK$nil
    (1.4.2002 to 31.12.2002: HK$2,915,000)                                              -         206,685
  Repurchase of shares                                                                  -          (5,896)
                                                                                  -------         -------
Net cash from financing activities                                                 71,406         580,863
                                                                                  -------         -------
Net increase in cash and cash equivalents                                          58,227         110,646
Cash and cash equivalents at beginning of
  the year/period                                                                  53,793         (56,969)
Effect of foreign exchange rate changes                                              (311)            116
                                                                                  -------         -------
Cash and cash equivalents at end of the year/period                 43            111,709          53,793
                                                                                  =======         =======
</TABLE>

See notes to consolidated financial statements.

                                       64
<PAGE>

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003

1. GENERAL

Wing On Travel (Holdings) Limited is an exempted company incorporated in Bermuda
with limited liability. Its shares are listed on The Stock Exchange of Hong Kong
Limited (the "Stock Exchange").

The Company is an investment holding company. Its subsidiaries are principally
engaged in the business of providing package tours, travel and other related
services. The Company was also involved in the business of transportation
services which was disposed of and discontinued during the year.

The financial statements for the current period cover the twelve-month year
ended 31 December 2003. The corresponding amounts shown for the income
statement, statement of changes in equity, cash flow statement and related notes
cover a nine month period from 1 April 2002 to 31 December 2002 and therefore
may not be comparable with amounts shown for the current year.

These financial statements have been prepared for the special purpose of filing
with the United States Securities and Exchange Commission for the express
purpose of complying with Article 3-09 of Regulation S-X of the Securities Act
1933. This filing requirement is based on the Company being a significant
investee of China Enterprises Limited ("CEL").

The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the consolidated
financial statements, the Company incurred a net loss of HK$370,972,000 for the
year ended 31 December 2003 (1 April 2002 to 31 December 2002: HK$302,248,000)
and used cash in operating activities of HK$62,983,000 for the year ended 31
December 2003 (HK$50,699,000 during the period from 1 April 2002 to 31 December
2002), and the Company had working capital of HK$89,824,000 at 31 December 2003
(HK$58,433,000 at 31 December 2002). Management is implementing plans to
increase the Company's profitability. Management believes that the successful
achievement of these initiatives should provide the Company with sufficient
resources to meet its near term cash requirements. In addition, the Company is
also considering a number of other strategic financing alternatives.

2. CHANGES IN ACCOUNTING POLICIES

In the current year, the Company has adopted, for the first time, the following
Hong Kong Financial Reporting Standard ("HKFRS") issued by the Hong Kong Society
of Accountants ("HKSA"). The term of HKFRS is inclusive of Statements of
Standard Accounting Practice ("SSAP"s) and Interpretations approved by the HKSA.

SSAP 12 (Revised) Income taxes

The Company has adopted SSAP 12 (Revised) Income taxes. The principal
effect of the adoption of SSAP 12 (Revised) is in relation to deferred tax. In
previous years, partial provision was made for deferred tax using the income
statement liability method under which a liability was recognized in respect of
timing differences arising, except where those timing differences were not
expected to reverse in the foreseeable future. SSAP 12 (Revised) requires the
adoption of a balance sheet liability method, whereby deferred tax is recognized
in respect of all temporary differences between the carrying amounts of assets
and liabilities in the financial statements and the corresponding tax bases used
in the computation of taxable profit, with limited exceptions. In the absence of
any specific transitional requirements in SSAP 12 (Revised), the new accounting
policy has been applied retrospectively. Comparative amounts have been restated
accordingly.

                                       65
<PAGE>

2. CHANGES IN ACCOUNTING POLICIES - continued

The adoption of SSAP 12 (Revised) has given rise to a goodwill of HK$9,767,000
and a corresponding decrease in the Company's share of net assets of associates.
The acquisition of the associates took place prior to 1 April 2001 and the
corresponding goodwill was written off against goodwill reserve.

In addition, the adoption of SSAP 12 (Revised) has led to a decrease in
accumulated losses of HK$3,052,000 as at 1 January 2003 (1 April 2002:
HK$2,442,000) and a corresponding increase in the Company's share of net assets
of associates. The net loss for the year ended 31 December 2003 and the nine
months ended 31 December 2002 have been decreased by HK$407,000 and HK$610,000
respectively.

3. SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared under the historical cost
convention, as modified for the revaluation of certain property, plant and
equipment, investment property and investments in securities. The financial
statements have been prepared in accordance with accounting principles generally
accepted in Hong Kong.

The principal accounting policies are as follows:

Basis of consolidation

The consolidated financial statements incorporate the financial statements of
the Company and its subsidiaries made up to 31 December.

The results of subsidiaries acquired or disposed of during the year are included
in the consolidated income statement from the effective date of acquisition or
up to the effective date of disposal, as appropriate.

All significant inter-company transactions and balances within the Company are
eliminated on consolidation.

Goodwill

Goodwill represents the excess of the cost of acquisition over the Company's
interest in the fair value of the identifiable assets and liabilities of a
subsidiary or an associate at the date of acquisition.

Goodwill arising on acquisition prior to 1 April 2001 continues to be held in
reserves and will be charged to the income statement at the time of disposal of
the relevant subsidiary or associate, or at such time as the goodwill is
determined to be impaired.

Goodwill arising on acquisition after 1 April 2001 is capitalized and amortized
on a straight line basis over its useful economic life. Goodwill arising on
acquisition of an associate is included within the carrying amount of the
associate. Goodwill arising on the acquisition of subsidiaries is presented
separately in the balance sheet.

                                       66
<PAGE>

3. SIGNIFICANT ACCOUNTING POLICIES - continued

Negative goodwill

Negative goodwill represents the excess of the Company's interest in the fair
value of the identifiable assets and liabilities of a subsidiary or an associate
at the date of acquisition over the cost of acquisition.

Negative goodwill arising on acquisition prior to 1 April 2001 continues to be
held in reserves, and will be credited to income at the time of disposal of the
relevant subsidiary or associate.

Negative goodwill arising on the acquisition of an associate is deducted from
the carrying value of that associate. Negative goodwill arising on the
acquisition of subsidiaries after 1 April 2001 is presented separately in the
balance sheet as a deduction from assets. Negative goodwill is released to
income based on an analysis of the circumstances from which the balance
resulted. To the extent that the negative goodwill is attributable to losses or
expenses anticipated at the date of acquisition, it is released to income in the
period in which those losses or expenses arise. The remaining negative goodwill
is recognized as income on a straight line basis over the remaining average
useful life of the identifiable acquired depreciable assets. To the extent that
such negative goodwill exceeds the aggregate fair value of the acquired
identifiable non-monetary assets, it is recognized as income immediately.

Revenue recognition

Income from tour and travel services is recognized upon the departure date
of each tour. Income from other travel related services is recognized when the
services are rendered.

Income from transportation services is recognized when the services are
rendered.

Interest income is accrued on a time basis by reference to the principal
outstanding and at the interest rate applicable.

Rental income, including rental invoiced in advance from properties under
operating leases, is recognized on a straight line basis over the term of the
relevant lease.

Income from sale of computer program source code is recognized upon the
execution of the sale agreement.

Dividend income from investments is recognized when the shareholders' rights to
receive payment have been established.

Income from disposal of investments is recognized when the risks and rewards of
the ownership of the investments have been transferred.

                                       67
<PAGE>

3. SIGNIFICANT ACCOUNTING POLICIES - continued

Property, plant and equipment

Property, plant and equipment other than properties under construction are
stated at cost or valuation less accumulated depreciation or amortization and
any identified impairment loss.

The gain or loss arising from disposal or retirement of an asset is determined
as the difference between the sale proceeds and the carrying amount of the asset
and is recognized in the income statement.

Depreciation and amortization is provided to write off the cost or valuation of
property, plant and equipment other than properties under construction over
their estimated useful lives, using the straight line method, at the following
rates per annum:

Leasehold land                  Over the remaining unexpired terms of the leases
Buildings                       2% or over the remaining unexpired terms of the
                                  leases, whichever the shorter
Furniture and fixtures          10% - 20%
Leasehold improvements          10% - 20%
Motor vehicles                  8.33% - 20%
Office equipment and machinery  20%
Vessels                         5%

Assets held under finance leases and sale and lease back arrangements are
depreciated over their estimated useful lives on the same basis as owned assets.

Properties under construction are stated at cost less impairment loss. Cost
includes all development expenditure and other direct costs attributable to such
projects. Properties under construction are not depreciated until completion of
construction. Cost on completed properties is transferred to other categories of
property, plant and equipment.

Investment properties

Investment properties are completed properties which are held for their
investment potential, any rental income being negotiated at arm's length.

No depreciation is provided in respect of investment properties which are held
under leases with unexpired terms, including the renewable period, of more than
twenty years. Investment properties are stated at their open market values based
on a professional valuation at the balance sheet date.

Any surplus or deficit arising on revaluation of investment properties is
credited or charged to the investment property revaluation reserve unless the
balance of this reserve is insufficient to cover a deficit, in which case the
excess of the deficit over the balance on the investment property revaluation
reserve is charged to the income statement.

On subsequent sale of an investment property, any revaluation surplus thereon is
included in the determination of the gain or loss on disposal.

                                       68
<PAGE>

3. SIGNIFICANT ACCOUNTING POLICIES - continued

Impairment

At each balance sheet date, the Company reviews the carrying amounts of its
assets to determine whether there is any indication that those assets have
suffered an impairment loss. If the recoverable amount of an asset is estimated
to be less than its carrying amount, the carrying amount of the asset is reduced
to its recoverable amount. An impairment loss is recognized as an expense
immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset
is increased to the revised estimate of its recoverable amount, but so that the
increased carrying amount does not exceed the carrying amount that would have
been determined had no impairment loss been recognized for the asset in prior
years. A reversal of an impairment loss is recognized as income immediately.

Interest in associates

An associate is an enterprise over which the Company is in a position to
exercise significant influence, including participation in financial and
operating policy decisions.

The consolidated income statement includes the Company's share of the
post-acquisition results of its associates for the year/period. In the
consolidated balance sheet, the interest in associates is stated at the
Company's share of net assets of the associates less any negative goodwill on
acquisition in so far as it has not already been released to income and any
identified impairment loss.

Other long term investment

Other long term investment is stated at cost less impairment loss.

Investments in securities

Investments in securities are recognized on a trade-date basis and are initially
measured at cost.

At subsequent reporting dates, debt securities that the Company has the
expressed intention and ability to hold to maturity (held-to-maturity
securities) are measured at amortized cost, less any impairment loss recognized
to reflect irrecoverable amounts. The annual amortization of any discount or
premium on the acquisition of a held-to-maturity security is aggregated with
other investment income receivable over the terms of the investment so that the
revenue recognized in each period represents a constant yield on the investment.

Investments other than held-to-maturity securities are classified as investment
securities and other investments.

Investment securities, which are securities held for an identified long-term
strategic purpose, are measured at subsequent reporting dates at cost, as
reduced by any impairment loss that is other than temporary.

Other investments are measured at fair value, with unrealized gains and losses
included in net profit or loss for the year/period.

                                       69
<PAGE>

3. SIGNIFICANT ACCOUNTING POLICIES - continued

Inventories

Inventories, representing principally consumables, are stated at the lower
of cost and net realizable value. Cost is calculated using the first-in,
first-out method.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred
tax.

The tax currently payable is based on taxable profit for the year/period.
Taxable profit differs from net profit as reported in the income statement
because it excludes items of income or expense that are taxable or deductible in
other periods and it further excludes items that are never taxable or
deductible.

Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amount of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are generally recognized for all taxable temporary differences,
and deferred tax assets are recognized to the extent that it is probable that
taxable profits will be available against which deductible temporary differences
can be utilized. Such assets and liabilities are not recognized if the temporary
difference arises from goodwill (or negative goodwill) or from the initial
recognition (other than in a business combination) of assets and liabilities in
a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognized for taxable temporary differences
arising on investments in subsidiaries and associates, except where the Company
is able to control the reversal of the temporary difference and it is probable
that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profit will be available to allow all or part of the asset to be
recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realized. Deferred tax is
charged or credited to the income statement, except when it relates to items
charged or credited directly to equity, in which case the deferred tax is also
dealt with in equity.

Retirement benefit schemes

The retirement benefit costs charged in the income statement represent the
contributions payable in respect of the current year/period to the Company's
defined contribution schemes.

Stock-based compensation

The Company operates a share option scheme where its directors or employees are
granted options to acquire shares of the Company at specified exercise prices.
No compensation costs are recognized in the income statement.

                                       70
<PAGE>

3. SIGNIFICANT ACCOUNTING POLICIES - continued

Leases

Leases are classified as finance leases whenever the terms of the leases
transfer substantially all the risks and rewards of ownership of the leased
assets to the Company. Assets held under finance leases are capitalized at their
fair value at the date of acquisition. The corresponding principal portions of
leasing commitments are shown as obligations under finance leases. The finance
costs, which represent the difference between the total leasing commitments and
the original principal outstanding at the inception of the leases, are charged
to the income statement over the period of the relevant leases so as to produce
a constant periodic rate of charge on the remaining balances of the obligations
for each accounting period.

Assets under sale and lease back arrangements of which the Company has been
granted options to buy back the assets at pre-determined buy-back prices at the
expiration of the lease periods are stated at the original carrying values of
the assets in the balance sheet. The corresponding amounts received from sales
of the assets are shown as liabilities under sale and lease back arrangements.
The finance charges, which comprise the aggregate of the rentals payable for the
use of the assets under the leases and the difference between the buy-back
prices and the original sale values of the assets, are charged to the income
statement over the period of the relevant leases so as to produce a constant
periodic rate of charge on the remaining balance of the obligations for each
accounting period.

All other leases are classified as operating leases and their rentals payable
are charged to the income statement on a straight line basis over the term of
the relevant lease.

Foreign currencies

Transactions in foreign currencies are translated at the approximate rates
ruling on the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are re-translated at the rates ruling on the
balance sheet date. Gains and losses arising on exchange are dealt with in the
income statement.

On consolidation, the assets and liabilities of operations outside Hong Kong are
translated at the rates ruling on the balance sheet date. Income and expense
items are translated at the average exchange rate for the year/period. Exchange
differences arising, if any, are classified as equity and transferred to the
Company's translation reserve. Such translation differences are recognized as
income or as expenses in the period in which the operation is disposed of.

4. TURNOVER

Turnover represents the amounts received and receivable for services provided to
outside customers, less trade discounts and returns during the year/period. An
analysis of the Company's turnover is as follows:

<TABLE>
<CAPTION>
                                1.1.2003              1.4.2002
                                   to                    to
                               31.12.2003            31.12.2002
                               ----------            ----------
                                 HK$'000               HK$'000
<S>                            <C>                   <C>
Travel and related services     1,291,906             1,185,560
Transportation services           124,329               137,726
                                ---------             ---------
                                1,416,235             1,323,286
                                =========             =========
</TABLE>

                                       71
<PAGE>

5. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

During the year, for management purposes, the Company was organized into two
operating divisions - travel and related services, and transportation services.
The business segment of transportation services was discontinued with effect
from 31 October 2003. These divisions are the basis on which the Company reports
its primary segment information.

Principal activities are as follows:

<TABLE>
<CAPTION>
                                                  Continuing       Discontinued
                                                   operation         operation
                                                  ----------      --------------
                                                  Travel and
                                                    related       Transportation
                                                   services          services        Elimination      Consolidated
                                                   --------          --------        -----------      ------------
                                                    HK$'000           HK$'000          HK$'000           HK$'000
<S>                                               <C>             <C>                <C>              <C>
For the year ended 31 December 2003
TURNOVER
External sales                                    1,291,906          124,329                -           1,416,235
Inter-segment sales                                       -            5,248           (5,248)                  -
                                                  ---------          -------           ------           ---------
Total                                             1,291,906          129,577           (5,248)          1,416,235
                                                  =========          =======           ======           =========
Inter-segment sales are charged at
  prevailing market price.
RESULTS
Segment results                                      17,880          (19,505)               -              (1,625)
                                                  =========          =======           ======
Interest income                                                                                             1,150
Amortization of goodwill arising
  on acquisition of subsidiaries                          -             (496)               -                (496)
Surplus arising from revaluation of
  investment property                                     7                -                -                   7
Impairment loss recognized in respect
  of investments in securities                      (26,974)               -                -             (26,974)
Impairment loss recognized in respect
  of leasehold land and buildings                      (301)               -                -                (301)
Impairment loss recognized in respect
  of properties under construction                   (2,400)               -                -              (2,400)
Loss on disposal of investments in
  securities                                                                                              (31,098)
Loss on disposal of property, plant
  and equipment                                     (28,419)            (168)               -             (28,587)
Loss on disposal of interest in a
  co-operative joint venture                        (20,000)               -                -             (20,000)
Net unrealized holding loss on other
  investments                                                                                              (2,849)
Unallocated corporate expenses                                                                            (32,156)
                                                                                                        ---------
Loss from operations                                                                                     (145,329)
Finance costs                                                                                             (25,045)
Share of results of associates                     (114,788)               -                -            (114,788)
Impairment loss recognized in respect of
  interest in an associate                          (31,717)               -                -             (31,717)
Loss on disposal of discontinued operation                -          (32,697)               -             (32,697)
Loss on disposal of associates                      (23,471)               -                -             (23,471)
                                                                                                        ---------
Loss before taxation                                                                                     (373,047)
Taxation credit                                                                                             2,075
                                                                                                        ---------
Loss before minority interests                                                                           (370,972)
Minority interests                                                                                              -
                                                                                                        ---------
Net loss for the year                                                                                    (370,972)
                                                                                                        =========
</TABLE>

                                       72
<PAGE>

5. BUSINESS AND GEOGRAPHICAL SEGMENTS - continued

   Business segments - continued

<TABLE>
<CAPTION>
                                                         Continuing           Discontinued
                                                          operation             operation
                                                         ----------          --------------
                                                         Travel and
                                                           related           Transportation
                                                          services              services            Consolidated
                                                          --------              --------            ------------
                                                           HK$'000               HK$'000               HK$'000
<S>                                                      <C>                 <C>                    <C>
As at 31 December 2003

ASSETS
Segment assets                                              676,963                     -               676,963
Interest in associates                                      221,467                     -               221,467
Unallocated corporate assets                                                                            208,921
                                                                                                      ---------
Consolidated total assets                                                                             1,107,351
                                                                                                      =========
LIABILITIES
Segment liabilities                                         245,147                     -               245,147
Unallocated corporate liabilities                                                                       539,105
                                                                                                      ---------
Consolidated total liabilities                                                                          784,252
                                                                                                      =========
OTHER INFORMATION
Capital additions                                             7,947                15,081                23,028
Depreciation and amortization of
  property, plant and equipment                               4,935                19,640                24,575
Loss on disposal of property, plant
  and equipment                                              28,419                   168                28,587
Impairment losses recognized                                 29,675                     -                29,675
Amortization of goodwill arising on
  acquisition of subsidiaries                                     -                   496                   496
                                                            =======               =======             =========
</TABLE>

                                       73
<PAGE>

5. BUSINESS AND GEOGRAPHICAL SEGMENTS - continued

   Business segments - continued

<TABLE>
<CAPTION>
                                                  Continuing       Discontinued
                                                   operation         operation
                                                  ----------       ------------
                                                  Travel and
                                                    related       Transportation
                                                   services          services        Elimination      Consolidated
                                                   --------          --------        -----------      ------------
                                                    HK$'000           HK$'000          HK$'000           HK$'000
                                                                                                       (Restated)
<S>                                               <C>             <C>                <C>              <C>
For the period from 1 April 2002
to 31 December 2002

TURNOVER
External sales                                     1,185,560         137,726                -          1,323,286
Inter-segment sales                                        -           6,768           (6,768)                 -
                                                   ---------         -------           ------          ---------
Total                                              1,185,560         144,494           (6,768)         1,323,286
                                                   =========         =======           ======          =========
Inter-segment sales are charged at
 prevailing market price.

RESULTS
Segment results                                       (6,524)         (7,621)               -            (14,145)
                                                   =========         =======           ======
Interest income                                                                                           10,679
Amortization of goodwill arising
  on acquisition of subsidiaries                           -            (165)               -               (165)
Allowance for advances to service
  suppliers                                         (162,122)              -                -           (162,122)
Allowance for short term investment
  deposit                                            (23,000)              -                -            (23,000)
Impairment loss recognized in respect
  of leasehold land and buildings                    (12,281)              -                -            (12,281)
Impairment loss recognized in respect
  of properties under construction                    (1,000)              -                -             (1,000)
Allowance for irrecoverable trade debts              (22,813)              -                -            (22,813)
Unrealized holding loss on other
  investments                                                                                               (733)
Unallocated corporate expenses                                                                           (30,690)
                                                                                                       ---------
Loss from operations                                                                                    (256,270)
Finance costs                                                                                            (12,708)
Share of results of associates                       (33,463)              -                -            (33,463)
Loss on deemed disposal/disposal of
  subsidiaries                                        (1,712)              -                -             (1,712)
                                                                                                       ---------
Loss before taxation                                                                                    (304,153)
Taxation credit                                                                                              669
                                                                                                       ---------
Loss before minority interests                                                                          (303,484)
Minority interests                                                                                         1,236
                                                                                                       ---------
Net loss for the period                                                                                 (302,248)
                                                                                                       =========
</TABLE>

                                       74
<PAGE>

5. BUSINESS AND GEOGRAPHICAL SEGMENTS - continued

   Business segments - continued

<TABLE>
<CAPTION>
                                                  Continuing           Discontinued
                                                   operation             operation
                                                  ----------           ------------
                                                  Travel and
                                                    related           Transportation
                                                   services              services            Consolidated
                                                   --------              --------            ------------
                                                    HK$'000               HK$'000               HK$'000
                                                                                              (Restated)
<S>                                               <C>                 <C>                    <C>
As at 31 December 2002

ASSETS
Segment assets                                       669,625               137,481               807,106
Interest in associates                               489,357                     -               489,357
Unallocated corporate assets                                                                     134,851
                                                                                               ---------
Consolidated total assets                                                                      1,431,314
                                                                                               =========
LIABILITIES
Segment liabilities                                  257,167                21,550               278,717
Unallocated corporate liabilities                                                                498,021
                                                                                               ---------
Consolidated total liabilities                                                                   776,738
                                                                                               =========
OTHER INFORMATION
Capital additions                                     14,576                14,300                28,876
Depreciation and amortization of
  property, plant and equipment                        5,474                13,101                18,575
Loss on disposal of property,
  plant and equipment                                  1,355                   687                 2,042
Impairment losses recognized                          13,281                     -                13,281
Allowance for irrecoverable trade debts               22,813                     -                22,813
Amortization of goodwill arising on
  acquisition of subsidiaries                              -                   165                   165
                                                     =======               =======             =========
</TABLE>

                                       75
<PAGE>

5. BUSINESS AND GEOGRAPHICAL SEGMENTS - continued

Geographical segments

No geographical segment information in respect of the Company's operations has
been presented as over 90% of the Company's operations was derived from Hong
Kong.

The analysis of carrying amount of segment assets and additions to property,
plant and equipment and intangible assets analyzed by the geographical area in
which the assets are located is as follows:

<TABLE>
<CAPTION>
                                                                                             Additions to
                                                                                            property, plant
                                                         Carrying amount                     and equipment
                                                        of segment assets                and intangible assets
                                                        -----------------                ---------------------
                                                                                      1.1.2003          1.4.2002
                                                                                         to                to
                                                     2003              2002          31.12.2003        31.12.2002
                                                     ----              ----          ----------        ----------
                                                    HK$'000           HK$'000          HK$'000           HK$'000
                                                                    (Restated)
<S>                                                 <C>             <C>              <C>               <C>
The People's Republic of China
  (excluding Hong Kong) (the "PRC")                   248,358          345,662                -                -
Hong Kong                                             300,522          304,002           23,028           28,876
South-east Asia                                       180,433          144,927                -                -
Japan and Korea                                       155,771          146,316                -                -
Others                                                    764              290                -                -
                                                      -------          -------           ------           ------
                                                      885,848          941,197           23,028           28,876
                                                      =======          =======           ======           ======
</TABLE>

6. OTHER OPERATING INCOME

<TABLE>
<CAPTION>
                                                              1.1.2003           1.4.2002
                                                                 to                 to
                                                             31.12.2003         31.12.2002
                                                             ----------         ----------
                                                               HK$'000            HK$'000
<S>                                                          <C>                <C>
An analysis of the Company's other operating income
 is as follows:

Exchange gain                                                      335                168
Interest income                                                  1,150             10,679
Net income on sale of computer program source code               3,000               -
Recovery of overseas sales tax                                   8,242               -
Sundry income                                                    9,809              6,078
                                                                ------             ------
                                                                22,536             16,925
                                                                ======             ======
</TABLE>

7. ALLOWANCE FOR ADVANCES TO SERVICE SUPPLIERS

The Company makes advances to its overseas tour operators for financing their
provision of tourist services to the Company in their destination points. The
allowance made in prior period represented the amounts due from those operators
with whom the Company did not have further business and the directors consider
that their recoverability was remote.

                                       76
<PAGE>

8. LOSS FROM OPERATIONS

<TABLE>
<CAPTION>
                                                              1.1.2003           1.4.2002
                                                                 to                 to
                                                             31.12.2003         31.12.2002
                                                             ----------         ----------
                                                               HK$'000            HK$'000
<S>                                                          <C>                <C>
Loss from operations has been arrived at after charging:

Auditors' remuneration                                          1,792               1,598
Depreciation and amortization on:
  Owned assets                                                 19,689              14,622
  Assets held under finance leases and sale and lease
    back arrangements                                           4,886               3,953
Information technique development expenses                      1,136                 844
Loss on disposal of property, plant and equipment              28,587               2,042
Minimum lease payments paid in respect of rented premises      12,459              19,850
Staff costs *                                                  80,194             125,272

and after crediting:

Rental income from investment property less negligible
  outgoings                                                       109                  82
                                                              =======             =======
</TABLE>

* The amount includes retirement benefit scheme contributions (net of
forfeiture) of HK$1,879,000 (1.4.2002 to 31.12.2002: HK$4,615,000).

9. DIRECTORS' REMUNERATION AND HIGHEST PAID EMPLOYEES

<TABLE>
<CAPTION>
                                                   1.1.2003              1.4.2002
                                                      to                    to
                                                  31.12.2003            31.12.2002
                                                  ----------            ----------
                                                    HK$'000               HK$'000
<S>                                               <C>                   <C>
Emoluments to executive directors
  Fees                                                    -                    -
  Salaries and other benefits (Note)                 1,500                 4,513
  Compensation for loss of office                        -                 2,600
  Retirement benefit scheme contributions               97                   389
                                                    ------                ------
                                                     1,597                 7,502
                                                    ------                ------
Emoluments to non-executive directors
  Fees                                                 200                     -
  Salaries and other benefits (Note)                 1,980                 1,286
  Retirement benefit scheme contributions              210                   137
                                                    ------                ------
                                                     2,390                 1,423
                                                    ------                ------
                                                     3,987                 8,925
                                                    ======                ======
</TABLE>

Note: The directors' salaries and other benefits include the operating lease
      rentals amounting to HK$nil (1.4.2002 to 31.12.2002: HK$1,401,000) in
      respect of rented premises provided to directors. The amounts were also
      included in the minimum lease payments paid in respect of rented premises
      under note 8 above.

                                       77
<PAGE>

9. DIRECTORS' REMUNERATION AND HIGHEST PAID EMPLOYEES - continued

<TABLE>
<CAPTION>
                                                                        Number of director(s)
                                                                        ---------------------
                                                                   1.1.2003              1.4.2002
                                                                      to                    to
                                                                  31.12.2003            31.12.2002
                                                                  ----------            ----------
<S>                                                               <C>                   <C>
Emoluments of the directors were within the following bands:

Nil - HK$1,000,000                                                    13                     9
HK$1,000,001 - HK$1,500,000                                            -                     1
HK$2,000,001 - HK$2,500,000                                            1                     -
HK$2,500,001 - HK$3,000,000                                            -                     1
HK$3,500,001 - HK$4,000,000                                            -                     1
                                                                      ===                   ===
</TABLE>

Details of emoluments paid by the Company to the five highest paid individuals
(including directors, details of whose emoluments are set out above) are as
follows:

<TABLE>
<CAPTION>
                                                   1.1.2003              1.4.2002
                                                      to                    to
                                                  31.12.2003            31.12.2002
                                                  ----------            ----------
                                                    HK$'000               HK$'000
<S>                                               <C>                   <C>
Salaries and other benefits                          5,927                 8,479
Retirement benefit scheme contributions                485                   601
                                                     -----                 -----
                                                     6,412                 9,080
                                                     =====                 =====
</TABLE>

<TABLE>
<CAPTION>
                                                              1.1.2003              1.4.2002
                                                                 to                    to
                                                             31.12.2003            31.12.2002
                                                             ----------            ----------
<S>                                                          <C>                   <C>
Emoluments of the five highest paid individuals were
 within the following bands:

Nil - HK$1,000,000                                                3                     2
HK$1,000,001 - HK$1,500,000                                       -                     1
HK$1,500,001 - HK$2,000,000                                       1                     -
HK$2,000,001 - HK$2,500,000                                       1                     -
HK$2,500,001 - HK$3,000,000                                       -                     1
HK$3,500,001 - HK$4,000,000                                       -                     1
                                                                 ===                   ===
Number of directors                                               2                     3
Number of employees                                               3                     2
                                                                 ---                   ---
                                                                  5                     5
                                                                 ===                   ===
</TABLE>

                                       78
<PAGE>

10. FINANCE COSTS

<TABLE>
<CAPTION>
                                                                   1.1.2003              1.4.2002
                                                                      to                    to
                                                                  31.12.2003            31.12.2002
                                                                  ----------            ----------
                                                                    HK$'000               HK$'000
<S>                                                               <C>                   <C>
Finance lease charges                                                 2,459                   850
Interest on borrowings wholly repayable within five years            22,586                11,858
                                                                     ------                ------
Total finance costs                                                  25,045                12,708
                                                                     ======                ======
</TABLE>

11. DISCONTINUED OPERATION

On 25 October 2003, the Company entered into a sale and purchase agreement to
dispose of its then subsidiary, Trans-Island Limousine Service Limited and its
subsidiaries ("Trans-Island Group") which carried out all of the Company's
transportation services. The sale consideration will be determined with
reference to the audited completion account of Trans-Island Group as at 31
October 2003. As at the date of this report, the audit of completion account has
not been completed. Accordingly, the sale consideration of the transaction has
not yet been determined, against which HK$44,146,000 has been received. Based on
the completion account prepared by the management of Trans-Island Group,
HK$36,131,000 was treated as the sale consideration of this transaction. The
directors consider that there will not be any material adjustments to the
completion account prepared by the management of Trans-Island Group. The
disposal was completed on 31 October 2003, when the control of Trans-Island
Group was passed to the purchaser.

The results of the transportation services for the period from 1 January 2003 to
31 October 2003, which have been included in the consolidated financial
statements, were as follows:

<TABLE>
<CAPTION>
                                                   1.1.2003              1.4.2002
                                                      to                    to
                                                  31.10.2003            31.12.2002
                                                  ----------            ----------
                                                    HK$'000               HK$'000
<S>                                               <C>                   <C>
Turnover                                            124,329               137,726
Direct operating costs                              (99,712)             (123,684)
Other operating income                                1,403                 3,113
Administrative expenses                             (45,687)              (24,744)
Finance costs                                        (2,337)               (1,655)
                                                    -------               -------
Loss before taxation                                (22,004)               (9,244)
Taxation credit                                       1,718                   460
                                                    -------               -------
Net loss for the period                             (20,286)               (8,784)
                                                    =======               =======
</TABLE>

During the year, Trans-Island Group contributed HK$26,547,000 (1.4.2002 to
31.12.2002: HK$16,288,000) to the Company's net operating cash flows, paid
HK$11,644,000 (1.4.2002 to 31.12.2002: HK$778,000) in respect of investing
activities, and paid HK$11,205,000 (1.4.2002 to 31.12.2002: HK$13,938,000) in
respect of financing activities.

                                       79
<PAGE>

11. DISCONTINUED OPERATION - continued

The carrying amounts of assets and liabilities of Trans-Island Group at the date
of disposal are disclosed in note 39.

A loss of HK$32,697,000 arose on the disposal of Trans-Island Group, being the
proceeds of disposal less the carrying amount of the net assets of Trans-Island
Group and attributable unamortized goodwill.

12. TAXATION CREDIT

<TABLE>
<CAPTION>
                                                         1.1.2003              1.4.2002
                                                            to                    to
                                                        31.12.2003            31.12.2002
                                                        ----------            ----------
                                                          HK$'000               HK$'000
                                                                              (Restated)
<S>                                                     <C>                 <C>
Taxation in other jurisdictions
  Current year/period                                          -                    11
  Overprovision in prior years                                 -                   (19)
Deferred taxation (note 35)                               (1,718)                 (460)
                                                          ------                ------
Taxation attributable to the Company                      (1,718)                 (468)
                                                          ------                ------
Share of taxation attributable to associates
  Hong Kong                                                    -                   270
  Other jurisdictions                                       (357)                 (471)
                                                          ------                ------
                                                            (357)                 (201)
                                                          ------                ------
                                                          (2,075)                 (669)
                                                          ======                ======
</TABLE>

No provision for Hong Kong Profits Tax has been made as the Company did not have
any assessable profit in the year/period.

No provision for overseas taxation has been made as the Company has no taxable
profit during the year in other jurisdictions and taxation for other
jurisdictions for the period from 1 April 2002 to 31 December 2002 was
calculated at the rates prevailing in the relevant jurisdictions.

No charge or credit arose on the loss on discontinuance of the transportation
services during the year.

                                       80
<PAGE>

12. TAXATION CREDIT - continued

Taxation for the year/period can be reconciled to the loss before taxation per
the consolidated income statement as follows:

<TABLE>
<CAPTION>
                                                                  1.1.2003    1.4.2002
                                                                     to          to
                                                                 31.12.2003  31.12.2002
                                                                 ----------  ----------
                                                                   HK$'000     HK$'000
<S>                                                              <C>         <C>
Loss before taxation                                              (373,047)   (304,153)
                                                                  ========    ========
Tax at the domestic income tax rate of 17.5%
  (1.4.2002 to 31.12.2002: 16%)                                    (65,283)    (48,664)
Tax effect of share of results of associates                        19,495       5,133
Tax effect of expenses that are not deductible in determining
  taxable profit                                                    14,614      11,866
Tax effect of income that is not taxable in determining
  taxable profit                                                    (3,848)     (2,415)
Tax effect of tax losses not recognized                             33,901      33,443
Tax effect of tax losses utilized but not previously recognized     (2,023)       (248)
Increase in opening deferred tax liability resulting from
  an increase in Hong Kong Profits Tax rate                            755           -
Effect of different tax rates of subsidiaries operating
  in other jurisdictions                                               314         235
Overprovision in prior years                                             -         (19)
                                                                  --------    --------
Taxation credit for the year/period                                 (2,075)       (669)
                                                                  ========    ========
</TABLE>

13. DIVIDENDS

No dividends were declared by the Company for the year ended 31 December 2003
(1.4.2002 to 31.12.2002: nil).

14. LOSS PER SHARE

The calculation of the basic loss per share is based on the net loss for the
year of HK$370,972,000 (1.4.2002 to 31.12.2002: HK$302,248,000) and on
18,316,732,770 shares (1.4.2002 to 31.12.2002: the weighted average of
16,509,000,000 shares) in issue during the year/period.

The effect of prior period adjustments on loss per share for the period from
1 April 2002 to 31 December 2002 is immaterial.

No diluted loss per share has been presented as the conversion of the
convertible notes and shares issuable under the subscription agreement dated 31
May 2002 as mentioned in note 36 would result in a decrease in loss per share.

                                       81

<PAGE>

15. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                                          Office
                              Leasehold  Properties   Furniture                          equipment
                               land and      under      and      Leasehold     Motor       and
                               buildings construction fixtures  improvements  vehicles   machinery    Vessels      Total
                               --------- ------------ --------  ------------  --------   ---------    -------      -----
                               HK$'000     HK$'000    HK$'000     HK$'000     HK$'000     HK$'000     HK$'000     HK$'000
<S>                           <C>        <C>          <C>       <C>           <C>        <C>          <C>         <C>
COST OR VALUATION
At 1 January 2003               311,341      46,728      3,129       5,475     309,527      23,679       7,181     707,060
Currency realignment                  -           -         49          12           -          26           -          87
Additions                             -           -        889       4,747      15,682       1,710           -      23,028
Disposals                      (230,763)          -       (219)     (1,642)    (62,084)       (301)       (714)   (295,723)
Disposal of subsidiaries           (425)          -       (487)          -    (262,108)     (9,466)          -    (272,486)
                               --------    --------   --------    --------    --------    --------    --------    --------
At 31 December 2003              80,153      46,728      3,361       8,592       1,017      15,648       6,467     161,966
                               --------    --------   --------    --------    --------    --------    --------    --------
Comprising
  At cost                        73,153      46,728      3,361       8,592       1,017      15,648       6,467     154,966
  At valuation                    7,000           -          -           -           -           -           -       7,000
                               --------    --------   --------    --------    --------    --------    --------    --------
                                 80,153      46,728      3,361       8,592       1,017      15,648       6,467     161,966
                               --------    --------   --------    --------    --------    --------    --------    --------
DEPRECIATION,
  AMORTISATION AND
  IMPAIRMENT
At 1 January 2003               224,461       5,728      2,193       3,284     211,033      16,783       5,967     469,449
Currency realignment                  -           -         33          12           -          17           -          62
Provided for the year               890           -        331       1,460      18,580       3,132         182      24,575
Impairment losses recognized
  for the year                      301       2,400          -           -           -           -           -       2,701
Eliminated on disposals        (166,556)          -       (145)       (813)    (57,161)       (176)       (674)   (225,525)
Eliminated on disposal of
  subsidiaries                     (157)          -       (325)          -    (171,869)     (7,158)          -    (179,509)
                               --------    --------   --------    --------    --------    --------    --------    --------
At 31 December 2003              58,939       8,128      2,087       3,943         583      12,598       5,475      91,753
                               --------    --------   --------    --------    --------    --------    --------    --------
NET BOOK VALUES
At 31 December 2003              21,214      38,600      1,274       4,649         434       3,050         992      70,213
                               ========    ========   ========    ========    ========    ========    ========    ========
At 31 December 2002              86,880      41,000        936       2,191      98,494       6,896       1,214     237,611
                               ========    ========   ========    ========    ========    ========    ========    ========
</TABLE>

An analysis of the properties of the Company held at the balance sheet date is
as follows:

<TABLE>
<CAPTION>
                                               Leasehold                         Properties
                                           land and buildings                 under construction
                                          ---------------------              ---------------------
                                          2003             2002              2003             2002
                                          ----             ----              ----             ----
                                         HK$'000          HK$'000           HK$'000          HK$'000
<S>                                      <C>              <C>               <C>              <C>
Long leases in Hong Kong                 10,237           76,100                 -                -
Medium term leases in Hong Kong          10,977           10,780                 -                -
Medium term leases outside Hong Kong          -                -            38,600           41,000
                                         ------           ------            ------           ------
                                         21,214           86,880            38,600           41,000
                                         ======           ======            ======           ======
</TABLE>

During the year, the directors reviewed the carrying amounts of its property,
plant and equipment and identified that the value of properties under
construction was impaired. Accordingly, the carrying amount of properties under
construction was reduced to its recoverable amount, which was determined with
reference to the independent professional valuation on an open market value as
at 31 December 2003.

Subsequent to the balance sheet date, the Company entered into sale and purchase
agreements to dispose of two properties in Hong Kong. One of the transactions
was completed on 31 March 2004 and the other transaction will be completed on or
before 31 May 2004. An aggregate loss of approximately HK$301,000 will be
recorded upon completion. Accordingly, an equivalent amount was written off
against the carrying amounts of the properties as at the balance sheet date to
reflect their recoverable amounts.

                                       82

<PAGE>

15. PROPERTY, PLANT AND EQUIPMENT - continued

Details of property, plant and equipment which are stated at valuation at the
balance sheet date are as follows:

<TABLE>
<CAPTION>
                                                          Leasehold
                                                     land and buildings
                                                    ---------------------
                                                     2003          2002
                                                     ----          ----
                                                    HK$'000       HK$'000
<S>                                                 <C>           <C>
At valuation
  - 31 July 1997                                     4,800         4,800
  - 31 March 1998                                    2,200         2,200
                                                    ------        ------
                                                     7,000         7,000
Less: Accumulated depreciation, amortization
            and impairment                          (4,588)       (4,548)
                                                    ------        ------
Net book value                                       2,412         2,452
                                                    ======        ======
</TABLE>

The valuations at 31 July 1997 and 31 March 1998 represented the carrying values
(equivalent to their approximately fair value) of the leasehold land and
buildings at the time when they ceased to be classified as investment
properties. Had the leasehold properties been carried at their historical cost
less accumulated depreciation, amortization and impairment loss, the carrying
value of the leasehold properties would have been stated at HK$2,412,000 (2002:
HK$2,452,000).

The net book value of motor vehicles, and office equipment and machinery of the
Company held under finance leases and sale and lease back arrangements at 31
December 2003 was HK$ nil (2002: approximately HK$33,155,000) and HK$ nil (2002:
HK$2,023,000) respectively.

16. INVESTMENT PROPERTY

<TABLE>
<CAPTION>
                                     1.1.2003              1.4.2002
                                        to                    to
                                    31.12.2003            31.12.2002
                                    ----------            ----------
                                     HK$'000               HK$'000
<S>                                 <C>                   <C>
At beginning of the year/period       1,230                 1,230
Surplus on revaluation                  170                     -
                                      -----                 -----
At end of the year/period             1,400                 1,230
                                      =====                 =====
</TABLE>

The investment property of the Company is freehold and held outside Hong Kong.

The investment property was revalued at 31 December 2003 by a firm of
independent professional property valuers, Norton Appraisals Limited, on an open
market value basis at HK$1,400,000. The valuation gave rise to a revaluation
increase of HK$170,000, of which HK$7,000 and HK$163,000 has been credited to
the income statement and the investment properties valuation reserve
respectively.

                                       83

<PAGE>

17. INTEREST IN ASSOCIATES

<TABLE>
<CAPTION>
                                             2003                  2002
                                             ----                  ----
                                            HK$'000               HK$'000
                                                                (Restated)
<S>                                         <C>                 <C>
Share of net assets                         253,184               548,275
Negative goodwill arising from
  acquisition of an associate (note 18)           -               (58,918)
                                            -------               -------
                                            253,184               489,357
Impairment loss recognized                  (31,717)                    -
                                            -------               -------
                                            221,467               489,357
                                            =======               =======
</TABLE>

Particulars of the Company's associates as at 31 December 2003 are as follows:

<TABLE>
<CAPTION>
                                                     Issued and           Proportion of
                                Place of               paid up          issued/registered
                              incorporation        share capital/         capital held
Name of associate             and operation      registered capital      by the Company      Principal activities
-----------------             -------------      ------------------     -----------------    --------------------
                                                        '000             2003       2002
                                                                         ----       ----
<S>                           <C>                <C>                 <C>            <C>      <C>
Ananda Travel Service          Australia                   A$400          40%         40%    Travel and related services
  (Aust.) Pty. Limited

Apex Quality Group Limited     British Virgin          HK$43,276        49.6%          -     Investment holding
  ("Apex")                       Islands ("BVI")/
                                 Hong Kong

CYTS Wing On Travel            Hong Kong                HK$2,000          50%         50%    Travel and related services
  Service Company Limited

Guilin Osmanthus Hotel         PRC                      US$3,489     Note (a)       49.5%    Operation of a hotel

Heilongjiang Ananda            PRC                    RMB283,140          50%         50%    Operation of a hotel
  Entertainment Company                                                                        and an entertainment
  Limited ("Heilongjiang                                                                       resort complex and
  Ananda") Note (b)                                                                            development of a
                                                                                               residential and
                                                                                               commercial complex

Rosedale Hotel Group Limited   Bermuda/               HK$432,757*          -        49.3%    Investment holding
  ("Rosedale") Note (c)          Hong Kong

Wing On International Travel   PRC                      RMB5,000          49%         49%    Travel and related services
  Service Ltd. Guangdong

Wing On JAS Nice Wing          Hong Kong                HK$1,000          50% **      50% ** Travel and related
  Limited#                                                                                     services
</TABLE>

*     Issued and paid up share capital as at 31 December 2002

**    Directly held by the Company

#     In liquidation since February 2004

                                       84

<PAGE>

17. INTEREST IN ASSOCIATES - continued

Notes:

(a) During the year, the directors considered that following the change of the
management of the Company, the Company cannot exercise significant influence on
the financial and operating policies of an associate, Guilin Osmanthus Hotel,
and accordingly, resolved to classify the carrying amount of this investment
amounting to HK$26,974,000 as an investment in securities as at the balance
sheet date.

(b) During the year, the directors reviewed the carrying amounts of interest in
associates and considered that the recoverable amount of Heilongjiang Ananda is
minimal due to its continuing operating losses. Accordingly, an amount of
HK$31,717,000 was recognized as impairment loss to write off the carrying value
of this associate in the financial statements.

(c) On 9 July 2003, the Company entered into a sale and purchase agreement with
an independent third party to dispose of its holding of 49.3% interest in an
associate, Rosedale, for a consideration of HK$88 million. Under the agreement,
the purchaser was obliged to pay a total of HK$20,000,000 on or before the
completion of the sale, and the balance is payable within 12 months from the
date of completion, against which 136,666,666 shares in Rosedale (name changed
to China Velocity Group Limited on 26 January 2004) are pledged to the Company.

The completion of the disposal involved a number of transactions. Among them,
Rosedale would undergo a group reorganization, under which Rosedale continues as
a public listed company concentrating on business other than hotel and
leisure-related businesses; Apex, a former subsidiary of Rosedale, together with
its subsidiaries would hold all assets and liabilities of Rosedale and its
subsidiaries in relation to the hotel and leisure-related businesses; and shares
of Apex would be distributed to shareholders of Rosedale by way of distribution
in specie. Details of the group reorganization are set out in the circular to
shareholders of the Company on 31 October 2003.

In connection with the disposal of Rosedale, the Company made an unconditional
cash offer for 77,920,268.1 Apex shares held by the Apex shareholders other than
those held by China Strategic Holdings Limited and their respective associates
and parties acting in concert with any of them. The offer period was from 19
December 2003 to 9 January 2004. As at the date of the balance sheet, holders of
800,194 shares, representing approximately 0.3% of the share capital of Apex,
accepted and the Company held a 49.6% interest in Apex.

The disposal of Rosedale was completed on 16 December 2003.

Other than Wing On JAS Nice Wing Limited and Ananda Travel Services (Aust) Pty.
Limited whose financial statements end on 31 March, the financial statements of
all other associates end on 31 December. The Company's share of their results
and net assets under the equity method is based on their financial statements
made to 31 December 2003.

                                       85

<PAGE>

17. INTEREST IN ASSOCIATES - continued

Notes: - continued

Included in the interest in associates at 31 December 2003 are the interest in
Apex and Heilongjiang Ananda. Extracts from the financial statements prepared in
accounting principles generally accepted in Hong Kong of Apex for the period
from 13 December 2003 to 31 December 2003 and Heilongjiang Ananda for the year
ended 31 December 2003 and 2002 are as follows:

<TABLE>
<CAPTION>
Apex                                                       2003
----                                                       ----
                                                         HK$'000
<S>                                                    <C>
FINANCIAL POSITION
Non-current assets                                      1,592,960
                                                       ----------
Current assets                                             84,038
Current liabilities                                      (143,811)
                                                       ----------
Net current liabilities                                   (59,773)
                                                       ----------
Total assets less current liabilities                   1,533,187
Non-current liabilities                                (1,018,106)
Minority interests                                        (72,058)
                                                       ----------
Net assets                                                443,023
                                                       ==========
Share of net assets attributable to the Company           219,739
                                                       ==========
RESULTS FOR THE PERIOD
Turnover                                                    7,857
                                                       ==========
Net loss for the period                                   (12,985)
                                                       ==========
Net loss for the period attributable to the Company        (6,441)
                                                       ==========
</TABLE>

                                       86

<PAGE>

17. INTEREST IN ASSOCIATES - continued

<TABLE>
<CAPTION>
Heilongjiang Ananda                                   2003        2002
-------------------                                   ----        ----
                                                    HK$'000     HK$'000
<S>                                                 <C>         <C>
FINANCIAL POSITION
Non-current assets                                   876,215     901,714
                                                    --------    --------
Current assets                                        32,119      26,632
Current liabilities                                 (844,900)   (812,074)
                                                    --------    --------
Net current liabilities                             (812,781)   (785,442)
                                                    --------    --------
Net assets                                            63,434     116,272
                                                    ========    ========
Share of net assets attributable to the Company       31,717      58,136
Impairment loss recognized                           (31,717)          -
                                                    --------    --------
                                                           -      58,136
                                                    ========    ========
RESULTS FOR THE YEAR
Turnover                                              53,388      56,223
                                                    ========    ========
Net loss for the year                                (52,722)    (60,430)
                                                    ========    ========
Net loss for the year attributable to the Company    (26,361)    (30,215)
                                                    ========    ========
</TABLE>

In addition, included in the Company's share of associates was share of results
of Rosedale. The financial statements of Rosedale during the period from 1
January 2003 to 16 December 2003, the date of completion of disposal, prepared
in accounting principles generally accepted in Hong Kong, are as follows:

<TABLE>
<CAPTION>
Rosedale                                                2003        2002
--------                                                ----        ----
                                                      HK$'000     HK$'000
<S>                                                   <C>         <C>
RESULTS FOR THE PERIOD
Turnover                                               131,303     181,692
                                                      ========    ========
Net loss for the period                               (165,871)    (99,810)
                                                      ========    ========
Net loss for the period attributable to the Company    (81,774)     (2,447)
                                                      ========    ========
</TABLE>

As Rosedale was disposed of in December 2003, no financial position as at 31
December 2003 was presented.

The shares of Rosedale are listed on the Stock Exchange and the then market
value of the shares held by the Company as at 31 December 2002 was approximately
HK$273,333,000.

                                       87

<PAGE>

18. NEGATIVE GOODWILL ARISING FROM ACQUISITION OF AN ASSOCIATE

<TABLE>
<CAPTION>
                                                                 1.1.2003    1.4.2002
                                                                    to          to
                                                                31.12.2003  31.12.2002
                                                                ----------  ----------
                                                                  HK$'000    HK$'000
<S>                                                             <C>         <C>
NEGATIVE GOODWILL
Balance at beginning of the year/period                            59,043          -
Arising from acquisition of an associate during the year/period         -     59,043
Released on disposal                                              (59,043)         -
                                                                  -------    -------
Balance at end of the year/period                                       -     59,043
                                                                  -------    -------
REALIZATION
Balance at beginning of the year/period                               125          -
Released to the income statement during the year/period             1,350        125
Released on disposal                                               (1,475)         -
                                                                  -------    -------
Balance at end of the year/period                                       -        125
                                                                  -------    -------
CARRYING AMOUNT
At end of the year/period                                               -     58,918
                                                                  =======    =======
</TABLE>

Negative goodwill was recognized to the income statement over 40 years, which
was determined based on the remaining average useful life of identifiable
depreciable assets acquired.

19. OTHER LONG TERM INVESTMENT

The other long term investment represents the contribution paid to a joint
venture partner in 2001 for a joint development of a piece of land in Chengdu,
the PRC, into a tourist attraction. On 11 December 2002, the Company entered
into an agreement with the joint venture partner to withdraw from the project.
Under the agreement, the joint venture partner will transfer the titles of a
total of approximately 3,000 square meters of commercial areas and car parking
spaces in a commercial building in Chengdu, the PRC, to the Company. The amount
to be settled through this arrangement will be based on the professional
valuation of the properties. Up to the date of this report, the transaction is
still not yet completed. The directors are of the opinion that the value of
property interests to be transferred will cover the investment cost paid and
accordingly no provision for impairment loss is necessary.

                                       88

<PAGE>

20. LONG TERM INVESTMENT DEPOSITS

<TABLE>
<CAPTION>
                               2003       2002
                               ----       ----
                              HK$'000    HK$'000
<S>                           <C>        <C>
Deposits for acquisition of
  investment (Note)            60,000     60,000
Disposal                      (60,000)         -
                              -------    -------
                                    -     60,000
                              =======    =======
</TABLE>

Note:

The deposits represent the deposits paid for acquisition of 100% interest in a
co-operative joint venture which will develop and operate a hotel in Guangdong,
the PRC. During the year, the Company entered into an agreement to dispose of
two-third of its rights to the intended interests in the co-operative joint
venture for HK$40,000,000 but the completion thereof has not yet taken place.
After the aforesaid agreement, the directors considered it is not viable to
carry out the investment to avoid further substantial commitments. The Company
then entered into another agreement with the aforesaid purchaser to dispose of
the remaining rights and entire commitments of the Company in the said
co-operative joint venture (which together with the aforesaid partial interest
disposal of constitute the Company's entire interests in the co-operative joint
venture in the acquisition agreement) to the purchase at a nominal
consideration. The loss arising therefrom is classified as loss on disposal of
interest in a co-operative joint venture.

21. INVESTMENTS IN SECURITIES

<TABLE>
<CAPTION>
                                Investment securities   Other investments           Total
                                ---------------------   -----------------           -----
                                  2003        2002       2003       2002       2003        2002
                                  ----        ----       ----       ----       ----        ----
                                HK$'000     HK$'000    HK$'000    HK$'000    HK$'000     HK$'000
<S>                             <C>         <C>        <C>        <C>        <C>         <C>
Equity securities
Unlisted shares, at cost         126,232      22,626          -          -    126,232      22,626
Listed shares in Hong Kong             -           -      2,847      5,450      2,847       5,450
                                --------    --------   --------   --------   --------    --------
                                 126,232      22,626      2,847      5,450    129,079      28,076
Impairment loss recognized       (26,974)          -          -          -    (26,974)          -
                                --------    --------   --------   --------   --------    --------
                                  99,258      22,626      2,847      5,450    102,105      28,076
                                ========    ========   ========   ========   ========    ========
Market value of listed shares          -           -      2,847      5,450      2,847       5,450
                                ========    ========   ========   ========   ========    ========
Carrying amount analyzed for
  reporting purposes as:
Non-current                       99,258      22,626          -          -     99,258      22,626
Current                                -           -      2,847      5,450      2,847       5,450
                                --------    --------   --------   --------   --------    --------
                                  99,258      22,626      2,847      5,450    102,105      28,076
                                ========    ========   ========   ========   ========    ========
</TABLE>

                                       89

<PAGE>

21. INVESTMENTS IN SECURITIES - continued

Particulars of the Company's investment securities as at 31 December 2003 are as
follows:

<TABLE>
<CAPTION>
                                               Issued           Proportion of
                              Place of       and paid up       issued/registered        Interest
                            incorporation  share capital/        capital held         attributable
Name of company             and operation  registered capital  by the subsidiaries   to the Company        Principal activities
---------------             -------------  ------------------  -------------------   --------------        --------------------
                                              '000              2003       2002      2003       2002
                                                                ----       ----      ----       ----
<S>                         <C>            <C>                <C>          <C>       <C>        <C>        <C>
Guilin Osmanthus Hotel           PRC            US$3,489        49.5%      49.5%     49.5%      49.5%       Operation of a hotel
  (see Note 17)                                               Note (a)

Guangxi Guijia Property          PRC            US$8,021          26%         -      18.2%         -        Operation of a hotel
  Management Company                                          Note (b)                                        and leisure-related
  Limited                                                                                                     businesses

Jian Shen Co., Ltd.              BVI            US$0.1             -         19%        -         19%       Investment holding

King Fu Investment Holdings      BVI            US$50              -         19%        -         19%       Investment holding
  Ltd.
</TABLE>

Notes:

(a) During the year, the directors reviewed the carrying amounts of investments
in securities and considered that it is unlikely to recover the interest in
Guilin Osmanthus Hotel and the present value of the estimated future cash flows
expected to arise from the investment is minimal. Accordingly, impairment loss
of HK$26,974,000 was recognized in the financial statements to write down the
carrying amount of the investment.

(b) Though a subsidiary of the Company holds a 26% interest in this investee
company, the directors considered that the Company cannot exercise significant
influence on the financial and operating policies of the investee company and
accordingly, it is classified as an investment in securities.

22. GOODWILL

<TABLE>
<CAPTION>
                                                  1.1.2003   1.4.2002
                                                    to         to
                                                 31.12.2003 31.12.2002
                                                 ---------- ----------
                                                  HK$'000    HK$'000
<S>                                              <C>        <C>
COST
At beginning of the year/period                    13,232     59,807
Arising from acquisition during the year/period         -     13,232
Eliminated on disposal of a subsidiary            (13,232)   (59,807)
                                                  -------    -------
At end of the year/period                               -     13,232
                                                  -------    -------
AMORTISATION AND IMPAIRMENT
At beginning of the year/period                       165     59,807
Charge for the year/period                            496        165
Eliminated on disposal of a subsidiary               (661)   (59,807)
                                                  -------    -------
At end of the year/period                               -        165
                                                  -------    -------
CARRYING AMOUNT
At end of the year/period                               -     13,067
                                                  =======    =======
</TABLE>

The amortization period adopted for the goodwill was 20 years.

                                       90

<PAGE>

23. INVENTORIES

At the balance sheet date, all inventories were carried at cost. The inventories
represent principally consumables which are to be utilized in the ordinary
course of operations. The amount recognized as an expense in the income
statement during the year/period was insignificant.

24. AMOUNTS DUE FROM RELATED COMPANIES

The balances represent the aggregate amounts due from related parties. Certain
directors of the Company are also directors of and/or have beneficial interests
in these companies. The amounts are unsecured and interest free. The balances as
at 31 December 2003 were principally trading balances and those at 31 December
2002 also included prepayments in respect of the land operating costs.

During the period from 1 April 2002 to 31 December 2002, the directors reviewed
the amounts due from companies controlled by former executive directors. The
directors considered that the recoverability of such amounts was remote and
accordingly, allowance was made in the financial statements.

25. AMOUNTS DUE FROM (TO) ASSOCIATES

The amounts due from (to) associates are unsecured, interest free and have no
fixed terms of repayment.

26. TRADE AND OTHER RECEIVABLES

<TABLE>
<CAPTION>
                                   2003      2002
                                   ----      ----
                                  HK$'000   HK$'000
<S>                               <C>       <C>
Trade receivables                   7,029    26,579
Advance cost to tour operations   276,522   268,654
Deposits and prepayments           17,080    29,306
Other receivables                  50,207    13,558
                                  -------   -------
                                  350,838   338,097
                                  =======   =======
</TABLE>

The aged analysis of the trade receivables at the reporting dates is as follows:

<TABLE>
<CAPTION>
                                    2003     2002
                                    ----     ----
                                   HK$'000  HK$'000
<S>                                <C>      <C>
0 - 30 days                         2,617    11,858
31 - 60 days                        1,573     7,816
61 - 90 days                          815     2,569
Over 90 days                        2,024     4,336
                                    -----    ------
                                    7,029    26,579
                                    =====    ======
</TABLE>

The Company allows an average credit period of 60 days to local customers and 90
days to overseas customers.

During the period from 1 April 2002 to 31 December 2002, the directors reviewed
the advance cost payments to certain land operators and considered that their
recoverability was remote. Accordingly, the amounts were fully provided for in
the financial statements as allowance for advances to service suppliers, as
described in note 7.

                                       91

<PAGE>

27. LOAN RECEIVABLES

<TABLE>
<CAPTION>
                                                               2003      2002
                                                               ----      ----
                                                              HK$'000   HK$'000
<S>                                                           <C>       <C>
Loan to land operator (Note a)                                 23,000    23,000
Loan to certain overseas companies and individuals (Note b)    31,950    22,272
Loan to the property purchaser (Note c)                             -    77,200
                                                              -------   -------
                                                               54,950   122,472
                                                              =======   =======
</TABLE>

Notes:

      (a) The loan to land operator represents an advance made to one of the
Company's land operators for the designated purpose of purchase of coaches. The
amount is secured, bears interest at a rate of 10% per annum on the principal
amount over a period of thirty months and should be repayable by thirty equal
monthly instalments commencing August 2000. On 23 July 2002, the Company entered
into an agreement with the land operator to reschedule the terms of repayment.
Under the terms of that agreement, the loan should be repaid in full on or
before 31 March 2003. Pursuant to the supplemental agreements thereafter, the
repayment date of the loan is extended to 31 December 2004.

      (b) During the year/period, the Company provided loan facilities to
certain overseas companies and individuals to earn interest. The amounts are
unsecured, carrying interest at market rates and repayable within one year.

      (c) The loan to the property purchaser arose from the disposal by the
Company of its 81% interests in two subsidiaries during the year ended 31 March
2002. During the year, the Company disposed of the receivable together with
remaining interests in these investments amounting to HK$77,200,000 and
HK$22,913,000 (including HK$287,000 receivable from the investee companies)
respectively to exchange for a 70% interest in an investment company which holds
a 26% interest in a PRC joint venture engaged in the operation of a hotel and
leisure-related businesses.

28. TRADING CASH BALANCES

The amounts represent foreign currencies held for money exchange purposes.

29. TRADE AND OTHER PAYABLES

<TABLE>
<CAPTION>
                                                  2003      2002
                                                  ----      ----
                                                 HK$'000   HK$'000
<S>                                              <C>       <C>
Trade creditors                                   77,121    81,669
Amounts payable for acquisition of investments    43,000    76,200
Accrued liabilities                               83,160    66,504
Other payables                                    35,910    17,187
                                                 -------   -------
                                                 239,191   241,560
                                                 =======   =======
</TABLE>

                                       92

<PAGE>

29. TRADE AND OTHER PAYABLES - continued

The aged analysis of the trade payables at the reporting dates is as follows:

<TABLE>
<CAPTION>
                                                             2003      2002
                                                             ----      ----
                                                            HK$'000   HK$'000
<S>                                                         <C>       <C>
0 - 30 days                                                 44,715    37,664
31 - 60 days                                                15,687    18,117
61 - 90 days                                                 9,593    12,265
Over 90 days                                                 7,126    13,623
                                                            ------    ------
                                                            77,121    81,669
                                                            ======    ======
</TABLE>

30. LOANS FROM RELATED COMPANIES

Certain directors of the Company are also directors of and/or have beneficial
interests in those companies. The loans are unsecured, bear interest at market
rates and with the terms of repayment as follows:

<TABLE>
<CAPTION>
                                                            2003      2002
                                                            ----      ----
                                                           HK$'000   HK$'000
<S>                                                        <C>       <C>
Amounts repayable after 1 year but within 2 years          223,312         -
Amounts repayable within 1 year                              8,000     6,474
                                                           -------   -------
                                                           231,312     6,474
                                                           =======   =======
</TABLE>

31. AMOUNTS DUE TO RELATED COMPANIES

The balances represent principally trading balances including trade payables and
loan interest payable, which are unsecured, interest free and repayable on
demand.

32. OBLIGATIONS UNDER FINANCE LEASES AND SALE AND LEASE BACK ARRANGEMENTS

<TABLE>
<CAPTION>
                                                                               Present value
                                               Minimum                          of minimum
                                            lease payments                     lease payments
                                            --------------                     --------------
                                        2003             2002              2003             2002
                                        ----             ----              ----             ----
                                       HK$'000          HK$'000           HK$'000          HK$'000
<S>                                    <C>              <C>               <C>              <C>
Amounts payable under finance
  leases and sale and lease back
  arrangements
Within one year                           -             10,167               -              8,764
Between one to two years                  -              7,835               -              7,087
Between two to five years                 -              7,638               -              7,297
                                       ------           ------            ------           ------
                                          -             25,640               -             23,148
Less: Future finance charges              -             (2,492)              -                  -
                                       ------           ------            ------           ------
Present value of lease obligations        -             23,148               -             23,148
                                       ======           ======
Less: Amount due within one year
     shown under current liabilities                                         -             (8,764)
                                                                          ------           ------
Amount due after one year                                                    -             14,384
                                                                          ======           ======
</TABLE>

                                       93

<PAGE>

32. OBLIGATIONS UNDER FINANCE LEASES AND SALE AND LEASE BACK ARRANGEMENTS -
continued

The Company entered into finance leases to acquire certain of its property,
plant and equipment. The terms of the finance leases ranged from 2 to 4 years
and the average effective borrowing rate was 8.5% (8.5% per annum for the period
from 1 April 2002 to 31 December 2002). Interest rate was fixed at the contract
date. The leases were on a fixed repayment basis and no arrangement was entered
into for contingent rental payments. The Company's obligations under the finance
leases were secured by the lessors' charge over the leased assets. There were no
new finance leases entered into by the Company during the year.

33. BORROWINGS

<TABLE>
<CAPTION>
                                                 2003        2002
                                                 ----        ----
                                               HK$'000     HK$'000
<S>                                            <C>         <C>
Bank loans                                          921      48,446
Bank overdrafts                                       -       7,717
Other loans                                      33,560     150,000
                                               --------    --------
                                                 34,481     206,163
Less: Amount due within one year shown under
     current liabilities                        (28,230)   (184,474)
                                               --------    --------
Amount due after one year                         6,251      21,689
                                               ========    ========
Secured                                             921     121,046
Unsecured (Note)                                 33,560      85,117
                                               --------    --------
                                                 34,481     206,163
                                               ========    ========
Borrowings are repayable as follows:

Within one year or on demand                     28,230     184,474
Between one to two years                          6,251      11,579
Between two to five years                             -      10,110
                                               --------    --------
                                                 34,481     206,163
                                               ========    ========
</TABLE>

Note: Included in unsecured other loans of the Company are HK$15,000,000 which
are secured on assets provided by a related company (Note 50 (c)).

Interest rates for bank loans and overdraft are generally based on the banks'
usual lending rates in Hong Kong. Other loans amounting to HK$15,000,000 (2002:
HK$100,000,000) carried a fixed interest rate of 12% per annum and the remainder
carries interest at prime interest rate per annum.

34. CONVERTIBLE NOTES

<TABLE>
<CAPTION>
                                2003       2002
                                ----       ----
                               HK$'000    HK$'000
<S>                            <C>        <C>
Convertible notes               254,125    370,000
Less: Conversion into shares          -   (115,875)
                               --------   --------
                                254,125    254,125
                               ========   ========
</TABLE>

                                       94

<PAGE>

34. CONVERTIBLE NOTES - continued

During the period from 1 April 2002 to 31 December 2002, the Company issued
convertible notes amounting to HK$370,000,000. The convertible notes carry
interest at 2% per annum and are repayable within two years. The holders of the
convertible notes have the right to convert on any business day the convertible
notes into new shares of the Company at any time or from time to time during a
period of two years from the date of issuance of the convertible notes, at an
initial conversion price of HK$0.032 per share, subject to adjustments. Upon
full conversion of the outstanding convertible notes at the balance sheet dates,
a total of 7,941,395,000 shares of the Company will be issued.

The outstanding convertible notes are scheduled to be repaid on 19 April 2004.
Accordingly, the outstanding amount is classified under current liabilities.

35. DEFERRED TAXATION

The following are the major deferred tax liabilities and assets recognized and
movement thereon during the current and prior accounting periods:

<TABLE>
<CAPTION>
                                           Accelerated
                                               tax       Tax
                                           depreciation losses     Others      Total
                                           ------------ ------     ------      -----
                                             HK$'000    HK$'000    HK$'000    HK$'000
<S>                                        <C>          <C>        <C>        <C>
At 1 April 2002                               12,943     (4,418)         -      8,525
Charge (credit) to income for the period         132       (592)         -       (460)
Released on deemed disposal of a
  subsidiary                                     (13)        (2)         -        (15)
                                             -------    -------    -------    -------
At 31 December 2002 and
  1 January 2003                              13,062     (5,012)         -      8,050
Credit to income for the year                   (106)    (2,133)      (234)    (2,473)
Effect of change in tax rate
  - charge (credit) to income for the year     1,225       (470)         -        755
Released on disposal of subsidiaries         (14,181)     7,615        234     (6,332)
                                             -------    -------    -------    -------
At 31 December 2003                                -          -          -          -
                                             -------    -------    -------    -------
</TABLE>

For the purpose of the balance sheet presentation, the above deferred tax assets
and liabilities were offset.

At 31 December 2003, the Company has unused tax losses of HK$555,159,000 (2002:
HK$470,470,000) available for offset against future profits. A deferred tax
asset has been recognized for the year ended 31 December 2003 in respect of
HK$nil (1.4.2002 to 31.12.2002: HK$31,325,000) of such losses. No deferred tax
asset has been recognized in respect of the remaining tax losses due to the
unpredictability of future profit streams. The losses arising from overseas
subsidiaries are immaterial, and will expire after a specific period of time.
The Company's other unrecognized tax losses may be carried forward indefinitely.

                                       95

<PAGE>

36. SHARE CAPITAL

<TABLE>
<CAPTION>
                                                  Number of shares       Amount
                                                  ----------------     ---------
                                                                        HK$'000
<S>                                                <C>               <C>
Shares of HK$0.01 each
Authorized
  Balance as at 1 April 2002                       20,000,000,000            200,000
  Increased on 10 April 2002 (Note a)              30,000,000,000            300,000
                                                   --------------    ---------------
  Balance as at 31 December 2002 and
    at 31 December 2003                            50,000,000,000            500,000
                                                   ==============    ===============
Issued and fully paid
  Balance as at 1 April 2002                        9,081,317,770             90,813
  Issued on 19 April 2002 (Note b)                  4,800,000,000             48,000
  Issued to strategic partners (Note c)             1,000,000,000             10,000
  Conversion into shares from convertible notes     3,621,105,000             36,211
  Shares repurchased and cancelled (Note d)          (185,690,000)            (1,857)
                                                   --------------    ---------------
  Balance as at 31 December 2002 and
    at 31 December 2003                            18,316,732,770            183,167
                                                   ==============    ===============
</TABLE>

Notes:

(a) Pursuant to a resolution passed by the shareholders of the Company at a
special general meeting on 10 April 2002, the authorized share capital of the
Company was increased from HK$200,000,000 to HK$500,000,000 by the creation of
an additional 30,000,000,000 new shares of HK$0.01 each in the capital for the
Company.

(b) Pursuant to the subscription agreement dated 1 February 2002 which was
approved by the shareholders of the Company at the special general meeting of
the Company held on 10 April 2002, the Company issued 4,800,000,000 new shares
of HK$0.01 each of the Company at a price of HK$0.027 per share to Million Good
Limited, a substantial shareholder of the Company as at the balance sheet date.
The net proceeds of approximately HK$129,600,000 together with that from the
issue of convertible notes as described in note 34 would be used to repay debts,
acquire investment, expand business of the Company with the balance be used as
additional working capital of the Company. The new shares issued rank pari passu
with the then existing shares in all respects.

                                       96

<PAGE>

36. SHARE CAPITAL - continued

(c) The subscription agreements dated 31 May 2002 in respect of the subscription
of shares of the Company by three subscribers for 2,000,000,000, 500,000,000 and
500,000,000 new shares respectively of HK$0.01 each of the Company at a price of
HK$0.08 per share were approved by the shareholders of the Company at the
special general meeting of the Company held on 4 July 2002. The net proceeds,
upon receipt, would be used to expand and consolidate the Company's business in
the PRC, which may involve investments and acquisition by the Company of
existing companies or operations in those businesses where appropriate. The last
two subscriptions have been completed and the new shares issued rank pari passu
with the then existing shares in all respects. On 9 October 2003, the Company
entered into a settlement agreement (the "Settlement Agreement") with the
subscriber of the 2,000,000,000 shares (the "Subscriber") in which it was stated
that the Subscriber's position was that there was not in existence any agreement
or understanding, whether written or oral, in connection with any subscription
by the Subscriber of shares in the Company. The Settlement Agreement also stated
that the Company's position was that there was in existence a document stated to
be dated 31 May 2002 relating to subscription by the Subscriber of shares in the
Company as well as a document stated that the completion date for such
subscription had been extended. The Settlement Agreement provides that such
disputed documents did not have any effect and would not proceed. There was no
monetary consideration for the Settlement Agreement.

(d) During the period from 1 April 2002 to 31 December 2002, the Company
repurchased a total number of 185,690,000 of its own shares on the Stock
Exchange as follows:

<TABLE>
<CAPTION>
                         Number
                        of shares               Price per share                  Aggregate
Month of repurchase    repurchased          Highest         Lowest          consideration paid
-------------------    -----------          -------         ------          ------------------
                                              HK$             HK$                 HK$'000
<S>                    <C>                  <C>             <C>             <C>
July 2002               20,080,000            0.038           0.035                   728
August 2002            151,170,000            0.038           0.025                 4,809
September 2002          14,440,000            0.017           0.016                   245
</TABLE>

The above shares were cancelled upon repurchase and accordingly the issued share
capital of the Company was reduced by the nominal value of these shares. The
premium paid on repurchase was charged against the share premium account.

(e) During the year, the directors proposed a capital reorganization of the
Company ("Proposed Capital Reorganization"). Details of the Proposed Capital
Reorganization were disclosed in the Company's announcement dated 17 February
2003. In October 2003, the directors resolved that the Proposed Capital
Reorganization would not proceed.

                                       97

<PAGE>

37. SHARE OPTION SCHEME

The Company has a share option scheme (the "Scheme"), which was approved and
adopted by shareholders of the Company on 3 May 2002, enabling the directors to
grant options to employees, executives or officers of the Company or any of its
subsidiaries (including executive and non-executive directors of the Company or
any of its subsidiaries) and any suppliers, consultants, agents or advisers who
will contribute or have contributed to the Company or any of its subsidiaries as
incentives and rewards for their contribution to the Company or such
subsidiaries. The maximum number of shares in respect of which options may be
granted under the Scheme, when aggregated with any shares subject to any other
schemes, shall not exceed 10% of the issued share capital of the Company on the
date of approval and adoption of the Scheme.

Option granted must be taken up within 30 days of the date of offer. The
consideration payable for the option is HK$1. Options may be exercised at any
time from the date of acceptance of the share option to such date as determined
by the board of directors but in any event not exceeding 10 years. The exercise
price is determined by the directors of the Company and will not be less than
the higher of (i) the average closing price of the shares for the five business
days immediately preceding the date of grant, (ii) the closing price of the
shares on the date of grant or (iii) the nominal value of the shares of the
Company.

      No share options have been granted under the Scheme since its adoption.

38. RESERVES

<TABLE>
<CAPTION>
                                                            Investment
                                                             property
                                       Share      Special   revaluation Translation  Goodwill    Statutory   Accumulated
                                      premium     reserve     reserve    reserve      reserve     reserves     losses      Total
                                    ----------  ----------  ----------- -----------  ----------  ----------  ----------- ----------
                                     HK$'000      HK$'000     HK$'000    HK$'000       HK$'000     HK$'000     HK$'000    HK$'000
<S>                                 <C>         <C>         <C>         <C>          <C>         <C>         <C>         <C>
At 1 April 2002
   - as previously reported            795,296      55,554         573        (262)           -         150    (294,790)    556,521
   - adjustment on adoption of
       SSAP 12 (Revised) (note 2)            -           -           -           -       (9,767)          -       2,442      (7,325)
                                    ----------  ----------  ----------  ----------   ----------  ----------  ----------  ----------
   - as restated                       795,296      55,554         573        (262)      (9,767)        150    (292,348)    549,196
Premium on issue of shares,
   net of expenses of HK$2,915,000     228,349           -           -           -            -           -           -     228,349
Premium utilized on repurchase
   of shares                            (4,039)          -           -           -            -           -           -      (4,039)
Exchange difference arising on
   translation of financial
   statements of operations
   outside Hong Kong                         -           -           -        (322)           -           -           -        (322)
Share of reserve of an associate             -           -           -         (65)           -           -           -         (65)
Reserve released on disposal of
   subsidiaries                              -           -           -          68            -           -           -          68
Reserve released on deemed
   disposal of a subsidiary                  -           -           -         470            -           -           -         470
Net loss for the period                      -           -           -           -            -           -    (302,248)   (302,248)
                                    ----------  ----------  ----------  ----------   ----------  ----------  ----------  ----------
At 31 December 2002 and
   1 January 2003                    1,019,606      55,554         573        (111)      (9,767)        150    (594,596)    471,409
Surplus arising from revaluation
   of investment property                    -           -         163           -            -           -           -         163
Exchange difference arising on
   translation of financial
   statements of operations
   outside Hong Kong                         -           -           -        (286)           -           -           -        (286)
Share of reserve of an associate             -           -           -          73            -           -           -          73
Transfer to investments in
   securities on reclassification
   of investments                            -           -           -           -        9,767           -           -       9,767
Net loss for the year                        -           -           -           -            -           -    (370,972)   (370,972)
                                    ----------  ----------  ----------  ----------   ----------  ----------  ----------  ----------
At 31 December 2003                  1,019,606      55,554         736        (324)           -         150    (965,568)    110,154
                                    ==========  ==========  ==========  ==========   ==========  ==========  ==========  ==========
</TABLE>

                                       98

<PAGE>

38. RESERVES - continued

The special reserve represents the difference between the nominal value of the
shares of the acquired subsidiaries and the nominal value of the shares of the
Company issued for the acquisition under the group reorganization in September
1997.

The accumulated losses, translation reserve and statutory reserves of the
Company include losses of HK$246,293,000 (2002: HK$223,662,000), surplus of
HK$73,000 (2002: deficit of HK$65,000) and HK$150,000 (2002: HK$150,000)
respectively attributable to the associates of the Company.

39. DISPOSAL OF DISCONTINUED OPERATION

On 31 October 2003, the Company disposed of its subsidiary which carried out the
segment of transportation services. The net assets of Trans-Island Group at the
date of disposal and at 31 December 2002 were as follows:

<TABLE>
<CAPTION>
                                               2003        2002
                                               ----        ----
                                             HK$'000     HK$'000
<S>                                          <C>         <C>
Net assets disposed of:

Property, plant and equipment                  92,977     101,132
Inventories                                        56          57
Amounts due from group companies                8,775      17,698
Trade and other receivables                    24,779      30,910
Tax recoverable                                     -         727
Bank balances and cash                          3,356       4,654
Trade and other payables                      (39,476)    (26,524)
Tax payable                                       (61)        (61)
Bank borrowings                               (15,152)    (27,400)
Obligations under finance leases              (18,529)    (22,486)
Deferred taxation                              (6,332)     (8,050)
                                             --------    --------
                                               50,393      70,657
Unamortized goodwill                           12,571      13,067
                                             --------    --------
                                               62,964      83,724
                                                         ========
Cash consideration                            (36,131)
                                             --------
                                               26,833
Commission and related expenses                 5,864
                                             --------
Loss on disposal of subsidiaries               32,697
                                             ========
Net cash inflow arising from disposal:
  Cash consideration                           36,131
  Less: Bank balances and cash disposed of     (3,356)
       Commission and related expenses         (5,864)
                                             --------
                                               26,911
                                             ========
</TABLE>

The subsidiaries disposed of during the year contributed HK$124,329,000 to the
Company's turnover and HK$22,004,000 to the Company's loss before taxation.

                                       99

<PAGE>

40. DEEMED DISPOSAL/DISPOSAL OF SUBSIDIARIES

During the period from 1 April 2002 to 31 December 2002, several subsidiaries of
the Company were deemed disposed/disposed of. The aggregate assets and
liabilities of these subsidiaries at their respective dates of disposal were as
follows:

<TABLE>
<CAPTION>
                                                                 1.1.2003   1.4.2002
                                                                   to         to
                                                                31.12.2003 31.12.2002
                                                                ---------- ----------
                                                                  HK$'000    HK$'000
<S>                                                             <C>        <C>
Net assets disposed of:

Property, plant and equipment                                        -        517
Trade and other receivables                                          -      7,659
Amounts due from related companies                                   -         56
Tax recoverable                                                      -         47
Bank balances and cash                                               -      1,448
Trade and other payables                                             -     (5,733)
Tax payable                                                          -       (346)
Amounts due to related companies                                     -        (15)
Obligations under finance leases                                     -        (56)
Bank borrowings                                                      -       (792)
Deferred taxation                                                    -        (15)
                                                                  ------   ------
                                                                     -      2,770
Retained as investments in associates/investments in securities
  by the Company                                                     -     (1,596)
Reserves released on disposal of subsidiaries                        -        538
                                                                  ------   ------
                                                                     -      1,712
Loss on deemed disposal/disposal of subsidiaries                     -     (1,712)
                                                                  ------   ------
Consideration                                                        -          -
                                                                  ======   ======
Satisfied by:

Cash consideration                                                   -          -
                                                                  ------   ------
                                                                     -          -
                                                                  ======   ======

Analysis of net cash outflow of cash and cash equivalents
  in connection with the deemed disposal/disposal of
  subsidiaries:

Cash consideration                                                   -          -
Bank balances and cash disposed of                                   -     (1,448)
                                                                  ------   ------
                                                                     -     (1,448)
                                                                  ======   ======
</TABLE>

There was no disposal of major subsidiary(ies) other than Trans-Island Group
during the year.

The subsidiaries disposed of during the period from 1 April 2002 to 31 December
2002 did not have any significant impact on the turnover, operating results and
cash flows of the Company.

                                      100
<PAGE>

41.   ACQUISITION OF SUBSIDIARIES

On 24 September 2003, the Company acquired 100% of the issued share capital of
Sinomatrix Limited by assets swap as described under note 27(c) above.
Sinomatrix Limited, in turn holds 70% interest in Silver Bay Commodities Co.,
Ltd. The aggregate assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                        HK$'000
<S>                                     <C>
Net assets acquired:
  Investments in securities              99,258
  Minority interests                    (29,778)
                                        -------
Net assets acquired                      69,480
                                        =======
</TABLE>

The subsidiaries acquired during the year contributed insignificant amount to
the Company's turnover and loss from operations.

This acquisition has been accounted for by the acquisition method of accounting.

42.   MAJOR NON-CASH TRANSACTIONS

(a) During the year ended 31 December 2003, the Company disposed of the amount
receivable from the property purchaser as mentioned under Note 27(c) above
together with interests in other investments amounting to HK$77,200,000 and
HK$22,913,000 (including HK$287,000 receivable from the investee companies)
respectively to exchange for a 70% interest in an investment company which holds
a 26% interest in a PRC joint venture engaged in the operation of a hotel and
leisure-related businesses. The acquired investee company is classified as
investment securities at a fair value of HK$99,258,000 at the date of completion
of the transaction.

(b) During the year, the Company disposed of its interests in Rosedale for a
consideration of HK$88,000,000 of which HK$68,000,000 is due for payment after
31 December 2003.

(c) During the year, the Company disposed of two-third of its rights to
interests in a co-operative joint venture for HK$40,000,000, which is yet to be
received as at the balance sheet date.

(d) During the year, the Company entered into finance lease arrangements in
respect of assets with a total capital value of HK$ nil (1.4.2002 to 31.12.2002:
HK$12,155,000) at the inception of the finance leases.

                                      101

<PAGE>

42.   MAJOR NON-CASH TRANSACTIONS - continued

(e) During the period from 1 April 2002 to 31 December 2002, the Company
disposed of its interest in an investment holding company which holds a right to
acquire a 60% interest in Luoyang Golden Gulf Hotel Co. Limited to Rosedale for
a consideration of HK$110,000,000 satisfied by 366,666,666 new shares of
Rosedale. Accordingly, the Company's investments in associates amounting to
HK$110,000,000 were transferred from long term investment deposits which
comprised of HK$24,400,000 brought forward, an amount of HK39,400,000 paid
during the period and the balance of HK$46,200,000 unpaid as at 31 December
2002.

(f) During the period from 1 April 2002 to 31 December 2002, the Company
acquired the remaining 25% interest in Trans-Island Group for HK$40,000,000. At
31 December 2002, a balance of HK$30,000,000 was outstanding.

43.   ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
                                            2003                     2002
                                           -------                 -------
                                           HK$'000                 HK$'000
<S>                                        <C>                     <C>
Bank balances, deposits and cash           111,709                  61,510
Bank overdrafts                                  -                  (7,717)
                                           -------                  ------
                                           111,709                  53,793
                                           =======                  ======
</TABLE>

44.   PLEDGE OF ASSETS

At 31 December 2003, the Company's credit facilities were secured by the
Company's assets as follows:

<TABLE>
<CAPTION>
                                          2003                  2002
                                        -------                -------
                                        HK$'000                HK$'000
<S>                                     <C>                    <C>
Property interests                       19,839                 86,880
Bank balances                               390                    802
Motor vehicles                                -                 33,961
Office equipment and machinery                -                  2,023
                                         ------                -------
                                         20,229                123,666
                                         ======                =======
</TABLE>

In addition, at 31 December 2002, the Company also pledged its holding of
1,000,000,000 shares in Rosedale with a market value of approximately
HK$200,000,000 to secure other loans of HK$100,000,000 granted to the Company.

                                      102

<PAGE>

45.   CONTINGENT LIABILITIES

<TABLE>
<CAPTION>
                                                                                    2003                  2002
                                                                                   -------               -------
                                                                                   HK$'000               HK$'000
<S>                                                                                <C>                   <C>
Guarantees given to banks, financial institutions and
  suppliers in respect of credit facilities granted                                      -                15,348
An undertaking to Apex (2002: Rosedale) to indemnify
  it against any potential loss upon the transfer of the land
  use right to the Luoyang Golden Gulf Hotel Co., Ltd.
  in relation to the disposal thereof during the period from
  1 April 2002 to 31 December 2002 as disclosed in note 42(e)                        37,347               37,347
Guarantee to the holder of the promissory note issued by a
  subsidiary of Apex                                                                365,000                    -
                                                                                    -------               ------
                                                                                    402,347               52,695
                                                                                    =======               ======
</TABLE>

In addition, the Company also had contingent liabilities in respect of
liabilities arising from claims against Trans-Island Group in connection with
its businesses before the disposal. The directors consider that the final
outcomes of those claims will not be material and accordingly, no provision has
been made in the financial statements.

46.   OPERATING LEASE COMMITMENTS

As lessee

At 31 December 2003, the Company had commitments for future minimum lease
payments under non-cancellable operating leases in respect of rented premises
which fall due as follows:

<TABLE>
<CAPTION>
                                              2003                  2002
                                             -------               -------
                                             HK$'000               HK$'000
<S>                                          <C>                   <C>
Within one year                               13,752                18,154
In the second to fifth years inclusive         7,777                13,884
                                              ------                ------
                                              21,529                32,038
                                              ======                ======
</TABLE>

Operating lease payments represent rentals payable by the Company for certain of
its office properties, shops and employees' quarters. Leases are negotiated for
an average term of two years.

As lessor

At 31 December 2003 and 31 December 2002, the Company had not contracted with
tenants for any future minimum lease payments.

                                      103

<PAGE>

47.   CAPITAL COMMITMENTS

<TABLE>
<CAPTION>
                                                             2003          2002
                                                            -------       -------
                                                            HK$'000       HK$'000
<S>                                                         <C>           <C>
Contracted for but not provided in the financial
  statements in respect of acquisition of property,
  plant and equipment                                            -         3,751
Contracted for but not provided in the financial
  statements in respect of investments                           -         5,000
                                                             -----         -----
                                                                 -         8,751
                                                             =====         =====
</TABLE>

48.   PROVIDENT FUND SCHEMES

The Company has retirement schemes covering a substantial portion of its
employees. The principal schemes are defined contribution schemes. The assets of
these schemes are held separately from those of the Company in funds under the
control of independent trustees.

With effect from 1 December 2000, the Company joined a Mandatory Provident Fund
Scheme ("MPF Scheme") for all its new employees employed therefrom or existing
employees wishing to join the MPF Scheme. The MPF Scheme is registered with the
Mandatory Provident Fund Scheme Authority under the Mandatory Provident Fund
Schemes Ordinance. The assets of the MPF Scheme are held separately from those
of the Company in funds under the control of an independent trustee. Under the
rules of the MPF Scheme, the employer and its employees are required to make
contributions to the MPF Scheme at rates specified in the rules. The only
obligation of the Company in respect of MPF Scheme is to make the required
contributions under the MPF Scheme.

The amounts charged to the income statement represent contributions payable to
schemes and the MPF Scheme by the Company at rates specified in the rules of the
schemes less forfeiture of HK$1,003,589 (1.4.2002 to 31.12.2002: HK$650,000)
arising from employees leaving the Company prior to completion of the qualifying
service period, if any.

At the balance sheet date, the total amount of forfeited contributions, which
arose upon employees leaving the retirement benefit schemes and which are
available to reduce the contributions payable in future years was HK$98,530
(2002: HK$233,000).

                                      104

<PAGE>

49.   POST BALANCE SHEET EVENTS

Subsequent to the balance sheet date, the following events took place:

      (a) Following the closing of cash offer for shares in Apex (as described
in note 17) on 9 January 2004, the Company holds a 67.9% interest in Apex. Apex
will be accounted for as a subsidiary of the Company thereafter.

      (b) On 13 January 2004, the Company entered into conditional agreements
with CEL, a substantial shareholder of the Company and Hutchison International
Limited ("HIL"), in relation to the issuance of the convertible notes by the
Company to each of them or their respective nominees for a consideration of
HK$155,000,000 and HK$105,000,000 respectively to finance the repayment of the
convertible notes due in April 2004. ("CN Agreements"). The convertible notes to
be issued carry interest of 2% per annum; entitle the holders to convert into
shares of the Company at the conversion price of HK$0.02 per share, subject to
adjustments, and are repayable on the third anniversary of the date of issue.
The completion of the agreements is conditional upon the fulfillment or waiver
by the relevant party of certain conditions including, among others, the
approval of the shareholders of the Company of the transactions and a waiver by
the Executive Director of the Corporate Finance Division of the Securities and
Futures Commission from the obligation on the part of CEL and HIL and their
respective concert parties to make general offer for the shares of the Company
upon exercise of all (or relevant part) of the conversion rights attaching to
the notes. ("Whitewash Waiver").

          On 8 June 2004, the ordinary resolutions in relation to the approval
of (a) the CN Agreements, the issue of the related convertible notes and the
transactions contemplated thereunder; and (b) the Whitewash Waiver were duly
passed by the disinterested shareholders and independent shareholders of the
Company respectively at the special general meeting of the Company held on that
date.

      (c) In February 2004, a 50% associate of the Company, acquired an interest
in a piece of land in Hong Kong. Subsequently, the Company entered into a sale
and purchase agreement to dispose of the entire interest of the aforesaid
associate. The disposal of the associate is expected to be completed by 30 June
2004. Upon the completion, the profit arising from the disposal will amount to
approximately HK$39,000,000.

      (d) The Company has redeemed HK$50,000,000 of the convertible notes due on
19 April 2004 and is discussing with the holders of the remaining convertible
notes on the possibility to extend the maturity date. Both CEL and HIL have
indicated their willingness to extent the maturity date for their convertible
notes and the directors are taking steps to finalize such arrangements.

                                      105

<PAGE>

50.   RELATED PARTY TRANSACTIONS

(a) During the year/period, the Company had transactions with related parties as
follows:

<TABLE>
<CAPTION>
                                                                                     1.1.2003       1.4.2002
                                                                                        to             to
(I)    Nature of transactions            Note    Name of company                    31.12.2003     31.12.2002
       ----------------------            ----    ---------------                    ----------     ----------
                                                                                      HK$'000        HK$'000
<S>    <C>                               <C>     <C>                                <C>            <C>
       Property rental expenses           (i)    Mass Success International
         paid and payable                          Limited                             1,790            288
         by the Company                          Cycle Company Limited and
                                                   Gunnell Properties Limited          1,630              -
                                                                                       -----          -----
                                                                                       3,420            288
                                                                                       =====          =====

       Air ticketing and travel          (ii)    Hanny Holdings Limited
         service income received                   and its subsidiaries                  666          1,056
         and receivable by the                   Paul Y. - ITC Construction
         Company                                   Holdings Limited  and its
                                                   subsidiaries                          486            838
                                                 Dong Fang Gas Holdings Limited
                                                   and its subsidiaries                  318              -
                                                 ITC Corporation Limited
                                                   and its subsidiaries                  266            460
                                                 China Strategic Holdings
                                                   Limited and its subsidiaries          213            248
                                                 PSC Corporation Limited                 213              -
                                                 Star East Holdings Limited
                                                   and its subsidiaries                  118            901
                                                 Mobile Media Management
                                                   Limited                                27              -
                                                 Cheung Wah Ho Dyestuffs
                                                   Company Limited                        17              -
                                                 X-One Management Limited                 11              -
                                                 Rosedale and its subsidiaries             -            303
                                                                                       -----          -----
                                                                                       2,335          3,806
                                                                                       =====          =====
       Interest on convertible notes     (iii)   Million Good Limited                  1,696          1,345
                                                                                       =====          =====

       Loan interest paid and            (iv)    China Strategic Holdings
         payable by the Company                    Limited and its subsidiaries        2,229            891
                                                 Hanny Holdings Limited
                                                   and its subsidiaries                1,790          1,298
                                                 Million Good Limited                  1,710              -
                                                 National Cheer Investment
                                                   Limited                               385              -
                                                                                       -----          -----

                                                                                       6,114          2,189
                                                                                       =====          =====

       Net income on sales of             (v)    Cyber Business Network
         computer program source code              (Hong Kong) Limited                 3,000              -
                                                                                       =====          =====
</TABLE>

Notes:

(i)   The property rental expenses paid and payable by the Company were
      determined in accordance with the terms of relevant agreements.

                                      106

<PAGE>

50.   RELATED PARTY TRANSACTIONS - continued

(a) During the year/period, the Company had transactions with related parties as
follows: - continued

Notes: - continued

(ii)  The above companies purchased air tickets from the Company at rates
      comparable to market rates.

(iii) The interest on convertible notes was calculated at the rate specified in
      the issued convertible notes.

(iv)  The interest paid and payable by the Company for loans from these
      companies was calculated at rates comparable to market rates.

(v)   The above company purchased the computer program source code from the
      Company at a price with reference to the market rate.

Certain directors of the Company are also directors of and/or have beneficial
interests in those companies other than Rosedale. Rosedale was an associate of
the Company and was disposed of in December 2003.

<TABLE>
<CAPTION>
                                                                                  1.1.2003       1.4.2002
                                                                                     to             to
(II)     Nature of transactions       Note    Name of company                    31.12.2003     31.12.2002
         ----------------------       ----    ---------------                    ----------     ----------
                                                                                   HK$'000        HK$'000
<S>      <C>                          <C>     <C>                                <C>            <C>
         Agency fees paid by the       (i)    Ananda Travel Service, Inc.              60            111
           Company                            HK Ananda Travel (Malaysia)
                                                Sdn. Bhd.                               -            484
                                              Ananda Travel Company
                                                Limited**                               -            321
                                              Ananda Travel Philippines, Inc.           -            103
                                                                                       --          -----

                                                                                       60          1,019
                                                                                       ==          =====

         Property rental expenses     (ii)    Tower Property
          paid by the Company                   Limited                                 -          5,439
                                                                                       ==          =====

         Printing expenses paid       (iii)   Ananda Public Relations &
           by the Company                       Advertising Limited                     -          1,013
                                                                                       ==          =====

         Air ticketing and travel     (iv)    Ananda Travel Service, Inc.               7             64
           services income received           HK Ananda Travel (Malaysia)
           by the Company                       Sdn. Bhd.                               -             14
                                                                                       --          -----

                                                                                        7             78
                                                                                       ==          =====
</TABLE>

Notes:

(i)   During the period from 1 April 2002 to 31 December 2002, the above
      companies acted as the Company's land operators in the jurisdictions in
      which they are located. Agency fees were calculated in accordance with the
      agency agreements entered into between the Company and each of the above
      related companies on 20 September 1997.

                                      107

<PAGE>

50.   RELATED PARTY TRANSACTIONS - continued

(a)   During the year/period, the Company had transactions with related parties
      as follows: - continued

Notes: - continued

(ii)  The Company continued to occupy office premises owned by Tower Property
      Limited until December 2002. The rentals were calculated on the basis of
      an amount determined by reference to the floor area of the relevant
      property, and comparable rent paid for similar properties by tenants
      occupying such premises.

(iii) During the period ended 31 December 2002, Ananda Public Relations &
      Advertising Limited provided printing services for the Company's
      promotional materials at prices comparable to market rates.

(iv)  During the period ended 31 December 2002, the above companies purchased
      air tickets and other travel related services from the Company at rates
      comparable to market rates.

The Company accrued no fee (1.4.2002 to 31.12.2002: HK$9,000) payable to each of
Ananda Development Limited and Ananda Holdings Limited for the Company to use
the address of certain premises in Guangzhou and Hong Kong as the correspondence
address of the Company's representative office in Guangzhou and the Company's
head office and principal place of business respectively.

The Company paid an annual fee of HK$10 (1.4.2002 to 31.12.2002: HK$10) to
Ananda Holdings Limited for a non-exclusive licence to the Company to use the
"Ananda" trademark.

Mr. Chan Yeuk Wai has controlling interests in the above companies, except for
Ananda Travel Philippines, Inc., Ananda Travel Service, Inc., Ananda Travel
Company Limited and HK Ananda Travel (Malaysia) Sdn. Bhd., companies in which
they have minority interests.

      ** Being English translation of legal Chinese name as the Company does
         not have any legal English name.

(b)   During the year, the Company executed a guarantee in favor of the holder
      of the promissory note issued by a subsidiary of Apex as security to
      secure the promissory note to the extent of HK$365 million together with
      interest. No commission or charges were received from Apex in respect of
      the guarantee.

(c)   During the year, a subsidiary of an indirect substantial shareholder has
      pledged certain of its share investments listed in Hong Kong with a lender
      to secure its loans granted to the Company. No commission or charges were
      paid to the subsidiary of the indirect substantial shareholder by the
      Company in respect of the security provided.

                                      108

<PAGE>

50.   RELATED PARTY TRANSACTIONS - continued

(d)   During the year/period, the Company recorded hotel management fee of HK$
      nil (1.4.2002 to 31.12.2002: HK$1,075,000) receivable from Heilongjiang
      Ananda in accordance with the hotel management contract entered with
      Heilongjiang Ananda.

(e)   During the year/period, two directors including a former executive
      director of the Company, executed personal guarantees to a bank and a
      securities company to secure their loans granted to the Company. No
      commission or charges were paid to the directors by the Company in respect
      of the above guarantees.

(f)   During the year/period, the Company received loans from related companies.
      Details of their relationship and the terms of the loans are set out in
      note 30 to the financial statements.

(g)   During the period from 1 April 2002 to 31 December 2002, the Company
      maintained trading accounts with related companies. Terms of the balances
      and allowances made during the period are set out in notes 24 and 31 to
      the financial statements.

(h)   On 22 July 2002, the Company together with other parties entered into a
      series of agreements with Rosedale. As at 31 December 2002, Rosedale was
      an associate of China Strategic Holdings Limited which is an indirect
      substantial shareholder of the Company. One of them included disposing of
      its interest in an investment company holding a right to acquire a 60%
      interest in Luoyang Golden Gulf Hotel Co., Limited whose principal asset
      is the Golden Gulf Hotel in Luoyang, the PRC, for a consideration of
      HK$110,000,000 which was satisfied by 366,666,666 new shares of Rosedale.
      The transaction was approved by the independent shareholders of the
      Company at the special general meeting held on 28 October 2002 and shall
      be completed subject to settlement of the outstanding payment in
      accordance to the payment schedule.

The Company, in relation to the disposal of the interest in the investment
company holding Luoyang Golden Gulf Hotel Co., Limited gave an undertaking to
Apex to indemnify it against any potential loss they may suffer as a result of
failure to transfer the land use right to Luoyang Golden Gulf Hotel Co., Limited
including the payment of any land premium payable for such transfer. It is
estimated that the land premium for such transfer would be approximately RMB39.7
million (equivalent to approximately HK$37,347,000).

In addition to the above 366,666,666 new shares in Rosedale, the Company also
subscribed for 1,000,000,000 shares in Rosedale at a price of HK$0.30 per share
amounting in aggregate to a total consideration of HK$300,000,000. The
transaction was also approved by the independent shareholders of the Company at
the special general meeting held on 28 October 2002.

                                      109

<PAGE>

51. PRINCIPAL SUBSIDIARIES

    Details of the Company's principal subsidiaries as at 31 December 2003, all
of which are wholly owned by the Company, unless otherwise stated, are as
follows:

<TABLE>
<CAPTION>
                                                             Issued and
                                        Place of               paid up
                                     incorporation/        share capital/
Name of company                       registration       registered capital      Principal activities
---------------                      -------------       ------------------      --------------------
<S>                                  <C>                 <C>                     <C>
Ananda Travel (Canada)                Canada                     C$15,000        Travel and related services
  Limited

Ananda Travel, Limited                Macau                  MOP1,000,000        Travel and related services

Ananda Travel (U.K.) Limited          United Kingdom                   L2        Travel and related services

Asian Pearl Investments               BVI                            US$1        Investment holding in the PRC
  Limited

Benchmark Pacific Limited             BVI                            US$1        Investment holding in Hong Kong

Credit Paradise Limited               Hong Kong                      HK$2        Property investment in
                                                                                   Malaysia

Golden Sun Limited                    Hong Kong                      HK$2        Investment holding

Hong Kong Wing On Travel              Hong Kong                Ordinary -        Outbound travel and related
  Service Limited                                          HK$180,000,100          services
                                                               Deferred -
                                                            HK$20,000,000 **

Kingsgrove International              Hong Kong                      HK$2        Property investment
  Limited

Many Good Money Exchange              Hong Kong                HK$100,000        Money exchange services
  Limited

Mexmara Holdings Limited              BVI                            US$1        Property investment in
                                                                                   Hong Kong

Millennium Target Holdings            BVI                            US$1        Investment holding in Hong Kong
  Limited

Moreton International Limited         Hong Kong                      HK$2        Property investment

Silver Bay Commodities Limited*       Hong Kong                 HK$20,000        Investment holding in the PRC

Sinomatrix Limited                    BVI                            US$1        Investment holding in Hong Kong

South Africa Express Limited          BVI                            US$1        Travel services in the PRC

Success Fund Industrial Limited       Hong Kong                    HK$100        Property investment in the PRC
</TABLE>

                                      110

<PAGE>

51.   PRINCIPAL SUBSIDIARIES - continued

<TABLE>
<CAPTION>
                                                             Issued and
                                        Place of               paid up
                                     incorporation/        share capital/
Name of company                       registration       registered capital      Principal activities
---------------                      -------------       ------------------      --------------------
<S>                                  <C>                 <C>                     <C>
Super Grade Investment                BVI                            US$1        Property investment in
  Limited                                                                          Hong Kong

Watertours of Hong Kong               Hong Kong                Ordinary -        Watertour services
  Limited                                                    HK$1,500,000
                                                             "B" - HK$100 **

Wing On China Hotel                   BVI                            US$1        Investment holding in the PRC
  Investment Limited
(formerly known as "Ananda
 China Hotel Investment Limited")

Wing On Hotel Management              BVI                            US$4        Hotel management services
  Limited                                                                          in the PRC
(formerly known as "Ananda
 Hotel Management Limited")

Wing On Travel And Tour               Hong Kong              HK$2,000,000        Inbound travel and related
  Limited (formerly known as                                                       services
  "Ananda Travel Limited")

Wing On Travel (BVI) Limited          BVI                       US$10,000        Investment holding in Hong Kong
(formerly known as "Ananda
 Wing On Travel (BVI) Limited")

World Way (Pacific) Limited           Hong Kong                      HK$2        General trading
</TABLE>

      * 70% owned by the Company

      ** The deferred shares and "B" shares are owned by the Company,
practically carry no rights to dividends or to receive notice of or to attend or
vote at any general meeting of the respective companies or to participate in any
distribution in winding up.

      All of the above principal subsidiaries, other than Wing On Travel (BVI)
Limited, are held indirectly by the Company.

      The above principal subsidiaries operate in their respective place of
incorporation or registration unless as stated otherwise.

      The above table lists the subsidiaries of the Company which, in the
opinion of the directors, principally affected the results or assets and
liabilities of the Company. To give details of other subsidiaries would, in the
opinion of the directors, result in particulars of excessive length.

      No debt securities have been issued by any of the subsidiaries.

                                      111

<PAGE>

52.   SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
      HONG KONG ("HK GAAP") AND IN THE UNITED STATES ("US GAAP")

The consolidated financial statements are prepared in accordance with HK GAAP,
which differ in certain significant respects from US GAAP. The cash flow
statement used in the primary financial statements complies with International
Accounting Standards No. 7.

The significant differences between HK GAAP and US GAAP as they relate to the
Company are principally attributable to the accounting for the goodwill arising
on acquisition prior to 2001, convertible notes with beneficial conversion
features, hotel and investment properties, and share options.

Under HK GAAP, the acquisition of the minority interest in Trans-Island Group in
July 2002 resulted in an excess of purchase consideration paid over the fair
value of the net assets acquired, which was recorded as goodwill and is being
amortized over a period of 20 years. Under US GAAP, intangible assets, including
goodwill, with indefinite useful lives are not amortized but instead tested for
impairment at least annually in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible
Assets".

Under HK GAAP, the excess of the fair value of the net assets acquired over the
purchase consideration paid for the acquisition is recorded as negative
goodwill, which is presented as a deduction from the assets of the Company in
the consolidated balance sheet. The Company releases the negative goodwill to
the statement of income on a systematic basis over the remaining weighted
average useful life of the identifiable acquired depreciable/amortizable assets.
Under US GAAP, the excess of assigned value of identifiable assets over the cost
of an acquired company, should be allocated on a pro rata basis to the fair
values of all acquired assets except financial assets other than investments
accounted for by the equity method, assets to be disposed of by sale, deferred
tax assets, prepaid assets relating to pension or other postretirement benefit
plans, and any other current assets.

The Company follows the current practice in Hong Kong of not separately
accounting for nondetachable conversion features embedded in convertible notes
that are in-the-money on the date of issuance (a "beneficial conversion
feature"). Under US GAAP, the embedded beneficial conversion feature should be
valued separately upon issuance. The discount resulting from allocation of
proceeds to the beneficial conversion feature should be recognized as interest
expense over the maturity of the convertible notes. All of the unamortized
discount remaining at the date of conversion should be immediately recognized as
interest expense.

      Under HK GAAP, revaluation of hotel and investment properties annually
instead of provision of depreciation on the historical cost of acquisition is
generally permitted. The revalued amount becomes the deemed cost base of the
assets of Company or its affiliates and no depreciation is provided on the
deemed cost. Under US GAAP, financial statements are required to be prepared on
a historical cost basis. Accordingly, hotel and investment properties are
restated at cost and depreciation on historical costs will be recognized under
US GAAP.

Under HK GAAP, hotel and investment properties are stated on the basis of
appraised values and depreciation is not provided. Under US GAAP, investment
properties not held for resale are stated at historical cost less accumulated
depreciation. This difference in accounting under HK GAAP and US GAAP had a
significant impact on the Company's equity method affiliate's results of
operations or financial position.

                                      112

<PAGE>

52.   SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
      HONG KONG ("HK GAAP") AND IN THE UNITED STATES ("US GAAP") - continued

The Company follows the current practice in Hong Kong that no accounting entry
is made on grant of share options to its employees and directors. Under US GAAP,
the Company accounts for its share option scheme under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, the amount of compensation expense is determined based on the
intrinsic value, i.e. the excess, if any, of the quoted market price of the
shares over the exercise price of the options at the date of the grant and is
amortized over the vesting period of the related options. Since no options have
been granted under the Company's option plans, this difference in accounting
under HK GAAP and US GAAP has had no impact on the Company's results of
operations or financial position.

The adjustments necessary to present net loss and shareholders' equity in
accordance with US GAAP, for the year ended 31 December 2003 and nine months
ended 31 December 2002, respectively, are shown in the tables set out below.

<TABLE>
<CAPTION>
                                                                                1.1.2003              1.4.2002
                                                                                   to                    to
                                                                               31.12.2003            31.12.2002
                                                                            ---------------       ---------------
                                                                                HK$'000               HK$'000
<S>                                                                         <C>                   <C>
Net loss as reported under HK GAAP (as restated for
  the period from 1 April 2002 to 31 December 2002)                                (370,972)             (302,248)
Reversal of retroactive application of SSAP 12 (Revised)                                  -                  (610)
                                                                            ---------------       ---------------
As previously reported                                                             (370,972)             (302,858)
US GAAP adjustments:
  Reversal of amortization of goodwill                                                  496                   165
  Difference in amortization attributable to the excess of
      fair value of net assets acquired over the purchase
      consideration paid for a business acquired                                        568                    49
  Reversal of revaluation surplus of investment property                                 (7)                    -
  Additional loss on disposal of discontinued operation                                (661)                    -
  Additional loss on disposal of an associate                                          (617)                    -
  Interest expense attributable to amortization of the
    beneficial conversion feature embedded in the
    convertible notes                                                               (64,828)             (102,233)
  Net US GAAP adjustments attributable to equity
    method affiliate                                                                  7,712                     -
                                                                            ---------------       ---------------
Net loss under US GAAP                                                             (428,309)             (404,877)
                                                                            ===============       ===============

Comprising:
  Continuing operation                                                             (408,519)             (396,258)
  Discontinued operation                                                            (19,790)               (8,619)
                                                                            ---------------       ---------------
                                                                                   (428,309)             (404,877)
                                                                            ===============       ===============

Loss per share under US GAAP - basic and diluted
  Continuing operation                                                      (2.23) HK cents       (2.40) HK cents
  Discontinued operation                                                    (0.11) HK cents       (0.05) HK cents
                                                                            ---------------       ---------------
                                                                            (2.34) HK cents       (2.45) HK cents
                                                                            ===============       ===============
</TABLE>

                                      113

<PAGE>

52.   SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
      HONG KONG ("HK GAAP") AND IN THE UNITED STATES ("US GAAP") - continued

In addition, interest income for the year ended 31 December 2003 of HK$1,150,000
(1 April 2002 to 31 December 2002: HK$10,679,000) classified as a component of
other operating income for HK GAAP purposes is considered to be non-operating
income for US GAAP purposes.

<TABLE>
<CAPTION>
                                                                                     2003                  2002
                                                                                    -------               -------
                                                                                    HK$'000               HK$'000
<S>                                                                                 <C>                   <C>
Shareholders' equity as reported under HK GAAP
  (as restated for 2002)                                                            293,321               654,576
Reversal of retroactive application of SSAP 12 (Revised)                                  -                 6,715
                                                                                    -------               -------

As previously reported                                                              293,321               661,291
US GAAP adjustments:
  Reversal of revaluation surplus of investment property                               (170)                    -
  Reversal of amortization of goodwill                                                  661                   165
  Difference in amortization attributable to negative goodwill                          617                    49
  Additional loss on disposal of discontinued operation                                (661)                    -
  Additional loss on disposal of an associate                                          (617)                    -
   Accounting for beneficial conversion feature present in
    the convertible notes                                                            17,939                82,767
  Net US GAAP adjustments attributable to equity method
    affiliate                                                                         7,712                     -
                                                                                    -------               -------
Shareholders' equity under US GAAP                                                  318,802               744,272
                                                                                    =======               =======
</TABLE>

Other comprehensive loss

<TABLE>
<CAPTION>
                                                                                  1.1.2003              1.4.2002
                                                                                     to                    to
                                                                                 31.12.2003            31.12.2002
                                                                                 ----------            ----------
                                                                                  HK$'000               HK$'000
<S>                                                                              <C>                   <C>
US GAAP net loss                                                                   (428,309)             (404,877)
Foreign currency translation adjustment                                                (213)                 (387)
                                                                                   --------              --------
Comprehensive loss                                                                 (428,522)             (405,264)
                                                                                   ========              ========
</TABLE>

Total assets

<TABLE>
<CAPTION>
                                                                                    2003                  2002
                                                                                  ---------             ---------
                                                                                   HK$'000               HK$'000
<S>                                                                               <C>                   <C>
Total assets under US GAAP                                                        1,114,893             1,438,243
                                                                                  =========             =========
</TABLE>

Total liabilities

<TABLE>
<CAPTION>
                                                                                      2003                  2002
                                                                                    -------               -------
                                                                                    HK$'000               HK$'000
<S>                                                                                 <C>                   <C>
Total liabilities under US GAAP                                                     766,313               693,971
                                                                                    =======               =======
</TABLE>

The unamortized balance of the beneficial conversion feature present in the
convertible notes has been included in the carrying value of the convertible
notes.

                                      114

<PAGE>

52.   SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
HONG KONG ("HK GAAP") AND IN THE UNITED STATES ("US GAAP") - continued

Valuation allowances
--------------------

Roll forward schedule of allowances for doubtful assets (all related to
continuing operations)

For the year ended 31 December 2003
-----------------------------------

<TABLE>
<CAPTION>
                                                               Charged to
                                                               costs and
                                            1.1.2003            expenses            Write-off          31.12.2003
                                            --------            --------            ---------          ----------
                                             HK$'000             HK$'000             HK$'000             HK$'000
<S>                                         <C>                <C>                  <C>                <C>
Allowance for doubtful debts                  32,690                   -                   -              32,690
Allowance for advances to
  service suppliers                          209,385                   -                   -             209,385
Allowance for short term
  investment deposit                          23,000                   -                   -              23,000
                                             =======             =======             =======             =======
</TABLE>

For the period from 1 April 2002 to 31 December 2002
----------------------------------------------------

<TABLE>
<CAPTION>
                                                               Charged to
                                                               costs and
                                            1.4.2002            expenses            Write-off         31.12.2002
                                            --------           ----------           ---------         ----------
                                             HK$'000             HK$'000             HK$'000            HK$'000
<S>                                         <C>                <C>                  <C>               <C>
Allowance for doubtful debts                   9,877              22,813                   -             32,690
Allowance for advances to
  service suppliers                           47,263             162,122                   -            209,385
Allowance for short term
  investment deposit                               -              23,000                   -             23,000
                                             =======             =======             =======            =======
</TABLE>

Recent Accounting Pronouncements Not Yet Adopted
------------------------------------------------

      In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities".
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 ended 15
December 2003. In December 2003 the FASB issued FIN 46R, which defers the
implementation due to the end of the first reporting period after 15 March 2004
unless the Company has a special purpose entity in which case the provisions
must be applied for fiscal year ended 31 December 2003. The Company does not
have any special purpose entities therefore they will adopt the provision in
December 2004.

                                      115

<PAGE>

52. SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
HONG KONG ("HK GAAP") AND IN THE UNITED STATES ("US GAAP") - continued

Recent Accounting Pronouncements Not Yet Adopted - continued
------------------------------------------------

      In November 2002, the Emerging Issue Task Force ("EITF") reached a
consensus on Issue No. 00-21 ("EITF No. 00-21"), "Revenue Arrangements with
Multiple Deliverables". EITF No. 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which the vendor will perform
multiple revenue generating activities. EITF No. 00-21 is effective for fiscal
periods beginning after 15 June 2003. The Company's adoption of EITF No. 00-21
did not have a significant impact on the Company's financial position, cash
flows or results of operations.

      In April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133
on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is applied prospectively and is effective for contracts
entered into or modified after 30 June 2003, except for SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to 15 June 2003 and certain provisions relating to forward purchases and
sales on securities that do not yet exist. The Company's adoption of SFAS No.
149 did not have a significant impact on its results of operations or financial
position.

      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". It
establishes standards for how an issuer classifies and measures certain
financial instruments. SFAS No. 150 is effective for financial instruments
entered into or modified after 31 May 2003, and otherwise is effective at the
beginning of the first interim period beginning after 15 June 2003. It requires
that certain financial instruments that, under previous guidance, could be
accounted for as equity be classified as liabilities, or assets in some
circumstances. It does not apply to features embedded in a financial instrument
that is not a derivative in its entirety. SFAS No. 150 also requires disclosures
about alternative ways of settling the instruments and the capital structure of
entities whose shares are mandatorily redeemable. The Company's adoption of SFAS
No. 150 did not have a significant impact on its cash flows, results of
operations or financial position.

                                      116

<PAGE>
 Pursuant to Article 3-09 of Regulation S-X, Hangzhou Zhongce Statements for the
years ended December 31, 2001, 2002 and 2003 in accordance with U.S. GAAP, are
set out as follows.

                          HANGZHOU ZHONGCE RUBBER CO., LTD.
                          ---------------------------------

                          Report of Independent Registered Public
                          Accounting Firm and Consolidated Financial Statements
                          For the years ended December 31, 2001, 2002 and 2003

                                      117

<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

HANGZHOU ZHONGCE RUBBER CO., LTD.

<TABLE>
<S>                                                                            <C>
Report of Independent Registered Public Accounting Firm.................       119

Consolidated Financial Statements:

Consolidated Statements of Operations and Comprehensive Income
  for the years ended December 31, 2001, 2002 and 2003..................       120

Consolidated Balance Sheets as of December 31, 2002 and 2003............       121

Consolidated Statements of Shareholders' Equity for the years
  ended December 31, 2001, 2002 and 2003................................       123

Consolidated Statements of Cash Flows for the years ended
  December 31, 2001, 2002 and 2003......................................       124

Notes to Consolidated Financial Statements..............................       127
</TABLE>

                                      118

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Hangzhou Zhongce Rubber Co., Ltd.

We have audited the accompanying consolidated balance sheets of Hangzhou Zhongce
Rubber Co., Ltd. and its subsidiary as of December 31, 2002 and 2003 and the
related consolidated statements of operations and comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003, all expressed in Renminbi. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hangzhou Zhongce
Rubber Co., Ltd. and its subsidiary as of December 31, 2002 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company and its subsidiary will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the negative
working capital of the Company and its subsidiary of Rmb287,993,000 as of
December 31, 2003 raises substantial doubt about their ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ Deloitte Touche Tohmatsu
Hong Kong
April 23, 2004

                                      119

<PAGE>

         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                                   ---------------------------------------------------------
                                                                      2001            2002           2003            2003
                                                                   -----------     -----------    -----------      ---------
                                                                      RMB             RMB            RMB              US$
<S>                                                                <C>             <C>            <C>              <C>
REVENUES (NOTE 16):

  - third parties...........................................        1,903,683       2,400,964      3,545,366        428,184
  - related parties.........................................          184,202         209,112        250,842         30,295
                                                                   ----------      ----------     ----------       --------

Total.......................................................        2,087,885       2,610,076      3,796,208        458,479
COST OF REVENUES............................................       (1,837,000)     (2,250,785)    (3,416,622)      (412,635)
                                                                   ----------      ----------     ----------       --------

Gross profit................................................          250,885         359,291        379,586         45,844
Selling, general and administrative expenses................         (121,452)       (176,772)      (236,158)       (28,521)
(Provision for) recovery on amounts due from
  related companies (note 13)...............................          (27,000)          5,016         (5,942)          (718)
                                                                   ----------      ----------     ----------       --------

OPERATING INCOME............................................          102,433         187,535        137,486         16,605
NON-OPERATING INCOME (EXPENSES):
Interest income.............................................            1,654           1,491          1,071            129
Interest expenses...........................................          (40,779)        (40,789)       (44,582)        (5,384)
Other (expense) income......................................             (517)          2,938          4,333            523
Equity in (losses) earnings of affiliate....................           (2,486)          3,592         23,302          2,814
                                                                   ----------      ----------     ----------       --------

INCOME FROM OPERATIONS BEFORE INCOME TAXES
  AND MINORITY INTERESTS....................................           60,305         154,767        121,610         14,687
Provision for income taxes (note 9).........................           (2,454)        (17,697)       (12,764)        (1,541)
Minority interests..........................................           (2,120)         (3,795)        (2,509)          (303)
                                                                   ----------      ----------     ----------       --------
NET INCOME AND COMPREHENSIVE INCOME.........................           55,731         133,275        106,337         12,843
                                                                   ==========      ==========     ==========       ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      120

<PAGE>

                           CONSOLIDATED BALANCE SHEETS

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                          AS OF DECEMBER 31,
                                                                         --------------------------------------------------
                                                                           2002                  2003                2003
                                                                         ---------             ---------            -------
                                                                           RMB                    RMB                 US$
<S>                                                                      <C>                   <C>                  <C>
ASSETS

Current assets:
  Cash and cash equivalents.................................               133,736                98,900             11,944
  Restricted cash...........................................                26,183                44,684              5,397
  Accounts receivable, net of allowance for
    doubtful receivables of Rmb36,102 in 2002
    and Rmb34,160 in 2003...................................               314,184               379,000             45,773
  Other receivables.........................................                12,593                 4,505                544
  Inventories (note 4)......................................               597,325               738,369             89,175
  Marketable securities (note 5)............................                    50                     -                  -
  Prepaid expenses and other current assets.................                50,143                39,600              4,782
  Due from related companies, net of allowance
    for doubtful receivables of Rmb21,984 in 2002
    and Rmb25,942 in 2003 (note 13).........................               112,943               107,895             13,031
  Other tax recoverable.....................................                     -                 2,625                317
                                                                         ---------             ---------            -------
  Total current assets......................................             1,247,157             1,415,578            170,963

Investments in and advances to affiliate (note 6)...........               151,917               190,109             22,960
Due from Chinese joint venture partners.....................                 1,150                 1,200                145
Prepayments for equipment...................................                78,106                68,273              8,246
Property, plant and equipment, net (note 7).................               469,694               769,773             92,968
Deferred income taxes (note 9)..............................                14,277                20,325              2,454
Other assets................................................                 1,324                 1,085                131
                                                                         ---------             ---------            -------
  Total assets..............................................             1,963,625             2,466,343            297,867
                                                                         =========             =========            =======
</TABLE>

                                      121

<PAGE>

                     CONSOLIDATED BALANCE SHEETS - CONTINUED

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                          AS OF DECEMBER 31,
                                                                         --------------------------------------------------
                                                                           2002                  2003                2003
                                                                         ---------             ---------            -------
                                                                            RMB                   RMB                 US$
<S>                                                                      <C>                   <C>                  <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Short-term bank loans (note 8)............................               659,388               917,046            110,754
  Long-term bank loans - current portion (note 8)...........                41,600               135,000             16,304
  Accounts payable..........................................               401,175               471,967             57,001
  Other payables............................................                41,883                46,708              5,641
  Dividend payable..........................................                21,953                20,116              2,430
  Accrued liabilities.......................................                61,780               106,727             12,890
  Income taxes payable (note 9).............................                13,828                 6,007                725
  Other tax payable.........................................                13,187                     -                  -
                                                                         ---------             ---------            -------

  Total current liabilities.................................             1,254,794             1,703,571            205,745
Long-term bank loans, net of current portion
  (note 8)..................................................                75,000                60,000              7,246
Due to Chinese joint venture partners (note 14).............                   150                     -                  -
Due to a shareholder........................................                    67                    67                  8
Loans from related companies (note 13)......................                 1,058                   523                 63
                                                                         ---------             ---------            -------
  Total liabilities.........................................             1,331,069             1,764,161            213,062
                                                                         ---------             ---------            -------
Minority interests..........................................                15,972                18,481              2,232
                                                                         ---------             ---------            -------

Obligations and commitments (note 11)

Shareholders' equity:
  Registered capital........................................               469,749               613,603             74,107
  Additional paid-in capital................................                20,266                20,266              2,448
  Retained earnings.........................................               126,569                49,832              6,018
                                                                         ---------             ---------            -------
  Total shareholders' equity................................               616,584               683,701             82,573
                                                                         ---------             ---------            -------
  Total liabilities and shareholders' equity................             1,963,625             2,466,343            297,867
                                                                         =========             =========            =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      122

<PAGE>

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                               ADDITIONAL         (DEFICIT)
                                                               REGISTERED        PAID-IN          RETAINED
                                                                CAPITAL          CAPITAL          EARNINGS           TOTAL
                                                               ----------      ----------         ---------         -------
                                                                  RMB              RMB              RMB               RMB
<S>                                                            <C>             <C>                <C>              <C>
Balance at January 1, 2001...........................           469,749                -           (78,977)         390,772
Net income...........................................                 -                -            55,731           55,731
Reinvestment of prior year dividends in
  dedicated capital..................................                 -                -            56,540           56,540
                                                                -------          -------          --------          -------

Balance at December 31, 2001.........................           469,749                -            33,294          503,043
Increase of capital..................................                 -           20,266                 -           20,266
Net income...........................................                 -                -           133,275          133,275
Dividends declared...................................                 -                -           (40,000)         (40,000)
                                                                -------          -------          --------          -------

Balance at December 31, 2002.........................           469,749           20,266           126,569          616,584
Increase of registered capital.......................           143,854                -          (143,854)               -
Net income...........................................                 -                -           106,337          106,337
Dividends declared...................................                 -                -           (39,220)         (39,220)
                                                                -------          -------          --------          -------
Balance at December 31, 2003.........................           613,603           20,266            49,832          683,701
                                                                =======          =======          ========          =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      123

<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                                      -----------------------------------------------------
                                                                       2001            2002           2003            2003
                                                                      -------        --------       --------        -------
                                                                        RMB            RMB            RMB             US$
<S>                                                                   <C>            <C>            <C>             <C>
Cash flows from operating activities:
  Net income..................................................         55,731         133,275        106,337         12,843
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Minority interests........................................          2,120           3,795          2,509            303
    Equity in losses (earnings) of affiliates.................          2,486          (3,592)       (23,302)        (2,814)
    Deferred income taxes.....................................         (8,127)         (6,150)        (6,048)          (730)
    (Gain) loss on disposal of property, plant and
      equipment...............................................           (287)            955           (945)          (114)
    Provision for (recovery on) amounts due from
      related companies.......................................         27,000          (5,016)         5,942            718
    Depreciation and amortization.............................         54,649          61,024         71,748          8,665
Changes in operating assets and liabilities
  (net of effects of acquisition):
    Accounts and other receivables, net.......................         (2,695)        (61,612)       (56,728)        (6,851)
    Inventories...............................................        (71,506)       (124,530)      (141,044)       (17,034)
    Prepaid expenses and other current assets.................         (9,077)        (20,483)        10,543          1,273
    Due from related companies................................         34,024          (7,628)          (894)          (108)
    Other tax recoverable.....................................              -               -         (2,625)          (317)
    Other assets..............................................         (3,129)           (283)           239             29
    Accounts payable and other payables.......................         30,106         118,776         75,617          9,132
    Accrued liabilities.......................................          9,655          38,887         44,947          5,428
    Income taxes payable......................................            182          12,437         (7,821)          (945)
    Other taxes payable.......................................         (6,366)          7,140        (13,187)        (1,593)
                                                                      -------         -------        -------         ------
  Net cash provided by operating activities...................        114,766         146,995         65,288          7,885
                                                                      -------         -------        -------         ------
</TABLE>

                                      124

<PAGE>

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                                     -------------------------------------------------------
                                                                       2001            2002           2003            2003
                                                                     --------        --------       --------        --------
                                                                        RMB             RMB            RMB             US$
<S>                                                                  <C>             <C>            <C>             <C>
Cash flows from investing activities:
  Purchase of property, plant and equipment...................       (103,876)       (207,603)      (368,775)       (44,539)
  (Increase) decrease in restricted bank deposits.............        (48,301)         22,118        (18,501)        (2,234)
  Investments in and advances to affiliates, net..............          2,698         (48,071)       (14,890)        (1,798)
  (Decrease) increase in amount due to Chinese
    joint venture partners....................................         (5,413)          4,263            (50)            (6)
  Proceeds from disposal of property, plant and
    equipment.................................................          2,192          42,053          7,726            933
  Proceeds from disposal of trading securities................            170             170             50              6
  Acquisition of a subsidiary, net of cash acquired...........          4,120               -              -              -
  Decrease in due from a shareholder..........................              -              67              -              -
                                                                     --------        --------       --------        -------
Net cash used in investing activities.........................       (148,410)       (187,003)      (394,440)       (47,638)
                                                                     --------        --------       --------        -------

Cash flows from financing activities:
  Net increase in short-term bank loans.......................        127,239          75,158        247,658         29,910
  Proceeds of long-term bank loans............................         51,000          60,000        120,000         14,493
  Payment of dividends to shareholders........................         (5,257)              -        (41,057)        (4,959)
  Repayment of long-term bank loans...........................        (80,000)        (36,000)       (31,600)        (3,816)
  Advance (repayment) of loans from a
    related company...........................................         12,864         (11,806)          (535)           (65)
  Decrease in amount due to Chinese joint
    venture partners..........................................        (35,837)         (5,281)          (150)           (18)
  Decrease (increase) in amount due to
      a shareholder...........................................        (20,594)             67              -              -
  Payment of capital lease obligations........................        (18,973)              -              -              -
                                                                     --------        --------       --------        -------
Net cash provided by financing activities.....................         30,442          82,138        294,316         35,545
                                                                     --------        --------       --------        -------

Net (decrease) increase in cash and cash
  equivalents.................................................         (3,202)         42,130        (34,836)        (4,208)
Cash and cash equivalents, beginning of year..................         94,808          91,606        133,736         16,152
                                                                     --------        --------       --------        -------
Cash and cash equivalents, end of year........................         91,606         133,736         98,900         11,944
                                                                     ========        ========       ========        =======
</TABLE>

                                      125

<PAGE>

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                                      -----------------------------------------------------
                                                                        2001            2002           2003            2003
                                                                      -------          ------         ------          -----
                                                                        RMB             RMB             RMB            US$
<S>                                                                   <C>              <C>            <C>             <C>
Supplemental disclosures of cash flow information:
    Cash paid during the year for:
      Interest paid - net of amounts capitalized............           40,280          37,488         47,138          5,693
      Net income tax paid...................................            9,502          10,649         26,634          3,217
                                                                       ======          ======         ======          =====

Supplemental schedule of non-cash investing
   and financing activities:
    Capital lease obligations incurred .....................           18,973               -              -              -
                                                                       ======          ======         ======          =====

    Details of acquisition:
      Fair value of assets acquired (including cash
        acquired of Rmb4,120)...............................           50,644               -              -              -
      Minority interest acquired............................          (10,058)              -              -              -
      Loan advance capitalized in connection with
        the acquisition.....................................          (10,569)              -              -              -
                                                                       ------          ------         ------          -----
      Liabilities assumed...................................           30,017               -              -              -
                                                                       ======          ======         ======          =====
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      126

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

1.    ORGANIZATION AND BASIS OF PREPARATION

      Hangzhou Zhongce Rubber Company Limited (the "Company") was incorporated
in the People's Republic of China (the "PRC") on June 12, 1992. The Company has
a 51.24% equity interest in Hangzhou Fu Chun Jiang Chemical Industrial Co., Ltd.
("FCJ"), a company also incorporated in the PRC for a term of 20 years
commencing from September 28, 2001. The Company is engaged in the manufacture
and sale of rubber tires in the PRC. FCJ is engaged in the manufacture and trade
of tire rubber and carbon powder.

      Since the Company and FCJ (the "Group") conducts all of its operations in
the PRC, it is subject to special considerations and significant risks not
typically associated with investments in equity securities of the United States
of America (the "US") and western European companies. These include, among
others, risks associated with the political and economic environment, foreign
currency exchange, import restrictions and legal system of the PRC.

      The consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the US ("US GAAP").

These consolidated financial statements are prepared assuming that the Group
will continue as a going concern, which assumes the realization of assets and
the settlement of liabilities in the normal course of operations. The Group has
net current liabilities of Rmb287,993 as of December 31, 2003. The Group's
negative working capital may not allow it to meet its financial commitments as
presently structured.

The consolidated financial statements do not include any adjustments in the
carrying amounts of the assets and liabilities to their realizable amounts and
the classification thereof that might be necessary should the Group be unable to
continue as a going concern.

The Group's continuation as a going concern is dependent upon its ability to
generate sufficient cash flows to meet its obligations on a timely basis and to
obtain additional financing as may be required.

The Group has historically met cash needs from the proceeds of debt and
operating cash flows. Subsequent to the balance sheet date, certain banks have
extended or provided additional funding to the Group. However, there can be no
assurances that continuous extension of facilities or additional funding will be
made available to the Group. These factors raise substantial doubt about the
ability of the Group to continue as a going concern.

                                      127

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)   BASIS OF CONSOLIDATION

      The consolidated financial statements include the assets, liabilities,
revenue and expenses of the Company and its majority owned and controlled
subsidiary. All significant intercompany balances and transactions have been
eliminated on consolidation. Investments in 50% or less owned companies over
which the Company exercises significant influence but not control, are accounted
for using the equity method. Under the equity method, the Company's
proportionate share of the affiliate's net income or loss is included in the
consolidated statement of operations.

(b)   REVENUES

      Revenues represent the invoiced value of goods, net of value-added tax
("VAT") and other sales taxes, supplied to customers. Revenues are recognized
upon delivery and acceptance of goods by the customers. The Group permits the
return of damaged or defective products and accounts for these returns as
deduction from sales. The Group incurred sales taxes of Rmb46,583, Rmb40,639 and
Rmb64,108 for the year ended December 31, 2001, 2002 and 2003, respectively.

(c)   SHIPPING AND HANDLING FEES AND COSTS

      Costs for transportation of products to customers is recorded as a
component of selling, general and administrative expense, and amounted to
Rmb67,420, Rmb62,707 and Rmb91,563 for the years ended December 31, 2001, 2002
and 2003, respectively.

(d)   CASH AND CASH EQUIVALENTS

      The Group considers cash on hand, demand deposits with banks and liquid
investments which are unrestricted as to withdrawal or use and with an original
maturity of three months or less when purchased to be cash and cash equivalents.
Included in cash and cash equivalents as of December 31, 2002 and 2003 were
United States dollar deposits of US$3,364 (Rmb27,854) and US$2,916 (Rmb24,144),
respectively.

(e)   MARKETABLE SECURITIES

      The Group determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation at each
balance sheet date. Marketable securities are classified as either trading or
available-for-sale. Trading securities are carried at fair value, based on
quoted market prices, with unrealized gains and losses included in the
consolidated statement of operations for the year. Investments in marketable
securities classified as available-for-sale are also carried at fair value, with
unrealized gains or losses excluded from the consolidated statement of
operations and reported as other comprehensive income. If the decline in fair
value is determined to be other than temporary, the amount of write-down to fair
value is included in the determination of operating results for the year as a
realized loss. The cost of securities sold is based on the average cost method
and income earned is included in other income.

                                      128

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(f)   INVENTORIES

      Inventories are stated at the lower of cost, on an average cost basis, or
market value. Costs of work-in-progress and finished goods comprise direct
materials, direct labor and an attributable proportion of production overheads.
Provision for potentially obsolete or slow-moving inventory is made based on
management's analysis of inventory levels.

(g)   PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment is stated at cost of acquisition less
accumulated depreciation and provision for impairment loss. The cost of major
improvements and betterments is capitalized whereas the cost of maintenance and
repairs is expensed in the year incurred.

      Depreciation of property, plant and equipment is computed using the
straight-line method over the assets' remaining estimated economic useful lives
and an estimated residual value of 4% to 10% of the costs except for land use
rights which have no residual value. The estimated useful lives of property,
plant and equipment are as follows:

<TABLE>
<S>                                                           <C>
Land use rights                                               50 years
Buildings                                                     20 years
Machinery and equipment                                       10 years
Motor vehicles                                                5 years
Furniture, fixtures and office equipment                      5 years
</TABLE>

      Construction-in-progress represents factory and office buildings under
construction and plant and machinery pending installation. This includes the
costs of construction, the costs of plant and machinery and interest capitalized
on borrowings during the period of construction or installation. Assets under
construction are not depreciated until construction completed and the assets are
ready for their intended use. Interest capitalized was RmbNil, Rmb3,954 and
Rmb4,000 for the year ended December 31, 2001, 2002 and 2003, respectively.

(h)   IMPAIRMENT

      In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the
Group evaluates the impairment of long-lived assets based on the projection of
undiscounted cash flows whenever events or changes in circumstances indicate
that the carrying amounts of such assets may not be recoverable. In the event
such cash flows are not expected to be sufficient to recover the recorded value
of the assets, the assets are written down to their estimated fair values.

                                      129

<PAGE>

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(i)   INCOME TAXES

      The Group accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes". Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and to operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply when
those temporary differences are expected to reverse. Valuation allowances are
established to reduce the amount of deferred tax assets if it is considered more
likely than not that some portion of, or all of, the deferred tax asset will not
be realized.

(j)   VAT AND CONSUMPTION TAX ("CT")

      The Group is subject to VAT and CT. They are recognized on an accrual
basis and revenues are recorded net of these taxes.

(k)   FOREIGN CURRENCIES

      The Group maintains its books and records in Renminbi, its functional
currency. Foreign currency transactions are translated into Renminbi at the
applicable exchange rates quoted by the People's Bank of China (the "unified
exchange rates") prevailing at the dates of transactions. Monetary assets and
liabilities denominated in foreign currencies are translated into Renminbi using
the applicable unified exchange rates prevailing at the balance sheet dates.
Non-monetary assets and liabilities are translated at the unified exchange rates
prevailing at the time the assets or liabilities were acquired. The resulting
exchange differences are included in the consolidated statement of operations.
The Group incurred foreign exchange losses of Rmb192 in 2001, and had foreign
exchange gains of Rmb2,006 and Rmb4,333 in 2002 and 2003, respectively.

      The Renminbi currently is not generally 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 Renminbi 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 Group conducts business in the PRC and its financial performance and
position is measured in terms of Renminbi. Any devaluation of the Renminbi
against the United States dollar would consequently have an adverse effect on
the financial performance and asset values of the Group when measured in terms
of United States dollars.

      The translation of Renminbi (Rmb) amounts into United States dollar (US$)
amounts are included solely for the convenience of readers in the United States
of America and have been made at US$1.00 = Rmb8.28, the unified exchange rate on
December 31, 2003. No representation is made that the Renminbi amounts could
have been, or could be, converted into United States dollar at that or at any
other rate.

                                      130

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(l)   DEDICATED CAPITAL

      In accordance with the relevant laws and regulations for Sino-foreign
equity joint venture enterprises, the Group maintains discretionary dedicated
capital, which includes a general reserve fund, an enterprise expansion fund,
and a staff welfare and incentive bonus fund. The respective boards of directors
of the Company and its subsidiary will determine on an annual basis the amount
of the annual appropriations to dedicated capital. The Company and FCJ have to
set aside 5% of its net income after tax as reflected in their statutory
financial statements for each of general reserve fund and enterprise expansion
fund (except where the fund has reached 50% of the registered capital of the
Company and FCJ, respectively). The Group's appropriations to the general
reserve fund and the enterprise expansion fund are included in retained earnings
and are non-distributable; however, the appropriation for the staff welfare and
incentive bonus fund is charged to consolidated statements of operations and the
unused portion is recorded as a current liability.

Included in the retained earnings of the Group as of December 31, 2001, 2002 and
2003 were non-distributable dedicated capital of Rmb99,389, Rmb61,548 and
Rmb2,015, respectively.

(m)   USE OF ESTIMATES

      The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from those estimates. Significant items subject to such estimates and
assumptions include the carrying value and estimated useful lives of long-lived
assets; valuation allowances for receivables, inventories and deferred tax
assets; liability for product warranty; and the valuation of certain financial
instruments.

                                      131

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(n)   CONCENTRATION OF CREDIT RISK

      The Group's financial instruments that are exposed to concentration of
credit risk consist primarily of its cash and cash equivalents, restricted cash,
accounts and other receivables and advances to affiliate and Chinese joint
venture partners. The Group's cash and cash equivalents and restricted cash are
high-quality deposits placed with banking institutions with high credit ratings;
therefore, the credit risk is limited. The accounts receivable largely represent
amounts due from the Group's customers and are typically on an open account
basis. Concentrations of credit risk associated with the accounts receivable are
considered minimal due to the Group's diverse customer base. In no period did
sales to any one customer accounts for 10% or more of the Group's sales. The
Group maintains allowances to cover potential bad debts and believes that no
significant credit risk exists as a result of its diverse group of customers.
Credit losses, when realized, have historically been within the range of
management's expectations. The other receivables comprise principally deposits
to suppliers and receivable from local government. The Company does not believe
there is a significant credit risk from any of these counterparties as they are
either major suppliers of the Group or local government authorities. The Group
has reviewed the credit worthiness and financial position of its affiliate and
Chinese joint venture partners for credit risks associated with advances to
these entities. This affiliate and Chinese joint venture partners have good
credit standing and the Group does not expect to incur significant loss for
uncollected advances from these entities.

      The Group does not purchase derivative instruments to manage risks.

(o)   FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying value of current financial assets and current financial
liabilities approximates fair value due to the short-term nature of these
instruments. Bank loans approximate their carrying value as the interest rates
approximate those which would have been available for loans of similar remaining
maturity at the respective year ends. The fair value of the financial guarantees
issued by the Group is determined based on the sum of probability-weighted
present values in a range of estimated cash flows, all discounted using the same
interest rate convention.

(p)   COMPREHENSIVE INCOME

      The Group reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income". Comprehensive income consists of net income
(loss) and other gains and losses affecting shareholders' equity that, under US
GAAP, are excluded from net income (loss). Comprehensive income only represents
the Group's net income and has been disclosed within the consolidated statements
of operations and comprehensive income.

                                      132

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(q)   SEGMENT INFORMATION

SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information" establishes standards for disclosures about operating segments,
products and services, geographic areas and major customers. The Group is
organized and operates in one reportable segment which comprises the manufacture
and sale of tires.

(r)   RELATED PARTIES

      Parties are considered to be related to the Group if the parties that,
directly or indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with the Company and/or its
subsidiary. Related parties also include principal owners of the Company or its
subsidiary, their management, members of the immediate families of principal
owners of the Company or its subsidiary and their management and other parties
with which the Group may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own
separate interests. A party which can significantly influence the management or
operating policies of the transacting parties or if it has an ownership interest
in one of the transacting parties and can significantly influence the other to
an extent that one or more of the transacting parties might be prevented from
fully pursuing its own separate interests is also a related party.

(s)   ADVERTISING EXPENSES

      The Group expenses advertising costs as incurred. Advertising expenses
were Rmb4,618, Rmb6,580 and Rmb5,808 for the years ended December 31, 2001, 2002
and 2003, respectively.

(t)   GUARANTEES

      The Group has applied the measurement and disclosure provisions of FASB
Interpretation No. 45 ("FIN 45") "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness
of Others" to agreements that contain guarantee and certain indemnification
clauses. FIN 45 requires that upon issuance of a guarantee, the guarantor must
disclose and recognize a liability for the fair value of the obligation it
assumes under the guarantee. The initial recognition and measurement provisions
of FIN 45 are effective for guarantees issued or modified after December 31,
2002. As of December 31, 2003, the current carrying amount of the liability for
the Group's obligations under the guarantees is Rmb2,000.

                                      133

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(u)   RESTRICTED CASH

Bank deposits are classified as restricted cash when they are restricted as to
withdrawal or use. Bank deposits pledged as security for bank guarantees and
bank drafts amounted to Rmb26,183 and Rmb44,684 as of December 31, 2002 and
2003, respectively, and are presented as restricted cash in the consolidated
balance sheets.

(v)   RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. Research and
development expenses were Rmb995, Rmb1,301 and Rmb6,248 for the years ended
December 31, 2001, 2002 and 2003, respectively.

(w)   RECENT ACCOUNTING PRONOUNCEMENTS

      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". It
establishes standards for how an issuer classifies and measures certain
financial instruments. SFAS No. 150 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. It requires
that certain financial instruments that, under previous guidance, could be
accounted for as equity be classified as liabilities, or assets in some
circumstances. It does not apply to features embedded in a financial instrument
that is not a derivative in its entirety. SFAS No. 150 also requires disclosures
about alternative ways of settling the instruments and the capital structure of
entities whose shares are mandatorily redeemable. The adoption of SFAS No. 150
did not have a material impact on the Group's financial position, cash flows or
results of operations.

      In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities". 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 ended
December 15, 2003. In December 2003 the FASB issued FIN 46R, which defers the
implementation due to the end of the first reporting period after March 15, 2004
unless the Company or its subsidiary has a special purpose entity in which case
the provisions must be applied for fiscal years ended December 31, 2003. The
Group does not have a special purpose entity therefore they will adopt the
provision in December 2004.

                                      134

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(w)   RECENT ACCOUNTING PRONOUNCEMENTS - CONTINUED

      In November 2002, the Emerging Issue Task Force ("EITF") reached a
consensus on Issue No. 00-21 ("EITF No. 00-21"), "Revenue Arrangements with
Multiple Deliverables". EITF No. 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which the vendor will perform
multiple revenue generating activities. EITF No. 00-21 is effective for fiscal
periods beginning after June 15, 2003. The adoption of EITF No. 00-21 did not
have a material impact on the Group's financial position, cash flows or results
of operations.

3.    ACQUISITION

      In September 2001, the Company capitalized an amount of Rmb10,569
("Purchase Price") previously advanced to the Chinese joint venture partner of
FCJ for a 51.24% interest in that company. There were no differences between the
Purchase Price and the estimated fair values of the net assets acquired. Cash
acquired through the acquisition was Rmb4,120. This acquisition was immaterial
to the Group's results from operations and financial position.

4.    INVENTORIES

      Inventories by major categories are summarized as follows:

<TABLE>
<CAPTION>
                                           2002                  2003
                                         -------               -------
                                           Rmb                   Rmb
<S>                                      <C>                   <C>
Raw materials...................         246,038               279,238
Work-in-progress................          18,751                25,570
Finished goods..................         332,536               433,561
                                         -------               -------
                                         597,325               738,369
                                         =======               =======
</TABLE>

5.    MARKETABLE SECURITIES

      As of December 31, 2002, trading securities comprised municipal bonds in
the PRC, which was redeemed at its par value in fiscal 2003 resulting in no gain
or loss on redemption.

                                      135

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

6.    INVESTMENTS IN AND ADVANCES TO AFFILIATE

      In 1998, an agreement was entered into by the Company with three other PRC
enterprises in Hangzhou to establish a Sino-foreign equity joint venture,
Hangzhou Sunrise Rubber Co., Ltd. ("Hangzhou Sunrise") in the PRC, to construct
and operate a radial tire factory. The total investment and registered capital
of this new joint venture is US$29,980 (Rmb248,000). The equity interest owned
by the Company was 49.2% and its investment commitment was satisfied by the
contribution of its existing radial tire project under construction into
Hangzhou Sunrise. The radial tire factory of Hangzhou Sunrise commenced
operations in 2000.

      The following table presents summarized comparative financial information
for Hangzhou Sunrise, of which the Company has the ability to exercise
significant influence but does not control and are accounted for using the
equity method:

<TABLE>
<CAPTION>
                                                                 2001                  2002                 2003
                                                                -------              -------               -------
                                                                 Rmb                   Rmb                  Rmb
<S>                                                             <C>                  <C>                   <C>
Revenues.............................................           127,989              197,544               341,538
Operating gain.......................................             4,921               23,759                64,721
Net (loss) profit....................................            (5,047)               8,958                45,704
Current assets.......................................            59,857               84,319                71,842
Non-current assets...................................           478,870              580,367               725,032
Current liabilities..................................           183,066              214,382               271,852
Non-current liabilities..............................            90,850              176,535               205,549
Shareholders' equity.................................           264,811              273,769               319,473
</TABLE>

      Advances to Hangzhou Sunrise are Rmb45,534 and Rmb60,424 as of December
31, 2002 and 2003, respectively. The amounts are interest free and are repayable
upon demand; however, the Company will not require repayment prior to January
2005.

      As of December 31, 2002 and 2003, the Company had a 49.2% equity ownership
in Hangzhou Sunrise.

                                      136

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

7.    PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                                      2002                   2003
                                                                                    ---------            ----------
                                                                                      Rmb                    Rmb
<S>                                                                                 <C>                  <C>
Property, plant and equipment consists of the following:

At cost:

Buildings and land use rights..............................................          175,823               189,460
Machinery and equipment....................................................          541,403               827,663
Motor vehicles.............................................................           15,095                18,291
Furniture, fixtures and office equipment...................................           23,761                23,296
Construction-in-progress...................................................           41,479                83,498
                                                                                    --------             ---------
Total......................................................................          797,561             1,142,208
Less: Accumulated depreciation and amortization............................         (327,867)             (372,435)
                                                                                    --------             ---------
Total net book value.......................................................          469,694               769,773
                                                                                    ========             =========
</TABLE>

8.    BANK LOANS

      As of December 31, 2002 and 2003, Rmb20,000 and Rmb40,000 of the long-term
bank loans were guaranteed by an affiliate, respectively. Also, as of December
31, 2002 and 2003, RmbNil and Rmb100,000 of the long-term bank loans were
guaranteed by a related party. Long-term bank loans bear fixed interest rates
and had average annual interest rates of approximately 7.46% in 2001, 7.86% in
2002 and 5.63% in 2003.

      The outstanding balances of long-term bank loans as of December 31, 2003
were repayable as follows:

<TABLE>
<CAPTION>
                               Rmb
<S>                          <C>
2004................         135,000
2005................          20,000
2006................          40,000
                             -------
                             195,000
                             =======
</TABLE>

As of December 31, 2002 and 2003, short-term bank loans are repayable on demand
or within twelve months from the balance sheet dates.

                                      137

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

8.    BANK LOANS - CONTINUED

      As of December 31, 2002 and 2003, Rmb590,106 and Rmb475,646 of the
short-term bank loans were guaranteed by an affiliate, respectively. As of
December 31, 2002 and 2003, RmbNil and Rmb100,000 of the short-term bank loans
were guaranteed by a related company, respectively, and Rmb7,500 and Rmb40,000
of the short-term bank loans were also guaranteed by third parties. Also,
short-term bank loans of Rmb57,000 and RmbNil were secured by buildings and
equipment of the Company as of December 31, 2002 and 2003, respectively. The
short-term bank loans carried fixed interest rates and the average annual
interest rates were approximately 6.95% in 2001, 5.11% in 2002 and 4.20% in
2003.

      In addition to the above loan facilities provided by banks, the Group had
available import credit facilities amounting to Rmb124,200 in 2002 and
Rmb355,340 in 2003, of which Rmb70,794 in 2002 and Rmb155,830 in 2003 had been
utilized. The Group also had available letters of credit facilities which were
secured by bank deposits of the Group of Rmb16,178 in 2002 and RmbNil in 2003;
no facilities were utilized as of December 31, 2002 and 2003. Interest rates are
generally based on the banks' best lending rates plus 1% to 2% per annum,
subject to fluctuations at the banks' discretion. The banking facilities are
subject to annual review by the banks.

9.    PROVISION FOR INCOME TAXES

      The Group's profit before income taxes and minority interests for fiscal
2001, 2002 and 2003 is all derived in the PRC.

      The Group is subject to income taxes calculated at a tax rate ranging from
15% to 33% on the taxable income as reported in the statutory financial
statements adjusted for taxation based on tax laws prevailing in the PRC.

      In accordance with the relevant income tax laws applicable to Sino-foreign
joint ventures in the PRC, the Company, having a joint venture term of not less
than 10 years and engaging in production industries, is exempt from the PRC
local income tax during fiscal 2001 and 2002. A summary of the tax concessions
available to Company for fiscal 2001 and 2002 is as follows:

<TABLE>
<CAPTION>
CHINESE STATE
  UNIFIED                CHINESE LOCAL                        CONCESSION                   YEAR OF
INCOME TAX                INCOME TAX                         FROM CHINESE               COMMENCEMENT
 RATE (%)                  RATE (%)                        LOCAL INCOME TAX            OF TAX HOLIDAY
-------------            -------------                 -------------------------       --------------
<S>                      <C>                           <C>                             <C>
15.0                         1.5                       Full exemption for                   1993
                                                         10 years starting from
                                                         the commencement
                                                         of tax holiday
</TABLE>

                                      138

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

9.    PROVISION FOR INCOME TAXES - CONTINUED

      During fiscal 2003, the Company was not entitled to any tax concessions as
all tax concession periods expired, and therefore the Company was subject to a
State united income tax rate of 15% and a local income tax rate of 1.5%. FCJ was
not entitled to any tax concession during fiscal 2001, 2002 and 2003 and was
subject to the State united income tax rate of 30% and the local income tax rate
of 3%. During fiscal 2001 and 2002, if the Company were neither in the tax
holiday period nor had been specifically allowed special tax concessions, it
would have recorded additional income tax expenses of Rmb1,174 and Rmb1,960, the
consolidated net income would have been decreased by Rmb1,174 and Rmb1,960 for
the years ended December 31, 2001 and 2002, respectively.

      The Group is required to provide for VAT and CT which are the principal
taxes on the sales of tangible goods and the provision of certain specified
services. The general VAT rate applicable to the Company and FCJ is 17% while CT
is calculated at 10% on the domestic sales amount, except that the 10% CT on
radial tire products was abolished since January 1, 2001. VAT and CT are
recognized on an accrual basis and sales are recorded net of these taxes.

      The reconciliation of the effective income tax rate based on profit before
income taxes and minority interests stated in the consolidated statements of
operations to the statutory income tax rates in the PRC is as follows:

<TABLE>
<CAPTION>
                                                                  2001                  2002                  2003
                                                                  ----                  ----                  ----
                                                                  Rmb                   Rmb                   Rmb
<S>                                                              <C>                    <C>                   <C>
Weighted average statutory tax rates.................             16%                   18%                   18%
Effect of tax holiday................................             (2%)                  (1%)                   -
Permanent differences relating to
  non-taxable income and non-deductible
  expenses...........................................              2%                   (3%)                  (5%)
Valuation allowance..................................            (12%)                  (1%)                   -
Others...............................................              -                    (2%)                  (3%)
                                                                 ---                    --                    --
Effective tax rate...................................              4%                   11%                   10%
                                                                 ===                    ==                    ==
</TABLE>

                                      139

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

9.    PROVISION FOR INCOME TAXES - CONTINUED

Provision for income taxes consists of:

<TABLE>
<CAPTION>
                                                                  2001                 2002                  2003
                                                                 ------               ------                ------
                                                                  Rmb                  Rmb                   Rmb
<S>                                                              <C>                  <C>                   <C>
Current..............................................            10,581               23,847                18,812
Deferred.............................................              (889)              (5,071)               (6,000)
Adjustment of valuation allowance....................            (7,238)              (1,079)                  (48)
                                                                 ------               ------                ------
                                                                  2,454               17,697                12,764
                                                                 ======               ======                ======
</TABLE>

      The tax impact of temporary differences give rise to the following
deferred tax assets:

<TABLE>
<CAPTION>
                                                                                       2002                  2003
                                                                                      ------                ------
                                                                                       Rmb                   Rmb
<S>                                                                                   <C>                   <C>
Allowance for doubtful receivables.........................................            9,931                 9,917
Allowance for inventory obsolescence.......................................              508                 1,102
Provision for warranty expenses............................................            3,911                 9,851
Impairment loss provision for long-lived assets............................              297                   297
Depreciation...............................................................            3,586                 3,227
Others.....................................................................              519                   358
                                                                                      ------                ------

Total deferred tax assets..................................................           18,752                24,752
Valuation allowance for deferred tax assets................................           (4,475)               (4,427)
                                                                                      ------                ------

                                                                                      14,277                20,325
                                                                                      ======                ======
</TABLE>

      The valuation allowance refers to the portion of the deferred tax assets
that are not "more likely than not" going to be realized.

                                      140

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

10.   REGISTERED CAPITAL

      The Company was incorporated with an initial registered capital of
Rmb469,749. On August 18, 2003, the registered capital of the Company was
further increased from RMB469,749 to RMB613,603 by the capitalization of
dedicated capital and retained earnings amounting to RMB83,841 and RMB60,013,
respectively, as allowed under the laws and regulations in the PRC.

11.   OBLIGATIONS AND COMMITMENTS

      As of December 31, 2002 and 2003, the Group had outstanding capital
commitments for construction of factory premises and purchase of equipment
amounting to approximately Rmb158,032 and Rmb225,198, respectively.

      The Group leases certain of its warehouses under non-cancelable operating
leases expiring at various dates through 2008. Rental expense under operating
leases was Rmb3,255, Rmb4,397 and Rmb3,141 for the years ended December 31,
2001, 2002 and 2003, respectively.

      The following is a schedule of future minimum lease payments required
under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of December 31, 2003:

<TABLE>
<CAPTION>
                                                       Rmb
<S>                                                   <C>
2004.....................................             3,558
2005.....................................               167
2006.....................................               167
2007.....................................               167
2008.....................................               164
                                                      -----
Total minimum lease payments.............             4,223
                                                      =====
</TABLE>

      The Group also records an estimate of the product warranty obligation at
the time of sale based on the Group's historical experience. Changes in product
warranty provision are as follows:

<TABLE>
<CAPTION>
                                                   2001                 2002                  2003
                                                 -------              -------               -------
                                                   Rmb                  Rmb                   Rmb
<S>                                              <C>                  <C>                   <C>
Balance at beginning of year..............        13,130               19,972                23,720
Warranties paid...........................       (45,057)             (56,183)              (72,396)
Warranty provision........................        51,899               59,931               108,376
                                                 -------              -------               -------
Balance at end of year....................        19,972               23,720                59,700
                                                 =======              =======               =======
</TABLE>

                                      141

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

11.   OBLIGATIONS AND COMMITMENTS - CONTINUED

In addition, the Group provided guarantees to an affiliate, related companies
and a third party as of December 31, 2003, details of which are detailed in note
13(c). These guarantees are full and unconditional and would require the Group
to make scheduled payments immediately if the affiliate, related companies
and/or third party failed to do so.

As of December 31, 2003, the Group estimated the maximum potential amount of
future payments of the guarantees to be RMB387,639. Historically, the Group had
not made any payment for these guarantees and considered the probability of the
default by the affiliate and related companies to be low. As a result, the Group
estimated that the fair value of the obligations assumed under guarantees as of
December 31, 2003 to be RMB2,000 and recognized a liability for such amount in
the financial statements.

In addition, the Company and its subsidiary are parties to a variety of
contractual agreements under which the Group may be obligated to indemnify the
other party for certain matters. These contracts primarily relate to the
operating leases, financial agreements and various other agreements. Under these
contracts the Group may provide certain routine indemnifications relating to
representations and warranties (e.g., ownership of assets, environmental or tax
indemnifications) or personal injury matters. Historically, the Group has not
made any payment for these indemnifications and believes that if the Group were
to incur a loss in any of these matters, the loss would not have a material
effect on our financial condition or results of operations.

12.   DISTRIBUTION OF PROFIT

      The Company and FCJ declare dividends based on the profits as reported in
their statutory financial statements. Such profits will be different from the
amounts reported under US GAAP. The Company and FCJ had an aggregate retained
earnings of Rmb132,743 and Rmb107,726 as of December 31, 2002 and 2003,
respectively, as reported in their statutory financial statements.

                                      142

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

13.   RELATED PARTY BALANCES, TRANSACTIONS AND ARRANGEMENTS

(a)   DUE FROM/TO RELATED COMPANIES

      The amounts due from related companies primarily arise from sales of tires
and are unsecured, non-interest bearing and repayable at the end of credit
periods granted ranging from 90 days to 180 days. Historically, the Group has
not experienced losses related to these receivables with the exception of an
allowance for doubtful accounts amounting to Rmb27,000 charged to the
consolidated statement of operations during fiscal 2001. The management reviewed
the recoverability of these receivables and recognized a net recovery of
Rmb5,016 and an allowance for doubtful accounts of Rmb5,942, in the consolidated
statement of operations for fiscal 2002 and 2003, respectively.

      The loans from related companies represent funds advanced to the Group and
are unsecured, non-interest bearing and are not repayable until January 2005.

(b)   SALES TO/PURCHASES FROM RELATED PARTIES

      The Group recorded sales to related companies of approximately Rmb184,202,
Rmb209,112 and Rmb250,842 that have been reflected in the Group's consolidated
financial statements for the years ended December 31, 2001, 2002 and 2003,
respectively.

The Group paid subcontracting charges to an affiliate of approximately
Rmb127,989, Rmb199,373 and Rmb341,112 for tire processing that have been
reflected in the Group's consolidated financial statements for the years ended
December 31, 2001, 2002 and 2003, respectively.

These transactions were carried out after negotiations between the Group and the
respective related companies in the ordinary course of business and on the basis
of the estimated market value as determined by the management of the Company.

(c)   CONTINGENT LIABILITIES

      As of December 31, 2002 and 2003, the Company had outstanding bank
guarantees as follows:

<TABLE>
<CAPTION>
                                                     2002                  2003
                                                   -------               -------
                                                     RMB                   RMB
<S>                                                <C>                   <C>
Beneficiaries
-------------
Affiliate................................          160,000               220,195
Related companies........................            7,900               127,444
Third party..............................           20,000                40,000
                                                   -------               -------
                                                   187,900               387,639
                                                   =======               =======
</TABLE>

(d)   LOAN GUARANTEES PROVIDED BY RELATED COMPANIES

      Certain parties have guaranteed certain of the Group's bank borrowings at
no cost to the Group. Details of the borrowings are shown in note 8.

                                      143

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

14.   DUE FROM/TO CHINESE JOINT VENTURE PARTNERS

(i)   The amounts due from Chinese joint venture partners represented:

(a) advances made from FCJ to the Chinese joint venture partner; and

(b) payment of various operating expenses by FCJ on behalf of their Chinese
joint venture partners.

      These amounts were unsecured, non-interest bearing and had no fixed
repayment terms.

(ii) The amounts due to Chinese joint venture partners represented:

(a) the excess of the book value of the net assets contributed by the Chinese
joint venture partners upon the formation of FCJ over their shares of the
registered capital of these joint venture enterprises;

(b) other working capital assets, consisting primarily of inventories, property,
plant and equipment, less accounts payable and bank loans of the Chinese joint
venture partners, loaned to FCJ by the Chinese joint venture partners; and

(c) advances provided by the Chinese joint venture partners to FCJ to finance
their working capital requirements.

      These amounts are unsecured and non-interest bearing and are not repayable
until January 2005.

15.   STAFF RETIREMENT PLANS

      All of the Chinese employees of the Group are entitled to an annual
pension on retirement, which is equal to their ending basic salaries at their
retirement dates. The Chinese government is responsible for the pension
liabilities to these retired employees. The Group are only required to make
specified contributions to the state-sponsored retirement plan calculated at
rates ranging from 20% to 23.5% of average monthly salaries for the years ended
December 31, 2001, 2002 and 2003. The expenses reported in the consolidated
statements of operations related to these arrangements were Rmb21,438, Rmb26,549
and Rmb23,920 for the years ended December 31, 2001, 2002 and 2003,
respectively.

      The Group and their employees are also required to contribute 5% of the
monthly salaries to designated bank accounts opened by the Group under a
regulation implemented by certain PRC municipal governments. Upon resignation or
retirement of the employees, they are entitled to withdraw the principal and
related interest from these bank accounts to purchase housing. These bank
deposits cannot be withdrawn for other uses by the Group. As of December 31,
2002 and 2003, such restricted bank deposits amounted to Rmb10,005 and
Rmb10,034, respectively.

                                      144

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

16.   SEGMENT INFORMATION

      The Company's chief decision-maker, as defined under SFAS No. 131, is the
      Chief Executive Officer, who evaluates the Group's performance based on
      revenues and operating income. The Group operates principally in the tire
      manufacturing industry and has only one reportable segment, which is
      managed based on PRC GAAP. All manufacturing is conducted in the PRC.

      Analysis of Reportable Segments (Management Information - PRC GAAP basis)

<TABLE>
<CAPTION>
                                                                          AS OF AND FOR THE YEAR ENDED
                                                                                  DECEMBER 31,
                                                              ----------------------------------------------------
                                                                2001                  2002                  2003
                                                              ---------            ---------             ---------
                                                                Rmb                   Rmb                   Rmb
<S>                                                           <C>                  <C>                   <C>
Net revenue from external
  customers.................................                  1,910,524            2,404,692             3,581,366
Net revenue from related parties............                    184,202              209,112               250,842
Operating income............................                    109,274              191,262               175,487
</TABLE>

      Reconciliations of Reportable Segment Totals to Consolidated Totals - The
      amounts presented for reportable segments reconcile to the consolidated
      totals as follows:

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                                2001                  2002                  2003
                                                              ---------            ---------             ---------
                                                                 Rmb                  Rmb                   Rmb
<S>                                                           <C>                  <C>                   <C>
Net revenue from external customers..................         1,910,524            2,404,692             3,581,366
US GAAP adjustments:
  Warranty provision.................................            (6,841)              (3,728)              (36,000)
                                                              ---------            ---------             ---------
Total net revenue from external customers............         1,903,683            2,400,964             3,545,366
                                                              =========            =========             =========

Net revenue from related parties.....................           184,202              209,112               250,842
US GAAP adjustments..................................                 -                    -                     -
                                                              ---------            ---------             ---------
Total net revenue from related parties...............           184,202              209,112               250,842
                                                              =========            =========             =========

Operating income.....................................           109,274              191,263               175,486
US GAAP adjustments:
  Warranty provision.................................            (6,841)              (3,728)              (36,000)
  Fair value of the obligations assumed
    under guarantees.................................                 -                    -                (2,000)
                                                              ---------            ---------             ---------
Total operating income...............................           102,433              187,535               137,486
                                                              =========            =========             =========
</TABLE>

                                      145

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)

16.   SEGMENT INFORMATION - CONTINUED

      Revenues of the Group are primarily derived from sales of tires and their
      geographical analysis of revenues is as follows:

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                                2001                 2002                  2003
                                                              ---------            ---------             ---------
                                                                Rmb                  Rmb                   Rmb
<S>                                                           <C>                  <C>                   <C>
The PRC..............................................         1,632,962            2,061,236             3,057,152
Middle East Countries................................           112,540              165,664               249,212
US and Canada........................................            70,486              137,933               140,283
Others...............................................           271,897              245,243               349,561
                                                              ---------            ---------             ---------
                                                              2,087,885            2,610,076             3,796,208
                                                              =========            =========             =========
</TABLE>

                                      146

<PAGE>

                          ITEM 18. FINANCIAL STATEMENTS

CHINA ENTERPRISES LIMITED AND SUBSIDIARIES:

1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                        DESCRIPTIONS                                                                    PAGE NO.
                                        ------------                                                                    --------
<S>                                                                                                                     <C>
Report of Independent Registered Public Accounting Firm                                                                   148

Consolidated Statements of Operations and Comprehensive loss for the years ended December 31, 2001, 2002 and 2003         149

Consolidated Balance Sheets as of December 31, 2002 and 2003                                                              151

Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2002 and 2003                      153

Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003                                154

Notes to Consolidated Financial Statements                                                                                157

2. INDEX TO FINANCIAL STATEMENT SCHEDULE

Schedule VIII - Valuation and Qualifying Accounts                                                                         193
</TABLE>

                                      147

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and the Shareholders of China Enterprises Limited

      We have audited the accompanying consolidated balance sheets of China
Enterprises Limited and its subsidiaries as of December 31, 2002 and 2003 and
the related consolidated statements of operations and comprehensive loss,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003, all expressed in Renminbi. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

      We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of China
Enterprises Limited and its subsidiaries as of December 31, 2002 and 2003, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.

DELOITTE TOUCHE TOHMATSU
Hong Kong
April 23, 2004
(June 16, 2004 as to Note 24)

                                      148

<PAGE>

          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

       (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                                   ---------------------------------------------------------
                                                                      2001            2002           2003             2003
                                                                   -----------     -----------    -----------      ---------
                                                                      RMB             RMB            RMB              US$
<S>                                                                <C>             <C>            <C>              <C>
REVENUES:
  - third parties...........................................        1,903,683       2,400,964      2,613,398        315,628
  - related parties.........................................          184,202         209,112        194,971         23,547
                                                                   ----------      ----------     ----------       --------

Total (note 21).............................................        2,087,885       2,610,076      2,808,369        339,175
COST OF REVENUES............................................       (1,837,000)     (2,250,785)    (2,502,413)      (302,224)
                                                                   ----------      ----------     ----------       --------

Gross profit................................................          250,885         359,291        305,956         36,951
Selling, general and administrative expenses................         (134,424)       (192,211)      (205,210)       (24,784)
(Provision for) recovery on amounts due from
  related companies (note 18)...............................          (27,000)          5,016              -              -
                                                                   ----------      ----------     ----------       --------

OPERATING INCOME............................................           89,461         172,096        100,746         12,167
NON-OPERATING INCOME (EXPENSES):
Interest income.............................................           11,687          40,413          9,228          1,114
Interest expenses...........................................          (39,770)        (53,997)       (33,027)        (3,989)
Other (expense) income......................................             (385)            191          1,810            219
Change in fair value of call option (note 10)...............                -         (45,328)             -              -
Recovery on loan receivable (note 9)........................            9,800               -              -              -
Loss on disposal of a subsidiary (note 3)...................                -               -         (1,158)          (140)
Equity in losses of affiliates .............................           (2,486)        (89,520)      (120,217)       (14,519)
                                                                   ----------      ----------     ----------       --------

PROFIT (LOSS) FROM CONTINUING OPERATIONS BEFORE
  INCOME TAXES AND MINORITY INTERESTS.......................           68,307          23,855        (42,618)        (5,148)
Provision for income taxes (note 13)........................           (2,454)        (17,697)       (10,592)        (1,279)
Minority interests..........................................          (29,428)        (69,101)       (46,340)        (5,596)
                                                                   ----------      ----------     ----------       --------
PROFIT (LOSS) FROM CONTINUING OPERATIONS....................           36,425         (62,943)       (99,550)       (12,023)

DISCONTINUED OPERATIONS
Loss from discontinued operations, net of
  applicable income taxes of RmbNil in 2001,
  2002 and 2003 (note 4)....................................         (171,784)       (199,838)        (7,760)          (937)
                                                                   ----------      ----------     ----------       --------

NET LOSS....................................................         (135,359)       (262,781)      (107,310)       (12,960)
Other comprehensive income
  - translation adjustments relating to an affiliate........                -              38          1,636            198
                                                                   ----------      ----------     ----------       --------
COMPREHENSIVE LOSS..........................................         (135,359)       (262,743)      (105,674)       (12,762)
                                                                   ==========      ==========     ==========       ========
</TABLE>

                                      149
<PAGE>

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                       AND COMPREHENSIVE LOSS - CONTINUED

       (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                            ---------------------------------------------------------
                                                               2001              2002           2003          2003
                                                               ----              ----           ----          ----
                                                               RMB               RMB            RMB            US$
<S>                                                         <C>               <C>            <C>            <C>
BASIC AND DILUTED EARNINGS (LOSS) PER
  COMMON SHARE
Continuing operations ..............................             4.04             (6.98)        (11.04)         (1.33)
Discontinued operations ............................           (19.05)           (22.16)         (0.86)         (0.10)
                                                            ---------         ---------      ---------      ---------
Basic and diluted loss per common share ............           (15.01)           (29.14)        (11.90)         (1.43)
                                                            =========         =========      =========      =========

Weighted average number of common shares
  used in the calculation of basic and diluted
  earnings (loss) per common share .................        9,017,310         9,017,310      9,017,310      9,017,310
                                                            =========         =========      =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      150
<PAGE>

                          CONSOLIDATED BALANCE SHEETS

      (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND THEIR PAR VALUES)

<TABLE>
<CAPTION>
                                                                                     AS OF DECEMBER 31,
                                                                      ------------------------------------------
                                                                        2002              2003             2003
                                                                        ----              ----             ----
                                                                         RMB               RMB              US$
<S>                                                                   <C>                <C>              <C>
ASSETS

Current assets:
  Cash and cash equivalents ................................            140,957           63,623           7,684
  Restricted cash ..........................................             26,183                -               -
  Accounts receivable, net of allowance for
    doubtful receivables of Rmb50,974 in 2002
    and RmbNil in 2003 .....................................            314,183                -               -
  Other receivables ........................................             39,932            2,697             326
  Inventories (note 6) .....................................            597,325                -               -
  Marketable securities (note 7) ...........................                 50                -               -
  Prepaid expenses and other current assets ................             50,165               20               2
  Due from related companies, net of allowance
    for doubtful receivables of Rmb21,984 in
    2002 and RmbNil in 2003 (note 18) ......................            112,943                -               -
  Due from ultimate parent company .........................                  -            4,030             487
  Notes receivable (note 5) ................................             25,319           48,016           5,799
  Current assets of discontinued operations
    (note 4) ...............................................            565,044                -               -
                                                                      ---------          -------          ------
  Total current assets .....................................          1,872,101          118,386          14,298

Investments in and advances to affiliates (note 8) .........            232,982          267,057          32,253
Due from Chinese joint venture partners (note 19) ..........              1,150                -               -
Convertible note receivable from an affiliate, net
  (note 10) ................................................             53,339           81,448           9,837
Prepayments for equipment ..................................             78,106                -               -
Property, plant and equipment, net (note 11) ...............            469,694                -               -
Deferred income taxes (note 13) ............................             14,277                -               -
Other assets ...............................................              1,331                6               1
Goodwill, net ..............................................              3,876                -               -
Non-current assets of discontinued operations
  (note 4) .................................................            153,824                -               -
                                                                      ---------          -------          ------
  Total assets .............................................          2,880,680          466,897          56,389
                                                                      =========          =======          ======
</TABLE>

                                       151
<PAGE>

                     CONSOLIDATED BALANCE SHEETS - CONTINUED

      (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND THEIR PAR VALUES)

<TABLE>
<CAPTION>
                                                                                     AS OF DECEMBER 31,
                                                                      --------------------------------------------
                                                                         2002                2003            2003
                                                                         ----                ----            ----
                                                                          RMB                RMB              US$
<S>                                                                   <C>                <C>              <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Short-term bank loans (note 12) ..........................             659,388                  -              -
  Long-term bank loans - current portion (note 12) .........              41,600                  -              -
  Other short-term loan payable ............................                   -             27,708          3,346
  Accounts payable .........................................             401,486                311             38
  Other payables ...........................................              43,266              1,310            158
  Accrued liabilities ......................................              71,545              4,759            575
  Income taxes payable .....................................              13,828                  -              -
  Other taxes payable ......................................              16,190              2,753            332
  Current liabilities of discontinued operations
    (note 4) ...............................................             583,460                  -              -
                                                                      ----------         ----------       --------
  Total current liabilities ................................           1,830,763             36,841          4,449

Long-term bank loans, net of current portion
  (note 12) ................................................              75,000                  -              -
Due to Chinese joint venture partners (note 19) ............                 150                  -              -
Loans from related companies (note 18) .....................               1,058                  -              -
Non-current liabilities of discontinued operations
  (note 4) .................................................              12,671                  -              -
                                                                      ----------         ----------       --------
  Total liabilities ........................................           1,919,642             36,841          4,449
                                                                      ----------         ----------       --------
Minority interests .........................................             346,819                  -              -
Minority interests of discontinued operations
  (note 4) .................................................              79,013                  -              -
                                                                      ----------         ----------       --------
  Total minority interests .................................             425,832                  -              -
                                                                      ----------         ----------       --------
Obligations and commitments (note 16)

Shareholders' equity:
  Supervoting common stock - par value US$0.01
    per share (20,000,000 shares
    authorized; 3,000,000 shares outstanding at
    December 31, 2002 and 2003) (note 14) ..................                 244                244             29
  Common stock - par value US$0.01 per share
    (50,000,000 shares authorized; 6,017,310
    shares outstanding at December 31, 2002
    and 2003) (note 14) ....................................                 526                526             64
  Additional paid-in capital ...............................           1,033,253          1,033,253        124,789
  Dedicated capital ........................................              39,708                524             63
  Accumulated other comprehensive (losses)
    income .................................................                (505)             1,131            137
  Accumulated deficit ......................................            (538,020)          (605,622)       (73,142)
                                                                      ----------         ----------       --------
  Total shareholders' equity ...............................             535,206            430,056         51,940
                                                                      ----------         ----------       --------
  Total liabilities and shareholders' equity ...............           2,880,680            466,897         56,389
                                                                      ==========         ==========       ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      152
<PAGE>

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

       (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                   ACCUMULATED
                                     SHARES OF                                                       OTHER
                                   SUPERVOTING SHARES OF  SUPERVOTING         ADDITIONAL             COMPRE-
                                      COMMON     COMMON    COMMON     COMMON   PAID-IN   DEDICATED   HENSIVE   ACCUMULATED
                                       STOCK     STOCK      STOCK     STOCK    CAPITAL   CAPITAL     LOSSES     DEFICIT     TOTAL
                                       -----     -----      -----     -----    -------   -------     ------     -------     -----
                                                             RMB       RMB       RMB       RMB        RMB         RMB        RMB
<S>                                 <C>        <C>        <C>         <C>     <C>        <C>       <C>         <C>         <C>
Balance at January 1, 2001 ......   3,000,000   6,017,310     244      526    1,040,994   36,118     (543)     (124,712)    952,627
Net loss ........................           -           -       -        -            -        -        -      (135,359)   (135,359)
Released on disposition of
  discontinued operations .......           -           -       -        -            -  (11,578)       -             -     (11,578)
Transfer to dedicated capital ...           -           -       -        -            -   13,009        -       (13,009)          -
Dividends declared (Rmb0.1655
  per share) ....................           -           -       -        -       (1,493)       -        -             -      (1,493)
                                    ---------   ---------     ---      ---    ---------  -------    -----      --------    --------
Balance at December 31, 2001 ....   3,000,000   6,017,310     244      526    1,039,501   37,549     (543)     (273,080)    804,197
Net loss ........................           -           -       -        -            -        -        -      (262,781)   (262,781)
Loss on dilution of interest
  in an affiliate and a
  subsidiary of an affiliate ....           -           -       -        -       (6,248)       -        -             -      (6,248)
Foreign currency translation
  adjustment relating to an
  affiliate .....................           -           -       -        -            -        -       38             -          38
Transfer to dedicated capital ...           -           -       -        -            -    2,159        -        (2,159)          -
                                    ---------   ---------     ---      ---   ----------  -------    -----      --------    --------
Balance at December 31, 2002 ....   3,000,000   6,017,310     244      526    1,033,253   39,708     (505)     (538,020)    535,206
Net loss ........................           -           -       -        -            -        -        -      (107,310)   (107,310)
Foreign currency translation
  adjustment relating to an
  affiliate .....................           -           -       -        -            -        -    1,636             -       1,636
Transfer to dedicated capital ...           -           -       -        -            -    3,010        -        (3,010)          -
Transfer ........................           -           -       -        -            -  (42,718)       -        42,718           -
Share of dedicated capital
  of an affiliate ...............           -           -       -        -            -      524        -             -         524
                                    ---------   ---------     ---      ---    ---------  -------    -----     ---------    --------
Balance at December 31, 2003 ....   3,000,000   6,017,310     244      526    1,033,253      524    1,131      (605,622)    430,056
                                    =========   =========     ===      ===    =========  =======    =====     =========    ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      153
<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                  ------------------------------------------------
                                                                   2001          2002          2003          2003
                                                                   ----          ----          ----          ----
                                                                   RMB           RMB           RMB           US$
<S>                                                              <C>           <C>           <C>           <C>
Cash flows from operating activities:
  Net loss .................................................     (135,359)     (262,781)     (107,310)     (12,960)
  Adjustments to reconcile net loss to net cash
    provided by operating activities:
    Loss (gain) on disposition of discontinued
      components ...........................................       28,588       (20,144)        7,017          847
    Loss on disposal of a subsidiary .......................            -             -         1,158          140
    Minority interests .....................................      (57,840)      (76,073)       46,340        5,597
    Change in fair value of call option ....................            -        45,328             -            -
    Equity in losses of affiliates .........................        2,486        89,520       120,217       14,519
    Deferred income taxes ..................................       (8,127)       (6,150)       (3,139)        (379)
    Impairment loss provision for advances to
         affiliates ........................................            -         4,451             -            -
    Recovery on loan receivable ............................       (9,800)            -             -            -
    Impairment loss provision for long-lived assets ........       50,133       291,648           150           18
    Impairment loss provision for goodwill .................        4,023             -             -            -
    Provision for (recovery on) amounts due from
      related companies ....................................       27,000        (5,016)            -            -
    Loss (gain) on disposal of property, plant and
      equipment ............................................       21,322          (895)          581           70
    Depreciation and amortization ..........................      118,399       106,015        50,889        6,146
    Amortisation of discount on subscription of
      the convertible note receivable ......................            -       (21,914)       (6,301)        (761)
Changes in operating assets and liabilities
  (net of effects of acquisition and disposition):
    Accounts and other receivables, net ....................      (25,536)      (91,973)      (67,339)      (8,133)
    Inventories ............................................      (48,825)      (97,220)       31,942        3,858
    Prepaid expenses and other current assets ..............        3,910       (21,832)       (4,661)        (563)
    Due from related companies .............................       32,414       (10,641)        1,495          181
    Other assets ...........................................       (1,795)         (223)          194           23
    Accounts payable and other payables ....................      119,352       159,801        35,151        4,245
    Accrued liabilities ....................................       14,880        28,154        14,408        1,740
    Income taxes payable ...................................          182        12,437        (7,087)        (856)
    Other taxes payable ....................................        7,584         9,002        (8,904)      (1,075)
                                                                 --------      --------      --------      -------
  Net cash provided by operating activities ................      142,991       131,494       104,801       12,657
                                                                 --------      --------      --------      -------
</TABLE>

                                      154
<PAGE>

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                                 -------------------------------------------------
                                                                  2001           2002           2003         2003
                                                                  ----           ----           ----         ----
                                                                  RMB            RMB            RMB           US$
<S>                                                              <C>           <C>           <C>           <C>
Cash flows from investing activities:
  Subscription of a convertible note receivable ............            -      (127,284)            -            -
  Increase in notes receivable .............................            -      (464,961)     (114,001)     (13,768)
  (Increase) decrease in restricted bank deposits ..........      (46,328)       31,596       (14,431)      (1,743)
  Investments in and advances to affiliates, net ...........          929      (180,612)     (197,358)     (23,836)
  Purchase of property, plant and equipment ................     (135,212)     (287,536)     (256,872)     (31,023)
  Proceeds from disposal of property, plant and
    equipment ..............................................        2,267        77,320         4,601          556
  Proceeds from disposal of trading securities .............          170           170             -            -
  Repayment of loans receivable ............................       10,000             -             -            -
  Repayment of notes receivable ............................            -       140,412        91,304       11,027
  (Increase) decrease in due from Chinese joint
    venture partners .......................................      (10,036)        5,356          (200)         (24)
  Acquisition of a subsidiary, net of cash acquired ........        4,120             -             -            -
  Proceeds from disposal of business
    components, net ........................................        1,734           833      (104,128)     (12,576)
                                                                 --------      --------      --------      -------
Net cash used in investing activities ......................     (172,356)     (804,706)     (591,085)     (71,387)
                                                                 --------      --------      --------      -------

Cash flows from financing activities:
  Payment of dividends to shareholders .....................       (1,493)            -             -            -
  Payment of dividends to minority interests ...............          (66)       (5,801)       (1,527)        (184)
  Net increase in notes payable ............................            -       299,230             -            -
  Increase (decrease) in due to ultimate
    parent company .........................................          424        (1,772)       (4,030)        (487)
  Advance (repayment) of loans from a
    related company ........................................       24,198       (22,809)       (1,058)        (127)
  Net increase in short-term bank loans ....................      113,739        84,858       238,498       28,804
  Proceeds of long-term bank loans .........................       68,189       144,410       100,000       12,077
  Repayment of long-term bank loans ........................      (80,000)      (36,000)      (26,600)      (3,213)
  Decrease in due to Chinese joint venture partners ........      (10,194)      (19,936)            -            -
  Payment of capital lease obligations .....................      (18,973)            -             -            -
                                                                 --------      --------      --------      -------
Net cash provided by financing activities ..................       95,824       442,180       305,283       36,870
                                                                 --------      --------      --------      -------
Net increase (decrease) in cash and cash
  equivalents ..............................................       66,459      (231,032)     (181,001)     (21,860)
Cash and cash equivalents, beginning of year ...............      409,197       475,656       244,624       29,544
                                                                 --------      --------      --------      -------
Cash and cash equivalents, end of year .....................      475,656       244,624        63,623        7,684
                                                                 ========      ========      ========      =======
</TABLE>

                                      155
<PAGE>

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                  ----------------------------------------
                                                                  2001         2002         2003     2003
                                                                  ----         ----         ----     ----
                                                                   RMB          RMB          RMB      US$
<S>                                                              <C>          <C>         <C>        <C>
Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest paid - net of amounts capitalized .............      49,034       74,873     33,375     4,031
    Net income tax (refunded) paid .........................        (182)      11,410     20,228     2,445
                                                                 =======      =======     ======     =====

Supplemental schedule of non-cash investing and
  financing activities:
    Assignment of notes receivable to a holder
      of notes payable .....................................           -      299,230          -         -
    Capital lease obligations incurred .....................      18,973            -          -         -
    Conversion of convertible note receivable,
      and the related transfer from derivative
      instruments, to equity interest in an affiliate
      (see note 8) .........................................           -       50,531          -         -
    Long-term advance from a Chinese joint
       venture partner capitalized in a subsidiary .........      19,600            -          -         -
                                                                 =======      =======     ======     =====

    Details of acquisition:
      Fair value of assets acquired (including cash
        acquired of Rmb4,120) ..............................      50,644            -          -         -
      Minority interests acquired ..........................     (10,058)           -          -         -
      Loan advance capitalized in connection with
        the acquisition ....................................     (10,569)           -          -         -
                                                                 -------      -------     ------     -----

      Liabilities assumed ..................................      30,017            -          -         -
                                                                 =======      =======     ======     =====
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      156
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION
                       DATA AND UNLESS OTHERWISE STATED)

1.    ORGANIZATION AND BASIS OF PREPARATION

      China Enterprises Limited (the "Company") was incorporated in Bermuda on
January 28, 1993. Its common stock traded on the New York Stock Exchange (the
"NYSE") until September 27, 2002 when it was suspended from trading as a result
of the Company's failure to meet the NYSE's continuing listing standards. On
November 26, 2002, the Company's common stock began trading on the OTC
(Over-the-Counter) Bulletin Board. On December 30, 2002, the common stock of the
Company was delisted from trading on the NYSE.

      As of December 31, 2003, the Company had the following principal
subsidiaries (together with the Company, collectively referred to as the
"Group"):

-     Container Limited ("Container", incorporated in the British Virgin Islands
      (the "BVI"));

-     Capital Canton Limited ("Capital Canton", incorporated in the BVI);

-     Century Lead Limited ("Century Lead", incorporated in the BVI);

-     Honest Map Limited ("Honest Map", incorporated in the BVI);

-     Leading Returns Limited ("Leading Returns", incorporated in the BVI);

-     Million Good Limited ("Million Good", incorporated in the BVI);

-     Sincere Ocean Limited ("Sincere Ocean", incorporated in the BVI); and

-     Ventures Kingdom Limited ("Ventures Kingdom", incorporated in the BVI);

      All of these subsidiaries are distinct legal entities with limited
liability.

                                      157
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

1.    ORGANIZATION AND BASIS OF PREPARATION - CONTINUED

      Details of these subsidiaries are summarized as follows:

<TABLE>
<CAPTION>
                                      Capital       Century       Honest        Leading       Million     Sincere     Ventures
                        Container     Canton         Lead          Map          Returns        Good        Ocean      Kingdom
                        ---------     ------         ----          ---          -------        ----        -----      -------
<S>                     <C>           <C>           <C>          <C>            <C>           <C>         <C>         <C>
Legal status            Limited       Same as       Same as       Same as       Same as       Same as     Same as     Same as
                         liability     Container     Container     Container     Container     Container   Container   Container
                         company

Principal activities    Investment    Investment    Investment    Investment    Investment    Investment  Investment  Investment
                         holding       holding       holding       holding and   holding and   holding     holding     holding and
                                                                   financing     financing                             financing

Registered capital/     US$1          US$1          US$1          US$1          US$1          US$1        US$1        US$1
  Issued capital
  (amount as stated)

Percentage of           100           100           100           100           100           100         100         100
  ownership by the
  Company (%)
</TABLE>

      As of December 31, 2003, the Company had the following significant equity
method affiliates:

-     Hangzhou Zhongce Rubber Co., Limited ("HZ", located in Hangzhou, Zhejiang
Province, the People's Republic of China (the "PRC")); and

-     Wing On Travel (Holdings) Limited ("formerly known as Ananda Wing On
Travel (Holdings) Limited and incorporate in Bermuda) (together with its
subsidiaries, collectively referred to as "Wing On").

      HZ remained as a consolidated subsidiary of the Company for the periods
presented until the Company sold a 25% equity interest in HZ on September 30,
2003. HZ is engaged in the manufacture of rubber tires in the PRC. See note 3
for details of this disposition.

      The Company has a 32.21% equity interest in Wing On, which, together its
subsidiaries, is engaged in business of providing package tours, travel and
other related services with its shares listed on The Stock Exchange of Hong Kong
Limited.

      HZ, together with its subsidiary, conducts its operations in the PRC. The
Company is, accordingly, subject to special considerations and significant risks
not typically associated with investments in equity securities of the United
States of America (the "US") and western European companies. These include,
among others, risks associated with the political and economic environment,
foreign currency exchange, import restrictions and legal system of the PRC.

      The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the US ("US GAAP"). This basis
of accounting differs from that used in the statutory financial statements of
Wing On and HZ, which were prepared in accordance with accounting principles
generally accepted in Hong Kong and the accounting principles and the relevant
financial regulations as established by the Ministry of Finance of the PRC,
respectively.

                                      158
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

     (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION
                        DATA AND UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)   BASIS OF CONSOLIDATION

      The consolidated financial statements include the assets, liabilities,
revenue and expenses of the Company and all of its majority owned and controlled
subsidiaries. All significant intercompany balances and transactions have been
eliminated on consolidation. Investments in 50% or less owned companies over
which the Company exercises significant influence but not control, are accounted
for using the equity method. Under the equity method, the Company's
proportionate share of the affiliate's net income or loss is included in the
consolidated statement of operations.

(b)   REVENUES

      Revenues represent the invoiced value of goods, net of value-added tax
("VAT") and other sales taxes, supplied to customers. Revenues are recognized
upon delivery and acceptance of goods by the customers. The Company permits the
return of damaged or defective products and accounts for these returns as
deduction from sales.

(c)   SHIPPING AND HANDLING FEES AND COSTS

      Costs for transportation of products to customers is recorded as a
component of selling, general and administrative expense (see note 22).

(d)   CASH AND CASH EQUIVALENTS

      The Company considers cash on hand, demand deposits with banks and liquid
investments with an original maturity of three months or less when purchased to
be cash and cash equivalents. Included in cash and cash equivalents as of
December 31, 2002 and 2003 were United States dollar deposits of US$7,628
(Rmb63,160) and US$140 (Rmb1,160), respectively.

      Cash and cash equivalents included in the consolidated statements of cash
flows included cash and cash equivalents of discontinued operations shown under
the current assets of discontinued operations in the consolidated balance sheets
totaling Rmb103,667 and RmbNil as of December 31, 2002 and 2003, respectively.

                                      159
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(e)   MARKETABLE SECURITIES

      The Company determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation at each
balance sheet date. Marketable securities are classified as either trading or
available-for-sale. Trading securities are carried at fair value, based on
quoted market prices, with unrealized gains and losses included in the
consolidated statement of operations for the year. Investments in marketable
securities classified as available-for-sale are also carried at fair value, with
unrealized gains or losses excluded from the consolidated statement of
operations and reported as other comprehensive income. If the decline in fair
value is determined to be other than temporary, the amount of write-down to fair
value is included in the determination of operating results for the year as a
realized loss. The cost of securities sold is based on the average cost method
and income earned is included in other income.

(f)   INVENTORIES

      Inventories are stated at the lower of cost, on an average cost basis, or
market value. Costs of work-in-progress and finished goods comprise direct
materials, direct labor and an attributable proportion of production overheads.
Provision for potentially obsolete or slow-moving inventory is made based on
management's analysis of inventory levels.

(g)   PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment is stated at cost of acquisition less
accumulated depreciation and provision for impairment loss. The cost of major
improvements and betterments is capitalized whereas the cost of maintenance and
repairs is expensed in the year incurred.

      Depreciation of property, plant and equipment is computed using the
straight-line method over the assets' remaining estimated economic useful lives
and an estimated residual value of 4% to 10% of the costs except for land use
rights which have no residual value. The estimated useful lives of property,
plant and equipment are as follows:

              Land use rights                                   50 years
              Buildings                                         20 years
              Machinery and equipment                           10 years
              Motor vehicles                                     5 years
              Furniture, fixtures and office equipment           5 years

      Construction-in-progress represents factory and office buildings under
construction and plant and machinery pending installation. This includes the
costs of construction, the costs of plant and machinery and interest capitalized
on borrowings during the period of construction or installation. Assets under
construction are not depreciated until construction completed and the assets are
ready for their intended use. Interest capitalized was RmbNil, Rmb3,954 and
Rmb3,000 for the year ended December 31, 2001, 2002 and 2003, respectively.

                                      160
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(h)   GOODWILL

      The excess of the purchase price over the fair value of net assets
acquired is recorded on the consolidated balance sheet as goodwill. Prior to
January 1, 2002, goodwill was amortized to expense on a straight-line basis over
20 years and accumulated amortization was Rmb6,323 at December 31, 2001. In June
2001, the Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets", which provides that goodwill and other intangible assets with
indefinite lives will not be amortized, but will be tested for impairment on an
annual basis. The Company adopted SFAS No. 142 on January 1, 2002 and
discontinued amortization of its existing goodwill. The Company also evaluated
goodwill for impairment and determined that no impairment of recorded goodwill
was necessary as of January 1, 2002.

      The following transitional disclosure represents the Company's reported
and adjusted net loss, and basic and diluted loss per share assuming that SFAS
No. 142 had been adopted beginning January 1, 2001:

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                  ----------------------------------------
                                                                  2001           2002              2003
                                                                  ----           ----              ----
                                                                   RMB           RMB               RMB
<S>                                                              <C>            <C>              <C>
Net loss:
As reported..........................................         (135,359)         (262,781)        (107,310)
Add back: goodwill amortization......................              891                 -                -
                                                              --------          --------         --------
As adjusted..........................................         (134,468)         (262,781)        (107,310)
                                                              ========          ========         ========

Basic and diluted loss per share:
As reported..........................................           (15.01)           (29.14)          (11.90)
Add back: goodwill amortization......................             0.10                 -                -
                                                              --------          --------         --------
As adjusted..........................................           (14.91)           (29.14)          (11.90)
                                                              ========          ========         ========
</TABLE>

(i)   IMPAIRMENT

      In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company evaluates the impairment of
long-lived assets based on the projection of undiscounted cash flows whenever
events or changes in circumstances indicate that the carrying amounts of such
assets may not be recoverable. In the event such cash flows are not expected to
be sufficient to recover the recorded value of the assets, the assets are
written down to their estimated fair values (see note 4).

                                      161
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(j)   INCOME TAXES

      The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes". Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and to operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply when
those temporary differences are expected to reverse. Valuation allowances are
established to reduce the amount of deferred tax assets if it is considered more
likely than not that some portion of, or all of, the deferred tax asset will not
be realized.

(k)   VAT AND CONSUMPTION TAX ("CT")

      All of the Group's PRC entities are subject to VAT and CT. They are
recognized on an accrual basis and revenues are recorded net of these taxes.

(l)   FOREIGN CURRENCIES

      The PRC entities of the Group maintain their books and records in
Renminbi, their functional currency. Foreign currency transactions are
translated into Renminbi at the applicable exchange rates quoted by the People's
Bank of China (the "unified exchange rates") prevailing at the dates of
transactions. Monetary assets and liabilities denominated in foreign currencies
are translated into Renminbi using the applicable unified exchange rates
prevailing at the respective balance sheet dates. Non-monetary assets and
liabilities are translated at the unified exchange rates prevailing at the time
the assets or liabilities were acquired. The resulting exchange differences are
included in the consolidated statement of operations.

      Orion Tire and Orion BVI maintain their books and records in United States
dollars. The remaining companies in the Group other than the PRC entities, Orion
Tire and Orion BVI maintain their books and records in Hong Kong dollars, their
functional currency. For consolidation purposes, their balance sheets were
translated into Renminbi using the unified exchange rates prevailing at the
respective balance sheet dates. Their statements of operations are translated
using a weighted average rate for the period. Exchange differences arising on
the translation of these financial statements are treated as translation
adjustments and included in the accumulated other comprehensive losses account
within shareholders' equity in the consolidated financial statements.

      The Company's share capital is denominated in United States dollar. For
financial reporting purposes, the United States dollar capital amounts have been
translated into Renminbi at the respective exchange rates prevailing at the
capital injection dates.

                                      162
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(l)   FOREIGN CURRENCIES - CONTINUED

      The Renminbi currently is not generally 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 Renminbi 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 PRC entities conduct their business substantially in the PRC, and
their financial performance and position are measured in terms of Renminbi. Any
devaluation of the Renminbi 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 dollars. The PRC entities'
products are primarily sold in the PRC for Renminbi. Thus, their revenues and
profits are predominantly denominated in Renminbi, and will have to be converted
by the Company to pay dividends to the Company in United States dollars. Should
the Renminbi devalue against the 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 entities to the Company. The
Company currently is not able to hedge its Renminbi - United States dollar
exchange rate exposure in the PRC because neither the People's Bank of China nor
any other financial institution authorized to engage in foreign exchange
transactions in the PRC offers forward exchange contracts.

The translation of Renminbi (Rmb) amounts into United States dollar (US$)
amounts are included solely for the convenience of readers in the United States
of America and have been made at US$1.00 = Rmb8.28, the unified exchange rate on
December 31, 2003. No representation is made that the Renminbi amounts could
have been, or could be, converted into United States dollar at that or at any
other rate.

(m)   DEDICATED CAPITAL

      In accordance with the relevant laws and regulations for Sino-foreign
equity joint venture enterprises, the PRC entities maintain discretionary
dedicated capital, which includes a general reserve fund, an enterprise
expansion fund, and a staff welfare and incentive bonus fund. The respective
boards of directors of the PRC entities will determine on an annual basis the
amount of the annual appropriations to dedicated capital. In 2001, 2002 and
2003, certain PRC entities appropriated 5% respectively of the profits after tax
as reflected in their statutory financial statements to the general reserve
fund, enterprise expansion fund, and/or staff welfare and incentive bonus fund.
The Company's proportionate interest in appropriations to the general reserve
fund and the enterprise expansion fund are reflected in the consolidated balance
sheets under shareholders' equity as dedicated capital; however, the
appropriation for the staff welfare and incentive bonus fund is charged to
consolidated statements of operations and the unused portion is recorded as a
current liability.

                                      163
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(n)   BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

      The Company calculates basic and diluted earnings (loss) per share in
accordance with SFAS No. 128, "Earnings Per Share". Basic earnings (loss) per
share is computed using the weighted-average number of common shares outstanding
during the year. Diluted earnings (loss) per share is computed using the
weighted-average number of common shares and common stock equivalent shares
outstanding during the year. Common stock equivalent shares such as shares
issuable upon the exercise of stock options are excluded from the computation if
their effect is anti-dilutive. During 2001, 2002 and 2003, all outstanding
options were anti-dilutive (see note 15).

(o)   USE OF ESTIMATES

      The 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 disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from those estimates. Significant items subject to such estimates and
assumptions include the carrying value and estimated useful lives of long-lived
assets; impairment of goodwill; valuation allowances for receivables and
deferred tax assets; liability for product warranty; and the valuation of
certain financial instruments.

(p)   FINANCIAL INSTRUMENTS

      The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" as of January 1, 2001 and recognizes all derivative
instruments on the balance sheet at fair value. The Company does not purchase
derivative instruments to manage risks.

      The Group's financial instruments that are exposed to concentration of
credit risk consist primarily of its cash and cash equivalents, accounts and
other receivables, notes receivable, amounts due from ultimate parent company
and advances to affiliates. The Group's cash and cash equivalents are
high-quality deposits placed with banking institutions with high credit ratings;
therefore, the credit risk is limited. The accounts receivable largely represent
amounts due from the Group's customers and are typically on an open account
basis. Concentrations of credit risk associated with the accounts receivable are
considered minimal due to the Group's diverse customer base. In no period did
sales to any one customer accounts for 10% or more of the Group's sales. The
Group maintains allowances to cover potential bad debts and believes that no
significant credit risk exists as a result of its diverse group of customers.
Credit losses, when realized, have historically been within the range of
management's expectations. The other receivables comprise principally interest
receivable from notes holders. The Company does not believe there is a
significant credit risk from any of these counterparties as they are either
major suppliers of the Group or local government authorities. The notes
receivable are due from three parties and the Group has reviewed their credit
worthiness and does not expect to incur significant loss for uncollected
accounts. The Group has reviewed the credit worthiness and financial position of
its ultimate parent company and affiliates for credit risks associated with
amount due from ultimate parent company and advances to affiliates. These
entities have good credit standing and the Group does not expect to incur
significant loss for uncollected advances from these entities.

                                      164
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(p)   FINANCIAL INSTRUMENTS - CONTINUED

      The carrying value of current financial assets and current financial
liabilities approximates fair value due to the short-term nature of these
instruments. Bank loans approximate their carrying value as the interest rates
approximate those which would have been available for loans of similar remaining
maturity at the respective year ends. The fair value of convertible note
receivable as of December 31, 2002 and 2003 was Rmb89,947, which was determined
based on the estimated net amount the Company would receive as of December 31,
2003 from the note issuer and the interest rates of similar instruments from
market.

(q)   COMPREHENSIVE INCOME (LOSS)

      The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income". Comprehensive income consists of net income
(loss) and other gains and losses affecting shareholders' equity that, under
U.S. GAAP are excluded from net income (loss). Comprehensive loss for 2001 only
represents the Company's net loss, but for 2002 and 2003, the amount also
includes translation adjustment relating to an affiliate. Comprehensive loss has
been disclosed within the consolidated statements of operations and
comprehensive loss.

(r)   SEGMENT INFORMATION

      The Company reports information about operating segments on a basis
consistent with the Company's internal organization structure as well as
information about geographic areas and major customers in accordance with SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information".

(s)   RELATED PARTIES

      Parties are considered to be related to the Company if the parties that,
directly or indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with the Company. Related parties
also include principal owners of the Company, its management, members of the
immediate families of principal owners of the Company and its management and
other parties with which the Company may deal if one party controls or can
significantly influence the management or operating policies of the other to an
extent that one of the transacting parties might be prevented from fully
pursuing its own separate interests. A party which can significantly influence
the management or operating policies of the transacting parties or if it has an
ownership interest in one of the transacting parties and can significantly
influence the other to an extent that one or more of the transacting parties
might be prevented from fully pursuing its own separate interests is also a
related party.

                                      165
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(t)   STOCK-BASED COMPENSATION

      The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees", and has adopted the
disclosure-only requirements of SFAS No. 123, "Accounting of Stock-Based
Compensation". Compensation expense related to employee stock options is
recorded only if, on the measurement date, the quoted market price of the
underlying stock exceeds the exercise price.

(u)   ADVERTISING EXPENSES

      The Company expenses advertising costs as incurred. Advertising expenses
were Rmb5,332, Rmb7,550 and Rmb5,145 for the years ended December 31, 2001, 2002
and 2003, respectively.

(v)   DILUTION OF INTEREST IN EQUITY AFFILIATE/SUBSIDIARY

      The Company records the gains or losses arising from issuance by an equity
affiliate or subsidiary of its own stock in additional paid-in capital account
within shareholders' equity in the consolidated financial statements.

(w)   RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

      In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment to Statement 133 on Derivative Instruments and Hedging
Activities". SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is
applied prospectively and is effective for contracts entered into or modified
after June 30, 2003, except for SFAS No. 133 implementation issues that have
been effective for fiscal quarters that began prior to June 15, 2003 and certain
provisions relating to forward purchases and sales on securities that do not yet
exist. The adoption of SFAS No. 149 did not have a material impact on its
results of operations or financial position.

      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". It
establishes standards for how an issuer classifies and measures certain
financial instruments. SFAS No. 150 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. It requires
that certain financial instruments that, under previous guidance, could be
accounted for as equity be classified as liabilities, or assets in some
circumstances. It does not apply to features embedded in a financial instrument
that is not a derivative in its entirety. SFAS No. 150 also requires disclosures
about alternative ways of settling the instruments and the capital structure of
entities whose shares are mandatorily redeemable. The management has not yet
determined the impact, if any, on its financial position, results of operations
or cash flows.

                                      166
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(w)   RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED - CONTINUED

      In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities". 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 ended
December 15, 2003. In December 2003, the FASB issued FIN 46R which defers 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 ended December 31, 2003. The Company
does not have a special purpose entity therefore they will adopt the provisions
in December 2004.

      In November 2002, the Emerging Issue Task Force ("EITF") reached a
consensus on Issue No. 00-21 ("EITF No. 00-21"), "Revenue Arrangements with
Multiple Deliverables". EITF No. 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which the vendor will perform
multiple revenue generating activities. EITF No. 00-21 is effective for fiscal
periods beginning after June 15, 2003. The Company does not expect the adoption
of EITF No. 00-21 to have a material impact on the Company's financial position,
cash flows or results of operations.

(x)   RECLASSIFICATIONS

      Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform to the current year presentation.
These reclassifications had no effect on the results of operations or financial
position for any year presented.

                                      167
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

3.    ACQUISITION AND DIVESTITURE

      Divestiture

      On September 30, 2003, the Company completed the sale of its 25% equity
interest in HZ, for Rmb164,660 in cash, and recognized a loss of Rmb1,158 on the
sale. As a result of this transaction, the Company's equity interest in HZ is
reduced from 51% to 26%, and the Company can only exercise significant influence
but not control over HZ, which becomes an equity method affiliate of the
Company. The Company has included the results of the operations of HZ for the
nine-month period ended September 30, 2003 in its consolidated financial
statements for the year ended December 31, 2003, and has accounted for HZ's
results of operations from October 1, 2003 to December 31, 2003 using equity
method of accounting. In the opinion of the Company's management, the Company
has no plan to sell its remaining interest in HZ.

      See note 4 for other divestitures that have been classified as
discontinued operations.

      Acquisition

      In September 2001, HZ capitalized an amount of Rmb10,569 ("Purchase
Price") previously advanced to the Chinese joint venture partner of FCJ for a
51.24% interest in that company. There were no differences between the Purchase
Price and the estimated fair values of the net assets acquired. Cash acquired
through the acquisition was Rmb4,120. This acquisition was immaterial to the
Group's results from operations and financial position.

4.    DISCONTINUED OPERATIONS

      SFAS No. 144 requires a component of an entity that either has been
disposed of or is classified as held for sale to be reported as discontinued
operations if certain conditions are met.

      During 2001 and 2002, the Company decided to dispose of certain of its
subsidiaries which included Double Happiness Tyre Industries Corporation Limited
("DH"), Yantai C.S.I. Rubber Co., Limited ("YT"), Shandong C.S.I. Synthetic
Fiber Co., Limited ("SD") and Yinchuan C.S.I. (Greatwall) Rubber Co., Ltd.
("YC").

                                      168
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

4.    DISCONTINUED OPERATIONS - CONTINUED

(a)   DH

      DH consisted of a bias tire factory and a radial tire factory under
construction. All of DH's revenue was contributed by the bias tire factory as
trading and manufacturing activities were only carried out in this factory. In
fiscal 1995, DH temporarily suspended construction of the radial tire factory.
Total costs incurred for the factory up to December 31, 2002, net of provisions,
were approximately Rmb39,886, and had been included in construction-in-progress
under property, plant and equipment.

      In late September 2001, the Company's management adopted a plan to dispose
of its entire interest in DH and subsequently entered into a share transfer
agreement with a third party to dispose of its entire interest in the bias tire
factory only for a consideration of Rmb41,000. Although the completion of the
sale was pending upon certain approvals being obtained from government
authorities, the Company transferred substantially all its risks and benefits of
ownership of the factory to the buyer in early December 2001 and accordingly,
the Company recognized a net realized loss on such disposition of Rmb28,588
during fiscal 2001 and has ceased to account for the results of operations and
the assets and liabilities of the factory from the disposal date. The sales
proceeds were received by the Company in cash during fiscal 2001.

      The Company had also recognized an impairment loss of Rmb31,187 in fiscal
2001 for the planned disposition of the radial tire factory calculated on the
basis of anticipated sales value of Rmb30,000 which was expected to be received
in fiscal 2002 less a loss of Rmb73,728 from the waiver of loan advances by the
Company to the factory.

      The estimated selling price of Rmb30,000 was derived from prior
discussions with potential purchasers of the factory; however, the market
conditions worsened in fiscal 2002 and, as a result, the factory remained unsold
as of December 31, 2002. The Company recognized an additional impairment expense
of Rmb42,479 in the fourth quarter of fiscal 2002 to write down the net assets
of the factory to a nominal value of Rmb1 in view of the deteriorating market
conditions.

      In June 2003, the Company entered into a share transfer agreement with a
third party and completed the disposition of the radial tire factory for a
consideration of Rmb10,000. The Company recognized a gain on such disposition of
Rmb11,211 in 2003.

      Interest expense incurred on the outstanding loans used to finance the
construction of the factory, amounting to Rmb1,113, Rmb7,000 and Rmb743 for the
years ended December 31, 2001, 2002 and 2003, respectively, has been included in
loss from discontinued operations.

                                      169
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

4.    DISCONTINUED OPERATIONS - CONTINUED

(b)   YT

      In the fourth quarter of fiscal 2001, the Company decided to sell its
interests in YT as a result of the change in business climate on the demand of
traditional pneumatic tire. The Company recorded a non-cash impairment charge of
Rmb16,774 for fiscal 2001 to write down the carrying value of the long-lived
assets representing management's best estimate of the loss to be recognized on
sale of the Company's interests in this subsidiary. The Company subsequently
entered into a share transfer agreement with a third party to dispose of its
entire interest in YT and the respective shareholder's advance of Rmb20,167 for
an aggregate consideration of Rmb26,000. The sale was completed in 2002 and the
direct selling costs were Rmb550. The Company recognized a gain on such
disposition of Rmb7,967 in 2002.

(c)   SD

      Production at SD was suspended in October 1996 due to unfavourable market
conditions for synthetic nylon cord fabric. Management of SD and the Company,
together with the Laizhou City Government, were unable to agree on a concrete
plan for the future operations of SD and the Company recorded an impairment
charge on its long-lived assets of Rmb3,852 in fiscal 2000 based on the
estimated future cash flows for SD.

      During 2001, the Company had approved and committed to a plan to sell its
interest in SD and recognized an additional impairment charge of Rmb2,172
representing management's best estimate of the loss to be recognized on its
sale. In January 2002, the Company signed a transfer agreement to sell its
entire interest in SD to its Chinese joint venture partner for a consideration
of Rmb10. The sale was completed in July 2002 upon obtaining approval from the
relevant government authorities. The Company transferred substantially all its
risks and benefit of ownership of SD to the buyer and recognized a gain on such
disposition of Rmb12,177 in the third quarter of 2002.

(d)   YC

      The Company recognized an impairment loss provision for goodwill of YC of
Rmb4,023 in fiscal 2001. YC has recurring losses from its existing bias tire
products and the Company's management identified this as an indicator of asset
impairment. This condition led to operating results and forecasted future
results that were less than had been anticipated at the time of the Company's
acquisition of YC. The Company revised its projections and determined that the
projected results would not fully support the future amortization of the
goodwill balance of YC resulting in the recognition of this non-cash impairment
charge.

      In the second quarter of 2002, the Company recognized an impairment loss
provision for the long-lived assets of YC of Rmb174,384. Due to poor operating
results and continued weakness in markets operated by YC, the Company reviewed
and revised the projected future operating results of YC and determined that its
expected future undiscounted cash flows were less than the carrying amount of
its long-lived assets resulting in the recognition of this non-cash impairment
charge.

                                      170
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

4.    DISCONTINUED OPERATIONS - CONTINUED

(d)   YC - continued

      In the second half of fiscal 2002, the Company initiated a process to sell
YC. The Company recognized an additional non-cash impairment charge of Rmb74,785
to write down the carrying value of the long-lived assets of YC representing
management's best estimate of the loss to be recognized on the sale.

      In January 2003, the Company entered into a share transfer agreement with
the Chinese joint venture partner of YC to dispose of its entire interest in YC
for an initial aggregate consideration of Rmb35,000 approximating the carrying
value as of December 31, 2002.

      In September 2003, the Company entered into a supplemental agreement with
the Chinese joint venture partner of YC to reduce the sale consideration to
Rmb29,000. The sale was completed in January 2003 and the Company recognized a
loss on this disposition of Rmb14,724 in 2003.

      Accordingly, the operating results of DH, YT, SD and YC have been
segregated from continuing operations and reported as a separate line item on
the consolidated statement of operations. The Company has also restated its
financial statements for the year ended December 31, 2001 to present the
operating results of these subsidiaries as discontinued operations.

      Operating results of the discontinued operations are summarized below:

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                                            ------------------------------------
                                                                               2001           2002         2003
                                                                               ----           ----         ----
                                                                               RMB             RMB          RMB
<S>                                                                         <C>             <C>           <C>
Revenues ..............................................................      1,066,083       621,653           -
                                                                            ==========      ========      ======
Loss from operations of discontinued components before income taxes and
  minority interests (including impairment write-downs for those
  business components of Rmb54,156 in 2001, Rmb291,648 in 2002 and
  RmbNil in 2003, loss on disposition of Rmb28,558 in 2001, gain on
  disposition of Rmb20,144 in 2002 and loss on disposition of Rmb7,017
  in 2003, respectively), net of applicable income tax of Rmb26
  in 2001, RmbNil in 2002 and 2003 ....................................       (259,052)     (345,012)     (7,760)
Minority interests ....................................................         87,268       145,174           -
                                                                            ----------      --------      ------
Loss from discontinued operations .....................................       (171,784)     (199,838)     (7,760)
                                                                            ==========      ========      ======
</TABLE>

                                      171
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

4.    DISCONTINUED OPERATIONS - CONTINUED

      The components of assets and liabilities of the discontinued operations
included in the Company's consolidated balance sheets as of December 31, 2002
and 2003 are summarized below:

<TABLE>
<CAPTION>
                                                                       2002            2003
                                                                       ----            ----
                                                                        Rmb            Rmb
<S>                                                                   <C>              <C>
Cash and cash equivalents ......................................       103,667           -
Accounts receivable, net .......................................       234,490           -
Inventories ....................................................       210,999           -
Prepaid expenses, deferred expenses and other current assets....        12,014           -
Due from related companies .....................................         3,874           -
                                                                      --------         ---
  Current assets of discontinued operations ....................       565,044           -
                                                                      --------         ---
Property, plant and equipment, net .............................       153,273           -
Other assets ...................................................           551           -
                                                                      --------         ---
  Non-current assets of discontinued operations ................       153,824           -
                                                                      --------         ---
Short-term bank loans ..........................................      (207,080)          -
Long-term bank loans - current portion .........................       (60,000)          -
Accounts payable ...............................................      (221,389)          -
Other payables .................................................       (38,472)          -
Accrued liabilities ............................................       (31,204)          -
Other taxes payable ............................................       (25,315)          -
                                                                      --------         ---
  Current liabilities of discontinued operations ...............      (583,460)          -
                                                                      --------           -
Long-term bank loans net, of current portion ...................        (1,319)          -
Due to Chinese joint venture partners ..........................       (10,721)          -
Loans from related companies ...................................          (631)          -
                                                                      --------         ---
  Non-current liabilities of discontinued operations ...........       (12,671)          -
                                                                      --------         ---
Minority interests of discontinued operations ..................       (79,013)          -
                                                                      --------           -
                                                                        43,724           -
                                                                      ========         ===
</TABLE>

                                      172
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

5.    NOTES RECEIVABLE

      The notes, carrying interest at commercial rates, are unsecured,
receivable from unrelated parties and due in 2004.

6.    INVENTORIES

      Inventories by major categories are summarized as follows:

<TABLE>
<CAPTION>
                                                        2002           2003
                                                        ----           ----
                                                         Rmb            Rmb
<S>                                                   <C>              <C>
Raw materials ...................................      344,300           -
Work-in-progress ................................       21,985           -
Finished goods ..................................      442,039           -
                                                      --------         ---
Total ...........................................      808,324           -
Less: Inventories of discontinued operations.....     (210,999)          -
                                                      --------         ---
                                                       597,325           -
                                                      ========         ===
</TABLE>

7.    MARKETABLE SECURITIES

      As of December 31, 2002, trading securities comprised municipal bonds in
the PRC of which Rmb170 each was redeemed at its par value in fiscal 2002
resulting in no gain or loss on redemption.

                                      173
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

8.    INVESTMENTS IN AND ADVANCES TO AFFILIATES

      WING ON:

      In April 2002, Million Good subscribed for 4,800,000,000 new ordinary
shares of HK$0.01 each ("Subscription Shares") in Wing On, representing
approximately 34.6% of the then outstanding share capital of Wing On, at an
issue price of HK$0.027 per Subscription Shares for an aggregate subscription
price of HK$132,715 (Rmb140,784, including transaction costs of Rmb3,304),
pursuant to an agreement entered into in February 2002. Wing On is a Hong Kong
based travel company which mainly provides package tours, travel, transportation
and other related services. Its shares are listed on the Hong Kong Stock
Exchange.

      As part of the acquisition of an equity interest in Wing On, the Company
also subscribed for a two-year convertible note (the "Note") issued by Wing On
in the principal amount of HK$120,000 (Rmb127,284). In July 2002, the Company
exercised certain of its conversion rights under the terms of the Note resulting
in the issuance of 1,100,000,000 new ordinary shares of Wing On to Million Good.
This additional investment amounted to HK$47,639 (Rmb50,531) which comprised
HK$15,373 (Rmb16,306) of the carrying value of the Note (net of unamortized
discount on subscription) and the related transfer from derivative instruments
of HK$32,266 (Rmb34,225). No conversion rights were exercised by the Company or
other convertible note holders during fiscal 2003.

      The excess of the equity in the fair value of net assets of Wing On over
Million Good's aggregate investment costs of Rmb150,353 was allocated on a pro
rata basis to Wing On's assets pursuant to the rules specified in SFAS No. 141,
"Business Combinations" and out of which Rmb102,113 was allocated to assets that
are subject to depreciation and amortisation.

      Had the outstanding conversion right of the Note as of December 31, 2002
and 2003 been exercised in full for subscribing shares in Wing On on the date of
its subscription, the Company's equity in losses of affiliates for fiscal 2002
and 2003 would have been increased to Rmb123,137 and Rmb165,914, respectively.

      From May through September of 2002, several convertible note holders of
Wing On exercised the conversion right of certain of their notes and Wing On
also repurchased certain of its ordinary shares through unsolicited block
transactions. This resulted in a net dilution of the Company's interest in Wing
On and the creation of an "implied sale" of a portion of the Company's
investment. In accordance with Staff Accounting Bulletin No. 51 "Accounting for
Sales of Stock by a Subsidiary", the Company recorded a net unrealized loss as a
reduction of additional paid-in capital totaling Rmb5,622 during the fiscal year
2002. The net unrealized loss represents the difference between the Company's
carrying basis and the fair value of the portion of the investment in Wing On
deemed to have been sold or acquired. The Company also recorded its share of
unrealized loss of Rmb626 in additional paid-in capital as a result of dilution
of interest in a subsidiary of Wing On during fiscal 2002.

                                      174
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

8.    INVESTMENTS IN AND ADVANCES TO AFFILIATES - continued

      HZ:

      In June 2003, the Group entered into a share transfer agreement for the
disposition of 25% equity interest in its then 51% owned subsidiary, HZ (which
in turn owns 51.24% equity interest of FCJ). HZ and FCJ (hereinafter
collectively referred to as "HZ Tire") were major subsidiaries of the Group. The
sale was completed in September 2003 and as a result of this disposition, HZ
Tire became a major affiliate of the Group. See note 1 for details of HZ and
note 21 for segment information of HZ Tire prior to the disposition.

      OTHERS:

      In 1998, an agreement was entered into by HZ with three other PRC
enterprises in Hangzhou to establish a Sino-foreign equity joint venture,
Hangzhou Sunrise Rubber Co., Ltd. ("Hangzhou Sunrise"), to construct and operate
a radial tire factory. The total investment and registered capital of this new
joint venture is US$29,980 (Rmb248,000). The equity interest owned by HZ was
49.2% and its investment commitment was satisfied by the contribution of its
existing radial tire project under construction into Hangzhou Sunrise. The
radial tire factory of Hangzhou Sunrise commenced operations in 2000. As a
result of the disposition of the 25% equity interest in HZ, Hangzhou Sunrise
ceased to be an affiliate of the Group.

      On August 20, 2001, Sincere Ocean acquired a 33.33% of the outstanding
issued share capital of X One Holdings Limited ("X One", formerly known as Yutu
Holdings Limited) for a nominal consideration of US$3 (amount as stated) and
advanced a shareholder loan of approximately Rmb1,700. During fiscal 2002 and
2003, Sincere Ocean advanced further loans aggregating Rmb4,362 and Rmb884,
respectively, to X One to finance its working capital.

      The following table presents summarized comparative financial information
for the Company's investments in 50% or less owned investments, over which the
Company has the ability to exercise significant influence but does not control,
which are accounted for using the equity method:

<TABLE>
<CAPTION>
                                                                 2001                 2002             2003
                                                                 ----                 ----             ----
                                                                 Rmb                  Rmb              Rmb
<S>                                                             <C>                <C>              <C>
Revenues.............................................           127,612            1,603,559        5,307,123
Operating loss.......................................            (7,148)            (258,975)         (83,656)
Net loss.............................................            (7,583)            (323,191)        (355,237)
Current assets.......................................            31,939              671,185        2,106,765
Non-current assets...................................           479,557            1,416,045        1,575,892
Current liabilities..................................           183,369              735,234        2,277,462
Non-current liabilities..............................            96,153              511,772          326,991
Shareholders' equity.................................           231,974              840,224        1,027,988
</TABLE>

                                      175
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

8.       INVESTMENTS IN AND ADVANCES TO AFFILIATES - continued

         Advances to the affiliates are Rmb49,368 and Rmb90,644 as adjusted for
the equity method loss of RmbNil and Rmb60,898 as of December 31, 2002 and 2003,
respectively. As of December 31, 2003, other than aggregated advances to an
affiliate of Rmb90,510 as adjusted for the equity method loss of Rmb60,898 which
bear interest at Hong Kong Prime Rate, the amounts are interest free. Advances
to affiliates are repayable upon demand; however, the Company will not require
repayment prior to June 2005. An allowance relating to these advances amounting
to Rmb4,451 was charged to income as a component of selling, general and
administrative expenses for fiscal 2002 and no such allowance was maintained and
charged to income for fiscal 2001 and 2003.

         Equity ownership percentages for these affiliates are presented below:

<TABLE>
<CAPTION>
                                                             Place of
                                                          incorporation/
AFFILIATE                                                  registration                2002                2003
---------                                                 --------------               ----                ----
<S>                                                       <C>                         <C>                 <C>
Wing On.............................................        Bermuda                   32.21%              32.21%
Hangzhou Sunrise....................................        PRC                       49.20%                -
X One...............................................        Hong Kong                 33.33%              33.33%
HZ..................................................        PRC                           -                  26%
</TABLE>

9.       LOAN RECEIVABLE

         In late 1993, the Company acquired a majority interest in a formerly
state-owned enterprise located in Chongqing, the PRC, through the formation of
Chongqing C.S.I. Tyre Co. Limited ("CQ") with Chongqing Tyre Chief Factory
("Chongqing Factory").

         However, the Company began to renegotiate the terms of the joint
venture agreement of CQ during fiscal 1995. Pending the outcome of the
negotiations, the parties agreed that the capital injected by the Company was
treated as an interest-bearing loan to Chongqing Factory with effect from the
date of contribution. Accordingly, the original capital contribution of
Rmb56,966 (US$6,600) was accounted for as a loan receivable (the "Loan") from
Chongqing Factory and the financial position and results of operations of CQ
have not been included in the consolidated financial statements since fiscal
1996. The Company had also made full provision against recorded interest income
on the Loan.

         In fiscal 1997, the Company proposed to formally terminate the joint
venture agreement of CQ (the "Termination") with Chongqing Factory. Pursuant to
an approval document issued by the supervisory authority of Chongqing Factory
(the "Supervisor") on April 10, 1997, the Supervisor agreed to the Termination
as well as the transfer of the original investment by the Company in CQ to other
projects in the Chongqing region. Since the Company was unable to identify a
suitable project in Chongqing in which it could reinvest, the Company initiated
arbitration proceedings in early 1998 (the "Proceedings") in the PRC against
Chongqing Factory to enforce the Termination, and to recover the Loan and
accrued interest up to June 30, 1998 as well as the related legal expenses for
the Proceedings.

                                      176
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

9.       LOAN RECEIVABLE - CONTINUED

         A judgement of the Proceedings (the "Judgement") was obtained on March
31, 2000 that the joint venture agreement of CQ was approved to be terminated
and CQ is to be liquidated in accordance with the relevant rules and regulations
of the PRC. Under the Judgement, the Company was entitled to damages (the
"Damages") of approximately Rmb15,796 and Chongqing Factory was discharged from
other claims lodged by the Company. The Damages were required to be paid to the
Company within 45 days from the date of the Judgement. In view of the expected
long duration of and the uncertainty of amounts to be recovered from the
liquidation of CQ and after taking into consideration the compensation for
financial losses to be paid by Chongqing Factory, the Directors of the Company
made an aggregate provision against the outstanding principal balance of the
Loan of approximately Rmb34,935 up to fiscal 1999.

         Subsequent to the Judgement, Rmb200 was recovered from Chongqing
Factory in early 2001. Accordingly, the remaining balance of the Loan as of
December 31, 2000, other than the Rmb200 recovered in early 2001, was fully
provided for and this provision amounting to Rmb14,962 was included in the
consolidated statement of operations for the year ended December 31, 2000.

         In fiscal 2001, the Company had recovered a total amount of Rmb10,000
for the loan of which Rmb9,800 was recorded as a non-operating income. The
Directors of the Company believe that no further amount of significance will be
recovered from Chongqing Factory.

10.      CONVERTIBLE NOTE RECEIVABLE FROM AN AFFILIATE, NET

         As of December 31, 2002 and 2003, the Note consisted of Rmb53,339 and
Rmb81,448, respectively, principal amount, net of unamortized discount on
subscription of the Note. The Note bears interest at a rate of 2% per annum
payable semi-annually in arrears. The Company has a right to convert the Note
into ordinary shares of Wing On at a rate per share equal to HK$0.032, subject
to adjustments, at any time prior to the Note's maturity date, which will be two
years from the date the Note is issued.

         In accordance with SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities", as amended, the conversion option element of the Note
is an embedded derivative instrument and has to be measured at fair value when
initially recorded and at subsequent reporting dates. The fair value of this
conversion option, representing a discount on subscription of the Note, was
estimated using the Black-Scholes option pricing model at the date of
subscription of the Note, and as of December 31, 2002 and 2003, at approximately
Rmb79,553, RmbNil and RmbNil, respectively. The impact of changes in fair value
of this conversion option, taking into account the portion of the conversion
option exercised during fiscal 2002 (see note 8), was an expense of
approximately Rmb45,328 and had been recognized in the consolidated statement of
operations for fiscal 2002.

         See note 24 for details of a significant subsequent event on
convertible note receivable.

                                      177
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

11.      PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                                     2002                  2003
                                                                                     ----                  ----
                                                                                     Rmb                   Rmb
<S>                                                                                <C>                     <C>
Property, plant and equipment consists of the following:

At cost:

Buildings and land use rights..............................................          299,166                 -
Machinery and equipment....................................................          767,811                 -
Motor vehicles.............................................................           24,109                 -
Furniture, fixtures and office equipment...................................           32,893                 -
Construction-in-progress...................................................          103,047                 -
                                                                                   ---------                --

Total......................................................................        1,227,026                 -
Less: Accumulated depreciation and amortization............................         (604,059)                -
                                                                                   ---------                --

Total net book value.......................................................          622,967                 -
Less:   Property, plant and equipment of discontinued
          operations.......................................................         (153,273)                -
                                                                                   ---------                --
                                                                                     469,694                 -
                                                                                   =========                ==
</TABLE>

12.      BANK LOANS

         As of December 31, 2002 and 2003, Rmb16,000 and RmbNil of the long-term
bank loans were guaranteed by third parties, respectively, including amount
relating to discontinued operations of Rmb16,000 and RmbNil, respectively.
Rmb20,000 and RmbNil of the long-term bank loans as of December 31, 2002 and
2003, respectively, were also guaranteed by related companies. Long-term bank
loans bear fixed interest rates and had average annual interest rates of
approximately 7.46% in 2001 and 7.86% in 2002.

         Short-term bank loans included United States dollar loans of US$84,743
(Rmb701,672) and US$Nil as of December 31, 2002 and 2003, respectively.

         As of December 31, 2002 and 2003, Rmb683,106 and RmbNil of the
short-term bank loans were guaranteed by related companies, respectively,
including amount relating to discontinued operations of Rmb93,000 and RmbNil,
respectively. As of December 31, 2002, Rmb7,500 of the short-term bank loans
were also guaranteed by third parties. Short-term bank loans of Rmb127,700 and
RmbNil were secured by buildings and equipment of two of the PRC entities as of
December 31, 2002 and 2003, respectively, including Rmb70,700 and RmbNil
relating to discontinued operations, respectively. The short-term bank loans
carried fixed interest rates and the average annual interest rates were
approximately 6.95% in 2001 and 5.11% in 2002.

                                      178
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

   (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA
                          AND UNLESS OTHERWISE STATED)

12.      BANK LOANS - CONTINUED

         In addition to the above loan facilities provided by banks, the Group
had available import credit facilities amounting to Rmb124,200 in 2002 and
RmbNil in 2003, of which Rmb70,794 in 2002 and RmbNil in 2003 had been utilized.
The Group also had available letters of credit facilities which were secured by
bank deposits of the Group of Rmb16,178 in 2002 and RmbNil in 2003; no
facilities were utilized as of December 31, 2002 and 2003. Interest rates were
generally based on the banks' best lending rates plus 1% to 2% per annum,
subject to fluctuations at the banks' discretion. The banking facilities were
subject to annual review by the banks.

13.      PROVISION FOR INCOME TAXES

         The components of profit (loss) from continuing operations before
income taxes and minority interests are as follows:

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                --------------------------------------------------
                                                                  2001                 2002                 2003
                                                                  ----                 ----                 ----
                                                                  Rmb                  Rmb                   Rmb
<S>                                                             <C>                 <C>                   <C>
The PRC..............................................            60,471              154,900               117,650
All other jurisdictions..............................             7,836             (131,045)             (160,268)
                                                                -------             --------              --------
                                                                 68,307               23,855               (42,618)
                                                                =======             ========              ========
</TABLE>

         The Company was incorporated under the laws of Bermuda and, under
current Bermuda law, is not subject to tax on income or on capital gains. The
Company has received an undertaking from the Ministry of Finance of Bermuda
pursuant to the provisions of the Exempted Undertakings Tax Protection Act,
1966, as amended, that in the event that Bermuda enacts any legislation imposing
tax computed on profits or income, including any dividend or capital gains
withholding tax, or computed on any capital asset, gain or appreciation, or any
tax in the nature of estate duty or inheritance tax, then the imposition of any
such tax shall not be applicable to the Company or to any of its operations or
the shares, debentures or other obligations of the Company until March 28, 2016.
This undertaking is not to be construed so as to (i) prevent the application of
any such tax or duty on such person as an ordinary resident in Bermuda; or (ii)
prevent the application of any tax payable in accordance with the provision of
the Land Tax Act, 1967 or otherwise payable in relation to any land leased to
the Company in Bermuda.

         Except as stated in the following paragraphs, the Group's PRC entities
and other subsidiaries are subject to income taxes calculated at tax rates
(ranging from 15% to 44%) on the taxable income as reported in the statutory
financial statements adjusted for taxation based on tax laws prevailing at their
respective places of incorporation and operations.

                                      179
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

13.      PROVISION FOR INCOME TAXES - continued

         In accordance with the relevant income tax laws applicable to
Sino-foreign joint ventures in the PRC, the Group's PRC entities, other than
FCJ, having a joint venture term of not less than 10 years and engaging in
production industries, are fully exempt from the Chinese State unified income
tax for two years starting from the first profit-making year (after utilization
of available accumulated losses carried forward), followed by a 50% reduction of
the Chinese State unified income tax for the next three years thereafter ("tax
holiday"). In accordance with the same tax laws, the PRC entities, other than
FCJ, are also exempt from the PRC local income tax. Accumulated losses brought
forward by the PRC entities, not exceeding a period of five years, can be offset
against the profits to arrive at the assessable profits for income tax
computation purposes. A summary of the tax concessions available to the PRC
entities for fiscal 2001 and 2002 is as follows:

<TABLE>
<CAPTION>
                   CHINESE STATE
                      UNIFIED      CHINESE LOCAL        CONCESSION FROM            CONCESSION               YEAR OF
                    INCOME TAX      INCOME TAX           CHINESE STATE            FROM CHINESE            COMMENCEMENT
PRC ENTITIES         RATE (%)        RATE (%)          UNIFIED INCOME TAX       LOCAL INCOME TAX        OF TAX HOLIDAY
-------------      --------------  -------------       ------------------       ----------------        --------------
<S>                <C>             <C>                 <C>                   <C>                        <C>
HZ                      15.0            1.5            None                  Full exemption for               1993
                                                                               10 years starting from
                                                                               the commencement
                                                                               of tax holiday

DH                      24.0            3.0            None                  Same as HZ                       1992

YC                      24.0            3.0            Specifically allowed  Full exemption for               1994
                                                         to extend the         6 years starting from
                                                         50% reduction         commencement of
                                                         for 2001              tax holiday followed
                                                                               by a 50% reduction
                                                                               for the next 4 years
                                                                               thereafter

FCJ                     30.0            3.0            None                  None                             N/A
</TABLE>

         During fiscal 2003, the PRC entities are not entitled to any tax
concessions as all tax concession periods have expired. During fiscal 2001 and
2002, if the PRC entities were neither in the tax holiday period nor had they
been specifically allowed special tax concessions, they would have recorded
additional income tax expenses of Rmb1,174 and Rmb1,960, the consolidated net
loss would have been increased by Rmb599 and Rmb1,000, and basic and diluted net
loss per share would have been increased to Rmb15.08 and Rmb29.03 for the years
ended December 31, 2001 and 2002, respectively.

                                      180
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

13.      PROVISION FOR INCOME TAXES - continued

         The PRC entities are required to provide for VAT and CT which are the
principal taxes on the sales of tangible goods and the provision of certain
specified services. The general VAT rate applicable to the PRC entities is 17%
while CT is calculated at 10% on the domestic sales amount, except that the 10%
CT on radial tire products was abolished since January 1, 2001. VAT and CT are
recognized on an accrual basis and sales are recorded net of these taxes.

         The reconciliation of the effective income tax rate based on profit
(loss) from continuing operations before income taxes and minority interests
stated in the consolidated statements of operations to the statutory income tax
rates in Hong Kong, the PRC and the United States is as follows:

<TABLE>
<CAPTION>
                                                                    2001              2002                 2003
                                                                    ----              ----                 ----
                                                                    Rmb               Rmb                  Rmb
<S>                                                             <C>                 <C>                   <C>
Weighted average statutory tax rates.................               15%                17%                   18%
Effect of tax holiday................................               (1%)               (8%)                   -
Permanent differences relating to non-taxable
  income and non-deductible expenses.................                1%                74%                  (39%)
Valuation allowance..................................              (11%)               (5%)                  (7%)
Others...............................................                -                 (4%)                   3%
                                                                ------              -----                 -----
Effective tax rate...................................                4%                74%                  (25%)
                                                                ======              =====                 =====
</TABLE>

         Provision for income taxes consists of:

<TABLE>
<CAPTION>
                                                                 2001                  2002                  2003
                                                                 ----                  ----                  ----
                                                                  Rmb                   Rmb                  Rmb
<S>                                                             <C>                  <C>                   <C>
Current..............................................            10,581               23,847                13,732
Deferred.............................................              (889)              (5,071)               (3,140)
Adjustment of valuation allowance....................            (7,238)              (1,079)                    -
                                                                -------              -------               -------
                                                                  2,454               17,697                10,592
                                                                =======              =======               =======
</TABLE>

                                      181
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

13.      PROVISION FOR INCOME TAXES - continued

         The tax impact of temporary differences gives rise to the following
deferred tax assets (liabilities):

<TABLE>
<CAPTION>
                                                                                       2002                  2003
                                                                                       ----                  ----
                                                                                       Rmb                   Rmb
<S>                                                                                  <C>                   <C>
Allowance for doubtful receivables.........................................            9,931                     -
Allowance for inventory obsolescence.......................................              508                     -
Provision for warranty expenses............................................            3,911                     -
Impairment loss provision for long-lived assets............................              297                     -
Depreciation...............................................................            3,586                     -
Tax losses carried forward.................................................           16,562                16,562
Others.....................................................................              519                     -
Valuation allowance for deferred tax assets................................          (21,037)              (16,562)
                                                                                     -------               -------
                                                                                      14,277                     -
                                                                                     =======               =======
</TABLE>

         As of December 31, 2002 and 2003, the tax losses from continuing
operations carried forward derived principally from subsidiaries subject to US
income tax, which amounted to Rmb16,562 and expire at various times through
2006. The loss carry forwards can only be utilized by the subsidiaries
generating the losses. The valuation allowance refers to the portion of the
deferred tax assets that are not "more likely than not" going to be realized.

14.      CAPITAL STOCK

         Capital Stock

         Each share of Supervoting Common Stock is entitled to 10 votes whereas
each share of Common Stock is entitled to one vote. The Common Stock is
identical to the Supervoting Common Stock as to the payment of dividends. Except
for the difference in voting rights described above, the Supervoting Common
Stock and the Common Stock rank pari passu in all respects.

         Share Capital

         The Company was incorporated with an initial share capital of 1,200,000
Common Stock with a par value of US$0.01 each which was later reclassified to
Supervoting Common Stock. On May 14, 1993, the authorized share capital of the
Company was further increased from US$12 to US$700 by the creation of 50,000,000
shares of Common Stock of par value US$0.01 each and 18,800,000 shares of
Supervoting Common Stock of par value US$0.01 each. 6,000,000 shares of
Supervoting Common Stock (including the 1,200,000 Common Stock reclassified to
Supervoting Common Stock) were issued to the ultimate parent company of the
Company as a consideration for the transfer of two PRC entities to the Company
and on June 23, 1993, the Company redeemed 3,000,000 shares of its outstanding
Supervoting Common Stock at their par value of US$0.01 per share.

         There were no movements in share capital of the Company during fiscal
2001, 2002 or 2003.

                                      182
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

15.      STOCK OPTIONS

         Pursuant to an executive stock option scheme adopted on June 7, 1994,
the Company grants options to officers and employees, and directors who are also
employees, of the Company and its subsidiaries to subscribe Common Stock of the
Company, subject to a maximum of 910,000 shares. Shares of Common Stock to be
issued upon the exercise of options will be authorized and unissued shares. An
independent committee (the "Committee") of the Board of Directors, consisting of
non-employee directors has been formed to monitor and consider the granting of
options under the scheme. The subscription price will be determined by the
Committee, and will not be less than 80% of the average closing market price of
shares of Common Stock over the five trading days immediately preceding the date
of offer of the option.

         A summary of stock options activity during the three years ended
December 31, 2001, 2002 and 2003 is as follows:

<TABLE>
<CAPTION>
                                                                                                           WEIGHTED
                                                                                                            AVERAGE
                                                                                    NUMBER OF              EXERCISE
                                                                                     SHARES                  PRICE
                                                                                    ---------              --------
                                                                                                              US$
<S>                                                                                 <C>                    <C>
Outstanding at January 1, 2001.............................................          239,990                 6.76
Lapsed.....................................................................         (219,990)                6.47
                                                                                    --------
Outstanding at December 31, 2001 and 2002..................................           20,000                 9.94
Lapsed.....................................................................          (20,000)                9.94
                                                                                    --------
Outstanding at December 31, 2003...........................................                -
                                                                                    ========
</TABLE>

         No stock options were granted in fiscal 2001, 2002 or 2003.

         All the above share options vested immediately upon the date of grant
and the exercise prices were set at 100% of the market prices of the shares of
the Company prevailing at the dates of grant. Accordingly, no compensation
expense was recognized in the consolidated statements of operations.

                                      183
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

16.      OBLIGATIONS AND COMMITMENTS

         As of December 31, 2002 and 2003, the Group had outstanding capital
commitments for construction of factory premises and purchases of equipment
amounting to approximately Rmb219,945 and RmbNil, respectively, including
commitments of subsidiaries classified as discontinued operations amounting to
Rmb61,913 and RmbNil, respectively.

         The Group leases certain of its warehouses under non-cancellable
operating leases expiring at various dates through 2008. Rental expense under
operating leases was Rmb5,156, Rmb4,397 and Rmb2,250 for the years ended
December 31, 2001, 2002 and 2003, respectively, including amount relating to
discontinued operations of Rmb1,811, RmbNil and RmbNil, respectively.

         As of December 31, 2003, the Group's subsidiaries with continuing
operations and the subsidiaries classified as discontinued operations did not
have any significant commitments under operating leases.

         The Company also records an estimate of the product warranty obligation
at the time of sale based on the Company's historical experience. Changes in
product warranty provision are as follows:

<TABLE>
<CAPTION>
                                                CONTINUING OPERATIONS                  DISCONTINUED OPERATIONS
                                           --------------------------------       --------------------------------
                                            2001         2002          2003         2001        2002         2003
                                            ----         ----          ----         ----        ----         ----
                                            Rmb          Rmb           Rmb          Rmb         Rmb          Rmb
<S>                                       <C>          <C>          <C>          <C>           <C>         <C>
Balance at beginning of year...            13,130       19,972       23,720       14,632       18,000       13,337
Warranties paid................           (45,057)     (56,183)     (46,019)     (37,125)      (9,988)           -
Warranty provision.............            51,899       59,931       66,799       45,697        5,325            -
Eliminated on disposition of
  business components..........                 -            -      (44,500)      (5,204)           -      (13,337)
                                          -------      -------      -------      -------       ------      -------
Balance at end of year.........            19,972       23,720            -       18,000       13,337            -
                                          =======      =======      =======      =======       ======      =======
</TABLE>

17.      DISTRIBUTION OF PROFIT

         Dividends from the PRC entities will be declared based on the profits
as reported in their statutory financial statements. Such profits will be
different from the amounts reported under U.S. GAAP. As of December 31, 2002,
the Company's subsidiaries in the PRC had an aggregate accumulated deficit of
Rmb137,229, as reported in their statutory financial statements, including
deficit of Rmb269,972 of the PRC entities classified as discontinued operations.
As of December 31, 2003, the Company had no subsidiaries established in the PRC
and the Company's affiliates in the PRC had an aggregate accumulated deficit of
Rmb106,454 as reported in their statutory financial statements.

         The Company proposed and paid dividends of US$180 (Rmb1,493), US$Nil
and US$Nil for the years ended December 31, 2001, 2002 and 2003, respectively,
on the outstanding Supervoting Common Stock and Common Stock.

                                      184
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

18.      RELATED PARTY BALANCES, TRANSACTIONS AND ARRANGEMENTS

(a)      DUE FROM/TO RELATED COMPANIES

         The amounts due from related companies primarily arise from sales of
tires and are unsecured, non-interest bearing and repayable at the end of credit
periods granted ranging from 90 days to 180 days. Historically, the Company has
not experienced losses related to these receivables with the exception of an
allowance for doubtful accounts amounting to Rmb27,000 charged to the
consolidated statement of operations during fiscal 2001. The management reviewed
the recoverability of these receivables during fiscal 2002 and recognized a net
recovery of Rmb5,016 in the consolidated statement of operations for fiscal
2002.

         As of December 31, 2002, the loans from related companies represented
funds advanced to the Company and were unsecured, non-interest bearing and had
no fixed repayment terms. As of December 31, 2003, the Company had no amounts
due from/to related companies as a result of the disposition of its subsidiaries
in the PRC.

(b)      LAND USE RIGHT

         The Taiyuan municipal government granted its approval for Taiyuan
Rubber Factory, the Chinese joint venture partner of DH, to use the parcel of
land on which DH's bias tire factory is located, but had not issued any land use
right certificate. Taiyuan Rubber Factory had agreed in principle to lease the
land to DH for the 50-year term of the joint venture and indicated that there
would be a rent-free period during the initial five-year period, an annual fee
of Rmb129 for the following five-year period, and an annual fee of Rmb258 for
the remaining period of the lease. A lease contract had not yet been signed
between the parties, and such lease would be subject to the prior formal
transfer of the land use right to Taiyuan Rubber Factory from the Taiyuan
municipal government. Taiyuan Rubber Factory had undertaken to bear any cost
associated with the arrangements to be made for the transfer and to bear any
loss which DH may suffer as a result of the failure to effect the transfer; such
agreement ceased upon disposition of the Company's entire interest in the bias
tire factory to a third party during fiscal 2001.

(c)      MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT

         Pursuant to a management and administrative services agreement between
the Company and the ultimate parent company in 1993 and renewed in 1997 and
2000, for a term of three years, the ultimate parent company will provide
certain management services to the Company for an annual fee of US$30 (Rmb248).
In addition, the Company has agreed to reimburse the ultimate parent company for
administrative services of approximately Rmb4,127, Rmb4,731 and Rmb5,708 for the
years ended December 31, 2001, 2002 and 2003, respectively, rendered on behalf
of the Company on a cost plus 5% basis.

                                      185
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

18.      RELATED PARTY BALANCES, TRANSACTIONS AND ARRANGEMENTS - continued

         (d)      SALES TO/PURCHASES FROM RELATED PARTIES

         HZ recorded sales to related companies of approximately Rmb184,202,
Rmb209,112 and Rmb194,971 that have been reflected in the Company's consolidated
financial statements for the years ended December 31, 2001, 2002 and 2003,
respectively.

         HZ paid subcontracting charges to an affiliate of approximately
Rmb127,989, Rmb199,373 and Rmb277,470 for tire processing that have been
reflected in the Company's consolidated financial statements for the years ended
December 31, 2001, 2002 and 2003, respectively.

         These transactions were carried out after negotiations between HZ and
the respective related companies in the ordinary course of business and on the
basis of the estimated market value as determined by the management of HZ.

         (e)      INDEMNIFICATION FROM A CHINESE JOINT VENTURE PARTNER OF
                  ACCOUNTS RECEIVABLE BALANCE

         The Chinese joint venture partner of DH agreed to indemnify DH against
any financial losses resulting from any uncollectible trade and other receivable
balance transferred into DH by the predecessor state-owned enterprise upon the
establishment of the joint venture. As of December 31, 2000, the Chinese joint
venture partner of DH agreed to indemnify Rmb4,403 of these receivable balances.
Such arrangement ceased upon disposition of the Company's entire interest in the
bias tire factory of DH to a third party during fiscal 2001.

         (f)      CONTINGENT LIABILITIES

         As of December 31, 2002, HZ had undertaken to guarantee, without
charge, certain bank loan facilities of approximately Rmb160,000 granted by
certain banks to an affiliate in the PRC.

         (g)      LOAN GUARANTEES PROVIDED BY RELATED COMPANIES

         Certain parties guaranteed certain of the Group's bank borrowings at no
cost to the Company as of December 31, 2002. Details of the borrowings are shown
in note 12.

                                      186
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

19.      DUE FROM/TO CHINESE JOINT VENTURE PARTNERS

         (i)      As of December 31, 2002, the amounts due from Chinese joint
         venture partners represented:

              (a)      advances made from FCJ to the Chinese joint venture
              partner; and

              (b)      payment of various operating expenses by HZ and FCJ on
              behalf of their Chinese joint venture partners.

         These amounts were unsecured, non-interest bearing and had no fixed
repayment terms.

         (ii)     As of December 31, 2002, the amounts due to Chinese joint
         venture partners represented:

              (a)      the excess of the book value of the net assets
              contributed by the Chinese joint venture partners upon the
              formation of FCJ over their shares of the registered capital of
              these joint venture enterprises;

              (b)      other working capital assets, consisting primarily of
              inventories, property, plant and equipment, less accounts payable
              and bank loans of the Chinese joint venture partners, loaned to
              the FCJ by the Chinese joint venture partners; and

              (c)      advances provided by the Chinese joint venture partners
              to FCJ to finance their working capital requirements.

These amounts were unsecured and had no stipulated fixed repayment dates.
Interest was charged on Rmb3,000 of the outstanding balance due to a Chinese
joint venture partner of a subsidiary classified as discontinued operations at
its effective cost of borrowing of 6.1% per annum for the year ended December
31, 2002. The remaining outstanding balances are non-interest bearing.

As of December 31, 2003, the Company had no amounts due from/to Chinese joint
venture partners as a result of the Company's disposition of a subsidiary during
fiscal 2003.

                                      187
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

20.      STAFF RETIREMENT PLANS

         All of the Chinese employees of the PRC entities are entitled to an
annual pension on retirement, which is equal to their ending basic salaries at
their retirement dates. The Chinese government is responsible for the pension
liabilities to these retired employees. The PRC entities are only required to
make specified contributions to the state-sponsored retirement plan calculated
at rates ranging from 20% to 23.5% of average monthly salaries for the years
ended December 31, 2001, 2002 and 2003. The expenses reported in the
consolidated statements of operations related to these arrangements were
Rmb21,438, Rmb26,549 and Rmb17,940 for the years ended December 31, 2001, 2002
and 2003, respectively.

         Certain PRC entities and their employees are also required to
contribute 5% of the monthly salaries to designated bank accounts opened by
these subsidiaries under a regulation implemented by certain PRC municipal
governments. Upon resignation or retirement of the employees, they are entitled
to withdraw the principal and related interest from these bank accounts to
purchase housing. These bank deposits cannot be withdrawn for other uses by
these PRC entities. As of December 31, 2002 and 2003, such restricted bank
deposits amounted to Rmb10,005 and RmbNil, respectively.

                                      188
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

21.      SEGMENT INFORMATION

         The Group operates principally in the tire manufacturing industry and
has only one reportable segment for continuing operations based on HZ Tire, the
Company's major PRC entities operating in Hangzhou. This reportable segment is a
strategic business unit and is managed separately. The accounting policies of
this segment are the same as those described in the summary of significant
accounting policies. All intercompany transactions have been eliminated.

         The remaining segment includes other subsidiaries of the Company except
for DH, SD, YT and YC which are presented separately under the discontinued
operations segment. Corporate identifiable assets include primarily cash and
goodwill. The chief operating decision maker evaluates the operating income of
each segment in assessing performance and allocating resources between segments.

<TABLE>
<CAPTION>
                                                                                  2001
                                                      -------------------------------------------------------------
                                                                                                       DISCONTINUED
                                                                   CONTINUING OPERATIONS                OPERATIONS
                                                      -------------------------------------------------------------
(Rmb)                                                 HZ TIRE      OTHERS       CORPORATE     TOTAL
                                                      ---------    -------      --------    ---------
<S>                                                   <C>          <C>          <C>         <C>        <C>
Revenues.......................................       2,087,885          -             -    2,087,885    1,066,083
Depreciation and amortization..................          54,606          -           370       54,976       63,423
Impairment loss provision for long-lived
  assets.......................................               -          -             -            -       50,133
Impairment loss provision for goodwill.........               -          -             -            -        4,023
Provision for an amount due from
  a related company............................          27,000          -             -       27,000            -
Operating income (loss)........................         101,878       (315)      (12,102)      89,461     (182,847)
Recovery of impairment loss on
  loan receivable..............................               -          -         9,800        9,800            -
Equity in losses of affiliates.................           2,486          -             -        2,486            -
Loss on disposition of discontinued
  components...................................               -          -             -            -       28,588
Capital expenditures...........................         123,876          -             -      123,876       30,309
Identifiable assets............................       1,545,627    231,955       106,867    1,884,449    1,094,516
Included in identifiable assets above are
  the following:
  - Investments in and advances to affiliates           102,022          -             -      102,022            -
  - Deferred income taxes assets...............           8,127          -             -        8,127            -
</TABLE>

                                      189
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

21.      SEGMENT INFORMATION - continued

<TABLE>
<CAPTION>
                                                                                     2002
                                                      --------------------------------------------------------------------
                                                                                                              DISCONTINUED
                                                                   CONTINUING OPERATIONS                       OPERATIONS
                                                      --------------------------------------------------------------------
(Rmb)                                                  HZ TIRE         OTHERS       CORPORATE     TOTAL
                                                       -------         ------       ---------     -----
<S>                                                   <C>             <C>           <C>         <C>           <C>
Revenues .........................................    2,610,076             -             -     2,610,076       621,653
Depreciation and amortization ....................       63,687             -             -        63,687        42,328
Impairment loss provision for long-lived
  assets .........................................            -             -             -             -       291,648
Change in fair value of call option ..............            -       (45,328)            -       (45,328)            -
Operating income (loss) ..........................      188,429        (4,854)      (11,479)      172,096       (70,965)
Equity in (earnings) losses of affiliates ........       (3,591)       93,111             -        89,520             -
Gain on disposition of discontinued
  components .....................................            -             -             -             -        20,144
Capital expenditures .............................      210,264             -             -       210,264        77,272
Identifiable assets ..............................    1,969,286       148,181        44,345     2,161,812       718,868
Included in identifiable assets above are
  the following:
  - Investments in and advances to affiliates ....      137,156        95,826             -       232,982             -
  - Deferred income taxes assets .................       14,277             -             -        14,277             -
</TABLE>

<TABLE>
<CAPTION>
                                                                                    2003
                                                      --------------------------------------------------------------------
                                                                                                              DISCONTINUED
                                                                   CONTINUING OPERATIONS                       OPERATIONS
                                                      --------------------------------------------------------------------
(Rmb)                                                  HZ TIRE         OTHERS       CORPORATE     TOTAL
                                                       -------         ------       ---------     -----
<S>                                                   <C>             <C>           <C>         <C>           <C>
Revenues .........................................    2,808,369             -             -     2,808,369            -
Depreciation and amortization ....................       50,889             -             -        50,889            -
Operating income (loss) ..........................      121,849          (456)      (20,647)      100,746            -
Equity in (earnings) losses of affiliates ........      (15,120)      135,337             -       120,217            -
Loss on disposition of discontinued
  components .....................................            -             -             -             -       (7,017)
Capital expenditures .............................      256,872             -             -       256,872            -
Identifiable assets ..............................      176,547       267,354        22,996       466,897            -
Included in identifiable assets above are
  the following:
  - Investments in and advances to affiliates ....      176,547        90,510             -       267,057            -
  - Deferred income taxes assets .................            -             -             -             -            -
</TABLE>

         Revenues of the Group are primarily derived from sales of tires and
their geographical analysis of revenues is as follows:

<TABLE>
<CAPTION>
                                                CONTINUING OPERATIONS               DISCONTINUED OPERATIONS
                                        -----------------------------------    ---------------------------------
                                                YEAR ENDED DECEMBER 31,              YEAR ENDED DECEMBER 31,
                                           2001         2002        2003           2001         2002        2003
                                           ----         ----        ----           ----         ----        ----
                                           Rmb          Rmb          Rmb           Rmb          Rmb         Rmb
<S>                                     <C>          <C>          <C>          <C>           <C>            <C>
PRC............................         1,632,962    2,061,236    2,248,825      818,269      422,878         -
Middle East Countries..........           112,540      165,664      101,718       17,783       99,682         -
US and Canada..................            70,486      137,933      143,054       86,326       67,178         -
Others.........................           271,897      245,243      314,772      143,705       31,915         -
                                        ---------    ---------    ---------    ---------    ---------      ----
                                        2,087,885    2,610,076    2,808,369    1,066,083      621,653         -
                                        =========    =========    =========    =========    =========      ====
</TABLE>

         Identifiable assets of the Group are principally located in the PRC.

                                      190
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

22.      OTHER SUPPLEMENTAL INFORMATION

         The following items are included in the consolidated statements of
operations:

<TABLE>
<CAPTION>
                                                CONTINUING OPERATIONS         DISCONTINUED OPERATIONS
                                            ----------------------------    -------------------------
                                                YEAR ENDED DECEMBER 31,       YEAR ENDED DECEMBER 31,
                                             2001       2002       2003       2001     2002     2003
                                             ----       ----       ----       ----     ----     ----
                                             Rmb        Rmb        Rmb        Rmb      Rmb      Rmb
<S>                                         <C>       <C>        <C>        <C>       <C>       <C>
Foreign exchange losses (gain), net ....       466      (152)    (1,810)       220       153     -
Sales taxes ............................    47,981    40,639     48,954     63,081    33,137     -
Shipping and handling costs ............    67,942    62,707     80,296     49,970    34,072     -
</TABLE>

23.      LEGAL PROCEEDINGS

         In 1994, the Company acquired a 70% indirect interest in Dalian C.S.I.
Rubber Co. Ltd. ("DL") from its ultimate parent company. Subsequent to the
completion of the acquisition, the Company was made aware that the Chinese joint
venture partner of DL had entered into another joint venture contract with a
major United States manufacturer of tires and rubber products (the "Tire
Manufacturer"). The terms of the new joint venture contract involved the sale to
the Tire Manufacturer of the same radial tire factory and related facilities
(the "Assets") which were to have been contributed into DL by the Chinese joint
venture partner under the original joint venture agreement.

         On March 14, 1995, the Company and its subsidiary, Orion Tire filed a
claim in the US against the Tire Manufacturer for compensation in connection
with the Tire Manufacturer's alleged wrongful acquisition of the Assets.

         In August 1999, the US District Court for the Central District of
California (the "District Court") granted the Tire Manufacturer's motion for
summary judgment to dismiss Orion Tire's merits of the case.

         In November 2001, the US Court of Appeals for the Ninth Circuit
reversed the judgment of the District Court and remanded Orion Tire's claim
against the Tire Manufacturer for further proceedings. The Company and Orion
Tire then proceeded to claim for economic advantage against the Tire
Manufacturer. No representations regarding the outcome of the case can be made
at this time. As of the date of this report, the Directors of the Company
believe the outcome of the proceedings will not have any material adverse
financial effect on the Company or any of the operating subsidiaries.

                                      191
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/SHARE OPTION DATA AND
                            UNLESS OTHERWISE STATED)

24.      SUBSEQUENT EVENTS

         On January 13, 2004 and March 17, 2004, Wing On entered into agreements
with the Company and another holder of its convertible notes in relation to the
issuance of new convertible notes, whereby Wing On would issue new convertible
notes to the Company for HK$155,000 (Rmb165,183), of which HK$84,800 (Rmb89,956)
will be settled by the cancellation of the Company's current convertible notes
of Wing On (the "Old Notes")and the remaining balance will be satisfied in cash
by the Company. The new convertible notes entitles the Company to convert into
new shares of Wing On during a period of three years from the date of issue, at
an initial conversion price of HK$0.02 per share, subject to adjustments. On
June 8, 2004, these agreements were approved by Wing On's shareholders that do
not own the Old Notes.

         On June 16, 2004, the Group entered into a conditional agreement to
purchase real estate properties for Rmb450 million.

                                      192
<PAGE>


                   CHINA ENTERPRISES LIMITED AND SUBSIDIARIES

                SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS

                             (Renminbi in thousands)

<TABLE>
<CAPTION>
                                                      CONTINUING OPERATIONS                       DISCONTINUED OPERATIONS
                                        BALANCE AT                              BALANCE  BALANCE AT
                                        BEGINNING                     SALE OF   AT END   BEGINNING              SALE OF  BALANCE AT
                                         OF YEAR   ADDITIONS RECOVERY BUSINESS  OF YEAR   OF YEAR   ADDITIONS  BUSINESS  END OF YEAR
<S>                                     <C>        <C>       <C>      <C>       <C>      <C>        <C>        <C>       <C>
Year ended December 31, 2001:-
Allowance for doubtful receivables ....   63,624         -   (10,668)       -   52,956    130,676     42,790   (38,366)   135,100
Valuation allowance for deferred
        tax assets(1) .................   29,354         -    (7,238)       -   22,116    117,697     50,366   (19,040)   149,023
Impairment loss provision (recovery)
        on loan receivable ............   56,766         -    (9,800)       -   46,966          -          -         -          -
Provision for an amount due from a
        related company ...............        -    27,000         -        -   27,000          -          -         -          -

Year ended December 31, 2002:-
Allowance for doubtful receivables ....   52,956         -    (1,982)       -   50,974    135,100      4,515    (6,511)   133,104
Valuation allowance for deferred
        tax assets(1) .................   22,116         -    (1,079)       -   21,037    149,023    (19,804)  (70,662)    58,557
Impairment loss provision on loan
        receivable ....................   46,966         -         -        -   46,966          -          -         -          -
Provision (recovery) for an amount
        due from a related company        27,000         -    (5,016)       -   21,984          -          -         -          -

Year ended December 31, 2003:-
Allowance for doubtful receivables ....   50,974         -         -  (50,974)       -    133,104          -  (133,104)         -
Valuation allowance for deferred
        tax assets(1) .................   21,037         -         -  (21,037)       -     58,557          -   (58,557)         -
Impairment loss provision on loan
        receivable ....................   46,966         -         -        -   46,966          -          -         -          -
Provision for an amount due from a
        related company ...............   21,984         -         -  (21,984)       -          -          -         -          -
</TABLE>

Note (1): The deferred tax assets related to the allowances for doubtful
receivables, inventory obsolescence, write-down of inventories to net realizable
value, provision for warranty expenses, impairment loss provision for long-lived
assets, accelerated depreciation allowances and tax losses carried forward are
considered not "more likely than not" going to be realized. Accordingly,
valuation allowances were set up against these deferred tax assets.

                                      193
<PAGE>

                                ITEM 19. EXHIBITS

The following exhibits are filed as part of this annual report:

EXHIBIT
NUMBER            DESCRIPTION
1                 Memorandum and Articles of Association (incorporated by
                  reference to Exhibit 1 to the Company's Form 20-F for the
                  fiscal year ended December 31, 2001, Document Control Number:
                  02048962)

4(a)1             Contract dated January 8, 2003 between Ningxia Yinchuan Rubber
                  Manufacturing, the Chinese joint venture partner of Yinchuan
                  CSI, as buyer and the Company as seller for the sale of
                  seller's interest in Yinchuan CSI (incorporated by reference
                  to Exhibit 4(a)2 to the Company's Form 20-F for the fiscal
                  year ended December 31, 2002, Document Control Number:
                  3822216)

4(a)2             Contract dated June 15, 2003 between Hangzhou Industrial &
                  Commercial Trust & Investment Co. Ltd. as buyer and the
                  Company as seller for the sale of 25% interests in Hangzhou
                  Zhongce (incorporated by reference to Exhibit 4(a)3 to the
                  Company's Form 20-F for the fiscal year ended December 31,
                  2002, Document Control Number: 3822216)

4(a)3             Contract dated January 13, 2004 between Wing On and the
                  Company for the issue of 2% convertible note to the Company or
                  its nominee

4(a)4             Contract dated June 16, 2004 between Shanghai Jiu Sheng
                  Investment Company Limited and the Company for the acquisition
                  of the Properties

4(c)4             Executive Share Option Scheme (incorporated by reference to
                  Exhibit 4(c) to the Company's Form 20-F for the fiscal year
                  ended December 31, 2001, Document Control Number: 02048962)

8                 Subsidiaries of the Company

12(1)             Certification of the CEO of the Company pursuant to Rule
                  13a-14(a) of the Securities Exchange Act of 1934, as amended

12(2)             Certification of the CFO of the Company pursuant to Rule
                  13a-14(a) of the Securities Exchange Act of 1934, as amended

13(1)             Certification of the CEO of the Company pursuant to Section
                  906 of the Sarbanes-Oxley Act of 2002

13(2)             Certification of the CFO of the Company pursuant to Section
                  906 of the Sarbanes-Oxley Act of 2002

14(1)             Code of Ethics for Chief Executive and Senior Financial
                  Officers

                                      194
<PAGE>

                                   SIGNATURES

         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.

                            CHINA ENTERPRISES LIMITED
                                  (REGISTRANT)

                            /s/ Chow Chun Man, Jimmy
                          -----------------------------
                              CHOW CHUN MAN, JIMMY
                             Chief Financial Officer

Date: July 22, 2004

                                      195
<PAGE>

                                 EXHIBITS INDEX

EXHIBIT
NUMBER            DESCRIPTION
1                 Memorandum and Articles of Association (incorporated by
                  reference to Exhibit 1 to the Company's Form 20-F for the
                  fiscal year ended December 31, 2001, Document Control Number:
                  02048962)

4(a)1             Contract dated January 8, 2003 between Ningxia Yinchuan Rubber
                  Manufacturing, the Chinese joint venture partner of Yinchuan
                  CSI, as buyer and the Company as seller for the sale of
                  seller's interest in Yinchuan CSI (incorporated by reference
                  to Exhibit 4(a)2 to the Company's Form 20-F for the fiscal
                  year ended December 31, 2002, , Document Control Number:
                  3822216 )

4(a)2             Contract dated June 15, 2003 between Hangzhou Industrial &
                  Commercial Trust & Investment Co. Ltd. as buyer and the
                  Company as seller for the sale of 25% interests in Hangzhou
                  Zhongce (incorporated by reference to Exhibit 4(a)3 to the
                  Company's Form 20-F for the fiscal year ended December 31,
                  2002, Document Control Number: 3822216)

4(a)3             Contract dated January 13, 2004 between Wing On and the
                  Company for the issue of 2% convertible note to the Company or
                  its nominee

4(a)4             Contract dated June 16, 2004 between Shanghai Jiu Sheng
                  Investment Company Limited and the Company for the acquisition
                  of the Properties

4(c)4             Executive Share Option Scheme (incorporated by reference to
                  Exhibit 4(c) to the Company's Form 20-F for the fiscal year
                  ended December 31, 2001, filed with the Commission on July 12,
                  2002, Document Control Number: 02048962)

8                 Subsidiaries of the Company

12(1)             Certification of the CEO of the Company pursuant to Rule
                  13a-14(a) of the Securities Exchange Act of 1934, as amended.

12(2)             Certification of the CFO of the Company pursuant to Rule
                  13a-14(a) of the Securities Exchange Act of 1934, as amended.

13(1)             Certification of the CEO of the Company pursuant to Section
                  906 of the Sarbanes-Oxley Act of 2002

13(2)             Certification of the CFO of the Company pursuant to Section
                  906 of the Sarbanes-Oxley Act of 2002

14(1)             Code of Ethics for Chief Executive and Senior Financial
                  Officers

                                      196