# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

# FORM 20-F

ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934For the fiscal year
ended December 31, 2006

Commission File Number
1-14742

# JINPAN INTERNATIONAL
LIMITED

(Exact Name of
Registrant as Specified in its Charter and Translation of Registrant's Name into English)

British Virgin Islands(Jurisdiction of
incorporation or organization)

c/o Hainan Jinpan
Electric Company, LtdSection D-2No. 100 Nanhai AvenueJinpan Development Area
Haikou, Hainan PRC(Address of principal
executive offices)

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

Common Stock, $0.009
par value(Title of Class)

American Stock Exchange
(Name of each exchange on which registered)

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

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

Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock as of the close of
the period covered by the annual report: 8,171,617 shares of common stock, par value $0.009 per share

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

If this report is an annual or
transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes 
No

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes   No

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

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

Item 17                 Item
18

If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes   No



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# Table of Contents

|          |                                                                                                                               | Page
|--------- | ----------------------------------------------------------------------------------------------------------------------------- | ----
|          | Part I                                                                                                                        |     
|Item 1.   | Identity of Directors, Senior Management and Advisors                                                                         | 1   
|Item 2.   | Offer Statistics and Expected Timetable                                                                                       | 1   
|Item 3.   | Key Information                                                                                                               | 1   
|Item 4.   | Information on the Company                                                                                                    | 13  
|Item 4A.  | Unresolved Staff Comments                                                                                                     | 29  
|Item 5.   | Operating and Financial Review and Prospects - Management's Discussion and Analysis                                           | 29  
|Item 6.   | Directors, Senior Management and Employees                                                                                    | 38  
|Item 7.   | Major Shareholders and Related Party Transactions                                                                             | 42  
|Item 8.   | Financial Information                                                                                                         | 43  
|Item 9.   | Offer and Listing                                                                                                             | 45  
|Item 10.  | Additional Information                                                                                                        | 46  
|Item 11.  | Quantitative and Qualitative Disclosure About Market Risk                                                                     | 50  
|Item 12.  | Description of Securities Other than Equity Securities                                                                        | 50  
|          | Part II                                                                                                                       |     
|Item 13.  | Defaults, Dividend Arrearages and Delinquencies                                                                               | 50  
|Item 14.  | Material Modifications to the Rights of Security Holders and Use of Proceeds                                                  | 50  
|Item 15.  | Controls and Procedures                                                                                                       | 51  
|Item 16A. | Audit Committee Financial Expert                                                                                              | 52  
|Item 16B. | Code of Ethics                                                                                                                | 52  
|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                                                        | 53  
|          | Part III                                                                                                                      |     
|Item 17.  | Financial Statements                                                                                                          | 53  
|Item 18.  | Financial Statements                                                                                                          | 53  
|Item 19.  | Exhibits                                                                                                                      | 54  
|          | Financial Statements                                                                                                          |     
|          | Report of Independent Auditors                                                                                                | F-3 
|          | Consolidated Balance Sheets as of December 31, 2006 and 2005                                                                  | F-5 
|          | Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004                                        | F-6 
|          | Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years ended December 31, 2006, 2005 and 2004 | F-7 
|          | Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                                    | F-8 
|          | Notes to Consolidated Financial Statements                                                                                    | F-9 
|          |                                                                                                                               |     

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# PART I

# Currency Translation

We,
Jinpan International Limited (Jinpan International), together with our wholly
owned subsidiary Hainan Jinpan Electric Company, Ltd (Hainan Jinpan), a
Sino-foreign cooperative joint venture, and Hainan Jinpans predecessor, Haikou
Jinpan Special Transformer Works (Haikou Jinpan), are referred to in this
annual report collectively as we, unless Jinpan International, Hainan Jinpan,
or Haikou Jinpan are specifically referenced. We prepared our financial statements in
accordance with U.S. GAAP, however, the monetary unit used in the financial
statements is Renminbi Yuan, referred to in the financial statements as RMB or
Renminbi, the lawful currency of the Peoples Republic of China. For the
readers convenience, some financial information was converted from Renminbi into
U.S. Dollars, referred to herein as US$ using the noon buying rate in New York
City for cable transfers in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York on December 31, 2006, of RMB7.81 = US$1.00. The dollar
amounts reflected in these conversions should not be construed as representing amounts
that can actually be received or paid or convertible into dollars (unless otherwise
indicated), nor do such conversions mean that the Renminbi amounts (i) actually represent
the corresponding dollar amounts stated, or (ii) can be converted into dollars at the
assumed rate.

# Item 1. Identity of
Directors, Senior Management and Advisors

Not
Applicable.

# Item 2. Offer Statistics
and Expected Timetable

Not
Applicable.

# Item 3. Key Information

Selected Financial Data

The
following selected financial data should be read in conjunction with Item 5,
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes included in this
annual report.

Set
forth below is selected consolidated financial data with respect to our statements of
operations for the years ended December 31, 2006, 2005, 2004, 2003 and 2002.

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|                                     | Year ended December 31, | 
|------------------------------------ | ----------------------- | 
|
|
|
|Income Statement Data:               |                         | 
|Sales                                |                         | 
|Costs of goods sold                  |                         | 
|Gross profit                         |                         | 
|Selling and administrative  expenses |                         | 
|Interest Expenses                    |                         | 
|Other income                         |                         | 
|Income before taxation               |                         | 
|Income Tax                           |                         | 
|Income before Minority Interest      |                         | 
|Minority interest                    |                         | 
|Net income                           |                         | 
|Earnings  per share:                 |                         | 
|Basic                                |                         | 
|Fully diluted                        |                         | 
|Number of shares outstanding: (2)    |                         | 
|Basic                                |                         | 
|Fully diluted                        |                         | 

|                          | As of December 31, | 
|------------------------- | ------------------ | 
|
|
|Balance Sheet Data:       |                    | 
|Cash and cash equivalents |                    | 
|                          |                    | 
|Total assets              |                    | 
|                          |                    | 
|Minority interest         |                    | 
|                          |                    | 
|Equity                    |                    | 
|                          |                    | 

_________________

(1)       
          For your convenience, conversion of amounts from Renminbi into U.S. dollars has
          been made at the noon buying rate in New York City for cable transfers in
          foreign currencies as certified for customs purposes by the Federal Reserve Bank
          of New York on December 31, 2006 of RMB7.81 = US$1.00. No representation is made
          that the Renminbi amounts could have been, or could be, converted into U.S.
          dollars at this rate or at any other established rate.

(2)       
          There are 20,000,000 shares of common stock authorized and 1,000,000 shares of
          preferred shares authorized.

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# Forward Looking
Statements

This
report and the information incorporated by reference herein contain forward-looking
statements regarding, among other things, our financial condition, results of operations,
plans, objectives, future performance and business. All statements contained or
incorporated by reference in this document other than historical information are
forward-looking statements. Forward-looking statements include, but are not limited to,
statements that represent our beliefs concerning future operations, strategies, financial
results or other developments, and contain words and phrases such as may,
expects, believes, anticipates, estimates,
should, or similar expressions. Because these forward-looking statements are
based on estimates and assumptions that are subject to significant business, economic and
competitive uncertainties, many of which are beyond our control or are subject to change,
actual results could be materially different. Although we believe that our plans,
intentions and expectations reflected in or suggested by these forward-looking statements
are reasonable, we cannot assure you that we will achieve or realize these plans,
intentions or expectations. Forward-looking statements are inherently subject to risks,
uncertainties and assumptions. Important factors that could cause results or events to
differ from current expectations are described in the section titled Risk
Factors.

Such
forward-looking statements should be regarded solely as our current plans, estimates and
beliefs. We do not intend, and expressly disclaim any obligation, to update any
forward-looking statements to reflect future events or circumstances after the date of
this prospectus supplement.

# Risk Factors

Our
business is subject to many risks and uncertainties, which may affect our future financial
performance. If any of the events or circumstances described below occurs, our business
and financial performance could be harmed, our actual results could differ materially from
our expectations and the market value of our securities could decline. The risks and
uncertainties discussed below are not the only ones we face. There may be additional risks
and uncertainties not currently known to us or that we currently do not believe are
material that may harm our business and financial performance.

# Risks Related to Our
Business

Because a significant portion of
our revenues are derived from sales of our cast resin transformers, any decrease in sales
of cast resin transformers could harm our operating results.

Sales
generated by cast resin transformers will continue to account for virtually all of our
revenues. Accordingly, our business and results of operations are dependent on the demand
for this single product, thus, any decrease in the demand for this product, whether as a
result of competition, technological changes, economic conditions in China, restrictions
on our ability to market this product, or other factors would have a material adverse
effect on our business, financial condition, and results of operations.

If we lose our key personnel, our
ability to operate our company and our results of operations may suffer.

Our
success is largely dependent upon our ability to hire and retain additional marketing
personnel. We employ highly qualified employees but competition for qualified personnel is
intense and there can be no assurance that we will be able to hire or retain qualified
marketing personnel. Any inability to attract and retain qualified marketing personnel
would have a material adverse effect on our business.

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Our growth may be slow if the
demand for electric power in China does not continue.

Demand
for our products is linked closely to increased demand for electrical power in China.
While such demand has experienced tremendous growth over the past several years, there can
be no assurance that such growth will continue. Any material decline in the use of
electricity in China is likely to adversely impact our business. Based on economic
analysis and studies, however, we do not expect demand for electric power in China to
decline in the next 10 years.

If any of our current suppliers
delay, interrupt, or halt supply we could be forced to obtain our raw materials at higher
prices from alternative sources.

The
principal raw materials we require in our business are (1) cast resin, used to coat the
copper coils of our transformers, (2) silicon steel, used to construct the cores of our
transformers, and (3) copper foil and wire for our copper windings.

Although
we usually have a two or three month supply of these raw materials in our inventory and we
believe that we are able to obtain our cast resin, silicon steel, and copper materials
from several other companies besides our current suppliers, if we were to experience
significant delays, interruptions, or reductions in our supply of cast resin, silicon
steel, and copper materials, we could face increased costs which may have a material
adverse effect on our results of operations.

Other
raw materials required to manufacture our products include glass fiber and quartz powder.
We maintain at least two suppliers for each of our major raw materials in order to enhance
our ability to obtain an adequate supply of high quality, competitively-priced raw
materials. We purchase our glass fiber and quartz powder from local suppliers in nearby
regions and believe that these materials are readily available. We have never experienced
any disruption in the supply of any raw material that has had a material impact on our
operations, we cannot be certain however, that a disruption in supply by our raw material
suppliers will not occur in the future. If such a disruption occurs and we experience a
significant delay in the supply of these materials, there may be a material adverse effect
on our results of operations.

Competition with other large and
small transformer manufacturers may result in reduced prices and loss of market share. We
may also face competition from foreign companies.

The
market for cast resin transformers in China is highly competitive and we expect increased
competition in the future. We primarily compete with several large transformer
manufacturers as well as a number of small transformer manufacturers. Most of our
competitors are government-owned entities and only few of our competitors have greater
name recognition and more extensive engineering, manufacturing, and marketing capabilities
than we do. Our future success will largely depend on our marketing efforts and ability to
expand production capacity.

Although
price has historically not been a major factor in competing against other cast resin
transformer manufacturers, it does remain a factor in competing against oil-filled
transformer manufacturers and other more traditional, less expensive transformer devices.
Increased competition may result in price reductions or loss of market share, which would
adversely affect our business, results of operations or financial condition.

Due
to high production costs, foreign companies do not currently compete against us in the
transformer market in China. There can be no assurance, however, that foreign
manufacturers will not enter into joint venture arrangements or establish wholly
foreign-owned enterprises, which would subject us to increased competition with foreign
companies and adversely affect our results of operations.

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We
believe that the principal competitive factors affecting the transformer market in China,
include, in order of significance, product reputation, product performance and safety,
product quality, marketing expertise, and product price. There can be no assurance that we
will be able to compete successfully in the future with existing or new competitors.
Following Chinas entry into the World Trade Organization, we may have additional
competitors in China such as ABB, Siemens, and Alstom.

If we are unable to maintain our
expertise in manufacturing processes or identify new technologies as they arise we will be
unable to compete successfully.

The
electrical transformer industry may be subject to changing technology, evolving industry
standards, emerging competition and innovative product introductions. Although we are not
presently aware of a transformer technology more advanced than that used in our products,
there can be no assurance that we will successfully identify new technologies as they
arise and develop and bring new products and services to the market in a timely manner or
that products, services or technologies developed by others will not render our products,
services, or technologies noncompetitive, obsolete, or less marketable.

Accidents involving the use of our
transformers could result in injury or damage to our customers, expose us to financial
liability, and adversely affect our ability to market our product.

Although
we have never experienced a significant accident such as a fire or an explosion resulting
from the operation of our transformers and we generally believe that our transformers are
safe and do not pose a significant risk of combustion, fire, or explosion, there can be no
assurance that an accident, which may cause injury or damage to the user of our
transformers, will not occur. Any such incident would expose us to potential claims or
liabilities which may damage our reputation among potential customer, resulting in a
potentially adverse effect on our ability to market our products.

We may face product liability
claims that may result in costly litigation and divert attention of our management.

Our
business exposes us to liability risks that are inherent in the manufacturing and
marketing of potentially dangerous electrical equipment. Consistent with industry practice
in China, we do not currently maintain product liability insurance on our products. Such a
product liability claim may adversely affect our business, operating results or financial
condition. Currently, we do not know of any such product liability suits pending against
us.

We may be subject to infringement
claims by third parties that could subject us to financial liability or limit our product
offerings, and our competitive position could be harmed if we are unable to protect our
intellectual property.

We
own the rights to the trademark JST, which is registered with the Trademark
Bureau of the State Administration of Industry and Commerce in China. We believe that this
trademark has significant value and is important to our marketing and expansion efforts.
However, with regard to our current trademark or any future trademarks, we cannot be sure
that any one or all of the following scenarios has not occurred or will not occur, any one
of which could have a material adverse effect upon us:

| |  |  | we
are unable to register other names or service marks that we may consider important;
| | - |  | --------------------------------------------------------------------------------------

| |  |  | our
currently  registered  trademark or any future registered trademark currently does or
will violate the           proprietary rights of others;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
trademarks are not upheld by the Chinese government or its judicial system if challenged;
| | - |  | ---------------------------------------------------------------------------------------------

| |  |  | we
are prevented from using our trademarks; or
| | - |  | ----------------------------------------------

| |  |  | because
enforcing our proprietary rights or defending against the ownership claims of others may
be extremely costly, we may not have the financial resources necessary to enforce or
defend our trademarks.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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British Virgin Islands law is less
defined than the laws governing corporations organized in the United States and may
provide less protection for shareholders.

We
were incorporated as a company in the British Virgin Islands on April 3, 1997 under the
International Business Companies Act of the British Virgin Islands (the Old
Act). Companies incorporated under the Old Act prior to 2006 were capable of
voluntarily re-registering as a BVI Business Company under the BVI Business Companies Act,
2004 (No. 16 of 2004) (the New Act) during 2006, but if they did not elect to
re-register under the New Act during 2006 then on January 1, 2007 they were automatically
re-registered under the New Act, although certain provisions from the Old Act will
continue to apply to such companies unless they disapply those grandfathering provisions.
We did not voluntarily re-register under the New Act during 2006 and were automatically
re-registered as a BVI Business Company on January 1, 2007 and since that date have not
disapplied the grandfathering provisions. Our corporate affairs are governed by our
Memorandum and Articles of Association and by the New Act.

The
New Act has provisions for shareholders remedies along the lines of section 459 of
the UK Companies Act 1985 based on unfair prejudice, and derivative actions. Shareholders
have the rights given to them under our memorandum of association (the
Memorandum) and the articles of association (the Articles) and
under the New Act. The New Act specifies three default rights that a share confers on a
shareholder: the right to vote, the right to an equal share in any dividend paid in
accordance with the New Act and the right to an equal share in any distribution of our
surplus assets. We may issue shares in which these statutory rights are negated, modified
or added to where expressly authorized in our Memorandum, but if not then the default
rights will apply. The existing rights of our shareholders have been preserved on the
automatic re-registration on January 1, 2007.

Directors of British Virgin
Islands corporations may act without court approval to implement reorganizations, certain
mergers or consolidations, asset sales or transfers, and the dissolution of a
corporation.

The
provisions of Part IX of the New Act reproduce similar provisions from the Old Act dealing
with corporate reconstructions, specifically mergers, consolidations, sale of assets,
forced redemption of minority shareholders, arrangements and provisions dealing with
dissenting shareholders. These provisions give companies considerable autonomy and
flexibility in effecting corporate reconstruction. There are minimum formalities and
procedural hurdles, with the general requirements being written proposals approved by
directors and, in some instances by the shareholders as well, and registration of those
proposals with the Registrar. Apart from arrangements, none of the provisions require
court approval.

There
is nothing in the New Act which expressly requires the directors to consider any solvency
issues or to be satisfied of any solvency test in section 56 of the New Act (which applies
for any distribution by a company to its shareholders, and the purchase by the company of
its own shares) before carrying out the proposed reconstruction. Indeed, the New Act
provides that the purchase or redemption by a company of its shares pursuant to a right of
a shareholder to have his shares redeemed, or exchanged for money or other property, is
not a distribution (so that the solvency test need not be considered), and it could be
argued that a purchase of shares from a shareholder in a merger or consolidation is a
purchase pursuant to a shareholders right especially when the shareholders have
approved the merger or consolidation.

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The
provisions for effecting a merger or consolidation are very flexible and allow shares to
be cancelled, reclassified or converted into money or other assets, or into shares, debt
obligations or other securities in the surviving or consolidated company. Shares of the
same class can be treated differently, e.g. some shareholders can be given shares in the
surviving or consolidated company, while others of the same class can be bought out, i.e.
have their shares converted to cash.

# Risks Related to Our
Chinese Operations

We may be subject to the
political, economic, legal and other uncertainties of China, which is a socialist state
controlled by the Communist Party of China.

Because
we are a foreign company conducting our operations and owning assets primarily in China,
our operations and assets are subject to political, economic, legal and other
uncertainties which affect companies operating in China.

China
is a socialist state which since 1949, has been controlled by the Communist Party of
China. Changes in the top political leadership of the Chinese government may have a
significant impact on policy and the political and economic environment in China.
Furthermore, because economic reforms and growth in China have been more successful in
some provinces than in others, the continuation or increase of these economic disparities
could affect political or social stability.

China
is considered to be a high risk nation for business and investment in the Asian region.
Although China recently has permitted greater provincial and local economic autonomy and
private economic activity, the government of China has exercised and continues to exercise
substantial control over virtually every aspect of the Chinese economy through regulation
and state ownership. Therefore, government action in the future, including any decision by
the Chinese government not to continue to support the economic reform program that it
commenced in the late 1970s and the possible return of China to the more
centrally-planned economy that existed prior to the economic reforms, could have a
significant effect on economic conditions in China and on our operations. Chinas
economic reform plan was designed to bring into China foreign investment capital and
technological advancements. The result of these reforms has been a move towards a more
mixed economy and away from a more centrally-planned economy. The process of shifting more
responsibility for various aspects of economic enterprise to local management and regional
authorities continues, even though the system of Chinese socialism still involves
considerable influence by the central government in economic areas of production and
marketing.

The
economy of China differs from most countries belonging to the Organization for Economic
Co-operation and Development (OECD), in structure, government involvement,
level of development, growth rate, capital reinvestment, allocation of resources, rate of
inflation, and balance of payments position. Chinas economy is managed in part
through a series of five-year economic and social development plans, each Five-Year
Plan is formulated by the State Council and approved by the National Peoples
Congress and sets the overall agricultural, industrial, financial and other economic and
social development targets. In implementing each Five-Year Plan, the State Planning
Commission, a commission directly under the State Council, establishes annual production
and development targets, formulates and supervises the implementation of annual plans
designed to achieve those targets, and approves major economic projects. Although the
majority of productive assets in China are still owned by the Chinese Government, in the
past several years the Chinese Government has implemented economic reform measures that
emphasize decentralization, the utilization of market forces in the development of

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the Chinese economy, and the encouragement of
private economic activity. Such economic reform measures may be inconsistent or
ineffectual and we may not be able to capitalize on all such reforms. Further, there can
be no assurance that the Chinese Government will continue to pursue such policies, that
such policies will be successful if pursued, that such policies will not be significantly
altered from time to time or that business operations in China would not become subject to
the risk of nationalization, which could result in the total loss of investments in China.

Since
1978, the Chinese Government has been reforming its economic systems. Many of the reforms
are unprecedented or experimental and are expected to be refined and improved. Other
political, economic and social factors, such as political changes, changes in the rates of
economic growth, unemployment or inflation, or the disparities in per capita wealth
between regions within China, could also lead to further readjustment of the reform
measures. This refining and readjustment process may not always have a positive effect on
our operations. Although reforms to Chinas economic system have not adversely
impacted our operations in the past and are not expected to adversely impact our
operations in the foreseeable future, there can be no assurance that the reforms to
Chinas economic system will continue or that we will not be adversely affected by
changes in the Chinas political, economic and social conditions and by changes in
policies of the Chinese Government, such as changes in laws and regulations (or the
interpretations thereof), measures which may be introduced to control inflation, changes
in the rate or method of taxation, imposition of additional restrictions on currency
conversion and remittance abroad and reduction in tariff protection and other import
restrictions. Our operating results may also be significantly affected by the inadequate
development of an infrastructure for power plants and the potential unavailability of
adequate power and water supplies, transportation, satisfactory roads, communications
abilities and raw materials and parts.

The
Chinese economy has experienced significant growth in recent years, but such growth has
been uneven among various geographical regions and sectors of the economy. The Chinese
Government implemented various policies from time to time, including, but not limited to,
the periods from 1989 to 1991and again commencing in 1993, to restrain the rate of
economic growth, control inflation and otherwise regulate economic expansion. Although we
do not expect such policies to impact our operations, we may benefit from these types of
policies or, on the other hand, more severe measures or other actions by the Chinese
Government not currently expected could decrease demand for our products and adversely
affect our earnings.

Although
we believe that the economic reform and the macroeconomic measures adopted by the Chinese
government have had in general, a positive effect on the economic development of China,
the future direction of these economic reforms is uncertain and the uncertainty may
decrease the attractiveness of our company as an investment, which may in turn adversely
affect our stock price.

Changes in Chinas present
policy of economic reform and economic protection for foreign investment enterprises could
harm our operating results.

As
part of its economic reforms, China has designated certain areas as Special Economic Zones
(SEZs) or Economic and Technological Development Zones (EDZs).
Foreign investment enterprises in these areas generally benefit from greater economic
autonomy and advantageous tax treatment in China. The Chinese government has designated
Hainan Province, where we maintain our principal executive offices and manufacturing
facilities, as a SEZ. We are currently building a second manufacturing facility in an EDZ
located in the city of Wuhan in Hubei Province. Although we are not aware of any pending
or proposed changes in the policies or laws governing SEZs or EDZs that could have a
material adverse effect on our business, financial condition and results of operations,
there can be no assurance that such changes will not occur.

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We are subject to government
regulation and our operating results could be affected by changes in those regulations.

Our
operations and assets in China are subject to significant political uncertainty. Our
business, results of operations and financial condition could be adversely affected by
policy changes made by the Chinese government to any of the following:

| |  |  | laws
and regulations, or their interpretation and enforcement thereof,
| | - |  | ----------------------------------------------------------------------

| |  |  | confiscatory
or increased taxation,
| | - |  | -----------------------------------

| |  |  | restrictions
on currency conversion and currency devaluations,
| | - |  | --------------------------------------------------------------

| |  |  | imports,
import duties, and sources of supply, or
| | - |  | -------------------------------------------------

| |  |  | the
expropriation of private enterprise.
| | - |  | ----------------------------------------

Under
its current governmental leadership, China has been pursuing economic reform policies,
including the encouragement of private economic activity and greater economic
decentralization. We can provide no assurance that the Chinese government will continue to
pursue these policies, that these policies will be successful if pursued or will not be
significantly altered without notice, or that business operations would not become subject
to the risk of nationalization, which could result in the total loss of any investment in
China. Recent developments in Chinese law, however, may reduce the risk of
nationalization. The National Peoples Congress, Chinas parliament, adopted a
new property law in March 2007 stipulating that the property of the state, the
collective, the individual and other obliges is protected by law, and no units or
individuals may infringe upon it. This is the first time that equal protection of
state and private properties has been enshrined in Chinese law and is a significant step
in the countrys efforts to move to a market economy. The new property law is due to
take effect on October 1, 2007.

Under
the Chinese governments program of privatizing many state-owned enterprises, the
Chinese government has attempted to grow its revenues by increased tax collection.
Currently, the income tax rate for domestic companies in China is 33% while it is 15% for
foreign funded companies. China offers preferential tax treatment to foreign funded
companies as a means to attract foreign direct investment. There has been a nationwide
debate on whether, given its current state of development, China should continue to offer
preferential tax treatment to foreign funded companies. Experts and domestic companies
complained that the preferential tax treatment does not accord to WTOs principles,
unfairly discriminates against local firms that compete with foreign funded companies, and
results in a reduction of Chinas tax revenues. After much debate, the National
Peoples Congress, Chinas parliament, promulgated on March 16, 2007 a new
Corporate Income Tax Law that sets a unified corporate income tax rate of 25% applicable
to both domestic and foreign funded Companies. The new tax law is scheduled to take effect
on January 1, 2008. The National Peoples Congress has delegated rulemaking authority
to the State Council and the State Administration of Taxation.

Our
headquarters and primary manufacturing facility are located in Hainan province, which has
been designated a SEZ by the Chinese government. Our second manufacturing facility is
being built in an EDZ in Wuhan, China. We enjoy preferential tax treatment in both Hainan
and Wuhan. Since neither the State Council nor the State Administration of Taxation has
published regulations implementing the new tax law, it is not clear at this time whether
and how the new tax law would apply to foreign funded companies operating out of SEZs or
EDZs. Although we expect the Chinese government to continue to offer preferential tax
treatment to foreign funded companies operating out of SEZs and EDZs, we cannot assure
that such policies would continue. As a result of the new tax law, we may be subject to
increased taxation which could adversely affect our profitability.

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Our
economic development in China may also be limited by the following:

| |  |  | governmental
imposition of restrictive measures intended to reduce inflation, increase taxes, or
reform unprofitable state-owned enterprises,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
inadequate development of China's infrastructure,
| | - |  | -----------------------------------------------------

| |  |  | the
unavailability of adequate power, water supplies, raw materials, and parts, and
| | - |  | -----------------------------------------------------------------------------------

| |  |  | limited
transportation and communications capabilities.
| | - |  | -------------------------------------------------------

The
Chinese government regulates the import into China of various raw materials and also taxes
some types of imported capital equipment, which may affect our operations. The approval of
imports by the Chinese government is based to some extent on the lack of qualified
domestically-produced products and on its strategic plans for the development of local
Chinese industries. We can provide no assurance that Chinas policies will continue
to allow raw materials needed by our operations to be imported into China or will not
impose import fees, which may raise the cost of raw materials or capital equipment used in
our operations. The imposition of any of these costs could have a material adverse effect
on our business, results of operations, and financial condition.

Chinas entrance in the World
Trade Organization may result in increased competition from international companies.

Currently,
a significant portion of Chinas economic activity is export-driven and, therefore,
is affected by developments in the economies of Chinas principal trading partners,
including the U.S. On November 11, 2001, China signed an agreement to become a member of
the World Trade Organization (the WTO), the international body that sets most
trade rules, further integrating China into the global economy and significantly reducing
the barriers to international commerce. Chinas membership in the WTO became
effective on December 11, 2001. China has agreed upon its accession to the WTO to reduce
tariffs and non-tariff barriers, remove investment restrictions, provide trading and
distribution rights for foreign firms, and opened various service sectors to foreign
competition. To date, China fulfilled all the commitments it made for Chinas
accession to the World Trade Organization (WTO) and improved economic systems, laws,
regulations and policies related to doing business with other countries.

Chinas
accession to the WTO may favorably affect our business in that reduced market barriers and
an increasingly transparent investment environment will facilitate increased investment
opportunities in China, while tariff rate reductions and other enhancements will enable us
to develop better investment strategies and attract investment capital. In addition, the
WTOs dispute settlement mechanism provides a credible and effective tool to enforce
members commercial rights. Furthermore, with Chinas entry into the WTO, it is
believed that China will reform relevant laws on foreign investment to conform to the
common practices of a market economy. However, these factors may also increase the number
of foreign competitors and thus intensify competition in the transformer industry in
China, which may in turn decrease our market share and adversely affect our business,
results of operations, and financial condition.

Despite continued economic
reforms, the economic conditions in China may adversely affect our operations.

China
has operated a centrally-planned economy since 1949. Since 1978, China has implemented a
series of economic reform programs in an effort to revitalize its economy and improve
living standards, including the implementation of policies designed to attract foreign
investment and technology.

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According
to the National Bureau of Statistics (NBS), Chinas GDP in 2006 reached 20.94
trillion Yuan (2.6816 trillion US dollars), an increase of 10.7 percent over the previous
year. Of this total, the added value of primary industry rose 5 percent to 2.47 trillion
Yuan (290.70 billion US dollars), that of secondary and tertiary industries rose 12.5 and
10.3 percent to 10.2004 trillion Yuan (1.311 trillion US dollars) and 8.2703 trillion Yuan
(1.059 trillion US dollars) respectively. According to the statistics released by Customs
General Administration, the total value of imports and exports in 2006 reached 1.76
trillion US dollars, up 23.8 percent over the previous year. Of this total, the value of
exports was 969.1 billion US dollars, up 27.2 percent, and the value of imports was 791.6
billion US dollars, up 20 percent. China had a trade surplus of 75.5 billion US dollars.
There is no assurance that the Chinese economy will continue to grow at such rates and if
it fails to do so our business may be adversely affected.

Despite recent reforms, we may be
adversely affected by Chinas unsophisticated legal system and it may be difficult to
enforce our legal rights under Chinese law and for third parties to enforce the laws of
the United States or any other state in China.

Chinas
legal system is a civil law system, which is based on written statutes and legal cases
having little precedential value. China does not have a well-developed, consolidated body
of laws governing foreign investment enterprises. As a result, the administration of laws
and regulations by government agencies may be subject to considerable discretion in
individual cases. As legal systems in China develop, we, like other foreign business
entities, may be adversely affected by new laws, changes to existing laws (or new
interpretations of the laws) and preemption of provincial or local laws by national laws.
In addition, in circumstances where adequate laws do exist, it still may not be possible
for us to obtain swift and equitable enforcement of those legal rights under Chinese law.

Moreover,
because certain directors and officers are non-residents of the United States, it may be
difficult for investors to effect service of process upon these non-residents in the
United States or to enforce United States judgments against them in Chinas courts.
There is uncertainty as to whether Chinas courts would enforce:

| |  |  | Judgments
of U.S. courts obtained against us or these non-resident directors and officers based on
the civil liability provisions of the securities laws of the United States or any state;
or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | In
original actions brought in the Republic of China, liabilities against us or these
non-resident directors and officers predicated upon the securities laws of the United
States or any state.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Also,
since a majority or our assets are located in China, it may be difficult for an investor
who obtains a judgment in the United States or another state to enforce such foreign
judgment in China. Such judgment may be further limited by applicable bankruptcy,
insolvency, liquidation, arrangement, moratorium or similar laws relating to or affecting
creditors rights generally and will be subject to a statutory limitation of time
within which proceedings may be brought.

Our facilities are subject to
Chinese environmental regulations that expose us to potential liability.

Environmental
protection in China is regulated in accordance with the Environmental Protection Law of
the Peoples Republic of China, which became effective on December 26, 1989. This law
sets national standards for environmental quality and monitoring as well as for the
utilization of natural resources and the reduction of pollution. As a manufacturer, we are
subject to annual inspections. We have passed our most recent inspection and believe that
we are in material compliance with applicable environmental laws. In September 2000, we
also obtained ISO 14001 certification from the Environmental Management Certification
Center for the Machinery Industry.

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The expansion of our operations
internationally may be adversely affected by Chinese economic, political, legal and other
uncertainties.

Although
we sell products to customers based principally in China, we are doing business in the
U.S. and seek to do business in other countries as well. In the future, our international
operations and sales may be affected by the following risks, which may adversely affect
Chinese companies doing business internationally:

| |  |  | political
and economic risks, including political instability,
| | - |  | --------------------------------------------------------------

| |  |  | currency
controls and exchange rate fluctuations,
| | - |  | -------------------------------------------------

| |  |  | changes
in import/export regulations, tariff and freight rates, and
| | - |  | -------------------------------------------------------------------

| |  |  | various
forms of protectionist trade legislation which currently exist or have been proposed in
some foreign countries.
| | - |  | -----------------------------------------------------------------------------------------------------------------------

We receive our revenues in
Renminbi, which experiences volatility in its exchange rate to certain foreign currencies
and may adversely affect our financial performance.

We
receive almost all of our revenues in Renminbi, which is not freely convertible into
foreign currencies. However, we are required to meet foreign currency obligations, such as
for future purchases of certain equipment and raw materials from Germany. The Chinese
government imposes control over our foreign currency reserves in part through direct
regulation of the conversion of Renminbi into foreign currency and through restrictions on
foreign imports. Effective January 1, 1994, pursuant to the Notice of the Peoples
Bank of China Concerning Further Reform of the Foreign Currency Control System (PBOC
Notice), the conversion of Renminbi into Hong Kong and United States dollars must be
based on rates set by the PBOC. Such rates are set daily, based on the previous days
Chinese interbank foreign exchange market rate with reference to current exchange rates on
the world financial markets or the PBOC Rate. On July 21, 2005, the Chinese
government revalued the Renminbi against the U.S. dollar and introduced a basket of
currencies system to determine the exchange rate, which is based on the interbank foreign
exchange market rates and current exchange rates of a basket of currencies in the world
financial markets. As a result of adopting a flexible exchange rate, Chinas
financial sector is now more responsive to fluctuations in the international currency
market. The Renminbi/US Dollar exchange rate has climbed steadily since. As of December
31, 2006, the exchange rate was 7.81 RMB to 1 US dollar.

Effective
as of December 1, 1996, Renminbi has become fully convertible for all current account
transactions. Foreign exchange, which is required for current account transactions, can be
bought freely at authorized Chinese banks, so long as the procedural requirements
prescribed by law are met. Payment of dividends to foreign investors holding equity
interests in Chinese companies, including Foreign Investment Enterprises, is considered a
current account transaction. At the same time, Chinese companies are also required to sell
their foreign exchange earnings to authorized Chinese banks. Purchase of foreign currency
for capital account transactions still requires prior approval of the State Administration
for Foreign Exchange.

Exchange
rate fluctuations may adversely affect our financial performance because of our foreign
currency denominated liabilities and may materially adversely affect the value, translated
or converted as applicable into United States dollars, of our net fixed assets, our
earnings and our declared dividends. We currently do not engage in any hedging activities
in order to minimize the effect of exchange rate risks.

# Future inflation in
China may inhibit economic activity in China.

In
recent years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation.  During the past ten years, the rate of inflation in China has
been as high as 20.7% and China

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has experienced deflation as low as
minus 2.2%.  These factors have led the Chinese government to adopt, from time to
time, various corrective measures designed to restrict the availability of credit or
regulate growth and contain inflation. While inflation has been more moderate since 1995,
high inflation may in the future cause the Chinese government to impose controls on credit
and/or prices, or to take other action, which could inhibit economic activity in China,
and thereby adversely affect the market for our products.

# Risks Relating to Our
Common Stock

We
may experience volatility in our stock price, which could negatively affect your
investment, and you may not be able to resell your shares at or above the price you paid
for them.

The
market price of our common stock may fluctuate significantly in response to a number of
factors, some of which are beyond our control, including:

| |  |  | quarterly
variations in operating results;
| | - |  | ------------------------------------------

| |  |  | changes
in financial estimates by securities analysts;
| | - |  | ------------------------------------------------------

| |  |  | changes
in market valuations of other similar companies;
| | - |  | --------------------------------------------------------

| |  |  | announcements
 by  us or  our  competitors  of  new  products  or of  significant  technical
 innovations,                  contracts, acquisitions, strategic partnerships or joint
ventures;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | additions
or departures of key personnel;
| | - |  | -----------------------------------------

| |  |  | any
deviations in net sales or in losses from levels expected by securities analysts; and
| | - |  | -----------------------------------------------------------------------------------------

| |  |  | future
sales of common stock.
| | - |  | -----------------------------

In
addition, the stock market has recently experienced extreme volatility that has often been
unrelated to the performance of particular companies. These market fluctuations may cause
our stock price to fall regardless of our performance.

# Item 4. Information on
the Company

# History and
Development

Jinpan
International Limited was incorporated as an International Business Company under the laws
of the British Virgin Islands on April 3, 1997. We currently own 100% of Hainan Jinpan
Special Transformer Works, which was renamed Hainan Jinpan Electric Company Ltd. on
October 9, 2004. At December 31, 2006, we owned 85% of Hainan Jinpan. Our principal
executive offices are located at c/o Hainan Jinpan Electric Corporation Ltd., No. 100
Nanhai Avenue, Jinpan Development Area, Haikou, Hainan China.

Hainan
Jinpan was established in June 1997 as a Sino-foreign cooperative joint venture between
Haikou Jinpan and Jinpan International. It is located in the Hainan Province in southern
China and is principally involved in the design, manufacture and sale of cast resin
transformers. Until June 30, 1997, Hainan Jinpans operations were wholly-owned and
conducted by Haikou Jinpan, which has, since its establishment in August 1993, sold in
excess of 19,113 cast resin transformers in China and has produced aggregate revenues of
approximately RMB2,604 million (US$318 million) as of December 31, 2006. Pursuant to the
terms of the joint venture contract between Haikou Jinpan and Jinpan International, Haikou
Jinpan received a 15% equity interest in Hainan Jinpan in exchange for the capital
contribution of its building, equipment, and other production and related facilities,
while we received an 85% equity interest in Hainan Jinpan in return for our commitment to
contribute capital of US$2.1 million. Hainan

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Jinpan  purchased all the remaining assets and liabilities of Haikou Jinpan in exchange for
US$2.1 million. On December 19, 2006,
Jinpan International entered into agreement with Haikou Jinpan to purchase all of Haikou
Jinpans interests in Hainan Jinpan (15%) for US$11 million. The transaction was
consummated on February 13, 2007, at which time Hainan Jinpan became Jinpan
Internationals wholly-owned subsidiary.

In
2005 and 2006, we invested approximately RMB 7.5 million and RMB 21 million, respectively,
on capital expenditures mainly to purchase equipment and expand our manufacturing plant
located in Hainan Province, China. We funded these expenditures with our available cash,
funds generated from operations, and credit facilities from Nan Yan Commercial Bank and
the Bank of China. In December 2006, we raised approximately US$25.7 million from the sale
of 1,350,371 shares of Common Stock. We used proceeds from the stock sale (1) to purchase
the outstanding minority interest in Hainan Jinpan, (2) to invest in a new manufacturing
facility in Wuhan, China, which we expect to become operational in early 2008, and (3) to
buy equipment for our expanded manufacturing facility in Hainan. We plan to allocate the
remainder of the proceeds to operational expenses. (See Item 5, Liquidity and Capital
Resources.) We expect to make capital expenditures of approximately RMB 50 million in
2007. We expect that our current cash and funds generated from operations, together with
existing credit facilities, will be sufficient to meet our capital expenditures in 2007.

# Business Overview

# General overview

Through
our wholly-owned Chinese subsidiary, Hainan Jinpan, we design, manufacture and sell cast
resin transformers for voltage distribution equipment in China. Our cast resin
transformers allow high voltage transmissions of electricity to be distributed to various
locations in lower, more usable voltages. According to the China National Transformer
Association, we are the second largest manufacturer and distributor of cast resin
transformers in China, using the aggregate capacity of the transformers as measured in
kilovolt-amperes (KVA) as a basis for comparison. In 2006, Hainan Jinpan had
total sales of RMB645 million (US$83.5 million) based upon sales of our transformers
having a total capacity of 6million KVA.

Hainan
Jinpan obtained an ISO9001 certification of its cast resin transformers in April 1997,
which was renewed for an additional period of three years expiring in 2006. Hainan Jinpan
also obtained an ISO14001 certification from the Environmental Management Certification
Center for the Machinery Industry in September 2000, making it one of only a few Chinese
transformer manufacturers to have received such certification from the International
Standardizing Organization. Equipment manufactured by Hainan Jinpan also underwent
complete type testing and was certified by KEMA High Power Laboratory in September 1999.
In addition, Hainan Jinpans transformers have been certified by the Chinese Ministry
of Machinery and Ministry of Electric Power, indicating that Hainan Jinpan has satisfied
the required national standards related to its:

| |  |  | product
quality;
| | - |  | ----------------

| |  |  | manufacturing
processes;
| | - |  | ------------------------

| |  |  | equipment;
and
| | - |  | --------------

| |  |  | personnel.
| | - |  | ----------

Hainan
Jinpan successfully listed its transformer products with Underwriters Laboratories Inc.
(UL). The products have been listed under transformer categories XPRS and
XPFS7 for the United States and Canada respectively with an effective issue date of
January 26, 2007. UL specializes in

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product compliance. UL listing
requires compliance with the ULs Standards for Safety, under which product samples
are tested and evaluated in accordance with applicable safety requirements. UL Standards
for Safety provide for certain technical requirements, which products must meet in order
to become eligible to bear a UL mark. Once a product meets these requirements,
authorization is given by UL to apply the appropriate UL mark to the products. This
listing marks the successful completion of a major project for the company which has been
ongoing for several years; prolonged by a redefinition of the project scope. UL listing is
considered by the industry to be necessary for entry into the North American market and
will improve the companys capability to address this market.

Our
cast resin transformers are used to distribute electricity from the end of electric
transmission lines to points of electricity usage within various types of facilities,
including residential, commercial, industrial, and other types of facilities. In order to
more efficiently transmit electricity over long distances, electrical voltage is typically
increased or stepped up by a power generating facility. Our cast resin
transformers step down or decrease voltage to a level that can be generally
used. Most step down transformers in China use oil to disperse the heat created when high
voltage is transformed into low voltage. Although oil-filled transformers are effective
and less expensive to purchase, relative to some other types of transformers, oil-filled
transformers require maintenance, produce leakage and pollution, and experience a higher
incidence of combustion than the cast resin transformers that we produce. We believe that
the problems associated with oil-filled transformers have resulted in demand for safer and
more efficient alternatives like our cast resin transformers, especially in urban areas.

We
manufacture four main types of cast resin transformers, which are distinguished by their
insulation systems. The insulation systems used are: 155 degree Celsius Class
F per IEC60076 (International Electrotechnical Commission) and 188 degree
Celsius Class H for the Chinese market and 150 and 185 degree Celsius per ANSI
(American National Standard Institute), IEEE (Institute of Electrical and Electronics
Engineers), and NEMA (National Electrical Manufacturers Associations) standards for the
U.S. and North American markets. In some transformers the high and low voltage coils are
cast in epoxy resin under vacuum conditions. In others, the high voltage coils are cast in
epoxy resin under vacuum conditions and the low voltage coils are encapsulated. Since our
coils are either cast or encapsulated, they use ambient air to cool the transformers
instead of requiring a liquid, such as oil, to absorb the heat produced. The Chinese
Ministry of Machinery has published guidelines requiring, to the extent possible, the use
of cast resin transformers in buildings containing transformers and in factories, which
are subject to a high risk of fire.

# Our electric
transforming products

We
manufacture and sell primarily four types of cast resin transformers. For the Chinese
market we make 155 and 188 degree Celsius insulation (class F and class H). We manufacture
and sell 16 standard sizes of transformers with KVA capacities ranging between 100 to 3150
KVA. For transformers with KVA of 400 and under, the high and low voltage coils are cast
in epoxy resin under vacuum conditions. For transformers with KVA above 400, the high
voltage coils are cast in epoxy resin under vacuum conditions and the low voltage coils
are encapsulated. For the U.S. and North American markets we make 150 degree Celsius and
185 degree Celsius insulation, per ANSI, IEEE, and NEMA standards. For each insulation
system we manufacture 9 standard sizes with KVA capacities ranging from 300 KVA to 3750
KVA. Our current maximum transformer KVA range both for the Chinese, U.S., and North
American markets is 20,000 KVA.

In
the event that our standard size cast resin transformers do not meet a customers
requirements or a customer seeks to purchase a transformer with a capacity in excess of
the maximum KVA capacities of our transformers, we offer design engineering services which
enable us to manufacture custom made

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transformers to fulfill a customers particular
needs. In order to customize our transformers, we employ 41 design engineers who utilize
3D design systems, Mechanic Desk Top software, and Auto Desk to design custom made
transformers. For example, our engineers designed and we installed a custom made
transformer with a capacity of 10,000 KVA for use in the Beijing subway system. The
pricing of our transformers is based upon capacity as measured in KVA. The price of our
transformers is typically increased by an additional 5% in the event that any design
engineering services are performed, regardless of the extent of services performed.

We
believe that the main advantages of our cast resin transformers as compared to other
electric transformers are that our transformers:

| |  |  | are
manufactured with fire resistant components;
| | - |  | ------------------------------------------------

| |  |  | do
not use a potentially environmentally harmful cooling liquid that may leak;
| | - |  | ------------------------------------------------------------------------------

| |  |  | use
less power or produce energy loss than other available transformers;
| | - |  | ------------------------------------------------------------------------

| |  |  | require
little maintenance;
| | - |  | ---------------------------

| |  |  | are
resistant to short circuit shocks;
| | - |  | --------------------------------------

| |  |  | have
greater emergency overload capability;
| | - |  | -------------------------------------------

| |  |  | have
greater reliability; and
| | - |  | -----------------------------

| |  |  | have
smaller dimensions and are less noisy.
| | - |  | -------------------------------------------

How electricity
transformers generally work

Transformers
are used to step-up and step-down voltages to transport electric energy over long
distances. A large transformer is commonly used at a generating facility to increase
voltage and decrease current needs in order to transport electric energy across
transmission lines. At the point the electric energy reaches the end user, a step-down
transformer is required to reduce voltage and increase current for general use. The
process of transforming high voltage to low voltage results in some energy loss which
produces heat. Therefore, electric transformers used to step-down voltages, like our cast
resin transformers, must contain an effective cooling system. Oil-filled transformers,
which are widely used in China, circulate oil through their coils to help disperse the
heat to the surrounding environment. Although oil-filled transformers are less expensive
to purchase than other types of transformers, including cast resin transformers, and work
effectively, the oil-filled transformers have the following problems, including:

| |  |  | the
need for periodic maintenance;
| | - |  | ----------------------------------

| |  |  | the
risk of combustion or explosion; and
| | - |  | ----------------------------------------

| |  |  | the
possibility of leakage, which creates potential environmental problems.
| | - |  | ---------------------------------------------------------------------------

In
light of these problems with oil-filled transformers, other types of transformers,
including cast resin transformers, have been increasingly used in China.

How cast resin
transformers generally work

Cast
resin transformers were developed in Germany in the 1960s as an alternative to oil-filled
transformers. In contrast to oil-filled transformers, which have their coils immersed in
oil to absorb and disperse heat, coils in a cast resin transformer are coated with a dry
epoxy resin which is able to withstand temperatures as high as 188 degrees Celsius. This
dry epoxy resin coating serves as the insulation medium between coils. To ensure effective
insulation, appropriate precautions must be maintained to ensure that any moisture or
condensation has been removed when the epoxy resin is cast. Rather than requiring a liquid
like oil to absorb the heat produced, cast resin transformers release the heat produced
into the ambient air in the form of hot air.

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# Business strategy

In
2006, we adopted a business strategy that continued with our previous strategy focusing on
promoting and developing existing and new products, forward integration, and strengthening
our sales force. For our existing transformer products, we have sought to offer our
products as part of the development of nuclear power in China. We have also expanded our
products to include those which provide alternative forms of energy. This is an emerging
area where we have focused most of our resources. Specifically, we have put our greatest
efforts into addressing the opportunities associated with wind energy, including further
developing these products and developing a wider client base for them. In addition, we
continued to expand our global reach, with the largest emphasis being placed on North
America. We also completed the UL listing process for our medium voltage cast resin
transformers. The following is a summary description of our business strategy:

Energy Products

We
continue to develop and expand our product line, extending the uses of our cast resin
transformers into areas that we believe has market potential. During 2006, we have
continued business development in conjunction with the building of nuclear power plants in
China and have continued to follow this market very closely. Wind-energy received the
greatest attention in 2006 as we have strengthened our position as a supplier of line
reactors to one of our major customers while designing transformers to new specifications
intended for use in future generation wind farms. Another area which we are investigating
is that of solar power. We view this as a potential market that will generate the
development of new products. We believe that the development of these new products will
greatly enhance our competitiveness in China and abroad.

UL Listing

At
the close of 2006, we were waiting for final confirmation from Underwriters
Laboratories, Inc. of the UL listing of our medium voltage cast resin transformers. In
January 2007, we received final confirmation of the listing. UL listing marks a major
milestone in our efforts to develop the North American Market. UL listing allows us to
participate in opportunities both in the U.S. and in Canada which we were excluded from in
the past. Much of the business development planned in 2007 for North America is centered
about our UL listing.

Integrated Assemblies

During
2006, we have continued to build sales with our switchgear products and units substations
and will continue to heavily promote these products in the Chinese market. Since 2004, we
have successfully developed Hainan Jinpan as a supplier of switchgear products. Switchgear
 forms the part of the system that enables operators to switch system equipment in and
out of the network on which it runs. We have executed a licensing agreement with one of
the worlds leading manufacturers of circuit breakers for use in our switchgear
assemblies. These efforts have helped us obtain certain large scale projects for switch
system equipment. We have also realized successful forward integration through our unit
substation business, which was initiated in 1999 and has grown considerably since then. A
unit substation is a miniature power generation station comprised of high voltage
switchgear, a transformer, low voltage switchgear, a power meter, and a power factor
compensation device all interconnected with cables or buss bars. Hainan Jinpan creates
unit substations by integrating the aforementioned equipment together with our
transformers. Unit substations are commonly used in applications related to construction
and reconstruction of city power networks. Switch gear and transformers are key components
in unit substations. Based on our success with integrated assemblies, we believe that we
are on the road to becoming a major electrical equipment supplier and offering complete
electrical equipment packages to our customers.

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Advance our position
in existing markets

During
2006, we continued to concentrate our efforts on expanding our presence in the original
equipment manufacturer (OEM) market. In 2004 and 2005, we made significant
progress in the large OEM market, successfully passing the qualification program of one of
the worlds largest power generating equipment manufacturers. In 2005, this large OEM
gave us its Best New Supplier Award at its annual suppliers conference. Our
business in the OEM market continued to grow in 2006. At its 2006 annual suppliers
conference, this large OEM gave us the Excellence in Quality Award. This year we plan to
undertake a major marketing initiative aimed at targeting OEM purchasers that require UL
listing as a part of their requirements and expect significant growth in this market
sector as we are one of two suppliers that can address UL listed cast resin transformers.

We
will continue to remain customer focused and to provide a higher degree of responsiveness
to our customers compared to our competition in the industry.

# Background
information relating to the electric transformer industry in China

GDP Growth and Demand
for Electricity

We
believe that the fast growing Chinese economy drives Chinas demand for electric
power. Growth in industrial output, rising consumer demand for products that require
electric power for their operations, and large influxes of rural immigrants into
Chinas major cities all contributes to Chinas growing demand for electric
power.

Over
the past 27 years, beginning in 1978, when China introduced economic reform and changed
its policy, Chinas economy has grown at an annual average growth rate of
approximately 9.35%. According to the National Bureau of Statistics (NBS), Chinas
GDP in 2004, 2005, and 2006 grew by 9.9%, 9.3%, and 10.7% respectively. To meet growing
demand for electric power, China invested heavily in power generation capacity. China had
electric generation capacity of 57.12 million in 1978. According to the China Electricity
Council (CEC), in 2006 Chinas power industry installed some 100 million KW of power
generators (increase of 20.3% as compared to 2005), bringing the total installed capacity
to 622 million KW, ranking second in the world. Growth in demand continued to outpace
growth in capacity in 2006, albeit slightly. China produced 2834.4 billion kilowatt-hours
of electricity in 2006, up 13.5% from a year ago and consumed 2824.8 billion
kilowatt-hours with a year-on-year growth of 14%.

According
to the NBS, the fast growth of industrial output is the key driving force behind the
consumption of electricity. In 2006, the manufacturing sector was the largest consumer of
power in the country, with consumption rising 14.3% to 2135.4 billion kilowatt-hours.
Because of fast growth in fixed asset investments, we expect that the production capacity
of Chinas industrial sector to continue to grow in 2007. Thus, we expect that the
electricity demanded by the industrial sector will continue to grow steadily.

Electrical Equipment
Industry

According
to the statistics released by National Bureau of Statistics, the electrical machinery
& equipment manufacturing industry achieved a total sales value of 986 billion Yuan
(126.4 billion US dollars) in 2006, up 35.7% from the prior year. Profit of the industry
reached 56 billion Yuan (7.18 billion US dollars) in 2006, an increase of 33.3% over the
previous year. Sales of generation equipment reached 159 billion Yuan (20.39 billion US
dollars) in 2006, an increase of 23.3% from the prior year,

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profit  reached to 8.3 billion  Yuan (1.06
billion US dollars), up 26.8% over
the year 2005. Sales of transmission and distribution and control equipment recorded a
sales of 384 billion Yuan (49.1 billion US dollars) in 2006, an increase of 28.4% over the
previous year, profit reached to 27.8 billion Yuan (3.56 billion US dollars) with 26.6%
growth over the year 2005. Sales of electrical wires, cables, optical lines and other
related materials reached 443 billion Yuan (56.8 billion US dollars), up 46.7% over 2005,
profit of this section accounted 19.4 billion Yuan (2.49 billion US dollars) in 2006, an
increase of 47.2% over the previous year.

Growth in the
Transformer Industry

According
to the China National Transformer Association, production and sales of cast resin
transformers in China have increased significantly since 1991. In 1991, the aggregate
production output of installed cast resin transformers was 0.43 million KVA. Since 1994,
installations of cast resin transformers have risen dramatically. From 1995 to 2005, the
total KVA capacity of cast resin transformers installed has increased from 6.19 million to
23.40 million, an increase of 278%.(1)

The
China National Transformer Association also reports that from 2001 through 2005, the
production and sales of cast resin transformers in China was 94.13 million KVA,
translating into an average production and sales per year of 18.83 million KVA, which
represents a compound annual growth rate of 12.6% in sales of transformers in
China.(1) According to industry experts, the power generating capacity in China
is expected to increase to 900 million kilowatts by the year 2020, which represents an
annual compound growth rate of 5% to 6%. This increase in power generating capacity
represents increased market opportunities for us.

The
table below sets forth our consolidated sales, by geographic region, for the years ended
December 31, 2004, 2005 and 2006:

|                | Year Ended December 31,
|--------------- | -----------------------
|
|
|Beijing         | 5.06                   
|Guangdong       | 4.10                   
|Wuhan           | 2.22                   
|Chongqing       | 1.14                   
|Yunnan, Guizhou | 1.17                   
|Sichuan         | 2.62                   
|Liaoning        | 5.29                   
|Shanghai        | 3.30                   
|Jiangsu         | 5.05                   
|Zhejiang        | 1.81                   
|Tianjin         | 2.38                   
|Guangxi         | 1.54                   
|Changsha        | 1.34                   
|Shanxi          | 1.24                   
|Hainan          | 0.94                   
|Other           | 3.05                   
|                |                        
|Total:          | 42.25                  

_________________

(1)       
          This year, the China National Transformer Association has delayed the
          dissemination of certain reports. We have, thus, been unable to obtain certain
          statistics for 2006.

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# How our cast resin
transformers are manufactured

The
essential components of our cast resin transformers are their windings and cores. Under
our current manufacturing process, we use thirteen copper coil winding machines to wind
copper wire into the high and low voltage coils contained in our traditional and copper
foil cast resin transformers and one copper foil winding machine to produce the low
voltage copper foil coils used in our copper foil cast resin transformers. Our copper
coils are insulated with fiberglass mats or quartz powder and are then cast with an epoxy
resin in an automated vacuum casting machine to provide further insulation. The vacuum
casting machine removes all moisture and condensation between the copper wire and the
resin coating. We implement such procedures to ensure that our copper coils are properly
insulated for safety. We use the materials described above so that none of our windings
crack when heat is produced in the transformer since the expansion coefficient of copper
is similar to the expansion coefficient of epoxy resin and fiberglass.

The
high and low voltage windings are then wrapped around a silicon steel core. The core is
composed of several rolls of silicon steel, which have been cut on an automated steel
cutting machine. The rolls of silicon steel are assembled and stacked by one of our two
assembly table machines to form the core of a transformer. As one of the most important
components of a transformer, the core is used as a transforming medium of electric energy
during the transforming process. Our use of high quality material, advanced cutting
machines and the design of our products, have resulted in efficiently minimizing the
energy loss and noise produced during the operation of the transformer. We test and
inspect our transformers in accordance with Chinese national standards and will not
deliver a transformer to a customer unless each required test has been passed. The
standard testing procedure is comprised of the following 12 procedures:

1.       
          measurement of winding resistance;

2.       
          measurement of voltage ratio;

3.       
          measurement of impedance voltage;

4.       
          measurement of current;

5.       
          source voltage withstand test;

6.       
          induced overvoltage withstand test;

7.       
          measurement of winding insulation resistance;

8.       
          measurement of partial discharge;

9.       
          lightning impulse test;

10.       
          temperature raise test;

11.       
          measurement of sound level; and

12.       
          short-circuit test.

# The raw materials
used in our cast resin transformers and their sources of supply

The
principal raw materials we require for our business are (1) epoxy resin, used to coat the
copper coils of our transformers, (2) silicon steel, which comprises the cores of our
transformers, and (3) copper foil, for our copper foil windings.

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We
maintain at least two suppliers for each of our major raw materials in order to enhance
our ability to obtain an adequate supply of high quality, competitively-priced raw
materials. The main suppliers of our principal raw materials are as follows:

|Material      | Supplier                                                    | Country 
|------------- | ----------------------------------------------------------- | --------
|
|              | Hexion Specialty Chemicals, Inc.                            | U.S.    
|              |                                                            
|Cast Resin    | Xiamen Xiangyu Speed Fair Trading Co., Ltd.                 | China   
|              | (Chinese distributor for Huntsman Advanced Materials, Inc.) |         
|             
|              | Thyssenkrupp Electrical Steel GmbH                          | Germany 
|              |                                                            
|Silicon Steel | Legnano Teknoelectric Company S.P.A.                        | Italy   
|              |                                                            
|              | Wuhan Steel Processing Co., Ltd.                            | China   
|             
|Copper        | Jiangyin Golden Ball Group Co., Ltd.                        | China   
|              |                                                            
|(Rod)         | TongLing Nonferrous Metals (Group) Inc.                     | China   
|             
|(Foil)        | MKM (Mansfelder Kupfer and Messing GmbH)                    | Germany 
|              |                                                            
|              | Luoyang Copper (Group) Co., Ltd.                            | China   
|             
|(Wire)        | Nexans TianJin Magnet Wire & Cable Co,. Ltd.                | China   
|              |                                                            
|              | Guangdong Zhongshan Electric Wire & Cable Co., Ltd.         | China   
|             
|(Bus-bar)     | Outokumpu Copper Products(Malaysia) SDN. BHD                | Malaysia
|              |                                                            
|              | Jiangyin Electrical Alloy Co., Ltd.                         | China   
|              |                                                            
|              | Jiangyin Huaxi Copper Products Co., Ltd.                    | China   
|             

Other
raw materials required to produce our products include copper wire, glass fiber, and
quartz powder. We purchase our glass fiber, and quartz powder from local suppliers in
nearby regions and believe that these materials are readily available.

Because
of strong demand for steel and copper, prices these materials increased markedly during
2006. By raising prices, cutting costs through vertical integration, and further
optimizing our manufacturing processes to reduce waste, we successfully limited the impact
of rising materials costs on our profit. Although we currently do not engage in any
hedging activities, we are actively exploring means to use the futures market to minimize
our exposure to sudden price fluctuations. We expect the price of steel and copper to
continue to rise in 2007, albeit at a slower pace than 2006. Strong demands worldwide on
these materials and uncertain pricing in steel and copper may impact our raw materials
costs during 2007.

# Our sales and
marketing network

We
sell our cast resin transformers through our sales network, which consists of the use of
36 regional sales offices in various cities in China, including Beijing, Shanghai and
Chongqing. We employ 73 sales representatives, 50 of whom are based in our regional sales
offices and 23 are based at our headquarters in Haikou. All of our sales representatives
are salaried employees. We also sell our products through 4 independent sales agents who
receive commissions based on sales. We sell the majority of our transformers in Beijing,
Guangdong, Jiangsu and the northeast of China.

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# Our significant
customers

Sales
to our five largest customers aggregated approximately 13%, 16%, and 16% of our total
sales during the fiscal years ended December 31, 2004, 2005, and 2006, respectively, and
sales to our largest customer for those same periods accounted for approximately 3.2%, 5%,
and 6.3% of our total sales, respectively. There can be no assurance that any of our
principal customers will maintain their volume of business with us or that a similar
volume of business will be forthcoming from new or existing customers to replace any lost
business. The loss of one or more of these existing principal customers without
replacement by a customer of similar volume could have a material adverse effect on our
business and financial condition.

# Our trademark, JST

We
own the rights to the trademark JST, which is registered with the Trademark
Bureau of the State Administration of Industry and Commerce of China. We believe that this
trademark has significant value and is important to our marketing and expansion efforts.
However, with regard to our trademark or any other future trademarks, we cannot be sure
that any one or all of the following scenarios has not occurred or will not occur, any one
of which could have a material adverse effect upon us:

| |  |  | we
are unable to register other names or service marks that we may consider important;
| | - |  | --------------------------------------------------------------------------------------

| |  |  | our
currently registered trademark or any future registered trademark currently does or will
violate the proprietary rights of others;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
trademarks are not upheld by the Chinese government or its judicial system if challenged;
| | - |  | ---------------------------------------------------------------------------------------------

| |  |  | we
are prevented from using our trademarks; or
| | - |  | ----------------------------------------------

| |  |  | because
enforcing our proprietary rights or defending against the ownership claims of others may
be  extremely  costly,  we may not have the  financial  resources  necessary to enforce
or defend our                   trademarks.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Our competitors in
the electric transformer business

We
believe that there are many manufacturers of cast resin transformers in China, most of
which are small scale manufacturers. We primarily compete in the cast resin transformer
market with two large transformer manufacturers but also with a large number of small
transformer manufacturers. Most of our competitors are government-owned entities. We
believe that in 2006, only 11 Chinese cast resin transformer manufacturers had an annual
electricity production in excess of 300,000 KVA per year, whereas we produced
approximately 4 million KVA in 2006.

Although
a few of our competitors entered the transformer market before us and have achieved
greater product recognition than us, we believe that our growing name recognition and the
quality and efficiency of how we manufacture our products allows us to compete effectively
against our competitors. We believe that we operate more efficiently than our
government-owned competitors because, as a non-government-owned company, our operations
are not subject to the additional governmental approvals and regulatory processes as are
government-owned entities. This in particular results in our lower production costs and
greater flexibility, as compared to our government-controlled competitors. Furthermore,
since not one of our transformers has been returned to us or, to our knowledge, have been
the cause of any major accidents, we believe that our competitors do not manufacture
transformers that are safer or of a higher quality than our transformers.

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In
addition, we believe that foreign cast resin transformer manufacturers presently do not
pose a significant competitive threat to us because of their relatively high production
costs. However, there can be no assurance that entry into the WTO and the consequent
reduction of tariff imports will not increase competition or that foreign manufacturers,
many of which have greater financial, personnel, technical and other resources than we
have, will not enter into meaningful joint venture arrangements, or establish wholly
foreign-owned enterprises to manufacture transformers within China, either of which could
have an adverse effect upon our business.

# Government Regulation

General conditions in
China

China
is a socialist state which since 1949, has been controlled by the Communist Party of
China. Changes in the top political leadership of the Chinese government may have a
significant impact on policy and the political and economic environment in China.
Furthermore, because economic reforms and growth in China have been more successful in
some provinces than in others, the continuation or increase of these economic disparities
could affect political or social stability.

China
is considered to be a high risk nation for business and investment in the Asian region.
Although China recently has permitted greater provincial and local economic autonomy and
private economic activity, the government of China has exercised and continues to exercise
substantial control over virtually every aspect of the Chinese economy through regulation
and state ownership. Therefore, government action in the future, including any decision by
the Chinese government not to continue to support the economic reform program that it
commenced in the late 1970s and the possible return of China to the more
centrally-planned economy that existed prior to the economic reforms, could have a
significant effect on economic conditions in China and on our operations. Chinas
economic reform plan was designed to bring into China foreign investment capital and
technological advancements. The result of these reforms has been a move towards a more
mixed economy and away from a more centrally-planned economy. The process of shifting more
responsibility for various aspects of economic enterprise to local management and regional
authorities continues, even though the system of Chinese socialism still involves
considerable influence by the central government in economic areas of production and
marketing.

Because
we are a foreign company conducting our operations and owning assets primarily in China,
our operations and assets are subject to political, economic, legal and other
uncertainties which affect companies operating in China.

Government regulation
in China

Our
operations and assets in China are subject to significant political uncertainty. Our
business, results of operations and financial condition could be adversely affected by
policy changes made by the Chinese government to any of the following:

| |  |  | laws
and regulations, or their interpretation and enforcement thereof,
| | - |  | ----------------------------------------------------------------------

| |  |  | confiscatory
or increased taxation,
| | - |  | -----------------------------------

| |  |  | restrictions
on currency conversion and currency devaluations,
| | - |  | --------------------------------------------------------------

| |  |  | imports,
import duties, and sources of supply, or
| | - |  | -------------------------------------------------

| |  |  | the
expropriation of private enterprise.
| | - |  | ----------------------------------------

Under
its current governmental leadership, China has been pursuing economic reform policies,
including the encouragement of private economic activity and greater economic
decentralization. We can provide no assurance, however, that the Chinese government will
continue to pursue these policies, that these policies will be successful if pursued or
will not be significantly altered without notice, or that

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business operations would
not become subject to the risk of
nationalization, which could result in the total loss of any investment in China. Under
the Chinese governments program of privatizing many state-owned enterprises, the
Chinese government has attempted to increase its revenues by increased tax collection. If
these efforts to increase tax revenues continue, we could incur increased taxation
expenses which may impact our profitability. Moreover, economic development in China may
also be limited by the following:

| |  |  | governmental
 imposition of restrictive  measures intended to reduce inflation,  increase taxes, or
reform                  unprofitable state-owned enterprises,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
inadequate development of the Chinese infrastructure,
| | - |  | ---------------------------------------------------------

| |  |  | the
unavailability of adequate power, water supplies, raw materials, and parts, and
| | - |  | -----------------------------------------------------------------------------------

| |  |  | limited
transportation and communications capabilities.
| | - |  | -------------------------------------------------------

The
Chinese government regulates the import into China of various raw materials and also taxes
some types of imported capital equipment, which may affect our operations. The approval of
imports by the Chinese government is based to some extent on the lack of qualified
domestically-produced products and on its strategic plans for the development of local
Chinese industries. We can provide no assurance that Chinas policies will continue
to allow raw materials needed by our operations to be imported into China or will not
impose import fees, which may raise the cost of raw materials or capital equipment used in
our operations. The imposition of any of these costs could have a material adverse effect
on our business, results of operations, and financial condition.

Chinas legal
system and how it affects us.

Chinas
legal system is a civil law system, which is based on written statutes and legal cases
having little precedential value. China does not have a well-developed, consolidated body
of laws governing foreign investment enterprises. As a result, the administration of laws
and regulations by government agencies may be subject to considerable discretion in
individual cases. As legal systems in China develop, we, like other foreign business
entities, may be adversely affected by new laws, changes to existing laws (or new
interpretations of the laws) and preemption of provincial or local laws by national laws.
In addition, in circumstances where adequate laws do exist, it still may not be possible
for us to obtain swift and equitable enforcement of those legal rights under Chinese law.

Chinas environmental law and
how it affects us.

Environmental
protection in China is regulated in accordance with the Environmental Protection Law of
the Peoples Republic of China, which became effective on December 26, 1989. This law
sets national standards for environmental quality and monitoring as well as for the
utilization of natural resources and the reduction of pollution. As a manufacturer, we are
subject to annual inspections. We have passed our most recent inspection and believe that
we are materially in compliance with applicable environmental laws.

International trade in
China

Currently,
a significant portion of Chinas economic activity is export-driven and, therefore,
is affected by developments in the economies of Chinas principal trading partners,
including the U.S.

Chinas
entrance into the WTO, effective December 11, 2001, will result in important development
opportunities for its economic construction as well as many challenges. The Most
Favored Nation status and the national treatment that China will gain from other WTO
members will be help increase the countrys export volume. In accordance with the WTO
agreement, China will work to adopt transparent and equitable trade and investment
policies, continue to improve the investment and business conditions, encourage fair
competition, accord national treatment where needed and further strengthen the protection
of intellectual property rights and all the legitimate rights and interests of foreign
investors. The central government is accelerating the drafting of amendments and the
abolishment of obsolete laws, rules, and regulations in accordance with Chinas WTO
commitments. Chinas entrance into the WTO will create many economic opportunities
for China, as well as many challenges.

Since
January 1, 2005, China has entered into the post-WTO transitional period from
its WTO entry. The post-WTO transitional period is the period from January 1,
2005 to the date when China opens all its sectors it promised to foreign participation.
This will negatively impact domestic sales of Chinas agricultural, auto, financial,
and services industries, as well as the retail sector, because domestic businesses in
these industries will lose sales to their foreign counterparts. In 2005, the transitional
period for several important service sectors, including banking, securities, insurance,
and retail trade will expire. In 2005, the Chinese government abolished regional
limitation on foreign insurance companies, reduced asset requirements on foreign brokerage
firms, and allowed for the establishment of foreign-funded brokerage firms without joint
venture requirements. On December 11, 2006, new regulations on the administration of
foreign-funded banks took effect marking the full opening of the countrys banking
sector to foreign competitors. Foreign-funded banks can now conduct Renminbi business for
Chinese citizens. The Chinese government is encouraging foreign banks to incorporate
locally and set up subsidiaries to minimize risks for Chinese customers. Foreign banks
that continue to run their Chinese

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operations as branches operated from
overseas may find that the range of services they can offer customers will be restricted.
China also opened its foreign exchange business to foreign-funded banks. Some 111 foreign
financial institutions now offer Renminbi services to Chinese and foreign enterprises in
25 cities all over China. In 2007, regional limitations on basic telecommunications will
be cancelled. Foreign telecommunications companies will be allowed to own up to 49 percent
of telecommunications joint ventures.

According
to the Customs General Administration, the total volume of Chinas foreign trade in
2006 reached a record high of 1.76 trillion U.S. dollars, up 23.8% over the prior year. Of
this total, the value of exports was 969.1 billion U.S. dollars, up 27.2 percent, and the
value of import was 791.6 billion U.S. dollars, up 20 percent. China had a trade surplus
of 177.5 billion U.S. dollars. On April 1, 1996, the Chinese government reduced the rate
of import duties of 4,971 tax items, thus effectively decreasing the tariff rate from 35%
to 23% on average. On October 1, 1997, the Chinese government reduced the import duty rate
of 4,874 commodity items, reducing customs duties from 23% to 17% on average. Starting
from January 1, 2001, the Chinese government decided to reduce customs duties again,
decreasing the overall level of customs duties to 15.3%. This decrease involved 3,462
items, making up 49% of Chinas total tax items. Having entered the WTO, the Chinese
government will continue to carry out its promise of gradually reducing customs duties.
Commencing January 1, 2005, Chinas overall customs duty rate decreased to 9.9% from
10.4%, which includes the reduction of the average import duty rate for agricultural
products which decreased from 15.6% to 15.3% and the average import duty rate of
industrial products which decreased from 9.5% to 9%. These tariff reductions may allow a
flow of more foreign goods into the domestic market at lower prices and will pose
competitive pressure on Chinese enterprises.

In
2006, China paid-in 69.5 billion US dollars of foreign direct investment, and attracted
63.02 billion US dollars of foreign direct investment. The foreign direct investment
actually used in 2006 was 63.0 billion US dollars, an increase of 4.5 percent. The
year-end foreign exchange reserves of China reached 1,066.3 billion US dollars, an
increase of 247.3 billion US dollars as compared with that at the beginning of the year.
While Chinas entry into the WTO and the related relaxation of trade restrictions may
lead to increased foreign investment, it may also lead to increased competition in
Chinas markets from international companies.

# Economic
conditions in China and how they affect us

According
to the National Bureau of Statistics (NBS), Chinas GDP in 2006 reached
RMB20.94 trillion (2.68 trillion U.S. dollars), an increase of 10.7% over the previous
year. Of this total, the added value of primary industry rose 5% to RMB2.47 trillion
(290.7 billion U.S. dollars), that of secondary and tertiary industries rose 12.5 and
10.3% to RMB10.2 trillion (1.31 trillion dollars) and RMB8.27 trillion (1.06 billion
dollars), respectively.

According
to data released by the National Bureau of Statistics, Chinas total value added of
the industrial sector was 9,035.1 billion Yuan (1,158 billion US dollars), up by 12.5
percent over the previous year. The value added of industrial enterprises above the
designated size (with an annual sales volume of at least five million Yuan) was up by 16.6
percent and their sales ratio was 98.1 percent. The profits made by the industrial
enterprises above the designated size were 1,878.4 billion Yuan (240.82 billion US
dollars), an increase of 31 percent over the previous year.

National
revenue reached 3.93 trillion Yuan (503.85 billion US dollars), a year-on-year increase of
769. 4 billion Yuan (98.64 billion US dollars). Urban per capita disposable income was
11,759 Yuan (1507.6 US dollars), an increase of 10.4 percent in real terms after allowing
for price factors, and rural per capita net income was 3,587 Yuan (459.87 US dollars), up
7.4 percent in real terms after allowing for price factors.

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In
2006, consumer spending remained stable but showed invigorating signs in China last year,
the total retail sales of consumer goods reach 76,410 billion Yuan(9,796.15 billion US
dollars), a year-on-year growth of 13.7 percent, which is 0.8 percentage points higher
than that in the previous year. Of this total, the retail sales of consumer goods in urban
areas increase by 14.3 percent and the retail sales at county and below county level is up
by 13.3 percent.

According
to the National Development and Reform Commission of China, the general level of consumer
prices in China was up by 1.5 percent over the previous year. Of this total, the prices
for service items were up 1.8 percent. The retail prices of commodities were up by 1.0
percent, while the producers prices for manufactured goods increased by 3.0 percent,
and the purchasing prices for raw materials, fuels and power went up by 6.0 percent. The
prices for investment in fixed assets were up 1.5 percent. Producers prices of farm
products were up by 1.2 percent. The sales prices for housing in 70 large and medium
cities were up by 5.5 percent.

The
completed investment in fixed assets of the country in 2006 was 10,987 billion
Yuan(1,408.59 billion US dollars), up by 24 percent over the previous year. Of the total
investment, that in urban areas was 9,347.2 billon Yuan(1,198.36 billion US dollars), up
by 24.5 percent; and that in rural areas reached 1,639.7 billion Yuan (210.22 billion US
dollars), up by 21.3 percent.

The
electricity consumption in China still maintained a fast growth rate in 2006. In 2006,
China produced 2,834.4 billion kilowatt-hours, up 13.5 percent from a year ago and
consumed 2,824.8 billion kw-hours with a year-on-year growth of 14 percent. The
manufacturing sector remains the top power consumer of the country, with its total power
consumption rising 14.3 percent to 2135.4 billion kw-hours in 2006. The heavy industry
consumed 1702.1 billion kw-hour with an annual growth in 2006 of 15.4 percent. Power
consumption of the light industry rose by 11.9 percent to 413.3 billion kw-hours. The
growth is 1.87 percent higher than in 2005. The service sector consumed 282.2 billion
kw-hours, up 11.8 percent from 2005, while power consumption by households rose by 14.7
percent to 324 billion kw-hours.

China
generated 447.97 billion kilowatt-hours of electricity from January to February 2007, an
increase of 16.6 percent year on year, according to China Electricity Council (CEC).
Chinas power consumption would grow by 12.5 percent in 2007, the CEC predicted.

According
to the State Electricity Regulatory Commission (SERC), there will not be any large-scale
power shortages in 2007. With a number of power stations coming on line, there will be a
balance between supply and demand. This year, the generation capacity is expected to reach
700 gigawatts, adding that installed capacity would increase by 90-95 gigawatts.

Under
the governments development plan, by 2010, the overall generating capacity will
reach 800 million kw, of which 35 percent would be clean power generated from
hydropower, nuclear energy and other forms of new energy.

According
to the 11th five-year plan (from 2006 to 2010), China will invest a total amount of 1,200
billion Yuan in the construction of power grid during the period of 2006  2010,
which represents an annual investment of 250 billion Yuan.

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China
will build new 60,000 kilometers of the above 330 KV power transmission lines, 300 million
KVA of the above 330 KV transformation capacity, 100,259 kilometers of the above 500 KV
alternating current lines, 39.25 million KVA of the above 500 KV transformation capacity
and 2,480 kilometers of the above 500 KV direct current lines during the period of 11th
five-year plan.

From
2006 to 2010, China will invest annually 340 billion Yuan in the construction of power
grid and power sources, and 17 billion Yuan in the transmission and distribution
equipment.

Chinas Corporate
Income Tax

Currently,
the income tax rate for domestic companies in China is 33% while it is 15% for foreign
funded companies. China offers preferential tax treatment to foreign funded companies as a
means to attract foreign direct investment. There has been a nationwide debate on whether,
given its current state of development, China should continue to offer preferential tax
treatment to foreign funded companies. Experts and domestic companies complained that the
preferential tax treatment does not accord to WTOs principles, unfairly
discriminates against local firms that compete with foreign funded companies, and results
in a reduction of Chinas tax revenues. After much debate, the National Peoples
Congress, Chinas parliament, promulgated on March 16, 2007 a new Corporate Income
Tax Law that sets a unified corporate income tax rate of 25% applicable to both domestic
and foreign funded Companies. The new tax law is scheduled to take effect on January 1,
2008. The National Peoples Congress has delegated rulemaking authority to the State
Council and the State Administration of Taxation.

Our
headquarters and primary manufacturing facility are located in Hainan province, which has
been designated a SEZ by the Chinese government. Our second manufacturing facility is
being built in an EDZ in Wuhan, China. We enjoy preferential tax treatment in both Hainan
and Wuhan. Since neither the State Council nor the State Administration of Taxation has
published regulations implementing the new tax law at this time, it is not clear whether
and how the new tax law would apply to foreign funded companies operating out of SEZs or
EDZs. Although we expect the Chinese government to continue to offer preferential tax
treatment to foreign funded companies operating out of SEZs and EDZs, we cannot assure
that such policies would continue. As a result of the new tax law, we may be subject to
increased taxation which could adversely affect our profitability.

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# Organizational
Structure

We
primarily conduct our business through our subsidiary, Hainan Jinpan, a corporation that
is located in China. We currently own 100% of the common stock of Hainan Jinpan. At
December 31, 2006, we owned 85% of Hainan Jinpan. We also own 100% of the common stock of
Jinpan International (U.S.A.) Ltd., a New York corporation that conducts our North
American operations.

# Property, Plants and
Equipment

Our
production facilities are located in Haikou City, Hainan Province in southern China. We
operate six Chinese-made copper coil winding machines, one German-made low voltage copper
foil winding machine, two German-made high voltage winding machines, one German-made steel
cutting machine, which was recently acquired to upgrade our older steel cutting machine,
German-made assembly table machines and one German-made vacuum casting machine. The vacuum
casting machine is being used for the production of new products such as the filled resin
cast coil transformers. We believe that the vacuum casting machine represents one of the
most technologically advanced machines of its kind currently in operation in China. Our
belief is based on a comparison of the attributes of its casting system manufactured by
Hubers against those of another vacuum casting machine manufactured by Hedrich Vacuum
Systems Gmbh, which we believe to be widely used in China. Using the equipment we
currently use and maintain our annual production capacity is approximately 4.6 million KVA
per year. Increasing our plant utilization rate does not differ with respect to the
different areas of our manufacturing process. The coil winding machines, copper foil
winding machine, steel cutting machine and vacuum casting machine are all fully utilized.

We
believe that our facilities, including our machinery and equipment, currently are, and in
the foreseeable future will be, generally in good condition, well-maintained and suitable
for their intended uses. We also believe that our product assembly and sales and service
facilities have adequate capacity to accommodate our present needs and foreseeable
business growth.

Our
headquarters, administrative, and manufacturing facilities are located at 100 Nanhai Ave.,
Haikou, Hainan Province, China, which encompass approximately 40,000 square meters of
building space. Part of the property was previously purchased by Haikou Jinpan and was
contributed to Hainan Jinpan. The total rent for the leased portion of the property is
approximately RMB 102,000 (including maintenance fees), payable monthly. Our subsidiary,
Jinpan International (U.S.A.) Ltd., has administrative offices in Englewood Cliffs, New
Jersey, which encompasses approximately 130 square meters and is subject to a lease
expiring in March 2009. This lease provides for rent of approximately US$2,940 per month.

In
February 2007, we purchased approximately 400,000 square feet of land in Wuhan, which is
located in the center of China, closer to our material suppliers and provides easy access
to the highway and railroad. The land will be used for the expansion of our production
facility. The land and construction will cost approximately US$6 million. We expect to
complete the construction by the end of 2007 and begin production in early 2008. It is
expected that the Wuhan facility will increase our annual production capacity by 50%. The
Wuhan expansion was financed from the net proceeds we received from our stock sale in
December 2006 as described in Item 10.

We
lease 31 and own 4 sales offices in China, located in Beijing, Shanghai, Hefei, Nanning,
Anshan, Changsha, Hangzhou, Kunming, Tianjin, Wuhan, Chongqing, Chengdu, Suzhou, Taiyuan,

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Shenyang, Xian, Guangzhou,
Lanzhou, Shenzhen and Dalian, which
are subject to leases that provide for monthly rents ranging from RMB500 to RMB7,500 per
month. These sales offices range in size from 50 square meters to approximately 165 square
meters. We also use office space in the sales offices of three of our independent sales
agents, where instead of paying rent for the use of the office space, we pay additional
commissions to our independent sales agents who work from these offices.

During
year 2006, we manufactured 3,429 units of transformers which equates to approximately
3,750,000 KVA. We used approximately 90% of our full manufacturing capacity, 4,200,000
KVA, in 2006.

# Item 4A. Unresolved
Staff Comments

None.

# Item 5. Operating
Financial Review and Prospects

The
following discussion and analysis should be read together with our audited consolidated
financial statements and notes appearing in Item 18 below.

# Critical Accounting
Policies

Our
discussion and analysis of financial conditions and results of operations is based on our
consolidated financial statements, which have been prepared in accordance with generally
accepted accounting principles of the United States (U.S. GAAP). The preparation of these
financial statements requires us to make estimates and judgments that affect the amounts
reported in the consolidated financial statements and accompanying notes. These estimates
form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. We base our estimates and judgments on
historical experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies reflect
the more significant estimates and judgments used in the preparation of our consolidated
financial statements.

Provision for Doubtful
Accounts

We
reserve for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional
allowances may be required. We estimate the provision for doubtful accounts related to
trade receivable based on two methods. The amounts calculated using each of these methods
are combined to determine the total amount we reserve. First, we evaluate specific
accounts where we have information that certain customers are unable to meet their
financial obligations. In these cases, we make judgments, based on the best available
facts and circumstances, including but not limited to, the length of our relationship with
the customer and customers current credit status based on third party credit reports
and known market factors, to record specific reserve for customers against amounts due to
reduce our receivables to amounts that we expect to collect. These specific reserves are
re-evaluated and adjusted as additional information received affects the amounts
estimated. Second, a general provision is established as a certain percentage based on the
age status of receivables. This percentage is based on a collective assessment of
historical collection, write-off experience, current economic trends, and changes in our
customer payment terms and other factors that may affect our ability to collect. While bad
debts have historically been within the provision established, we cannot guarantee that we
will continue to experience the same bad debt rate that we have in the past.

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As
of December 31, 2005 and 2006, the Provision for Doubtful Accounts was RMB 10.6 million
and RMB 9.9 million respectively. For the year ended December 31, 2006, we recorded an
additional provision of RMB 0.8 million for the year ended December 31, 2006 based on our
estimates.

Inventories
Obsolescence

Inventories
are stated at the lower of cost or market value. Market value represents the net
realizable value for inventories. We periodically review our inventory for excess
inventory, obsolescence and declines in market value below cost and record an allowance
against the inventory balance for any such declines. We write down the value of ending
inventory for obsolete and unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value. These reviews require management to estimate
future demand for our products and the market conditions. Possible changes in these
estimates could result in revisions to the valuation of inventory. If actual market
conditions are less favorable than those projected, additional inventory write-downs may
be required. If actual market conditions are more favorable then projected, inventory
previously written down may be sold, resulting in lower cost of sales and higher income
from operations than expected in that period.

As
of December 31, 2005 and 2006, we recorded inventory obsolescence allowance in the amount
of RMB 1.2 million and RMB 1.2 million. For the year ended December 31, 2005, we did not
have to record any additional allowance subsequent to the year-end because actual
write-offs were lower than the estimated amounts.

Deferred Tax Valuation
Allowance

Estimates
and judgments are required in the calculation of certain tax liabilities and in
determining the recoverability of certain of the deferred tax assets, which arise from net
operating losses, tax carryforwards and temporary differences between the timing of the
recognition of revenues and expenses for tax and financial statement purposes. We record a
valuation allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized. While we have considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for the valuation
allowance, in the event we were to determine that we would not be able to realize all or
part of our 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. Likewise, should we
determine that we would be able to realize our deferred tax assets in the future in excess
of its net recorded amount, an adjustment to the deferred tax asset would increase income
in the period such determination was made.

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# Operating Results

# Summary of Financial
Results

The
following table presents selected statement of operations data expressed as a percentage
of net sales for the years ended December 31, 2004, 2005 and 2006.

|                                             | Year ended December 31
|-------------------------------------------- | ----------------------
|
|Net sales                                    | 100%                  
|Cost of goods sold                           | (65.40)%              
|Gross profit                                 | 34.60%                
|Selling, general and administrative expenses | (24.30)%              
|Other income                                 | 0.9%                  
|Income tax provision                         | (1.2)%                
|Income before minority interest              | 10%                   
|Minority interest                            | (1.7)%                
|Net income                                   | 8.3%                  

# Year ended December
31, 2006 compared with the year ended December 31, 2005

Sales.Net sales increased RMB 215 million (US$28.7 Million) or approximately 49%
          from RMB 438 million (US$53.6 Million) in the year ended December 31, 2005 to
          RMB 653 million (US$82.3 Million) in the year ended December 31, 2006. The
          increase in sales is mainly attributable to the development of certain reactors,
          which we began to sell in 2006. This contributed RMB 26.5 million to the sales
          increase. The increase is also due to an increase in the sale of switchgear and
          substations, the sales of which increased by 87% as compared with 2005, and
          contributed RMB 30.7 million to the sales increase. We also raised the standard
          selling price of transformers during 2006 due to higher cost of materials, which
          accounted for approximately RMB 27.6 million of our sales growth. The increase
          in the sales of transformers (quantity) contributed approximately RMB 130.4
          million to the sales increase.

Cost
of goods sold. Cost of goods sold increased RMB 173.6 million (US$22.9 Million) or
approximately 58% from RMB 297.8 million in the year ended December 31, 2005, to RMB 471.4
million in the year ended December 31, 2006. Cost of goods sold as a percentage of sales
increased by 4.2% in the year ended December 31, 2006, from 67.96% in the year ended
December 31, 2005, to 72.17% in the year ended December 31, 2006. The increase was a
result of worldwide price increases of raw materials associated with steel and copper
during the year 2006. The average steel price was RMB 36,000 per ton in 2006, which was
about the same as 2005, and the average copper wire price was RMB 68,500 per ton, which
was an increase of approximately 49% as compared with 2005. The cost of goods sold as
percentage of sales would have increased 24.4% if we did not take the measures mentioned
below. We improved the production design and efficiency which cut costs by approximately
2.2%. We increased our selling price, as mentioned above, which reduced the ratio of costs
of goods sold to sales by approximately 18%. Overall, the cost of goods sold as a
percentage of sales increased by 4.2%.

Gross
Profit. Gross profit increased RMB 41.4 million (US$5.7million) or approximately 29.5%
to RMB 181.8 million in the year ended December 31, 2006 from RMB 140.4 million in the
year ended December 31, 2005. As a percentage of sales, gross profit decreased from 32.04%
in the year ended December 31, 2005, to 27.83% in the year ended December 31, 2006. This
decrease also resulted from the aforementioned raw material price increase.

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Selling
and Administrative. Selling and administrative expenses, including the provision for
doubtful debt, increased by RMB 15.8 million (US$2.0 million) or approximately 17.9% from
RMB 88.4 million in the year ended December 31, 2005, to RMB 104.2 million in the year ended
December 31, 2006. As a percentage of sales, selling and administrative expenses decreased
4.1%, from 20.2% in the year 2005 to 16.1% in the year ended December 31, 2006. The
decrease of 4.1 % was primary the result of reduction in the areas of sales agents
fee, and traveling and meal entertainment expenses. We continue to focus on achieving
operating efficiencies by reviewing and enhancing our business processes and cost
structures.

Net
Income. Net income increased RMB22.6 million (US$2.9 Million) or approximately 60.9%
from RMB37.1 million (US$4.5 million) in the year ended December 31, 2005 to RMB59.7
million (US$7.5 million) in the year ended December 31, 2006. As a percentage of sales,
net income increased from 8.46 % in the year ended December 31, 2005, to 9.13% in the year
ended December 31, 2006.

Basic
Earnings Per Share. Earnings per share increased RMB3.30 (US$0.43) or approximately
58% from RMB5.7(US$0.70) in the year ended December 31, 2005 to RMB9.00 (US$1.13) in the
year ended December 31, 2006.

# Year ended December
31, 2005 compared with the year ended December 31, 2004

Sales. Net
sales increased RMB 88.6 million (US$10.8 Million) or approximately           25.35% from
RMB 349.6 million (US$42.2 Million) in the year ended December 31,           2004 to RMB
438.2 million (US$53.6 Million) in the year ended December 31, 2005.           During
2005, the number of units sold increased by 3% to 3,273 units as compared           with
3,167 units in the year 2005, however, our sales revenues increased by           25.35%,
primarily the result of selling more high priced units, those with high           KVA
capacity as compared with 2004. During 2005, we successfully increased sales           of
our higher priced units which accounted for approximately 10% of our sales
          growth. We also raised the standard selling price during 2005, which accounted
          for approximately 10% of our sales growth.

Cost
of goods sold. Cost of goods sold increased RMB 69.3million (US$8.5 Million) or
approximately 30% from RMB 228.5 million in the year ended December 31, 2004, to RMB 297.8
million in the year ended December 31, 2005. Cost of goods sold as a percentage of sales
increased by 2.6% in the year ended December 31, 2005, from 65.4% in the year ended
December 31, 2004, to 67.96% in the year ended December 31, 2005. The increase was a
result of worldwide price increases of raw materials associated with steel and copper
during the year 2005. The average steel price was RMB 36,700 per ton in 2005, which was an
increase of approximately 84% as compared with 2004, and the average copper wire price was
RMB 46,000 per ton, which was an increase of approximately 28% as compared with 2004. The
cost of goods sold as percentage of sales would have increased 36% if we did not take the
measures mentioned below. We fully utilized our financial strength to purchase a large
volume of materials which cut costs by approximately 13.4%. We increased our selling
price, as mentioned above, which reduced the ratio of cost of goods sold to sales by
approximately 20%. Overall, the cost of goods sold as a percentage of sales increase by
2.6%.

Gross
Profit. Gross profit increased RMB 19.3 million (US$2.36 Million) or approximately
15.95% to RMB 140.4 million in the year ended December 31, 2005 from RMB 121.1 million in
the year ended December 31, 2004. As a percentage of sales, gross profit decreased from
34.64% in the year ended December 31, 2004, to 32.04% in the year ended December 31, 2005.
This decrease also resulted from the aforementioned raw material price increase.

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Selling
and Administrative. Selling and Administrative expenses, including provision for
doubtful debt, increased by RMB 4.0 million (US$493,000) or approximately 4.7% from RMB
84.4 million in the year ended December 31, 2004, to RMB 88.4 million in the year ended
December 31, 2005. As a percentage of sales, selling and administrative expenses decreased
3.9%, from 24.1% in the year 2004 to 20.2% in the year ended December 31, 2005. The
decrease of 3.9 % was primary the result of reduction in the areas of sales agents
fee, traveling and meal entertainment expenses. We are continuing to focus on achieving
operating efficiencies by reviewing and enhancing business process and cost structure.

Net
Income. Net income increased RMB8.21 million (US$1 Million) or approximately 28.45%
from RMB28.9 million (US$3.49 Million) in the year ended December 31, 2004 to RMB37.1
million (US$4.5 Million) in the year ended December 31, 2005. As a percentage of sales,
net income increased from 8.26 % in the year ended December 31, 2004, to 8.46% in the year
ended December 31, 2005.

Basic
Earnings Per Share. Earnings per share increased RMB1.26 (US$0.16) or approximately
28.38% from RMB4.44(US$0.54) in the year ended December 31, 2004 to RMB5.70 (US$0.70) in
the year ended December 31, 2005.

# Impact of Inflation

We
do not believe that inflation over the past three years have had a material impact on our
revenues or operating results.

# Foreign Currency
Fluctuations

We
receive almost all of our revenues in Renminbi which is not freely convertible into
foreign currency. However, we are required to meet certain foreign currency obligations,
for things such as future purchases of certain equipment and raw materials.
The Chinese government controls our foreign currency reserves in part through direct
regulation of the conversion of Renminbi into foreign currency and through restrictions on
foreign imports. Effective January 1, 1994, pursuant to the PBOC Notice, the conversion of
Renminbi into Hong Kong and United States dollars must be based on the PBOC Rate.
Effective as of December 1, 1996, Renminbi has become fully convertible for all current
account transactions. Foreign currency which is required for current account transactions
can be bought freely at authorized Chinese banks, so long as the procedural requirements
prescribed by law are met. Payment of dividends to foreign investors holding equity
interests in Chinese companies, including Foreign Investment Enterprises, is considered a
current account transaction. At the same time, Chinese companies are also required to sell
their foreign exchange earnings to authorized Chinese banks. Purchase of foreign currency
for capital account transactions still requires prior approval of the State Administration
for Foreign Exchange. On July 21, 2005, the Chinese government revalued the Renminbi
against the U.S. dollar and introduced a basket of currencies system to determine the
exchange rate, which is based on the interbank foreign exchange market rates and current
exchange rates of a basket of currencies in the world financial markets. As a result of
adopting a flexible exchange rate, Chinas financial sector is now more responsive to
fluctuations in the international currency market. The Renminbi/US Dollar exchange rate
has climbed steadily since.

During
2006, the fluctuations in the Renminbi has not materially impacted our business. We
currently do not engage in any hedging activities that could minimize the effect of
exchange rate risks.

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# Political and
Economic Risks

Our
operations in China are subject to several  potential  political and economic  risks.
 See Item 3. Key Information - Risk Factors - Risks Related to our Chinese Operations.

# Trade Agreements

Chinas
entrance into the WTO on December 11, 2001 will result in development opportunities for
its economic construction as well as many challenges. The Most Favored Nation
status and the national treatment that China will gain from other WTO members will be
helpful in increasing the countrys export volume. Chinas State Council
announced that beginning January 1, 2002, tariffs will be reduced to 12% from 15.3%, and
tariffs were reduced further to 10% in 2005. This reduction in tariffs will allow more
foreign goods to enter into Chinas domestic market at lower prices which will pose
competitive pressure on Chinese enterprises. Chinas machinery industry is expected
to be affected by Chinas entrance into the WTO.

As
a result of its entrance into the WTO, China will become more involved in international
economic cooperation and competition. The transitional period for China after it enters
the WTO is expected to last three to five years. China will gradually open up a wide range
of sectors such as financial services, insurance, telecommunications, trade, commerce,
transportation, construction, tourism, and intermediary services to foreign investment. In
accordance with the WTO agreement, China will work to adopt transparent and equitable
trade and investment policies, continue to improve the investment and business conditions,
encourage fair competition, accord national treatment where needed and further strengthen
the protection of intellectual property rights and all the legitimate rights and interests
of foreign investors. The central government is speeding up the drafting of amendments and
the abolishment of obsolete laws, rules, and regulations in accordance with Chinas
WTO commitments.

# Taxation

Hainan
Jinpan is subject to PRC income tax at the applicable tax rate of 15%. However, Hainan
Jinpan has enjoyed a 50% tax exemption approved by Chinas government since 1997. The
50% tax exemption ended on January 1, 2005.

# Liquidity and Capital
Resources

Historically,
we financed our operations principally through cash generated from our operations, bank
borrowings and securities offerings.

We
have a credit facility of RMB48.4 million with the Nan Yan Commercial Bank. The letter of
credit under this credit facility is guaranteed by Jinpan International Ltd. and accrued
interest at a weighted average rate of 5.92% per annum for the year ended December 31,
2006. We also have an unsecured letter of credit facility from the Bank of China for RMB
35 million, accruing an average interest rate of 6.5% per annum. The Nan Yan Commercial
bank credit facility will expire in August 2007 and the Bank of China credit facility was
extended in May 2006 for one more year. We also received from the Bank of China, a working
capital credit facility of RMB 30,000,000. The entire RMB 30,000,000 credit line was used
as of December 31, 2006. As of December 31, 2006, the total amount borrowed under the
foregoing credit facilities was RMB 46.7 million.

On
December 19, 2006, we entered into Securities Purchase Agreements with certain
institutional and accredited investors providing for the issuance and sale of 1,350,371
shares (the Shares) of our common stock for an aggregate purchase price of
approximately US $25.7 million. The sale of the Shares closed on December 22, 2006.

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On
December 31, 2006, we had working capital of RMB456 million compared to RMB234.6 million
at December 31, 2005. This increase is due to an increase in cash from private equities
investors, accounts receivable and inventories. At December 31, 2006, we had approximately
RMB256 million (US$33 million) in cash and cash equivalents as compared to RMB 52.4
million (US$6.4 million) at December 31, 2005. The increase in cash and cash equivalent of
RMB 203.6 million was mainly due to issue new shares to private investors of RMB 185
million, cash generated from operating activities of RMB 39.2 Million, and payment of
capital expenditures of RMB 21 million.

In
our opinion, we believe that our working capital is sufficient for our present capital
requirements.

As
of December 31, 2006, we had inventories of RMB145.1 million as compared to RMB107.3
million as of December 31, 2005. The increase of RMB37.8 million is primarily as a result
of (1) RMB4.6 million decrease in raw materials; (2) RMB36.8 million increase in finished
goods; and (3) RMB5.6 million increase in work in process. The build-up in finished goods
was due to certain orders that were delivered in January 2007.

Net
cash provided from operating activities in 2006 was RMB 39.2 million which is RMB 19.7
million more than the cash flows provided by operating activities during year 2005. Cash
provided from operating activities during 2006 was primarily the result of increases in
accounts payable of RMB of 24.4 million, inventories of RMB 37.8 million, accounts
receivable of RMB 27.4 million, and net income of RMB 66.5 million after adjusting for
non-cash depreciation expense of RMB 6.8 million. Net cash used in investing activities in
2006 was RMB 21 million which was primarily the result of expanding production facilities
for RMB 10 million and purchasing equipment of RMB 11 million. We do not expect any
material changes in cash receipts from sales to our customers and payments made to our
vendors to acquire inventory.

Our
principal commitment consists of a long-term obligation outstanding under our operating
lease. We expect to increase capital expenditures of RMB 50 million in the year 2007.

We
anticipate, based on managements internal forecasts and assumptions relating to our
operations, that our existing cash and funds generated from our operations, together with
our existing financing agreements, will be sufficient to meet our working capital and
capital expenditure requirements for the next 12 months. In the event that our plans
change, our assumptions change or prove inaccurate, or other capital resources and
projected cash flow otherwise prove to be insufficient to fund our operations (due to, for
example, unanticipated expenses, technical problems or otherwise), we could be required to
seek additional financing sooner than currently anticipated. We have no current
arrangements with respect to sources of additional financing and there can be no assurance
that we would be able to obtain additional financing on terms acceptable to us, if at all.

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# Aggregate Contractual
Obligations

Apart
from the operating lease commitment disclosed in note 12 to the audited financial
statements, we have no other material contractual obligations. As of December 31, 2006,
our operating lease obligated us to the following payments:

|                            | Payments due by period (RMB in thousands)
|--------------------------- | -----------------------------------------
|                            |                                          
|
|                            |                                          
|Operating Lease Obligations | 6,782                                    
|Total                       | 6,782                                    

# Research and
Development, Patents and Licenses, etc.

Our
success is based partly on our research and development policies over the past three
years, which included focusing on developing advanced transformer technologies driven by
power distribution and generation applications. We have also focused on developing other
equipment, peripheral to transformers, in an effort to increase product offerings, and
incorporating the latest manufacturing technologies into our production processes. Such
development has focused on alternative forms of energy, including technology that
harnesses wind and solar energy. We will continue to invest in developing new technology
through research and development along these lines, which will ultimately enable us to
reach new markets and supply technologically advanced products that possess superior
quality and performance and create more value for our customers.

In
2006, we continued our customer centric approach to research and development, developing
products to meet their needs. We completed the following projects that were started in
2005.

|(1) |  | Development of ZICB9 isolation transformer for use in 800 Mega-watt power
               plants;
|--- |  | ------------------------------------------------------------------------------------------------

|(2) |  | Development of our ZQSC line of multiple coil rectifier transformers; and
|--- |  | -------------------------------------------------------------------------

|(3) |  | Development of switchgear included KYN28A-12 switchgear with a modular
               construction facilitating retrofitting and equipment upgrading, GCMS/GCL low
               voltage switchgear, and DC low voltage switchgear for uninterruptible power
               supplies (UPS). Two new substations were also developed: YBM3A & ZGS9.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
2006, our research and development efforts focused on cost reduction initiatives. We
successfully developed a transformer design that could use non-conventional materials that
could lower cost without compromising performance. In the field of alternative energy, we
continued our efforts to expand the application of cast resin transformer and reactor in
wind farms and nuclear plants.

In
2006, 2005, and 2004, we incurred RMB 5,149,000, RMB 4,459,000, and RMB1,962,000
respectively, in research and development costs.

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Keeping abreast of the
latest developments in the industry

Our
technical staff remains well informed with respect to advances in manufacturing equipment
raw materials and processing methods. Detailed information is gathered by attending major
industrial fairs and trade shows related to our industry. Typically, our technical staff
attends such events as the Industrial Fair in Hanover, Germany, the International
Electri-technical Exhibition in Beijing, China, and the IEEE Power Engineering
Societys (PES) Transmission and Distribution show in the U.S. Members of
our technical staff recently participated in all of these major shows and held technical
discussions with major equipment and material suppliers and manufacturers.

# Trends

Based
on our increased sales force, we foresee that sales will continue to grow during 2007.
However, the costs of our raw materials have increased as demand and prices for steel and
copper have increased and we anticipate that they will continue to increase. Strong
demands worldwide on these materials and uncertain pricing in steel and copper are likely
to impact our costs during 2007. To counteract the effects of the rising costs of raw
materials, we may increase the prices of our products during 2007, so that sales revenues
and net income continue to rise at a steady rate.

# Dividends

Any
future payment of dividends is within the discretion of our board of directors and will be
dependent upon, among other things, our earnings, capital requirements, financing
agreement covenants, our financial condition, and applicable laws. In January 2006, the
board declared a cash dividend of US$0.24 per share. We made the first distribution of
US$0.12 per share on February 28, 2006 and the second distribution of US$0.12 per share in
August of 2006. On January 15, 2007, the board of directors declared a cash dividend of
US$0.24 per share of common stock for 2007. We made the first distribution of US$0.12 per
share on February 28, 2006, to shareholders of record on February 22, 2007. The board may
or may not declare additional dividends in the foreseeable future; however, to the extent
that the board may decide to pay cash dividends in the future, these dividends will be
declared from the retained earnings, e.g., surplus, as determined by resolution of
the board. As we are a holding company, the amount of our retained earnings will be
limited by the amount of dividends which can be declared by our subsidiaries under
applicable law as discussed directly below.

Applicable
Chinese laws and regulations require that before a Sino-foreign equity joint venture
enterprise, such as Hainan Jinpan, distributes profits to its joint venture partners, in
our case Jinpan International and Hainan Jinpan, it must first do the following:

| |  |  | satisfy
all of its tax liabilities;
| | - |  | -----------------------------------

| |  |  | provide
for any losses still unpaid from previous years; and
| | - |  | ------------------------------------------------------------

| |  |  | make
allocations, in the proportions as determined by the discretion of the board, to a
capital reserve fund and a public welfare fund.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

Furthermore,
if there is to be any distribution of profits, it is required to be in the proportion of
each partys investment in the joint venture.

# Legal Proceedings

We are not party to, nor
is our property the subject, of any legal or arbitration proceeding that is material.

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# Off-Balance Sheet
Arrangements

We
do not have any off-balance sheet arrangements.

# Item 6. Directors,
Senior Management and Employees.

# Directors and Senior
Management

Our
directors and executive officers are as follows:

|Name             | Age | Position                                                                  
|---------------- | --- | --------------------------------------------------------------------------
|                 |     |                                                                           
|Li Zhiyuan       | 52  | Chairman of the Board of Directors, President, and Chief Executive Officer
|                 |     |                                                                           
|Ling Xiangsheng  | 55  | Vice Chairman of the Board of Directors and Vice President                
|                 |     |                                                                           
|Jing Yuqing      | 44  | Secretary                                                                 
|                 |     |                                                                           
|Stephan R. Clark | 53  | Director                                                                  
|                 |     |                                                                           
|Li-wen Zhang     | 52  | Director                                                                  
|                 |     |                                                                           
|Donald S. Burris | 63  | Director                                                                  
|                 |     |                                                                           
|Mark Du          | 46  | Principal Financial Officer                                               

Li
Zhiyuanhas served as our Chairman of the Board of Directors, President, and Chief
Executive Officer since April 1997, and of our predecessor, Haikou Jinpan, since August
1993, and as Chairman of the Board of Directors and Chief Executive Officer of Jinpan
Hainan since June 1997. From October 1991 to present, Mr. Li served as General Manager of
Haikou Rongda Enterprise Company and Director of Hainans KaDa Manufacturing Company,
a Sino-Japanese joint-venture. From August 1988 to October 1991, Mr. Li served as General
Manager of Hainan Jindao Yacht Company. From August 1982 to October 1988, Mr. Li was
employed as an engineer at Guangxi Electric Power Institute. Mr. Li is responsible for the
overall management of our operations. He is married to Jing Yuqing.

Ling
Xiangshenghas served as our Vice Chairman of the Board of Directors and Vice
President since May 1997, and of our predecessor, Haikou Jinpan, since August 1993 and is
responsible for the design, manufacture and development of our cast resin transformers. He
has also served as the Vice President of Jinpan Hainan since June 1997. From June 1990 to
December 1992, Mr. Ling was the chief consultant for the Danycast Company in Thailand
where he was responsible for the entire production process of its cast resin transformer
line. From January 1980 to June 1990, Mr. Ling was employed by the Beijing Transformer
Company ultimately serving as Chief Engineer and General Manager for its cast resin
transformer plant. Between October 1985 and February 1986, Mr. Ling attended Fuji Electric
Company in Japan to study vacuum cast resin insulated transformer manufacturing
technology. Mr. Ling was responsible for designing Chinas first cast resin
transformer.

Jing
Yuqinghas served as one of our directors and a director of our predecessor, Haikou
Jinpan, since August 1993. She also has served as a director of Jinpan Hainan since June
1997. From October 1988 to December 1992, Ms. Jing was employed by the Hainan Electric
Bureau Electric Planning Department as manager of the electrical engineering department.
From September 1984 to October 1988, Ms. Jing performed designing services for the
Liaoning Electric Designing Institute. Ms. Jing is the wife of Li Zhiyuan.

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Stephan
R. Clark was elected director in 2006 to replace Mr. William D. Nagel who retired from
the Board of Directors. Mr. Clark served as Group Vice President of Connectivity Solutions
and Chief Operating Officer at Avaya Communications from January 2000 to January 2004.
From October 1997 to January 2000, Mr. Clark served as the Marketing and Sales Vice
President of Lucent Power Systems. From January 1982 to October 1997, Mr. Clark worked at
AT&T where he acted as the managing director and chief representative in China and the
regional managing director for the Asia/Pacific, as well as holding various sales and
marketing positions. While at AT&T, Mr. Clark also served as program director for the
AT&T Executive Education Program at the Wharton School at the University of
Pennsylvania and the chairman for the Public Affairs Committee of American Chamber of
Commerce in the Peoples Republic of China. Mr. Clark holds a B.F.A. degree in
political communication from Southern Methodist University and an M.A. in Management from
the University of Texas at San Antonio.

Dr. Li-Wen Zhang
          was elected to our Board of Directors in June 2003. Dr. Zhang
          is a permanent staff member of the United Nations Department of General Assembly
          Management Affairs currently in Economic and Social Council Servicing Branch. As
          part of the managing staff, Dr. Zhang provided consulting services to the
          Delegation of Beijing Fiscal Bureau on socioeconomic issues in November of 2000.
          In 1996, Dr Zhang helped organize a conference in Shanghai with Chinese
          authorities regarding the Development and Management of Special Economic Zones
          in a Transitional Economy. Dr. Zhang received a Ph.D. in International
          Comparative Education from Columbia University in 2001 and holds a Masters
          degree in Economic Policy Management from Columbia University Graduate School of
          Business and International Affairs.

Donald
S. Burris was elected to our Board of Directors in June 2001. Mr. Burris is the senior
principal in the firm of Burris & Schoenberg, LLP, an AV-rated West Coast based law
firm with a national and international practice. Mr. Burris served as editor-in-chief of
the Georgetown Law Journal and as a law clerk to the Honorable James R. Browning of the
United States Court of Appeals for the Ninth Circuit and has taught at the Georgetown Law
Center, Loyola University School of Law, and the International Law Institute in
Washington, D.C. Mr. Burris also served with distinction as a Special Counsel for the
United States Senate Watergate Committee. Mr. Burris brings to the Company thirty-one
years of experience as a successful businessman and business litigation attorney who has
counseled clients from both a business and legal perspective.

Mark
Du has served as our financial controller since September 2002. Since January 1993,
Mr. Du has been Controller of PC Warehouse, Inc., a worldwide company headquartered in New
Jersey, with 24 subsidiaries companies located throughout the United States. From
September 1987 to December 1992, Mr. Du served in different accounting positions in
various accounting firms and companies. Mr. Du received his Masters in Business
Administration in Accounting from Pace University in 1987 and is a CPA.

# Compensation of
Directors and Officers

The
total compensation paid to our directors and officers during the last fiscal year was
RMB5,807,495 comprised of salaries in the amount of RMB3,944,175 and bonuses in the amount
of RMB1,863,320. During 2006, Hainan Jinpan did not reserve for any pension, retirement or
similar benefits for directors and officers.

In
February 2001, we granted stock options to five of our directors and our Chief Financial
Officer, to purchase an aggregate of 120,000 shares of our common stock. Such options are
exercisable at US$1.35 per share and, subject to termination of employment, expire 8 years
from the date of grant. The options are not transferable other than on death.

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In
September 2003, we granted stock options to seven of our employees to purchase an
aggregate of 140,000 shares of common stock. Such options are exercisable at the price of
US$3.55 per share and are subject to termination of employment, furthermore, the options
expire 10 years from the date granted, are not transferable other than on death and are
exercisable from the date of grant.

In
January 2004, we entered into stock option agreement with three of its independent
directors, to purchase 30,000 shares of our common stock. Options granted are exercisable
at the price of US$7.34 per share. The term of the options is 10 years from the date
granted. The options are not transferable other then death, and are exercisable from the
date granted.

Prior
to 2006, we adopted the disclosure-only provision of SFAS Statement No. 123, Accounting
for Stock Based Compensation (SFAS123) and applied Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for our employee stock-based compensation plans.
Compensation expense, both recorded and pro forma, is recognized over the options
vesting period. Effective January 1, 2006, we adopted the modified prospective transition
method provided by SFAS 123(R). As of December 31, 2006, all compensation cost related to
non-vested share-based compensation arrangements granted under the employee stock option
plan has been recognized.

# Board Practices

All
of our directors hold office until the next annual meeting of shareholders and until their
successors have been elected and qualified. Our officers are elected by the Board of
Directors at the first Board of Directors meeting after each annual meeting of
shareholders and hold office until death, resignation, or upon removal from office.

None
of our directors have service contracts with us providing for benefits upon termination of
their employment.

Our
audit committee consists of Stephan R. Clark ,Donald S. Burris, and Dr. Li-Wen Zhang, all
of whom are independent directors. Mr. Stephan R. Clark is the chair of audit committee.
The Audit Committee oversees our auditing procedures, receives and accepts the reports of
our independent certified public accountants, oversees our internal systems of accounting
and management controls, and makes recommendations to the Board of Directors as to the
selection and appointment of our auditors. The audit committee is governed by the terms of
the Charter of the Audit Committee of the Board of Directors.

Our
compensation committee consists of Donald S. Burris, Stephan R. Clark and Li-Wen Zhang.
Mr. Donald S. Burris is the chair of the compensation committee. The function of the
Compensation Committee is to administer the 2006 Stock Incentive Plan and to have
authority over the salaries, bonuses, and other compensation arrangements of our executive
officers.

Our
Nominating and Corporate Governance Committee consists of Li-Wen Zhang, Donald S. Burris,
and Stephan R. Clark. Dr. Li-Wen Zhang is the chair of the Nominating and Corporate
Governance Committee. This committee (1) identifies individuals qualified to become
members of the Board, (2) selects, or recommends to the Board, the director nominees for
the next annual stockholders meeting, (3) selects candidates to fill any vacancies on the
Board; and (4) develops and recommends to the Board a set of corporate governance
principles applicable to the corporation.

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# Employees

As
of December 31, 2006, we had approximately 502 employees in China, including 83 engineers
or technicians, 47 management and administrative personnel, 73 marketing and sales
personnel, 288 factory personnel and 5 employees in the United States, including 2
management and administrative personnel, 1 marketing and sales personnel, 1 accounting
personnel, and 1 legal personnel. All of our employees are contract employees, except our
U.S. employees, and have entered into renewable employment contracts with us. Terms of our
employment agreements with management, engineers, sales persons, and technicians range
from two to three years and the terms of our employment agreements with support personnel
range from six months to one year.

Our
employees are not currently members of a trade union. We have not experienced any strikes
or other labor disputes that have interfered with our operations and we believe that our
relations with our employees are good.

# Share Ownership

Under
the 2006 Stock Incentive Plan, we may issue stock or options to our or our
subsidiaries officers, directors, and consultants. The committee that administers
the plan has the discretionary authority to grant stock or options, subject to certain
limitations as set forth in the plan. Generally, the exercise price for the options shall
not be less than fair market value of common stock on the date of grant. However,
generally, when granted to a holder who owns more than 10% of the total combined voting
power of all classes of stock of us and our affiliates, the exercise price cannot be less
than 110% of the fair market value of the common stock on the date of grant. The term of
the option may not exceed 10 years from the date of grant, or five years for persons who
own more than 10% of the total combined voting power of all classes of our stock, of any
of our subsidiaries or a parent.

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# Item 7. Major
Shareholders and Related Party Transactions.

# Major Shareholders

The
following table sets forth specific information as of June 7, 2007, to the best of our
knowledge, concerning the beneficial ownership of (i) persons or entities who, to our
knowledge, beneficially own more than 5% of our outstanding ordinary shares, (ii) each of
our directors, and (iii) the number of our ordinary shares beneficially owned by all
officers and directors as a group.

|Title of Class | Name of Beneficial Owner                             | Amount Owned(1) | Percent of Class
|-------------- | ---------------------------------------------------- | --------------- | ----------------
|Common Stock   | Li Zhiyuan (2)                                       | 1,852,829       | 22.67%          
|Common Stock   | Jing Yuqing (3)                                      | 1,852,829       | 22.67%          
|Common Stock   | Ling Xiangsheng (4)                                  | 953,314         | 11.67%          
|Common Stock   | Stephan R. Clark (5)                                 | 2,333           | *               
|Common Stock   | Li-wen Zhang (6)                                     | 10,000          | *               
|Common Stock   | Donald S. Burris                                     | 4,000           | *               
|Common Stock   | All officers and directors as a group (6 persons)(7) | 2,822,476       | 34.54%          

_________________

|* |  | Represents
share ownership of less than one percent (1%).
|- |  | ---------------------------------------------------------

|(1) |  | We
believe that all persons named in the table have sole investment power with
               respect to all shares of common stock beneficially owned by them, unless
               otherwise noted in these footnotes.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes:
(i) 1,249,363 shares of common stock, (ii) 603,466 shares of common                stock
beneficially owned by Jinq Yuqing, the wife of Mr. Li , as to which Mr. Li
               disclaims beneficial ownership.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes:
(i) 603,466 shares of common stock (ii) 1,249,363 shares of common                stock
beneficially owned by Li Zhiyuan, the husband of Ms. Jing and our Chairman
               of the Board, Chief Executive Officer, and President, as to which Ms. Jing
               disclaims beneficial ownership. .
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes:
(i) 953,314 shares of common stock.
|--- |  | ---------------------------------------------

|(5) |  | Represents
2,333 shares of common stock issuable upon exercise of currently
               exercisable stock options.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

|(6) |  | Represents
10,000 shares of common stock issuable upon exercise of currently
               exercisable stock options.
|--- |  | ----------------------------------------------------------------------------------------------------------------------

|(7) |  | Includes
56,083 shares of common stock issuable upon exercise of currently
               exercisable stock options issued to all directors and executive officers.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

To
the best of our knowledge, as of June 7, 2007, 5,910,058 shares of common stock or 72.26%
of all shares of common stock outstanding were held by 14 record holders in the United
States.

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Our
shareholders who beneficially own 5% or more of the common stock outstanding do not have
different voting rights from other shareholders of common stock.

Since
February 9, 2004, beneficial ownership percentages for Mr. Li, Ms. Jing, and Mr. Ling have
decreased by 6.48%, 6.48%, and 5.91%, respectively, to the percentages as indicated in the
chart above.

# Related Party
Transactions

During
the year ended December 31, 2003, the minority shareholder in the joint venture, borrowed
RMB11,277,000 from Jinpan JV which carries an annual interest rate of 5.31%. RMB8,947,000
was repaid in November 2003 and the remainder was repaid in December 2003. Interest income
of RMB475,000 was received from the minority shareholder in June 2004.

On
February 14, 2006, we completed the acquisition of the 15% minority interest in Hainan
Jinpan for a purchase price of US$11 million. Upon completion of the acquisition, Hainan
Jinpan became our wholly owned subsidiary.

# Item 8. Financial
Information.

# Consolidated
Statements and Other Financial Information

See
Consolidated Financial Statements attached to this Form 20-F.

Dividend Policy

Any future
payment of dividends is within the discretion of our board of directors and will be
dependent upon, among other things, our earnings, capital requirements, financing
agreement covenants, our financial condition and applicable laws. In April 2003, our board
of directors declared a cash dividend of US$0.05 per share, payable in August 2003. In
October 2003, the board declared a cash dividend of US$0.40 per share (US$0.20 per share
adjusted for 2-for-1 stock split) of common stock for the year 2004. We made two
distributions to realize overall distribution of US$0.40 per shares during the year 2004.
In February 2005, our board of directors declared a cash dividend of US$0.20 per share. We
made the first distribution of US$0.10 per share on March 10, 2005 and made the second
distribution of US$0.10 per share on August 26, 2005, to the shareholders of record on
August 12, 2005. In January 2006, our board of directors declared a cash dividend of
US$0.24 per share. We made the first distribution of US$0.12 per share on February 28,
2006, to shareholders of record on February 10, 2006, and we made the second distribution
of US$0.12 per share on August 24, 2006, to the shareholders of record on August 10, 2006.
In January 2007, our board of directors declared a cash dividend of US$0.24 per share. We
will make the first distribution of US$0.12 per share on February 22, 2007, to the
shareholders of record on February 8, 2007, and we will make the second distribution
during the second half of 2007.

Our
board of directors may or may not declare additional dividends in the foreseeable future,
however, to the extent that our board of directors may decide to pay cash dividends in the
future, these dividends will be declared from the retained earnings, e.g., surplus, as
determined by resolution of our board. As we are a holding company, the amount of our
retained earnings will be limited by the amount of dividends which can be declared by our
subsidiaries under applicable law as discussed directly below.

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Applicable
Chinese laws and regulations require that before a Sino-foreign equity joint venture
enterprise, such as Hainan Jinpan, distributes profits to its joint venture partners, in
our case Jinpan International and Haikou Jinpan, it must first do the following:

| |  |  | satisfy
all of its tax liabilities;
| | - |  | -----------------------------------

| |  |  | provide
for any losses still unpaid from previous years; and
| | - |  | ------------------------------------------------------------

| |  |  | make
allocations, in the proportions as determined by the discretion of the board, to a
capital reserve fund and a public welfare fund.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

Furthermore,
if there is to be any distribution of profits, it is required to be in the proportion of
each partys investment in the joint venture.

# Significant Changes

On
February 14, 2006, we completed the acquisition of the 15% minority interest in Hainan
Jinpan for a purchase price of US$11 million. Upon completion of the acquisition, Hainan
Jinpan became our wholly owned subsidiary.

On
December 30, 2006, Wuhan Jinpan Electric Company Ltd. (Wuhan Jinpan), a wholly
owned subsidiary of Hainan Jinpan, entered into a Land Use Rights Transfer Agreement with
the Public Land Resource Management Bureau of the Donghu High Tech Development Area, an
administrative agency. Under this Agreement, Wuhan Jinpan purchased the rights to use a
parcel of land (28,791.61 square meters) located in Wuhan for a term of 50 years,
renewable thereafter in a term or terms to be negotiated at the time of renewal. The
transaction closed on February 5, 2007 for a purchase price of RMB 6,679,035. See Exhibit
4.7 for additional details.

On
April 13, 2007, Wuhan Jinpan also entered into a Contract of Construction with Wuhan Xinqi
Construction Group Company Ltd. to construct a manufacturing and office facility in Wuhan
for a price of RMB 20,280,000. The construction is scheduled to be completed by Oct 13,
2007. See Exhibit 4.8 for additional details.

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# Item 9. The Offer and
Listing.

# Trading Prices and
Markets

The
following table sets forth the high and low sales prices for our common stock, as publicly
traded on the American Stock Exchange (the AMEX), for: (i) the five most
recent full financial years, (ii) each full financial quarter for the two most recent full
financial years, and (iii) for each month, during the six months of December 2006 through
May 2007.

|                   | Common Stock
|------------------ | ------------
|
|2002               | 2.07        
|2003               | 8.0         
|2004               | 7.9         
|2005               | 7.20        
|2006               | 27.75       
|
|March 30, 2005     | 6.96        
|June 30, 2005      | 6.90        
|September 30, 2005 | 6.30        
|December 31, 2005  | 6.07        
|March 30, 2006     | 9.53        
|June 30, 2006      | 10.12       
|September 30, 2006 | 11.65       
|December 31, 2006  | 28.75       
|
|December, 2006     | 28.75       
|January, 2007      | 24.84       
|February, 2007     | 24.28       
|March, 2007        | 19.34       
|April, 2007        | 21.59       
|May, 2007          | 22.85       

Our common stock has
traded on the AMEX since February 8, 1998 under the symbol JST.

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# Item 10. Additional
Information.

# Memorandum and
Articles of Association

Our
registered office is located at the offices of Offshore Incorporations Limited, P.O. Box
957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. Our
purpose, as stated in Article 4 of our Memorandum of Association, is to engage in any
lawful act not prohibited under any law of the British Virgin Islands. We may not,
however: (i) engage in business with British Virgin Islands residents, (ii) own an
interest in real property situated in the British Virgin Islands, (iii) carry on banking
or trust business, unless licensed to do so under the Banks and Trust Companies Act of
1990, (iv) carry on business as an insurance or reinsurance company, insurance agent, or
insurance broker, unless licensed to do so under an enactment authorizing us to carry on
that business, (v) carry on business of company management, unless licensed under the
Company Management Act of 1990, or (vi) carry on the business of providing the registered
office or the registered agent for companies incorporated in the British Virgin Islands.

According
to our Articles of Association, our directors can vote on a proposal, arrangement or
contract in which they are materially interested and such transaction is not void or
voidable so long as such directors interest in the transaction is disclosed in good
faith or is known by the other directors. Our directors are empowered to cause us to
borrow money, to mortgage or charge our undertakings and property and to issue debentures,
debenture stock or other securities when money is borrowed. Under our Articles of
Association, a director shall not require a share qualification.Our Articles of
Association do not state whether in the absence of an independent quorum, a director has,
or does not have, the power to vote compensation to himself or another director. There is
no age limit requirement causing retirement of any director.

Holders
of our common stock are entitled to receive dividends if and when declared by our Board of
Directors out of funds legally available under British Virgin Islands law. All shares of
common stock are equal to each other with respect to liquidation and dividend rights.In the event of our liquidation, all assets available for distribution to the holders
of common stock are distributable among them according to their respective share
holdings.Holders of our common stock are entitled to one vote for each share held
of record on all matters to be voted upon by the shareholders, including the election of
directors. Holders of our common stock do not have cumulative voting rights in the
election of our directors. The Companys convertible preferred stock (the
Preferred Stock) is convertible at any time to shares of common stock and each
share of Preferred Stock entitles its holder to the same number of votes as a share of
common stock. Holders of our convertible preferred stock are entitled to receive a
preferred dividend per share (6% per annum) payable in kind, compounded quarterly. All
accrued and unpaid dividends on the convertible preferred stock are to be cancelled upon
conversion of such convertible preferred stock into common stock. In the event of our
liquidation, dissolution or winding up, the holders of our convertible preferred stock are
entitled to a preference over the holders of our common stock in the distribution of our
assets in an amount equal to the sum of: (i) US$4.375 per share, and (ii) an amount equal
to declared but unpaid dividends on each such share. After payment of the full amount of
the liquidation distributions to which the holders of our convertible preferred stock are
entitled, holders of our convertible preferred stock and holders of our common stock will
be entitled to any further distributions of our assets on a pari passu basis. Each
share of convertible preferred stock entitles its holder to the same number of votes as a
share of common stock with respect to any vote of our shareholders. Holders of our
convertible preferred stock are entitled, at any time, to convert their convertible
preferred stock into shares of common stock, subject to the anti-dilution adjustments
described below. Holders of our convertible preferred stock have certain anti-dilution
protection upon the occurrence of certain events including stock dividends, stock splits,
reclassifications, mergers and issuances of shares of our common stock.

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The
rights attached to any class or series of our stock may be varied with the written consent
of the holders of not less than three-fourths of the issued shares of that class or series
and the written consent of the holders of not less than three-fourths of the issued shares
of any other class or series which may be affected by such variation.

Our
directors may convene shareholder meetings as they deem necessary. The directors must
convene a meeting upon the written request of members holding 10% or more of our
outstanding voting shares. The directors must give at least 7 days notice of any meeting
to members whose names appear as members in our share register and are entitled to vote as
of the date such notice is given. A meeting may be called on short notice if: (i) members
holding not less than 90% of the total number of shares entitled to vote on the matters to
be considered at the meeting, or 90% of the votes of each class or series of shares where
members are entitled to vote thereon as a class or series, together with not less than a
90% majority of the remaining votes, have agreed to short notice of the meeting, or (ii)
all members holding shares entitled to vote on all or any matters to be considered at the
meeting have waived notice of the meeting, presence at such meeting being indicative of
such waiver.

Our
Memorandum of Association and Articles of Association have no limitations on the rights to
own securities.

Our
Memorandum of Association and Articles of Association do not have any provisions, which
would effectively delay, defer or prevent a change of control of our company.

Our
Memorandum of Association and Articles of Association do not have any provisions governing
the ownership threshold above which shareholder ownership must be disclosed.

# Material Contracts

On
December 19, 2006, we entered into Securities Purchase Agreements (the Purchase
Agreement), with certain institutional and accredited investors providing for the
issuance and sale of 1,350,371 shares (the Shares) of our common stock for an
aggregate purchase price of approximately US$25.7 million (the Purchase
Price). The closing of the sale of the Shares occurred on December 22, 2006 (the
Closing). We used and will use the proceeds from the sale of the Shares for
(1) capital expenditures, (2) the purchase of the minority interest in Hainan Jinpan, and
(3) general corporate purposes.

In
connection with the Purchase Agreements, each of our directors and executive officers
agreed to enter into a customary lock-up agreement, dated December 19, 2006 (the
Lock-Up Agreement), pursuant to which each of the individuals agreed, subject
to customary exceptions, not to sell or transfer any shares of our common stock held by
such individual for 30 days from the date that the SEC declared effective the registration
statement registering the resale of the Shares, pursuant to the Registration Rights
Agreements, dated December 19, 2006 (the Registration Rights Agreement),
entered in connection with the Purchase Agreements. Under the Registration Rights
Agreements we must file a registration statement on Form F-3 (the Registration
Statement) registering the resale of the Shares within 30 days after the Closing. We
filed the Registration Statement on January 19, 2007 and the SEC declared it effective on
January 30, 2007.

We
also entered into a Joint Venture Purchase Agreement, dated December 19, 2006 with Haikou
Jinpan to purchase its 15% ownership interest in Hainan Jinpan, our main operating
subsidiary, for a purchase price of US$11,000,000, financed by the proceeds from the sale
of the Shares. On February 14, 2006, we completed the acquisition. Upon competition,
Hainan Jinpan became our wholly owned subsidiary.

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On
December 30, 2006, Wuhan Jinpan Electric Company Ltd. (Wuhan Jinpan), a wholly
owned subsidiary of Hainan Jinpan, entered into a Land Use Rights Transfer Agreement with
the Public Land Resource Management Bureau of the Donghu High Tech Development Area, an
administrative agency. Under this Agreement, Wuhan Jinpan purchased the rights to use a
parcel of land (28,791.61 square meters) located in Wuhan for a term of 50 years,
renewable thereafter in a term or terms to be negotiated at the time of renewal. The
transaction closed on February 5, 2007 for a purchase price of RMB 6,679,035. See Exhibit
4.7 for additional details.

# Exchange Controls and
Other Limitations Affecting Security Holders

There
are no exchange control restrictions on payment of dividends on our common stock in the
British Virgin Islands. Other jurisdictions in which we conduct operations may have
various exchange controls. Dividend distribution and repatriation by Hainan Jinpan is
regulated by Chinas laws and regulations. To date, these controls have not had and
are not expected to have a material impact on our financial results. There are no material
British Virgin Islands laws which impose foreign exchange controls on us or that affect
the payment of dividends, interest or other payments to nonresident holders of our common
stock. British Virgin Islands law and our Memorandum and Articles of Association impose no
limitations on the right of nonresident or foreign owners to hold or vote our common
stock.

# Taxation

The
following discussion is a summary of all material anticipated British Virgin Islands and
Chinese tax consequences of an investment in our common stock for security holders located
in the United States. The discussion does not deal with all possible tax consequences
relating to an investment in our 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 national (e.g., non-Chinese and non-British Virgin Islands) tax laws. Accordingly,
each investor should consult his own tax advisor regarding the particular tax consequences
to him of an investment in our common stock. The following discussion is based upon laws
and relevant interpretations relating to our common stock currently in effect, all of
which are subject to change.

British
Virgin Islands Taxation Policy. Under the BVI Business Companies Act, 2004 (No. 16 of
2004) of the British Virgin Islands as currently in effect, a holder of common stock who
is not a resident of the British Virgin Islands is exempt from British Virgin Islands
income tax on dividends paid with respect to common stock and all holders of common stock
are not liable to British Virgin Islands income tax on gains realized during the year on
sale or disposal of any shares of common stock. The British Virgin Islands has introduced
legislation, the Mutual Legal Assistance (Tax Matters) (Amendment) Bill 2004 (the
Bill), to implement the European Union Savings Tax Directive (the Tax
Directive) and the bilateral agreements agreed with the European Union to be entered
into with the 25 Member States of the European Union. The Bill and the bilateral
agreements provide for alternative procedures, both a withholding tax option and an
automatic exchange of information option. Under the withholding tax option, banks and
other paying agents will automatically deduct tax from interest and other savings income
earned. For the purposes of implementation of the Tax Directive in the BVI, paying agents
will pay the withholding tax to the Competent Authority. 75% of the withholding tax levied
will be remitted to the tax authorities in the receiving EU Member States and the
Competent Authority will keep 25%. The withholding tax rates will be:

48



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| |  |  | 15%
from July 1, 2005;
| | - |  | ----------------------

| |  |  | 20%
from January 1, 2008; and
| | - |  | -----------------------------

| |  |  | 35%
from January 1, 2011.
| | - |  | -------------------------

Withholding
tax will be transferred to receiving EU Member States at specific periods but receiving EU
Member States will not receive information relating to EU resident individuals. Under the
automatic exchange of information option, the Tax Directive requires the following
information:

| |  |  | the
identity and residence of the beneficial owner;
| | - |  | ---------------------------------------------------

| |  |  | the
name and address of the paying agent;
| | - |  | -----------------------------------------

| |  |  | the
account number of the beneficial owner; and
| | - |  | -----------------------------------------------

| |  |  | information
concerning the savings income.
| | - |  | ------------------------------------------

This
information will be reported by the paying agent to the competent authority in the country
where the account is held and forwarded to the competent authority of the country where
the EU resident individual resides. If you are an individual who is resident in an EU
Member State and earn bank interest or other savings income, as defined by the Tax
Directive, on deposits or investments held in your own name in the BVI then you will
probably be affected by the implementation of the Tax Directive. The Tax Directive does
not apply to individuals, including EU nationals, who are resident outside the EU.

There
are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on
companies incorporated under the BVI Business Companies Act, 2004 (No. 16 of 2004). In
addition, the common stock of these companies is not subject to transfer taxes, stamp
duties or similar charges.

Presently,
there is no income tax treaty, convention or reciprocal tax treaty regarding withholdings
currently in effect between the United States and the British Virgin Islands.

Chinese
Taxation Policy. There are no material Chinese tax consequences to holders of common
stock solely as a result of the purchase, ownership and disposition of common stock or
receipt of dividends, if declared.

# Documents on Display

We
are subject to the informational requirements of the Securities Exchange Act of 1934, as
amended. In accordance with these requirements, we file reports and other information with
the Securities and Exchange Commission (the Commission). These materials,
including this annual report on Form 20-F and its exhibits, may be inspected and copied at
the Commissions Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549
and at the Commissions regional office at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of the materials may be obtained from the Public Reference
Room of the Commission at 100 F Street, N.E., Washington, D.C. 20549 at prescribed rates.
The public may obtain information on the operation of the Commissions Public
Reference Room by calling the Commission in the United States at 1-800-SEC-0330.

49



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# Item 11. Quantitative
and Qualitative Disclosure of Market Risk.

We
do not invest in derivative financial instruments or other market risk sensitive
instruments, except for certain corporate bond securities. Accordingly, our exposure to
financial market risk derives primary from changes in interest rates. The primary
objective of our investments in corporate securities is to preserve principal while
maximizing yields, without significantly increasing risk. These available for sale
securities are subject to interest rate risk. The fair market value of these securities
may fluctuate with changes in interest rate.

# Item 12. Description of
Securities Other than Equity Securities.

Not
applicable.

# Part II

# Item 13. Defaults,
Dividend Arrearages and Delinquencies.

None.

# Item 14.  Material
Modifications to the Rights of Security Holders and Use of Proceeds.

None.

50



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# Item 15. Controls and
Procedures

# Disclosure
Controls and Procedures

As
of the end of the period covered by this Annual Report, our management (with the
participation of our Principal Executive Officer and Principal Financial and Accounting
Officer) conducted an evaluation, pursuant to Rule 13a-15(b) promulgated under the
Exchange Act, of the effectiveness of the design and operation of our disclosure controls
and procedures as defined in Rule 13a-15(e) under the Exchange Act. In evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only a reasonable
assurance of achieving the desired control objectives, and management is necessarily
required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures and implementing controls and procedures based on the application
of managements judgment.

In
connection with the audit of our consolidated financial statements for the year ended
December 31, 2006, we and our independent public accounting firm, Grant Thornton,
identified the following material weakness (as defined by the Public Company Accounting
Oversight Board, Auditing Standard No.2) in our internal control over financial reporting:

| |  |  | During
the 2006 audit, Grant Thorntons auditing team encountered some difficulties
relating to inventory observation testing. In performing its test, the auditing team
found that some items were listed in the general ledger but were left out of the stock
take list provided to them on the day of the count. As a result, the auditing team had to
conduct significant additional audit procedures to gain comfort regarding the year end
inventory balance. The auditing team found that the discrepancies between the general
ledger and the stock take list were due to improper compilation of the stock take list
and data entry errors. However, to be conservative, we and the auditing team agreed to an
inventory adjustment that wrote off any inventory not supported by reliable third party
documentation.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
have allocated significant financial and human resources to remediate this material
weakness. As part of our effort to comply with Section 404 of the Sarbanes-Oxley Act for
fiscal year 2007, we are actively working with external consultants to assess our data
collection, financial reporting, and control procedures and to strengthen our internal
controls over financial reporting. In addition, we have established an internal audit
department to oversee the implementation of our internal controls over financial
reporting. The internal audit department is independent and reports directly to the audit
committee. Given these efforts, we expect to have effective controls in place that will
remediate this material weakness before the next years audit.

Based
on that evaluation, taking into account the reportable conditions and the material
weakness described above, our Principal Executive Officer and Principal Financial Officer
have concluded that our disclosure controls and procedures were not effective as of the
end of the period covered by this report.

Based
on the evaluation of our management, which included the participation of our Principal
Executive Officer and our Principal Financial Officer, pursuant to Rule 13a-15(d) of the
Exchange Act, other than as described above, there have been no material changes in our
internal control over financial reporting during 2006 that has materially affected, or is
reasonably likely to material effect our internal controls over financial reporting.

51



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# Item 16A.    Audit
Committee Financial Expert

Stephan
R. Clark, a member of our Audit Committee, meets the criteria of an Audit Committee
Financial Expert under the applicable rules and regulations of the SEC, and his
designation as the Audit Committees Financial Expert has been ratified by the Board.
Mr. Clark is independent, as that term is defined in the American Stock
Exchange listing standards.

# Item 16B.    Code of
Ethics

We
adopted a code of ethics that is applicable to all of our directors, officers and
employees, including our principal executive, financial and accounting officers, and
persons performing similar functions (the Code of Ethics). The Code of Ethics
covers areas of professional and business conduct, and is intended to promote honest and
ethical behavior, including fair dealing and the ethical handling of conflicts of
interest, support full, fair, accurate, timely, and understandable disclosure in reports
and documents we file with, or submits to, the SEC and other governmental authorities, and
in our other public communications; deter wrongdoing; encourage compliance with applicable
laws and governmental rules and regulations; and ensure the protection of our legitimate
business interests. We encourage all of our directors, officers, and employees to promptly
report any violations of the Code of Ethics, and have provided mechanisms by which they
may do so. We will provide a copy of the Code of Ethics to any person, without charge,
upon written request addressed to the Corporate Secretary of the Company at the
Companys offices in Englewood Cliffs, New Jersey.

# Item 16C.    Principal
Accountant Fees and Services

The
Audit Committee maintains a policy of approving and recommending only those services to be
performed by the Companys external auditors which are permitted under the
Sarbanes-Oxley Act and the applicable rules of the SEC relating to auditors
independence, and which are otherwise consistent with and will encourage, and are
remunerated at levels that accord with, the basic principles of auditor independence. The
practice of the Audit Committee is to receive from the Companys management, at the
time of approval of the Companys annual financial statements for the preceding
fiscal year, a list of all services, including audit, audit-related, tax and other
services, proposed to be provided during the current fiscal year to the Company and its
subsidiaries by Grant Thornton as well as a report regarding the extent of such services
actually provided by Grant Thornton during the previous fiscal year and the fees paid for
such services performed. After reviewing and considering the services proposed to be
provided during the current fiscal year and, where appropriate in order better to
understand their nature, discussing them with management, the Audit Committee pre-approves
such of the proposed services, with a specific pre-approved budget, as it considers
appropriate in accordance with the above principles. Management also maintains a practice
of discussing these matters on an ongoing basis during the year with Stephan R. Clark, the
Audit Committees appointed delegate in respect of audit-related and non
audit-related services. Additional services from Grant Thornton and any increase in
budgeted amounts will similarly be pre-approved during the year by the Audit Committee on
a case-by-case basis.

All
(100%) audit-related and non-audit-related services performed by Grant Thornton during
2006 were reported to, and the services proposed to be provided during 2006 were
pre-approved by, the Audit Committee in accordance with the procedures outlined above.

52



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The
following table provides information regarding fees we paid to Grant Thornton for all
services, including audit services, for the years ended December 31, 2006 and 2005,
respectively.

|                   | Year Ended December 31, 2005 | Year Ended December 31, 2006
|------------------ | ---------------------------- | ----------------------------
|Audit Fees         | RMB 880,000                  | RMB 1,248,000               
|Audit Related Fees | RMB 7,000                    | RMB 87,000                  
|Tax Fees           | -                            | -                           
|All Other fees     | -                            | -                           
|                   |                              |                             
|Total              | RMB 887,000                  | RMB 1,335,000               
|                   |                              |                             

Audit
Fees are the aggregate fees billed for the audit of our annual financial statements.
This category also includes services that generally the independent accountant provides,
such as statutory audits, consents and assistance with and review of documents filed with
the SEC.

Audit-Related
Fees are the aggregate fees billed for assurance and related services that are
reasonably related to the performance of the audit and are not reported under Audit Fees.
These fees include mainly accounting consultations regarding the accounting treatment of
matters that occur in the regular course of business, implications of new accounting
pronouncements and other accounting issues that occur from time to time.

Tax
Fees are the aggregate fees billed for professional services rendered for tax
compliance, tax advice, other than in connection with the audit. Tax compliance involves
preparation of original and amended tax returns, tax planning andtax advice.

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

Not
applicable.

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

None.

# Part III

# Item 17. Financial
Statements.

Not
applicable.

# Item 18. Financial
Statements.

See
Item 19 below for consolidated financial statements filed as a part of this annual report.

53



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# Item 19. Exhibits.

| |  | (a) |  | Index
to Financial Statements
| |  | --- |  | -----------------------------

|                                                                        | Page
|----------------------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting Firm                 | F-3 
|Consolidated Balance Sheets                                             | F-5 
|Consolidated Statements of Income                                       | F-6 
|Consolidated Statements of Shareholders Equity and Comprehensive Income | F-7 
|Consolidated Statements of Cash Flows                                   | F-8 
|Notes to Consolidated Financial Statements                              | F-9 

| |  | (b) |  | Exhibits
| |  | --- |  | --------

|Exhibit No. | Exhibit Description                                                                                                                                                                                      
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1         | Memorandum of Association and Articles of Association of Jinpan International Limited. (1)                                                                                                               
|1.2         | Amendments to the Memorandum of Association and Articles of Association. (1)                                                                                                                             
|4.1         | Form of Registration Rights Agreement, dated December 19, 2006, by and among Jinpan International Limited and the parties identified therein. (2)                                                        
|4.2         | Form of Registration Rights Agreement, dated December 19, 2006, by and among Jinpan International Limited and CD Investment Partners, Ltd. (2)                                                           
|4.3         | Form of Lock-Up Agreement, dated December 19, 2006, by and among Jinpan International Limited and the parties identified therein. (2)                                                                    
|4.4         | Form of Securities Purchase Agreement, dated December 19, 2006, by and among Jinpan International Limited and the buyers identified therein. (2)                                                         
|4.5         | Form of Securities Purchase Agreement, dated December 19, 2006, by and among Jinpan International Limited and CD Investment Partners, Ltd. (2)                                                           
|4.6         | Form of Joint Venture Purchase Agreement, dated December 19, 2006, by and among Jinpan International Limited and Haikon Jinpan Special Transformer Works. (2)                                            
|4.7*        | Summary of Land Use Rights Transfer Agreement dated December 30, 2006 between Wuhan Jinpan Electric Company Ltd. and the Public Land Resource Management Bureau of the Donghu High Tech Development Area.
|4.8*        | Summary of Contract of Construction dated April 13, 2007 between Wuhan Jinpan Electric Company Ltd. And the Wuhan Xinqui Construction Group Company Ltd.                                                 
|12.1*       | Certification of the Principal Executive Officer pursuant to 17 C.F.R. 240.13a-14(a), as adopted pursuant to  §302 of the Sarbanes-Oxley Act.                                                            
|12.2*       | Certification of Principal Financial Officer pursuant to 17 C.F.R. 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act.                                                                 
|13.1*       | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act.                                          
|14.1*       | Consent of Grant Thornton, Hong Kong.                                                                                                                                                                    
|14.2*       | Consent of Ernst & Young, Hong Kong.                                                                                                                                                                     

54



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_________________

|* |  | Filed
herewith.
|- |  | ---------------

|(1) |  | Filed as an exhibit to Jinpan International Limiteds Registration
          Statement on Form F-1 (File No. 333-8198), filed with the Securities and
          Exchange Commission on November 22, 1997, and incorporated herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Filed as an exhibit to Jinpan International Limiteds Form 6-K, filed with
          the Securities and Exchange Commission on December 20, 2006, and incorporated
          herein by reference.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

55



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# 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.

| | JINPAN INTERNATIONAL LIMITED
By:  /s/ Li Zhiyuan
Name:  Li Zhiyuan
Title:    Chief Executive Officer
             (Principal Executive Officer)
| | -----------------------------------------------------------------------------------------------------------------------------------------------

July 13, 2007

56



---

Financial Statements

JINPAN INTERNATIONAL LIMITED AND SUBSIDIARIES

Years ended December 31, 2006, 2005 and 2004

F-1



---

INDEX TO FINANCIAL
STATEMENTS

|                                                                                                                                 | Pages
|-------------------------------------------------------------------------------------------------------------------------------- | -----
|JINPAN INTERNATIONAL LIMITED AND SUBSIDIARIES:                                                                                  
|Report of Independent Registered Public Accounting Firm                                                                          | F-3  
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                                                     | F-5  
|Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004                                           | F-6  
|Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years ended    December 31, 2006, 2005 and 2004 | F-7  
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                                       | F-8  
|Notes to Consolidated Financial Statements                                                                                       | F-9  

F-2



---



F-3



---



F-4



---

# Jinpan International
Limited and Subsidiaries

Consolidated Balance
Sheets

As of December 31, 2006
and 2005

|                                                       |  | December 31, |   
|------------------------------------------------------ |  | ------------ | --
|                                                       |  |              |   
|
|                                                       |  |              |   
|
|
|Assets                                                 |  |              |   
|                                                       |  |             
|Current assets:                                        |  |             
|Cash and cash equivalents                              |  |              |   
|Restricted Cash                                        |  |              |   
|Investments available for sale                         |  |              | 4 
|Notes receivable                                       |  |              |   
|Accounts receivable, net                               |  |              | 5 
|Inventories, net                                       |  |              | 6 
|Prepaid expenses                                       |  |              |   
|Prepaid tax                                            |  |              |   
|Other receivables                                      |  |              |   
|                                                       |  |              |   
|Total current assets                                   |  |              |   
|                                                       |  |             
|Property, plant and equipment, net                     |  |              | 7 
|Construction in progress                               |  |              |   
|Deferred tax assets                                    |  |              | 8 
|                                                       |  |              |   
|Total assets                                           |  |              |   
|                                                       |  |              |   
|Liabilities and Shareholders' Equity                   |  |             
|                                                       |  |             
|Current liabilities:                                   |  |             
|Short term bank loans                                  |  |              | 9 
|Accounts payable                                       |  |              |   
|Notes Payable                                          |  |              |   
|Income tax                                             |  |              | 8 
|Value added tax                                        |  |              |   
|Advance from customers                                 |  |              |   
|Commission payable                                     |  |              |   
|Accrual employee benefits                              |  |              |   
|Government grant                                       |  |              | 10
|Other liabilities                                      |  |              |   
|                                                       |  |              |   
|Total current liabilities                              |  |              |   
|                                                       |  |             
|Long Term Liability:                                   |  |             
|Government grant                                       |  |              | 10
|                                                       |  |             
|Minority interest                                      |  |              | 17
|Commitments and contingent liabilities                 |  |              | 12
|                                                       |  |             
|Shareholders' equity:                                  |  |             
|Common stock, US$0.009 par value:                      |  |             
|Authorized shares - 20,000,000                         |  |             
|Issued and outstanding shares - 8,171,617 in 2006 and  |  |             
|6,708,946 in 2005                                      |  |              | 18
|Convertible preferred stock, US$0.009 par value:       |  |             
|Authorized shares - 1,000,000                          |  |             
|Issued and outstanding shares - 6,111 in 2006 and 2005 |  |              | 18
|Additional paid-in capital                             |  |              |   
|Reserves                                               |  |              | 11
|Retained earnings                                      |  |              | 18
|Accumulated other comprehensive income                 |  |              |   
|                                                       |  |              |   
|                                                       |  |              |   
|Less: Treasury shares at cost,                         |  |             
|Common stock 208,470 in 2006 and 212,470  in 2005      |  |              |   
|                                                       |  |              |   
|Total shareholders' equity                             |  |              |   
|                                                       |  |              |   
|Total liabilities and shareholders' equity             |  |              |   
|                                                       |  |              |   

The accompanying
notes form an integral part of these consolidated financial statements.

F-5



---

# Jinpan International Limited
and SubsidiariesConsolidated Statements
of IncomeFor the years ended
December 31, 2006, 2005 and 2004

|                                     |  | Year ended December 31, |   
|------------------------------------ |  | ----------------------- | --
|                                     |  |                         |   
|
|                                     |  |                         |   
|
|
|Net sales                            |  |                         | 16
|Other income                         |  |                         |   
|                                     |  |                         |   
|                                     |  |                         |   
|Costs and expenses:                  |  |                        
|Cost of products sold                |  |                         |   
|Provision for doubtful debts         |  |                         |   
|Selling and administrative           |  |                         |   
|                                     |  |                         |   
|                                     |  |                         |   
|Non operating income(loss):          |  |                        
|Gain/(Loss) from sales of investment |  |                         |   
|Dividend income of investment        |  |                         |   
|Interest Income                      |  |                         |   
|                                     |  |                         |   
|                                     |  |                         |   
|Non operating expenses:              |  |                        
|Interest expenses                    |  |                         |   
|                                     |  |                         |   
|Income before income taxes           |  |                         |   
|Income taxes                         |  |                         | 8 
|                                     |  |                         |   
|Income before minority interest      |  |                         |   
|Minority interest                    |  |                         |   
|                                     |  |                         |   
|Net income                           |  |                         |   
|                                     |  |                         |   
|Earnings per share                   |  |                        
|-Basic                               |  |                         |   
|                                     |  |                         |   
|-Diluted                             |  |                         |   
|                                     |  |                         |   
|Weighted average number of shares    |  |                        
|-Basic                               |  |                         |   
|                                     |  |                         |   
|-Diluted                             |  |                         |   
|                                     |  |                         |   

The accompanying
notes form an integral part of these consolidated financial statements.

F-6



---

# Consolidated Statements
of Shareholders Equity and Comprehensive Income

# For the years ended
December 31, 2006, 2005 and 2004

|                                   | Treasury
stock
shares |  | Number of
common
shares |          | Number of
preferred
shares |  | Treasury
stock
RMB |  | Common
stock
RMB |        | Convertible
preferred
stock
RMB |  | Additional
paid-in
capital
RMB |   | Reserves
RMB |     | Retained
earnings
RMB |  | Accumulated
other com-
prehensive
income
RMB |  | Compre-
hensive
income
RMB |         | TotalRMB | 
|---------------------------------- | --------------------- |  | ----------------------- | -------- | -------------------------- |  | ------------------ |  | ---------------- | ------ | ------------------------------- |  | ------------------------------ | - | ------------ | --- | --------------------- |  | -------------------------------------------- |  | -------------------------- | ------- | -------- | 
|                                   |                       |  |                         |          |                            |  |                    |  |                  |        |                                 |  |                                |   |              |     |                       |  |                                              |  |                            |         |          | 
|Balance at January 1, 2004         |                       |  |                         | (73,158  | )                          |  | 6,667,978          |  |                  | 18,379 |                                 |  | (1,077                         | ) |              | 496 |                       |  | 1                                            |  |                            | 86,807  |          | 
|Net income                         |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Transfer to reserves               |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Reacquired shares                  |                       |  |                         | (111,112 | )                          |  | -                  |  |                  | -      |                                 |  | (4,367                         | ) |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Converted to common stock          |                       |  |                         | -        |                            |  | 6,134              |  |                  | (6,134 | )                               |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Exercise of stock options for cash |                       |  |                         | -        |                            |  | 28,000             |  |                  | -      |                                 |  | -                              |   |              | 3   |                       |  | -                                            |  |                            | 457     |          | 
|Unrealized gains on investments    |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Reclassification adjustment for    |                       | 
|gains included in net income       |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Employee stock-based compensation  |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | 251     |          | 
|Currency translation adjustments   |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|                                   |                       |  |                         |          |                            |  |                    |  |                  |        |                                 |  |                                |   |              |     |                       |  |                                              |  |                            |         |          | 
|Balance at December 31, 2004       |                       |  |                         | (184,270 | )                          |  | 6,702,112          |  |                  | 12,245 |                                 |  | (5,444                         | ) |              | 499 |                       |  | 1                                            |  |                            | 87,515  |          | 
|                                   |                       | 
|Net income                         |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Transfer to reserves               |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Cash dividends distributed         |                       | 
|($0.20 per share)                  |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Reacquired shares                  |                       |  |                         | (28,200  | )                          |  | -                  |  |                  | -      |                                 |  | (1,335                         | ) |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Converted to common stock          |                       |  |                         | -        |                            |  | 6,134              |  |                  | (6,134 | )                               |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Exercise of stock options for cash |                       |  |                         | -        |                            |  | 700                |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | 20      |          | 
|Unrealized loss on investments     |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Employee stock-based compensation  |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|                                   |                       |  |                         |          |                            |  |                    |  |                  |        |                                 | 
|Currency translation adjustments   |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|                                   |                       |  |                         |          |                            |  |                    |  |                  |        |                                 |  |                                |   |              |     |                       |  |                                              |  |                            |         |          | 
|Balance at December 31, 2005       |                       |  |                         | (212,470 | )                          |  | 6,708,946          |  |                  | 6,111  |                                 |  | (6,779                         | ) |              | 499 |                       |  | 1                                            |  |                            | 87,535  |          | 
|                                   |                       | 
|Net income                         |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Transfer to reserves               |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Cash dividends distributed         |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|($0.24 per share)                  |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Issued  shares                     |                       |  |                         | -        |                            |  | 1,350,371          |  |                  | -      |                                 |  | -                              |   |              | 95  |                       |  | -                                            |  |                            | 184,891 |          | 
|Exercise of stock options for cash |                       |  |                         | 4,000    |                            |  | 112,300            |  |                  | -      |                                 |  | 43                             |   |              | 8   |                       |  | -                                            |  |                            | 2,353   |          | 
|Adoption SAB 108 (Note 19)         |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|Employee stock-based compensation  |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|                                   |                       |  |                         |          |                            |  |                    |  |                  |        |                                 | 
|Currency translation adjustments   |                       |  |                         | -        |                            |  | -                  |  |                  | -      |                                 |  | -                              |   |              | -   |                       |  | -                                            |  |                            | -       |          | 
|                                   |                       |  |                         |          |                            |  |                    |  |                  |        |                                 |  |                                |   |              |     |                       |  |                                              |  |                            |         |          | 
|                                   |                       |  |                         |          |                            |  |                    |  |                  |        |                                 |  |                                |   |              |     |                       |  |                                              |  |                            |         |          | 
|Balance at December 31, 2006       |                       |  |                         | (208,470 | )                          |  | 8,171,617          |  |                  | 6,111  |                                 |  | (6,736                         | ) |              | 602 |                       |  | 1                                            |  |                            | 274,779 |          | 
|                                   |                       |  |                         |          |                            |  |                    |  |                  |        |                                 |  |                                |   |              |     |                       |  |                                              |  |                            |         |          | 

The accompanying
notes form an integral part of these consolidated financial statements

F-7



---

# Jinpan International
Limited and Subsidiaries

# Consolidated Statements
of Cash FlowsFor the years ended
December 31, 2006, 2005 and 2004

|                                                          | Year ended December 31, | 
|--------------------------------------------------------- | ----------------------- | 
|                                                          |                         | 
|
|                                                          |                         | 
|
|Operating activities                                      |                         | 
|Net income                                                |                         | 
|Adjustments to reconcile net income to                    |                         | 
|net cash provided by/(used in) operating activities:      |                         | 
|Depreciation                                              |                         | 
|Deferred income taxes                                     |                         | 
|Provision for doubtful debts                              |                         | 
|Loss/(gain) on disposal of property, plant and equipment  |                         | 
|Minority interest                                         |                         | 
|Employee stock-based compensation                         |                         | 
|Loss /(Gain) from sales of investments available for sale |                         | 
|Changes in operating assets and liabilities               |                         | 
|Restricted cash                                           |                         | 
|Accounts receivable                                       |                         | 
|Notes receivable                                          |                         | 
|Inventories                                               |                         | 
|Prepaid expenses                                          |                         | 
|Prepaid tax                                               |                         | 
|Other receivables                                         |                         | 
|Accounts payable                                          |                         | 
|Income tax                                                |                         | 
|Value added tax                                           |                         | 
|Advance from customers                                    |                         | 
|Commission payable                                        |                         | 
|Accrual employee benefits                                 |                         | 
|Government grant                                          |                         | 
|Other liabilities                                         |                         | 
|                                                          |                         | 
|Net cash provided by/(used in) operating activities       |                         | 
|                                                          |                         | 
|Investing activities                                      |                         | 
|Purchases of property, plant and equipment                |                         | 
|Proceeds from sales of property, plant and equipment      |                         | 
|Payment for construction in progress                      |                         | 
|Proceeds from sales of available-for-sales securities     |                         | 
|                                                          |                         | 
|Net cash provided by (used in) investing activities       |                         | 
|                                                          |                         | 
|Financing activities                                      |                         | 
|Notes Payable                                             |                         | 
|Proceeds from bank loans                                  |                         | 
|Repayment of bank loans                                   |                         | 
|Acquisition of treasury stock                             |                         | 
|Proceeds from issued shares                               |                         | 
|Proceeds from exercise of stock options                   |                         | 
|Decrease in dividend payable to minority shareholders     |                         | 
|Dividends paid                                            |                         | 
|                                                          |                         | 
|Net cash provided by/(used in) financing activities       |                         | 
|                                                          |                         | 
|Effect of exchange rate changes on cash                   |                         | 
|                                                          |                         | 
|Net increase/(decrease) in cash and cash equivalents      |                         | 
|Cash and cash equivalents at beginning of year            |                         | 
|                                                          |                         | 
|Cash and cash equivalents at end of year                  |                         | 
|                                                          |                         | 
|Interest paid                                             |                         | 
|Income taxes paid                                         |                         | 

The
accompanying notes form an integral part of these consolidated financial statements.

F-8



---

|1. |  | ORGANIZATION
AND PRINCIPAL ACTIVITIES
|-- |  | -------------------------------------

| | Jinpan
International Limited (the Company) was incorporated under the laws of the
British Virgin Islands on April 3, 1997.
| | ----------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, the Company had direct interests in the following subsidiaries:
| | ----------------------------------------------------------------------------------------

|Name of entity                   | Date of
establishment | Percentage of equity
interest attributable to
the Company | Paid-up capital | Principal activities     
|-------------------------------- | --------------------- | --------------------------------------------------------- | --------------- | -------------------------
|Hainan Jinpan Electric Co., Ltd. | June 3, 1997          | 85%                                                       | RMB62,902,000   | Manufacturing and sale of
|("Jinpan JV" )                   |                       |                                                           |                 | cast resin transformers  
|Jinpan International             | February 18, 1998     | 100                                                       | US$10,000       | Marketing of cast resin  
|(USA) Limited                    |                       |                                                           |                 | transformers             
|("Jinpan USA")                   |                       |                                                           |                 |                          

| | The
Company, Jinpan JV and Jinpan USA are hereinafter collectively referred to as the Group.
| | ----------------------------------------------------------------------------------------------

| | The
principal activity of the Company is investment holding. Substantially all of the Groups
operations are conducted in the Peoples Republic of China (the PRC),
and its principal market is in the PRC. The term of Jinpan JV is 50 years, ending on
September 3, 2047, and can be extended with mutual consent of the joint venture parties,
subject to the approval of the relevant PRC government authorities. Income and losses and
the net assets on termination of the co-operative joint venture are shared on the basis
of percentage ownership. The co-operative joint venture can be terminated upon the
unanimous agreement of the Board of  Directors
of Jinpan JV. In the event that Jinpan JV is not extended, the joint venture will be
dissolved and liquidated pursuant to the provisions of applicable law and the joint
venture agreement. In addition, Jinpan JV may be terminated prior to the expiration of
the joint venture agreement upon the occurrence of certain events, including but not
limited, the inability of the enterprise to conduct its business due to financial losses
or a breach of the joint venture agreement by one of the parties thereto.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Group is subject to some considerations and risks not typically associated with
investments in equity securities of North America and Western European companies. These
include risks associated with, among others, the political, economic and legal
environments, foreign currency exchange and the transformer manufacturing industry in the
PRC. These are described further in the following paragraphs:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-9



---

|1. |  | ORGANIZATION
AND PRINCIPAL ACTIVITIES (CONTINUED)
|-- |  | -------------------------------------------------

| | a) |  | Political
environment
| | -- |  | ---------------------

| | All
of the Groups manufacturing facilities are located in the PRC and, as a result, the
Groups operations and assets are subject to political, economic, legal and other
uncertainties. The economy of the PRC differs from the economies of most countries
belonging to the Organization for Economic Co-operation and Development (the OECD)
in such respects as structure, government involvement, level of development, growth rate,
capital reinvestment, allocation of resources, rate of inflation and balance of payments
position. PRC is a socialist state which, since 1949, has been controlled by the
Communist Party of China. In the late 1970s, Chinas government permitted
greater provincial and local economic autonomy and private economic activity, away from a
more centrally-planned economy. Although the majority of productive assets in the PRC are
still owned by the PRC government, in the past two decades the PRC government has
implemented economic reform measures that emphasize decentralization, the utilization of
market forces in the development of the PRC economy and the encouragement of private
economic activity. Such economic reform measures may be inconsistent or ineffectual and
the Group may not be able to capitalize on all such reforms. Further, there can be no
assurance that the PRC government will continue to pursue such policies, that policies
will be successful if pursued, the such policies will not be significantly altered from
time to time or that business operations in the PRC would not become subject to the risk
of nationalization, which could result in the total loss of investment in that country.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) |  | Economic
environment
| | -- |  | --------------------

| | Since
the 1970s, the PRC government has been reforming and is expected to continue to
reform its economic and political systems. Many of the reforms are unprecedented or
experimental and are expected to be refined and improved over time. Other political,
economic and social factors could also lead to further readjustment of the reform
measures. This refining and readjustment process may not always have a positive effect on
the operations of the Group.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
the Groups operating results may be adversely affected by changes in the PRCs
political, economic and social conditions and changes in policies of the PRC government,
such as changes in laws and regulations (or the interpretation thereof), measures which
may be introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance abroad and
reduction in tariff protection and other import restrictions. The inadequate development
of an infrastructure and the potential unavailability of adequate power and water
supplies, transportation, satisfactory roads and communications and raw materials and
parts may also significantly affect the Groups operating results.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
PRC economy has experienced significant growth in recent years, but such growth has been
uneven among various geographical regions and among various sectors of the economy. The
PRC government has implemented various policies from time to time, such as during 1989 to
1991 and again commencing in 1993, to restrain the rate of such economic growth and
control inflation and otherwise regulate economic expansion. Although the Group might
benefit from these types of policies, more severe measures or other actions by the PRC
government could decrease demand for the Groups products or otherwise significantly
adversely affect the Groups earnings.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-10



---

|1. |  | ORGANIZATION
AND PRINCIPAL ACTIVITIES (CONTINUED)
|-- |  | -------------------------------------------------

| | c) |  | Legal
environment
| | -- |  | -----------------

| | The
legal system of the PRC relating to foreign investments is both new and continually
evolving, and currently there can be no certainty as to the application of its laws and
regulations in particular instances. Enforcement of existing laws or agreements may be
sporadic and implementation or interpretation of laws inconsistent. The PRCs
judiciary is relatively inexperienced in enforcing the laws that exist, leading to a
higher than usual degree of uncertainty as to the outcome of any litigation. Even when
adequate law exists in the PRC, it may not be possible to obtain swift and equitable
enforcement of the law.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d) |  | Foreign
currency exchange
| | -- |  | -------------------------

| | The
Group receives almost all of its revenues in Renminbi, which is not freely convertible
into foreign exchange. However, the Group will require foreign currency to meet foreign
currency obligations, such as for further purchases of certain equipment and raw
materials, and payment of dividends. The PRC government imposes control over its foreign
currency reserves in part through direct regulation of the conversion of Renminbi into
foreign exchange and through restriction on foreign imports. Effective January 1, 1994,
the conversion of Renminbi into United States Dollars must be based on rates set by the
Peoples Bank of China ( the PBOC), which rates are set daily based on
the previous days PRC interbank foreign exchange market rate with reference to
current exchange rates on the world financial markets (the PBOC Rate). The
Renminbi/United States Dollar exchange rate has been relatively stable since January 1,
1994. However, China revalued Renminbi against US Dollar on July 21, 2005 and introduced
a basket of currencies to determine the exchange rate against previous peg to dollar. As
a result of adoption flexible exchange rate, Chinas financial sector becomes more
responsive to fluctuation of international currency market. The Renminbi/US Dollar
exchange rate has climbed steadily since July 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Group currently does not engage in any hedging activities to minimize the effect of
exchange rate risks.
| | ------------------------------------------------------------------------------------------------------------

F-11



---

|2. |  | BASIS OF PRESENTATION
|-- |  | ---------------------

| | The
consolidated financial statements were prepared in accordance with accounting principles
generally accepted in the United States of America (US GAAP). This basis of
accounting differs from that used in the statutory financial statements of Jinpan JV,
which were prepared in accordance with the accounting principles and relevant financial
regulations applicable to foreign investment enterprises as established by the Ministry
of Finance of China.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
functional currency of the Company is Renminbi (RMB), the national currency
of China. Solely for the convenience of the reader, the financial statements have been
translated into United States dollars (US$) using PBOC rate of RMB7.81 to
US$1, the prevailing rate on December 31, 2006. No representation is made that the
Renminbi amounts could have been, or could be, converted into United States dollars at
this rate or any other.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|-- |  | ------------------------------------------

| | (a) |  | Basis
of Consolidation
| | --- |  | ----------------------

| | The
consolidated financial statements include the accounts of the Company and its
subsidiaries, substantially all of which are wholly-owned. All significant intercompany
accounts and transactions have been eliminated.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Cash
, Cash Equivalents and Restricted Cash
| | --- |  | -------------------------------------------

| | The
Group considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. There was approximately RMB 60 million held in
non-US banks or financial institutions as of December 31, 2006. At December 31, 2006, the
banks held approximately RMB 1.6 million as restricted cash related to guarantee of note
payable, and approximately RMB 8.4 million as restricted cash related to products
guaranty insurance.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | Trade
Receivables
| | --- |  | -----------------

| | Trade
receivables, which generally have 30-120 day terms, are recognized and carried at
original invoice amount less an allowance for any uncollectable amounts. An estimate for
doubtful debts is made when collection of the full amount is no longer probable and a
general provision of a certain percentage is established based on the age status of
receivables. This percentage is based on a collective assessment of historical
collection, write-off experience, current economic trends, and changes in our customer
payment terms and other factors that may affect our ability to collect.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | Investments
Available for Sale
| | --- |  | ------------------------------

| | The
Group classifies its marketable debt and equity securities at the date of acquisition as
available-for-sale. These securities are reported at fair value with the related
unrealized gains and losses included in other comprehensive income (loss), a component of
shareholders equity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12



---

|3. |  | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|-- |  | ------------------------------------------------------

| | (d) |  | Investments
Available for Sale (continued)
| | --- |  | ------------------------------------------

| | When
determining whether an impairment of investments exists or a decline in value of an
available-for-sale security is other-than-temporary, the Group evaluates evidence to
support a realizable value in excess of the current market price for securities with
readily determinable fair value. Such information may include the investments
financial performance (including such factors as earnings trends, dividend payments,
asset quality and specific events), the near term prospects of the investment, the
financial condition and prospects of the investments region and industry, and the
Groups investment intent. Typically, a sustained decline in the market value of a
quoted security for six months is generally indicative of an other-than-temporary
impairment. When a decline in value is deemed to be other-than-temporary, an impairment
loss is recognized through a charge to interest income and other, net in the current
period to the extent of the decline below the carrying value of the investment. Adverse
changes in market conditions or poor operating results of underlying investments could
result in additional other-than-temporary losses in future periods.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | Notes
Receivable
| | --- |  | ----------------

| | Notes
 receivable are unsecured, interest-free and payable within six months.
| | -----------------------------------------------------------------------------

| | (f) |  | Inventories
| | --- |  | -----------

| | Inventories
are priced at the lower of cost or market value. Market value represents the net
realizable value for inventories. Cost is determined using the weighted average cost
method.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (g) |  | Property,
Plant and Equipment
| | --- |  | -----------------------------

| | Property,
plant and equipment are stated at cost, less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful life of the asset.
Estimated useful lives are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Buildings                                | 10 - 20 years
|---------------------------------------- | -------------
|Machinery and equipment                  | 6 - 10 years 
|Motor vehicles                           | 6 years      
|Furniture, fixtures and office equipment | 5 years      

| | Maintenance
and repair costs of a routine nature are expensed as incurred. Expenditures for major
renewals and improvements that extend the life of an asset are capitalized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (h) |  | Construction
in Progress
| | --- |  | ------------------------

| | Construction
in progress is stated at cost which includes the cost of construction and other direct
costs attributable to the construction. No provision for depreciation is made on
construction in progress until such time as the relevant assets are completed and put
into use. Construction in progress at December 31, 2006 represented office building and
manufacturing factory constructed but not ready for occupancy at year end and machinery
under installation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13



---

|3. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|-- |  | ------------------------------------------------------

| | (i) |  | Impairment
of Long-lived Assets
| | --- |  | -------------------------------

| | The
Group accounts for the impairment of long-lived assets in accordance with Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. For long-lived assets used in operations, the Group records
impairment losses when events and circumstances indicate that these assets might be
impaired and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts of those assets. If less, the impairment losses are based
on the excess of the carrying amounts of these assets over their respective fair values.
Their fair values would then become the new cost basis. The fair values are determined by
quoted market prices if available. When quoted market prices are not available, the
present value of the future estimated net cash flow is generally used. For assets held
for sale, impairment losses are measured at the lower of the carrying amount of the
assets or the fair value of the assets less costs to sell. For assets to be disposed of
other than by sale, impairment losses are measured as their carrying amount less salvage
value, if any, at the time the assets cease to be used.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (j) |  | Income
Taxes
| | --- |  | ------------

| | In
July 2006, the Financial Accounting Standard Board (FASB) issued FASB interpretation No.
48, Accounting for Uncertainty in income Taxes (FIN 48). FIN 48 clarifies the
accounting and reporting for income taxes recognized in accordance with FASB No. 109.
This interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax position taken, or
expected to be taken, in income tax return. The Group will adopt FIN 48 as of January 1,
2007, as required. The cumulative effect of adopting FIN 48 will be recorded as an
adjustment to retained earnings. The Group does not expect that the adoption of FIN 48
will have a significant impact on the Groups financial position and result of
operation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Group uses the asset and liability method of accounting for income taxes in accordance
with Financial Accounting Standard Board (FASB) Statement No. 109, Accounting
for Income Taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. This method also requires the recognition of
future tax benefits such as net operating loss carry forwards, to the extent that
realization of such benefits is more likely than not. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Currently,
the income tax rate for domestic companies in China is 33% while it is 15% for foreign
funded Companies. The National Peoples Congress, Chinas parliament,
promulgated on March 16, 2007 a new Corporate Income Tax Law that sets a unified
corporate income tax rate of 25% applicable to both domestic and foreign funded
Companies. The new tax law is scheduled to take effect on January 1, 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (k) |  | Value
Added Tax
| | --- |  | ---------------

| | In
the PRC, Jinpan JV is subject to Value Added Tax (VAT) payable at 17% on
purchases of raw materials or semi-finished goods, except for certain limited types of
goods, which can be offset against the VAT payable on sales.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-14



---

|3. |  | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|-- |  | ------------------------------------------------------

| | (l) |  | Foreign
Currency Translation
| | --- |  | ----------------------------

| | The
functional currency of the Group is the Renminbi. The financial statements of foreign
subsidiaries having functional currency other than Renminbi have been translated into
Renminbi in accordance with FASB Statement No. 52, Foreign Currency Translation.
Assets and liabilities accounts are translated using the exchange rates in effect at the
balance sheet date; and shareholders equities are translated at historical exchange
rate. Income statement and cash flows amounts are translated using the average exchange
rate for the year. The gains and losses resulting from the changes in exchange rates from
year to year have been reported in other comprehensive income(loss). The effect on the
consolidated statements of income of transaction gains and losses is insignificant for
all years presented.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (m) |  | Operating
Leases
| | --- |  | ----------------

| | Leases
where substantially all the rewards and risks of ownership of assets remain with the
leasing company are accounted for as operating leases. Rentals applicable to such
operating leases are charged to the statement of income on the straight-line basis over
the lease terms.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (n) |  | Revenue
Recognition
| | --- |  | -------------------

| | Revenue
is recognized when persuasive evidence of an arrangement exists, delivery occurs, the
sales price is fixed or determinable and collectibility is reasonably assured. There are
no acceptance provisions, installation or other services required after the delivery. The
following policies apply to the Groups revenue transactions:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (i) |  | on
the sale of goods, when the significant risks and rewards of ownership have
          been transferred to the buyer upon delivery, provided that the Company
maintains           neither managerial involvement to the degree usually associated with
ownership,           nor effective control over the goods sold;
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (ii) |  | interest
income from bank deposits, on a time proportion basis on the principal
          outstanding and at the applicable interest rate; and
| |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  | (iii) |  | government
grant income is recognized when relevant approval documents from the           government
were received and subject to the terms in the documents. If the           management does
not believe that sufficient objective, positive evidence           currently exists to
conclude that approval of the grant from government is           probably, the receipt of
the grant has not been recognized as income.
| |  | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (o) |  | Use
of Estimates
| | --- |  | ----------------

| | The
preparation of the consolidated financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from those
estimates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (p) |  | Earnings
Per Common and Common Equivalent Share
| | --- |  | -----------------------------------------------

| | On
January 21, 2004, the Board of Directors of the Group declared a two-for-one stock split
to be effective February 6, 2004. Accordingly, all outstanding shares and per share data
in all periods presented have been restated to reflect the stock split.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-15



---

|3. |  | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|-- |  | ------------------------------------------------------

| | Basic
earnings per share for the years ended December 31, 2006, 2005 and 2004 have been
computed by dividing net income of RMB 59,659,000, RMB 37,076,000 and RMB 28,864,000 by the
weighted average number of 6,625,726 , 6,499,898 and 6,498,178 shares of common stock
outstanding, respectively, after giving effect of two-for-one stock split.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Diluted
earnings per share for the years ended December 31, 2006, 2005 and 2004 have been
computed by dividing net income of RMB 59,659,000, RMB37,076,000 and RMB 28,864,000 by the
weighted average number of 6,728,915, 6,640,396 and 6,663,305 shares of common stock
outstanding, respectively, after giving effect in 2004 of two-for-one stock split.
Reconciliation of for the denominator is as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                         | 2006 |  | 2005 |           | 2004 | 
|------------------------------------------------------------------------ | ---- |  | ---- | --------- | ---- | 
|Denominator for basic earnings per share 
     - weighted average shares |      |  |      | 6,625,726 |      | 
|Effect of dilutive securities:                                          
|Convertible preferred stock                                              |      |  |      | 6,111     |      | 
|Exercisable stock options                                                |      |  |      | 97,078    |      | 
|                                                                         |      |  |      |           |      | 
|                                                                         |      | 
|Denominator for diluted earnings per share                               |      |  |      |           |      | 
|- adjusted weighted average shares and                                   |      |  |      |           |      | 
|assumed conversions                                                      |      |  |      | 6,728,915 |      | 
|                                                                         |      |  |      |           |      | 

| | (q) |  | Accumulated
Other Comprehensive Income (Loss)
| | --- |  | ---------------------------------------------

| | Unrealized
gains or losses on the Groups investments available-for-sale and foreign currency
translation adjustments are included in accumulated other comprehensive income (loss).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16



---

|3. |  | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|-- |  | ------------------------------------------------------

| | The
following are the components of accumulated other comprehensive income (loss):
| | ----------------------------------------------------------------------------------

|                                         | Unrealized
Gains/(loss) on
Investments
Available for Sale |  | Foreign Currency
Translation
Adjustments |     | Total
|---------------------------------------- | --------------------------------------------------------- |  | ---------------------------------------- | --- | -----
|
|
|                                        
|
|Balance at January 1, 2005               |                                                           |  |                                          | (74 | )    
|Foreign currency translation adjustments |                                                           |  |                                          | -   |      
|                                         |                                                           |  |                                          |     |      
|                                         |                                                           | 
|Balance at December 31, 2005             |                                                           |  |                                          | (74 | )    
|                                         |                                                           |  |                                          |     |      
|                                         |                                                           | 
|Foreign currency translation adjustments |                                                           |  |                                          | -   |      
|                                         |                                                           |  |                                          |     |      
|Balance at December 31, 2006             |                                                           |  |                                          | (74 | )    
|                                         |                                                           |  |                                          |     |      

| | (r) |  | Research
and Development Costs
| | --- |  | ------------------------------

| | Research
and development costs consist of expenditures incurred during the course of planned
research and investigation aimed at the discovery of knowledge which will be useful in
developing new products or processes, or significantly enhancing existing products or
production processes, and implementation of such through design, testing of product
alternatives or construction of prototypes. The Group expenses all research and
development costs as incurred. The research and development costs incurred by the Group
during the years ended December 31, 2006, 2005 and 2004 amounted to RMB 5,149,000,
RMB4,459,000 and RMB1,962,000, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (s) |  | Advertising
Expense
| | --- |  | -------------------

| | The
cost of advertising is expensed as incurred. The Group incurred RMB516,000, RMB460,000
and RMB372,000 in advertising costs during the years ended December 31, 2006, 2005 and
2004, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (t) |  | Shipping
and Handling Expenses
| | --- |  | ------------------------------

| | The
cost of shipping and handling is expensed into selling and administration expenses as
incurred. The Group incurred RMB 15.8 million, RMB12.8 million and RMB10 million in
shipping and handling costs during the years ended December 31, 2006, 2005 and 2004,
respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-17



---

|3. |  | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|-- |  | ------------------------------------------------------

| | (u) |  | Stock
Based Compensation
| | --- |  | ------------------------

| | Prior
to 2006, the Group has adopted the disclosure-only provision of FAS Statement No. 123, Accounting
for Stock Based Compensation (SFAS123) and applies Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25)
and related interpretations in accounting for its employee stock-based compensation
plans. Compensation expense, both recorded and pro forma, is recognized over the options vesting
period.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2005, the Group had one stock-based employee compensation plan, which is
described in Note 18 the 1997 Stock Option Plan. The 1997 Stock Option
Plan was expired on October 30, 2006; the Group adopted 2006 Stock Option Plan which
is described more fully in Note 18.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2006, the Group adopted the modified prospective transition method provided by
SFAS No. 123(R), Share-Based Payment. A modified prospectivemethod
in which compensation cost is recognized beginning with the effective date (a) based on
the requirements of SFAS 123(R) for all share-based payments granted after the effective
date and (b) based on the requirements of Statement 123 for all awards granted to
employees prior to the effective date of SFAS 123(R) that remain unvested on the
effective date. SFAS No. 123(R) requires all share-based payment to employees, including
grants of employee stock option, to be recognized in the income statement based on the
fair values. Pro forma disclosure is no longer an alternative.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18



---

|3. |  | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|-- |  | ------------------------------------------------------

| | Employees
stock options granted prior to adoption of SFAS 123(R) that have not vested by the
adoption date will be expensed over the remaining portion of the vesting period, based on
fair value on the grant date estimated in accordance with the provision of SFAS 123.
All the options granted by the Company were vested prior to adoption of SFAS 123(R).  During year 2004,
the company recognized approximately RMB251,000 compensation cost based on variable accounting.
However, no compensation expense would have
been recognized for years ended December 31, 2006, 2005 and 2004 under SFAS 123(R).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (v) |  | Product
Warranty
| | --- |  | ----------------

| | The
Group provides a basic limited warranty, including parts and labor, for all products for
one year. The Group incurred RMB2,206,000, RMB1,748,000, and RMB72,000 in product
warranty expense during the years ended December 31, 2006, 2005 and 2004, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (w) |  | New
Accounting Pronouncements
| | --- |  | -----------------------------

| | In
July 2006, The FASB issued FASB interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN48). FIN 48 clarifies the accounting and reporting for
uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting
for Income Taxes. This interpretation prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return, and also provides guidance on
various related matters such as depreciation, interest and penalties, and disclosures.
FIN 48 will be effective for fiscal years beginning after December 15, 2006. The Group
will adopt FIN 48 in the beginning of 2007, and does not expect the adoption of this
interpretation to have a material impact on its Consolidated Financial Statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements (SAB 108).
SAB 108 provides interpretive guidance on the SECs views on how the effects of the
carryover or reversal of prior year misstatements. We adopted SAB 108 during the fourth
quarter of 2006. The adoption did not have a material impact on our financial position,
cash flows or results of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS
157), which clarified the definition of fair value, established guidelines for
measuring fair value, and expands disclosures regarding fair value measurements. SFAS 157
does not require any new fair value measurements and eliminates inconsistencies in
guidance found in various prior accounting pronouncements. SFAS 157 will be effective for
us on January 1, 2008. We are currently evaluating the impact of adopting SFAS 157 but do
not believe that the adoption of SFAS 157 will have any material impact on our financial
position, cash flows, or results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159) which permits entities to
choose to measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. SFAS 159 will be effective for
us on January 1, 2008. We are currently evaluating the impact of adopting SFAS 159 on our
financial position, cash flows, and results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (x) |  | Reclassifications
| | --- |  | -----------------

| | Certain
amounts in the 2005 financial statement have been reclassified to conform with the
current year's presentation.
| | -----------------------------------------------------------------------------------------------------------------------

F-19



---

|4. |  | INVESTMENTS
AVAILABLE FOR SALE
|-- |  | ------------------------------

| | Investments
available-for-sale held by the Group at December 31, 2006, 2005 are as follows:
| | -------------------------------------------------------------------------------------------

|                                     | 2006 |  | 2006 |     | 2005 | 
|------------------------------------ | ---- |  | ---- | --- | ---- | 
|
|
|Corporate bonds                      |      |  |      |     |      | 
|Cost                                 |      |  |      | 200 |      | 
|Gross unrealized loss                |      |  |      | (7  | )    | 
|                                     |      |  |      |     |      | 
|                                     |      | 
|Total investments available for sale |      |  |      | 193 |      | 
|                                     |      |  |      |     |      | 

| | The
time periods during which the investments available-for-sale have been in a continuous
unrealized loss position as of December 31, 2006 and 2005 are less than 12 months. The
net carrying value and estimated fair value of debt and marketable equity securities at
December 31, 2006, by contractual maturity, are shown below. Excepted maturities will
differ from contractual maturities because the issuers of the securities may have the
right to prepay obligations without prepayment penalties.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Available-for-Sale                    | Cost |  | Fair Market Value
|------------------------------------- | ---- |  | -----------------
|                                      |      |  |                  
|
|
|Due in one year or less               |      |  |                  
|Due after one year through four years |      |  |                  
|                                      |      |  |                  
|                                      |      | 
|Total                                 |      |  |                  
|                                      |      |  |                  

|5. |  | ACCOUNTS RECEIVABLE, NET
|-- |  | ------------------------

| | Accounts
receivable comprised:
| | ------------------------------

|                                   | 2006 |  | 2006 |        | 2005 | 
|---------------------------------- | ---- |  | ---- | ------ | ---- | 
|                                   |      |  |      |        |      | 
|
|
|Accounts receivable - trade        |      |  |      | 26,738 |      | 
|Less: provision for doubtful debts |      |  |      | (1,271 | )    | 
|                                   |      |  |      |        |      | 
|                                   |      | 
|Accounts receivable, net           |      |  |      | 25,467 |      | 
|                                   |      |  |      |        |      | 

|                                         | 2006 |  | 2006 |        | 2005 |  | 2004    |  
|---------------------------------------- | ---- |  | ---- | ------ | ---- |  | ------- | -
|                                         |      |  |      |        |      |  |         |  
|
|
|Movement of provision for doubtful debts |      |  |      |        |      |  |         |  
|Balance as at January 1                  |      |  |      | (1,316 | )    |  | (10,619 | )
|Reversal/(provided) during the year      |      |  |      | (102   | )    |  | (797    | )
|Less: Written off during the year        |      |  |      | 147    |      |  | 1,494   |  
|                                         |      |  |      |        |      |  |         |  
|                                         |      | 
|Balance as at December 31                |      |  |      | (1,271 | )    |  | (9,922  | )
|                                         |      |  |      |        |      |  |         |  

F-20



---

|6. |  | INVENTORIES,
NET
|-- |  | ----------------

| | Inventories
comprised:
| | ----------------------

|                                | 2006 |  | 2006 |        | 2005 | 
|------------------------------- | ---- |  | ---- | ------ | ---- | 
|
|
|Finished products               |      |  |      | 9,596  |      | 
|Work in process                 |      |  |      | 2,440  |      | 
|Raw materials                   |      |  |      | 6,636  |      | 
|                                |      |  |      |        |      | 
|                                |      |  |      | 18,672 |      | 
|Less: provision for inventories |      |  |      | (83    | )    | 
|                                |      |  |      |        |      | 
|Inventories, net                |      |  |      | 18,589 |      | 
|                                |      |  |      |        |      | 

|                                      | 2006 |  | 2006 |      | 2005 |  | 2004   |  
|------------------------------------- | ---- |  | ---- | ---- | ---- |  | ------ | -
|                                      |      |  |      |      |      |  |        |  
|
|
|Movement of provision for inventories |      |  |      |      |      |  |        |  
|Balance as at January 1               |      |  |      | (176 | )    |  | (1,167 | )
|Provided during the year              |      |  |      | -    |      |  | -      |  
|Less: Written off during the year     |      |  |      | (93  | )    |  | (518   | )
|                                      |      |  |      |      |      |  |        |  
|                                      |      | 
|Balance as at December 31             |      |  |      | (83  | )    |  | (649   | )
|                                      |      |  |      |      |      |  |        |  

|7. |  | PROPERTY,
PLANT AND EQUIPMENT
|-- |  | -----------------------------

|                                         | 2006 |  | 2006 |        | 2005 | 
|---------------------------------------- | ---- |  | ---- | ------ | ---- | 
|
|
|Buildings                                |      |  |      | 1,693  |      | 
|Machinery and equipment                  |      |  |      | 7,200  |      | 
|Motor vehicles                           |      |  |      | 1,790  |      | 
|Furniture, fixtures and office equipment |      |  |      | 544    |      | 
|                                         |      |  |      |        |      | 
|                                         |      |  |      | 11,227 |      | 
|Less: accumulated depreciation           |      |  |      | (7,072 | )    | 
|                                         |      |  |      |        |      | 
|                                         |      |  |      | 4,155  |      | 
|                                         |      |  |      |        |      | 

| | The
Groups buildings are located in the PRC and the land on which the Groups
buildings are situated is State-owned.
| | ---------------------------------------------------------------------------------------------------------------------

F-21



---

|8. |  | DEFERRED
TAX ASSETS AND INCOME TAXES
|-- |  | ------------------------------------

| | The
Company was incorporated in the British Virgin Islands and, under the current laws of the
British Virgin Islands, is not subject to tax on income or on capital gains.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Jinpan
USA, a wholly-owned subsidiary of the Company, is incorporated in the United States of
America. Jinpan USA has suffered operating losses in the current year and previous years,
accordingly no income tax is provided.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Jinpan
JV, a cooperative joint venture registered in the PRC in which the Company has an 85%
interest, is subject to PRC income taxes at the applicable tax rate of 15% for
Sino-foreign joint venture enterprises registered in Hainan Province, the PRC. In
addition, in accordance with the relevant PRC income tax laws applicable to Sino-foreign
joint venture enterprises, Jinpan JV is exempt from corporate income tax for two years
commencing from the first year with assessable profit after deducting the tax losses
brought forward, and is entitled to a 50% tax exemption for the next three years. The
first profitable year of Jinpan JV was 1997 and the tax holiday expired on December 31,
2001. However, being a technically advanced enterprise, as defined by Ministry of Science
and Technology, Jinpan JV is entitled to a 50% tax exemption after the tax holiday for
three further years commencing from January 1, 2002 as approved by the relevant
government authorities. The benefit of 50% tax exempt was expired on 12/31/2004, the
company was taxed at the applicable tax rate of 15% in the year 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-22



---

|8. |  | DEFERRED
TAX ASSETS AND INCOME TAXES (CONTINUED)
|-- |  | ------------------------------------------------

| | Total
dollar and per share effect of tax holidays of Jinpan JV for the years ended December 31,
2006, 2005 and 2004 were as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------

|                                     | 2006 |  | 2006 |   | 2005 |  | 2004 | 
|------------------------------------ | ---- |  | ---- | - | ---- |  | ---- | 
|                                     |      |  |      |   |      |  |      | 
|
|
|Effect on net income of the year     |      |  |      | - |      |  | -    | 
|                                     |      |  |      |   |      |  |      | 
|Effect on basic earnings per share   |      |  |      | - |      |  | -    | 
|                                     |      |  |      |   |      |  |      | 
|Effect on diluted earnings per share |      |  |      | - |      |  | -    | 
|                                     |      |  |      |   |      |  |      | 

| | Pretax
income for the years ended December 31, 2006, 2005 and 2004 was taxed in the following
jurisdictions:
| | ------------------------------------------------------------------------------------------------------------

|                               | 2006 |  | 2006 |        | 2005 |  | 2004   |  
|------------------------------ | ---- |  | ---- | ------ | ---- |  | ------ | -
|                               |      |  |      |        |      |  |        |  
|
|
|British Virgin Islands         |      |  |      | (738   | )    |  | (5,856 | )
|United States of America       |      |  |      | 233    |      |  | 1,851  |  
|The People's Republic of China |      |  |      | 10,567 |      |  | 83,894 |  
|                               |      |  |      |        |      |  |        |  
|                               |      |  |      | 10,062 |      |  | 79,889 |  
|                               |      |  |      |        |      |  |        |  

| | Significant
components of the provision for income taxes attributable to income before income taxes
are as follows:
| | -------------------------------------------------------------------------------------------------------------------

|         | 2006 |  | 2006 |        | 2005 |  | 2004    |  
|-------- | ---- |  | ---- | ------ | ---- |  | ------- | -
|         |      |  |      |        |      |  |         |  
|
|
|Current  |      |  |      |        |      |  |         |  
|Non-US   |      |  |      | (1,416 | )    |  | (11,242 | )
|         |      | 
|Deferred |      | 
|Non-US   |      |  |      | 44     |      |  | 351     |  
|         |      |  |      |        |      |  |         |  
|         |      |  |      | (1,372 | )    |  | (10,891 | )
|         |      |  |      |        |      |  |         |  

F-23



---

|8. |  | DEFERRED
TAX ASSETS AND INCOME TAXES (CONTINUED)
|-- |  | ------------------------------------------------

| | Deferred
tax assets comprised the following at December 31, 2006 and 2005:
| | --------------------------------------------------------------------------

|                                                  | 2006 |  | 2006 |      | 2005 | 
|------------------------------------------------- | ---- |  | ---- | ---- | ---- | 
|
|
|Deferred tax assets                               |      |  |      |      |      | 
|Provision for doubtful debts                      |      |  |      | 88   |      | 
|Inventory Reserved                                |      |  |      | 13   |      | 
|Deferred income                                   |      |  |      | -    |      | 
|Net operating loss carry forward of Jinpan USA    |      |  |      | 879  |      | 
|                                                  |      |  |      |      |      | 
|Total deferred tax assets                         |      |  |      | 980  |      | 
|                                                  |      | 
|Less: Valuation allowance for deferred tax assets |      |  |      | (879 | )    | 
|                                                  |      |  |      |      |      | 
|                                                  |      |  |      | 101  |      | 
|                                                  |      |  |      |      |      | 
|                                                  |      | 
|Deferred tax liabilities                          |      | 
|Interest income                                   |      |  |      | -    |      | 
|                                                  |      |  |      |      |      | 
|Total deferred tax liabilities                    |      |  |      | -    |      | 
|                                                  |      |  |      |      |      | 
|Net deferred tax assets                           |      |  |      | 101  |      | 
|                                                  |      |  |      |      |      | 

| | The
Group has provided a RMB6,865,000 (2005: RMB7,606,000) valuation allowance covering 100%
of net operating loss of Jinpan USA. The change in the valuation allowance for the
current year is RMB741,000 (2005: RMB448,000). At December 31, 2006, the Group has
available net operating loss of RMB17,162,000 (2005: RMB19,014,000), which will expire in
the years 2017 to 2023.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
were no deferred tax liabilities as at December 31, 2006.
| | ---------------------------------------------------------------

F-24



---

|8. |  | DEFERRED
TAX ASSETS AND INCOME TAXES (CONTINUED)
|-- |  | ------------------------------------------------

| | The
reconciliation of income tax computed at the PRC statutory 2006 income tax rate of 15%
(2005:15% and 2004:15%) in Hainan Province, the PRC to income before minority interests
is as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | 2006 |  | 2006 |       | 2005 |  | 2004   |  
|---------------------------------------- | ---- |  | ---- | ----- | ---- |  | ------ | -
|                                         |      |  |      |       |      |  |        |  
|
|
|Computed expected income taxes           |      |  |      | 1,509 |      |  | 11,983 |  
|Impact of tax holiday of Jinpan JV       |      |  |      | (148  | )    |  | (1,177 | )
|Non-deductible                           |      |  |      | (30   | )    |  | (235   | )
|Effect of difference between the PRC and |      | 
|USA tax rate                             |      |  |      | 69    |      |  | (543   | )
|Change in valuation allowance            |      |  |      | (6    | )    |  | (44    | )
|Others                                   |      |  |      | (23   | )    |  | (179   | )
|                                         |      |  |      |       |      |  |        |  
|                                         |      |  |      |      
|                                         |      |  |      | 1,372 |      |  | 10,891 |  
|                                         |      |  |      |       |      |  |        |  

|9. |  | SHORT
TERM BANK LOANS
|-- |  | ---------------------

|2006                  |  | 2006 |  | 2005   |  
|--------------------- |  | ---- |  | ------ | -
|
|
|Short term bank loans |  |      |  | 3,842  |  
|Letters of credit     |  |      |  | 2,147  |  
|Less: current portion |  |      |  | (5,989 | )
|                      |  |      |  |        |  
|                      |  |      |  | -      |  
|                      |  |      |  |        |  

| | The
bank loan is unsecured, bears an interest at the rate of 5.92% per annum and is repayable
on May 28, 2006. The total bank loan credit line is RMB 30,000,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Letters
of credit from Nan-Yang commercial bank are secured by three directors and guaranteed by
Jinpan International Limited, bears interest at a weighted average rate of 6.51%, 5.86%
and 4.84% per annum for the years ended December 31, 2006, 2005 and 2004, respectively,
and are repayable within 90 days. The total credit facility is RMB48,484,000
(US$6,000,000) from Nan-Yang Commercial Bank, of which RMB30,089,000 (US$3,853,303) is
unused and will expire in August 2007. In May 2006, Jinpan JV received an unsecured
letter of credit loan from Bank of China for the total credit facility of RMB35, 000,000.
.. This credit facility will expire in May 2007. Jinpan JV also received from Bank of
China for the total working capital credit facility of RMB 30,000,000, which were used as
of December 31, 2006.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. |  | GOVERNMENT
GRANT
|--- |  | ----------------

| | Since
1998, Jinpan JV received grants-in-advance from the PRC local government for its past
business performance. The Group recognizes revenue in the statement of income upon
receipt of approval from the government. The Group recognized income of nil, RMB1,000,000
and RMB 70,000 in 2006, 2005 and 2004, respectively. Subject to certain terms and
conditions of government approval documents, certain grants can not be recognized as
income after five years of the receipts. As such, there was approximately RMB 3,962,000
as of December 31, 2006 ( 2005: RMB 4,916,000) was classified as long term liability.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-25



---

|11. |  | DISTRIBUTION
OF INCOME
|--- |  | ----------------------

| | According
to the Articles of Association of Jinpan JV, Jinpan JV is required to maintain reserves
which include a statutory reserve fund, an enterprise expansion fund and staff welfare
and bonus fund based on the net income as reported in the statutory accounts prepared in
accordance with PRC GAAP. The amount of earnings of Jinpan JV available for distribution
under PRC GAAP was approximately RMB70 million, RMB49 million and RMB42 million for the
year ended December 31, 2006, 2005 and 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
statutory reserve fund, enterprise expansion fund and the staff welfare and bonus fund
represent appropriations made at the sole discretion of the board of Jinpan JV directors.
The enterprise expansion fund is used for future expansion. The staff welfare and bonus
fund is used for the collective welfare of the staff and workers of Jinpan JV.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the years ended December 31, 2006, 2005 and 2004, the directors of Jinpan JV proposed the
following appropriations to reserves.
| | --------------------------------------------------------------------------------------------------------------------------------------

|                             | 2006 |  | 2006 |     | 2005 |  | 2004  | 
|---------------------------- | ---- |  | ---- | --- | ---- |  | ----- | 
|                             |      |  |      |     |      |  |       | 
|
|
|Statutory reserve fund       |      |  |      | 930 |      |  | 7,262 | 
|Enterprise expansion fund    |      |  |      | -   |      |  | -     | 
|Staff welfare and bonus fund |      |  |      | -   |      |  | -     | 
|Dividends                    |      |  |      | -   |      |  | -     | 
|                             |      |  |      |     |      |  |       | 
|                             |      | 
|                             |      |  |      | 930 |      |  | 7,262 | 
|                             |      |  |      |     |      |  |       | 

| | The
Company declared a cash dividend of US$0.24 per share of common stock on January 17,
2006, which was paid on February 10, 2006 and August 24, 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

F-26



---

|12. |  | COMMITMENTS
AND CONTINGENT LIABILITES
|--- |  | -------------------------------------

| | (1) |  | Contingent
liabilities
| | --- |  | ----------------------

| | As
of December 31, 2006, the Group had bank guarantees to the Nan Yang Commercial Bank for
irrevocable Letters of credit of RMB16,763,000 for the purchase of raw materials. Details
of bank guarantees are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (a) |  | The
Group should jointly and severally pay and satisfy to Nan Yang Commercial           Bank
on demand all sums of money debts and liabilities whether certain or           contingent
whether now or at any time herein after owing or incurred to the bank           from or
by the Jinpan JV.
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (b) |  | The
guarantee shall be a continuing security, starting from the effective day           of
the principal contract until the two calendar years of the expiration of
          principal contract.
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Commitments
| | --- |  | -----------

| | Operating
lease commitments
| | ---------------------------

| | The
Group leases certain buildings and apartments under non-cancelable lease arrangements.
The operating lease rental incurred by the Group during the years ended December 31,
2006, 2005 and 2004 amounted to RMB6,782,000, RMB1,671,000 and RMB1,149,000, respectively
These operating leases expire in various years through 2011 and after. These leases may
be renewed for periods ranging from one to two years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Future
minimum payments under non-cancelable operating leases with initial terms of one year or
more consisted of the following at December 31, 2006:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

|                             | US$ |  | RMB |    
|---------------------------- | --- |  | --- | ---
|
|2007                         |     |  |     | 120
|2008                         |     |  |     | 80 
|2009                         |     |  |     | 60 
|2010                         |     |  |     | 48 
|2011 after                   |     |  |     | 561
|                             |     |  |     |    
|Total minimum lease payments |     |  |     | 869
|                             |     |  |     |    

| | Capital commitments
| | -------------------

| | As
of December 31, 2006 the Group has commitments of RMB2,237,990 for the purchase of new
office and plant and machinery.
| | -------------------------------------------------------------------------------------------------------------------------

| | Employment
contracts
| | --------------------

| | The
Groups employees in the PRC, include engineers technicians, management
administrative personnel, marketing and sales personnel, and factory personnel while
employees in United States include management, administration, and marketing personnel.
All of the employees except US employees are contract employees and have entered into
renewable employment contracts with the Group. Terms of the employment agreements with
management, engineers, sales persons and technicians range from two to five years and
terms of the employment agreements with support personnel range from six months to one
year.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-27



---

|12. |  | COMMITMENTS
AND CONTINGENT LIABILITES (CONTINUED)
|--- |  | -------------------------------------------------

| | Future
minimum payments to employees under employment contracts consisted of the following at
December 31, 2006:
| | ----------------------------------------------------------------------------------------------------------------

|                                           |  | US$ | RMB |    
|------------------------------------------ |  | --- | --- | ---
|
|
|2007                                       |  |     |     | 218
|2008                                       |  |     |     | 24 
|2009                                       |  |     |     | 21 
|2010                                       |  |     |     | 14 
|                                           |  |     |     |    
|Total minimum employment contract payments |  |     |     | 277
|                                           |  |     |     |    

|13. |  | FINANCIAL
INSTRUMENTS
|--- |  | ---------------------

| | Concentrations
of credit risk
| | -----------------------------

| | Financial
instruments that potentially subject the Group to significant concentrations of credit
risk consist principally of cash and cash equivalents, accounts receivable and
investments available for sales.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Group maintains cash and cash equivalents with Bank of China, Industrial and Commercial
Bank of China, China Construction Bank and Bank of Communications in the PRC and
Citibank, N.A. in the United States.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Concentrations
of credit risk with respect to accounts receivable are limited due to the large number of
entities comprising the Groups customer base. The Group performs ongoing credit
evaluations of its customers financial conditions and does not require collateral
for accounts receivable.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
provision for doubtful accounts the Group maintains is based upon the expected
collectibility of all accounts receivable. Losses have been within managements
expectations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not invest in derivative financial instruments or other market risk
sensitive instruments, for investments available for sales, except for certain corporate
bonds. Accordingly, our exposure financial market risk derives primary from changes in
interest rate.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-28



---

|13. |  | FINANCIAL
INSTRUMENTS (CONTINUED)
|--- |  | ---------------------------------

| | Fair
Value
| | ----------

| | Cash
and cash equivalents: The carrying amount reported in the balance sheet for cash and
cash equivalents approximates their fair value because of the short maturity of those
instruments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments,
Accounts receivable, notes receivable, other receivables, advance from customers and bankloans: The carrying amounts reported in the balance sheet for these items
approximate their fair value. The carrying value of accounts receivable, notes
receivable, other receivables, advance from customers, accruals, and bank loans
approximate their market values based on their short-term maturities. The fair value of
investments as of December 31, 2006 is RMB1,506,000, which is based on quoted market
prices.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14. |  | CONCENTRATION
OF RISK
|--- |  | ---------------------

| | During
2006, the Group was dependent on two major suppliers Hexion (Bakelite AG) and Xiamen
Xiangyu Speed Fair Trading Co., Ltd for cast resin, which accounted for approximately
1.3% (2005: 1.6%) and 0.75% of total purchases. And the Group was dependent on three
major suppliers, Wuhan Steel Processing Cp., Ltd, Thyssenkrupp Electrical Steel GmbH, and
Legnano Teknoelectric Company Spa for silicon steel, which accounted for approximately
27.5% , 6.4% (2005: 13.0%) and 5.3%(2005:24.2%)of total purchase. The Group also depend
on TongLing Nonferrous Metals (Group) Inc and Jiangying Jinqiu Group Co.Ltd . for copper
foil, which accounted for approximately 17.8% (2005: 7.6%) and 4.3% (2005:3.5 %) of total
purchases, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15. |  | PENSION
AND OTHER POSTRETIREMENT BENIFITS
|--- |  | -----------------------------------------

| | In
the beginning of 2006, Jinpan USA set up a simple IRA plan for employees. The employees
can contribution to Simple IRA plan from paycheck; the amount employees contributed are
tax deferred. During the 2006, the employer, Jinpan USA, did not make any contribution.
Jinpan JV has a defined contribution retirement plan for its employees. As stipulated by
the PRC government regulations, Jinpan JV participates in a defined contribution
retirement plan organized by the government of Hainan Province, the PRC. All permanent
employees are entitled to an annual pension which is equal to a fixed proportion of their
final basic salary at their retirement date. Jinpan JV and its employees are required to
make contributions to the retirement plan at rates of 20% and 6% of the employeesbasic
salary, respectively. Payment is made, on a monthly basis, to a PRC insurance company
organized by the PRC government which is responsible for the payments of pension benefits
to retired employees. Jinpan JV has no obligations for the pension benefits beyond the
annual contributions as described above. The pension costs recognized by Jinpan JV during
the years ended December 31, 2006, 2005 and 2004 amounted to RMB1,052,000(US$134,721),
RMB784,000(US$97,304) and RMB523,000, (US$63,212) respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-29



---

|16. |  | OPERATIONS
BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
|--- |  | --------------------------------------------------

| | Description
of products by segment
| | ----------------------------------

| | Cast
resin transformers is the only reportable segment of the Group.
| | --------------------------------------------------------------------

| | Geographic
area data
| | --------------------

|                                       | Year ended December 31, | 
|-------------------------------------- | ----------------------- | 
|                                       |                         | 
|
|                                       |                         | 
|
|
|Revenues from external customers:      |                         | 
|United States                          |                         | 
|PRC                                    |                         | 
|                                       |                         | 
|                                       |                         | 
|                                       |                         | 
|                                       |                         | 
|Property, Plant,and Equipment by area: |                         | 
|United States                          |                         | 
|PRC                                    |                         | 
|                                       |                         | 
|                                       |                         | 
|                                       |                         | 

|17. |  | MINORITY
INTEREST IN CONSOLIDATED SUBSIDIARY
|--- |  | --------------------------------------------

| | Minority
interest in equity of consolidated subsidiary represents 15% equity interest in Jinpan JV
owned by minority shareholders.
| | ----------------------------------------------------------------------------------------------------------------------------------

|18. |  | EQUITY
|--- |  | ------

| | Pursuant
to the board resolution of the Company dated January 21, 2002, the officers of the Group
were authorized and empowered, in the name and on behalf of the Group, to purchase up to
640,000 shares of the Groups common stock from time to time in the open market and
through privately, negotiated transactions; such repurchase program is to be financed
from internally generated corporate funds, with the acquired stock to be available for
use under the Groups stock option plan or for other corporate purposes. As of
December 31, 2006, 212,470 (2005: 212,470) shares of the Groups common stock were
transferred back into treasury at an aggregate cost of US$823,417, approximately
RMB6,779,000 . The Group did not purchase any of its stock in the open market during
2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2006, The Group issued 4,000 shares from its treasury shares to the employees who
exercised their stock options.
| | --------------------------------------------------------------------------------------------------------------------------

| | The
Groups convertible preferred stock (preferred stock) is convertible at
any time to shares of common stock and each share of preferred stock entitles its holder
to the same number of votes as a share of common stock. In the event of the Groups
liquidation, dissolution or winding up, the holders of preferred stock are entitled to a
preference over the holders of common stock in the distribution of assets in an amount
equal to the sum of: (i) US$2.188 per share, and (ii) an amount equal to declared but
unpaid dividends on each such share.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the board resolution of the Company dated December 19, 2006, the officers of the
Company were authorized to enter into agreements to sell 1,350,371 shares of its common
stock in a private placement for a total of approximately RMB 200,348,000
(US$25,657,000).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
private placement transaction was completed on December 22, 2006.
| | ---------------------------------------------------------------------

F-30



---

|18. |  | EQUITY
(CONTINUED)
|--- |  | ------------------

| | (a) |  | 1997
stock option plan
| | --- |  | ----------------------

| | A
total of 1,000,000 shares of Common Stock have been reserved for issuance under the
Companys 1997 Stock Option Plan. The 1997 Stock Option Plan provides for options to
employees, officers, directors and consultants of the Company. The 1997 Stock Option
Plan, which was established in October 1997, is administered by the board of directors or
a committee appointed by the board, which determines the terms of options granted,
including the exercise price, the number of shares subject to the option and the options
exercisability. The exercise price of all options granted under the Stock Option Plan
must be at least equal to the fair market value of each share on the date of grant.
Options shall be fully vested and become exercisable at the date of grant. The maximum
term of options granted under the 1997 Stock Option Plan is 10 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | 2001
stock option agreements
| | --- |  | ----------------------------

| | In
February 2001, the Group entered into stock option agreements with five of its directors
and Chief Financial Officer, to purchase 120,000 shares of common stock of the Group.
Options granted are exercisable at the price of US$1.35 per share and subject to
expiration 8 years from the date of grant, are not transferable other than on death, and
are exercisable from the date of grant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Group adopted the modified prospective transition method provided by SFAS No. 123(R), and
no compensation cost was recognized.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | Ms.
 Cherry Li and Ms. Grace Zhu, who were nominated as a director and Chief
          Financial Officer of the Company, each terminated their relationships with the
          Company in June and August 2002, respectively. Option grant in 2001 permitted
          Mr. Li and Ms. Zhu to retain the option.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2004, one of the directors exercised stock option to purchase total 20,000
shares of common stock of the Company at the exercise price of US$1.35 per share. Total
amount received from the exercise of the share option was US$27,000. During 2006, four
other directors exercised their stock option to purchase 65,000 shares of common stock at
the exercise price of US$1.35 per share. Total amount received was US$87,750 from
exercise of stock option.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | 2003
stock option agreement
| | --- |  | ---------------------------

| | In
September 2003, the Group entered into stock option agreements with seven of its
employees, to purchase 140,000 shares of common stock of the Group. Options granted are
exercisable at the price of US$3.55 per share and subject to termination of employment,
expire 10 years from the date of grant, are not transferable other than on death, and are
exercisable from the date of grant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2004, two employees exercised stock options to purchase 8,000 shares of common
stock of the Group at the exercise price of US$3.55 per share. Total amount received from
the exercise of the share option was US$28,400.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-31



---

|18. |  | EQUITY
(CONTINUED)
|--- |  | ------------------

| | In
April 2005, one employee exercised stock option to purchase total 700 shares of common
stock of the Group at the exercise price of US$3.55 per share. Total amount received from
the exercise of the share option was US$2,485.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2006, the employees exercised 41,300 shares of stock options that were granted. Total
amount received from the exercise of the option was US$146,615.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | 2004
stock option agreement
| | --- |  | ---------------------------

| | In
January 2004, the Group entered into stock option agreement with three of its independent
directors, to purchase 30,000 shares of common stock of the Group. Options granted are
exercisable at the price of US$7.34 per share. The term of the options is 10 years from
the dated granted. The options are not transferable other then death, and are exercisable
from the date granted.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2006, one of the directors exercised his stock options to purchase 10,000 shares
of common stock of the Group at the exercise price of US$ 73,400.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | 2006
Stock Option Plan
| | --- |  | ----------------------

| | On
October 30, 2006, the shareholders approved and adopted of 2006 Stock Option Plan.
A total of 300,000 shares of Common stock have been reserved for issuance under this
plan. The stock option plan provides for options to employees, officers, directors and
consultants of the Company. The 2006 Stock Option Plan is administered by the board of
directors or a committee appointed by the board, which determines the terms of options
granted, including the exercise price, the number of shares subject to the option and the
options exercisability. The exercise price of all options granted under the 2006
Stock Option Plan must be at least equal to the fair market value of each share on the
date of grant. Options shall be fully vested and become exercisable at the date of grant.
The \ maximum term of options granted under the 2006 Stock Option Plan is 10 years. As of
December 31, 2006, there were no options issued under the 2006 Stock Option Plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) |  | Number
of shares of common stock reserved for issuance upon exercise of stock options and
          preferred tock.
| | --- |  | -------------------------------------------------------------------------------------------------------------------

|                |  | 2006 |  | 2005    | 
|--------------- |  | ---- |  | ------- | 
|Warrants        |  |      |  | -       | 
|Stock options   |  |      |  | 145,000 | 
|Preferred stock |  |      |  | 6,111   | 
|                |  |      |  |        
|Total           |  |      |  | 151,111 | 
|                |  |      |  |        

F-32



---

|18. |  | EQUITY
(CONTINUED)
|--- |  | ------------------

| | (g) |  | Stock
Option Activity
| | --- |  | ---------------------

| | A
summary of the Groups stock option activities, and related information for the
years ended December 31, 2006, 2005 and 2004 are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------

|                                               | 2006 |  | 2005 |          | 2004 | 
|---------------------------------------------- | ---- |  | ---- | -------- | ---- | 
|
|
|Outstanding at beginning of year               |      |  |      | 261,300  |      | 
|Granted                                        |      |  |      | -        |      | 
|                                               |      | 
|Exercised                                      |      |  |      | (116,300 | )    | 
|Cancelled                                      |      |  |      | -        |      | 
|Forfeited                                      |      |  |      | -        |      | 
|                                               |      |  |      |          |      | 
|Outstanding at the end of year                 |      |  |      | 145,000  |      | 
|Exercisable at the year end                    |      |  |      | 145,000  |      | 
|                                               |      | 
|Weighted average fair value of options granted |      | 
|during the year                                |      |  |      | N/A      |      | 

| | We
measure the fair value of each stock option grant at the date of grant using a
Black-Scholes option price model. The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options, including expected volatility,
expected life, expected dividend rate and expected risk-free rate of return. There were
no options issued in 2006 and all the optioned granted prior to January 1, 2006 were
vested; therefore, no expense was recognized in 2006 after adoption of SFAS 123(R).
Weight-average exercise prices for options outstanding as of December 31, 2006 are
US$3.542. The weighted-average remaining contractual life of those options is six years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-33



---

|19. |  | STAFF
ACCOUNTING BULLETIN NO. 108
|--- |  | ---------------------------------

| | As
discussed under Recent Accounting Pronouncements in Note 1, in September 2006, the SEC
issued SAB 108. The Transaction provisions of SAB 108 permit the Company to adjust the
culmulative effect on retained earnings of immaterial errors relating to prior years. SAB
108 also requires the adjustment of any prior quarterly financial statements within the
fiscal year of adoption for the effects of such errors on the quarters when the
information is next presented. Such adjustments do not requires previously filed reports
with SEC to be amended. The Company adopted SAB 108 at the end of year 2006. In
accordance with SAB 108, the Company has adjusted beginning retained earnings for year
ended December 31,2006 in the accompany consolidated financial statements as described
below. The Company considered this adjustment to be immaterial to prior periods either
quantitatively or qualitatively. The following quantitative measure was considered in
reaching its determination (in RMB thousands).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Year EndedDecember 31 | Net after-tax effect of adjustment | Reportednet income | Percent of reportednet income
|--------------------- | ---------------------------------- | ------------------ | -----------------------------
|2005                  | 195                                | 37,076             | 0.53%                        
|                     
|2004                  | 234                                | 28,864             | 0.81%                        
|                     
|2003                  | 162                                | 26,913             | 0.60%                        
|                     
|2002                  | 181                                | 24,883             | 0.73%                        
|                     
|Total                 | 772                                | 117,736            | 0.66%                        
|                     

| | The
cumulative effect for years prior to 2002 was approximately RMB 2,165,000.
| | ------------------------------------------------------------------------------

| | Prior to 2005, Jinpan JV recorded its depreciation expenses assuming a residual value of 5 percent to
10 percent of the purchase price of its asset.  In 2006, while assessing the net realizable value
of the recorded residual values, Jinpan JV identified errors in depreciation expense
from 1993 through 2005 totaling RMB2,937,000, net of tax.  Jinpan JV corrected the carrying value of
the associated assets by reducing retained earnings and
increasing accumulated depreciation as indicated in Consolidated Statements of
Shareholders Equity and Comprehensive Income.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|20. |  | SUBSEQUENT
EVENTS
|--- |  | -----------------

| | a) |  | Cash
Dividend
| | -- |  | -------------

| | On
January 15, 2007, the Board of Directors the Group declared a cash dividend of US$.24 per
share of common stock for the year 2007. The Group made the first distribution of US$.12
per share on February 22, 2007, to shareholders of record on February 8, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) |  | Acquiring
Minority Interest
| | -- |  | ---------------------------

| | On
February 13, 2007, the Company has completed acquisition of 15% minority interest in
Jinpan JV, for a purchase price of US $11 million. The Company owns 100% of Jinpan JV
now. The excess paid for acquiring minority interest was approximately US$9.9 million and
which was allocated to additional paid in capital.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) |  | Warrants
granted to non-employees
| | -- |  | ---------------------------------

| | On
March 16, 2007, warrants to purchase 100,000 shares of the Groups common stock were
issued by the Group to an investment bank in connection with the services provided to the
Group on the sale of common stock in a private placement to accredited investors. The
exercise price of the warrant was US $23.30. This warrant shall expire on March 15, 2013.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d) |  | Acquiring
Land Use Right
| | -- |  | ------------------------

| | On
February 5, 2007, Jinpan JV, entered into agreement with Public Land Resource Management
Bureau, an administrative agency of the City of Wuhan of Hubei Province of the Peoples
Republic of China to purchase from the Chinese Government use rights to a parcel of land
(28,791.61 meters squared). The term of the use runs for 50 years from the date of the
signing of the Land Use Rights Transfer Agreement and renewable thereafter. The purchase
price for the land use rights is RMB 6,679,035.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-34



---

|21. |  | PARENTS
ONLY FINANCIAL INFORMATION
|--- |  | -----------------------------------

| | Jinpan
International Limited (the Company) is the parent company of the Jinpan JV and Jinpan
USA, below are the parents only balance sheet as of December 31, 2006 and Income
statement for the year ended December 31, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Jinpan International Limited
Balance Sheet
| | ------------------------------------------

|                                           | December 31 | 
|------------------------------------------ | ----------- | 
|                                           |             | 
|
|                                           |             | 
|
|                                          
|Cash                                       |             | 
|Investment                                 |             | 
|Other Receivable                           |             | 
|Prepaid Expense                            |             | 
|Due from Subsidiaries                      |             | 
|Investment in Subsidiaries                 |             | 
|                                           |             | 
|Total Assets                               |             | 
|                                           |             | 
|                                          
|Accounts Payable                           |             | 
|Bonus Payable                              |             | 
|Professional Fee Payable                   |             | 
|                                           |             | 
|Total Liabilities                          |             | 
|                                          
|Minority Interest                          |             | 
|                                          
|Common Stock                               |             | 
|Preferred Stock                            |             | 
|Paid In Capital                            |             | 
|Reserved                                   |             | 
|Retained Earnings                          |             | 
|Accumulated other Comprehensive Income     |             | 
|Treasury Stock                             |             | 
|                                           |             | 
|                                           |             | 
|                                           |             | 
|Total Liabilities and Shareholders' Equity |             | 
|                                           |             | 

F-35



---

|21. |  | PARENTS
ONLY FINANCIAL INFORMATION (CONTINUED)
|--- |  | -----------------------------------------------

| | Jinpan International Limited
Statement of Income
| | ------------------------------------------------

|                                    | For the year ended December 31 | 
|----------------------------------- | ------------------------------ | 
|                                    |                                | 
|
|                                    |                                | 
|                                    |                                | 
|Earnings from Subsidiaries          |                                | 
|General and Administration Expenses |                                | 
|                                    |                                | 
|Operating profit                    |                                | 
|Other Income                        |                                | 
|                                    |                                | 
|Net income before Tax               |                                | 
|Income Tax                          |                                | 
|                                    |                                | 
|Net Income before Minority Interest |                                | 
|Minority Interest                   |                                | 
|                                    |                                | 
|Net Income                          |                                | 
|                                    |                                | 

|22. |  | SCHEDULE
II
|--- |  | -----------

Jinpan International
Limited and Subsidiaries

VALUATION AND
QUALIFYING ACCOUNTS(RMB In Thousands)

|Description                                             | Balance at
Beginning of
Period |  | Purchase Price
Reserved |        | Charged
(Credited) to
Costs and Expenses |  | Charge to
Other Accounts |  | Deductions |       | Balance at End
of Period | 
|------------------------------------------------------- | ------------------------------ |  | ----------------------- | ------ | ---------------------------------------- |  | ------------------------ |  | ---------- | ----- | ------------------------ | 
|                                                        |                                |  |                         |        |                                          |  |                          |  |            |       |                          | 
|Year Ended December 31, 2006                            |                                |  |                         |        |                                          |  |                          |  |            |       |                          | 
|Reserved deducted from assets to which      they apply: |                                | 
|Provision for doubtful debt                             |                                |  |                         | 10,619 |                                          |  | -                        |  |            | 797   |                          | 
|Deferred tax valuation allowance                        |                                |  |                         | 7,606  |                                          |  | -                        |  |            | -     |                          | 
|                                                        |                                | 
|Year Ended December 31, 2005                            |                                |  |                         |        |                                          |  |                          |  |            |       |                          | 
|Reserved deducted from assets to which      they apply: |                                | 
|Provision for doubtful debt                             |                                |  |                         | 9,484  |                                          |  | -                        |  |            | 1,347 |                          | 
|Deferred tax valuation allowance                        |                                |  |                         | 7,158  |                                          |  | -                        |  |            | -     |                          | 
|                                                        |                                | 
|Year Ended December 31, 2004                            |                                |  |                         |        |                                          |  |                          |  |            |       |                          | 
|Reserved deducted from assets to which      they apply: |                                | 
|Provision for doubtful debt                             |                                |  |                         | 11,066 |                                          |  | -                        |  |            | -     |                          | 
|Deferred tax valuation allowance                        |                                |  |                         | 6,827  |                                          |  | -                        |  |            | -     |                          | 

_________________

(1)    
          Write-off against reserve

F-36