**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

________________________

 

**FORM 20-F**

**(Mark One)**

 

| **o** | **REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------|

 

**OR**

 

| **x** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 31, 2007**

 

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------|

 

**OR**

 

| **o** | **SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-------------------------------------------------------------------------------------------------|

 

Date of event requiring this shell company report:

 

|   | **For the transition period from** | **to** |
|--------|------------------------------------|--------|

 

 

Commission File Number 1-14742

 

________________________

 

 

 

 

**JINPAN INTERNATIONAL LIMITED**

**(Exact name of Registrant as specified in its charter)**

 

**British Virgin Islands**

(Jurisdiction of incorporation or organization)

 

**c/o Hainan Jinpan Electric Company, Ltd**

**Section D-2**

**No. 100 Nanhai Avenue**

**Jinpan 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 Shares, $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.

 

 

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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:**8,186,617 Common Shares, par value $0.009 per share**

 

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

 

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

 

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 x         Noo

 

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 filero    Accelerated        filer x   Non-accelerated filero

 

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

|   | Item 17o | Item 18 | x |
|--------|----------|---------|---|

 

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). YesoNox

 

 

 

 

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**Table of Contents**

 

|      |                                                                         | Page   |
|-----------|------------------------------------------------------------------------------|--------|
|      | **Part I**                                                                   |   |
| Item 1.   | Identity of Directors, Senior Management and Advisors                        | 4      |
| Item 2.   | Offer Statistics and Expected Timetable                                      | 4      |
| Item 3.   | Key Information                                                              | 4      |
| Item 4.   | Information on the Company                                                   | 18     |
| Item 4A.  | Unresolved Staff Comments                                                    | 32     |
| Item 5.   | Operating and Financial Review and Prospects                                 | 32     |
| Item 6.   | Directors, Senior Management and Employees                                   | 41     |
| Item 7.   | Major Shareholders and Related Party Transactions                            | 47     |
| Item 8.   | Financial Information                                                        | 48     |
| Item 9.   | The Offer and Listing                                                        | 50     |
| Item 10.  | Additional Information                                                       | 52     |
| Item 11.  | Quantitative and Qualitative Disclosure About Market Risk                    | 56     |
| Item 12.  | Description of Securities Other than Equity Securities                       | 56     |
|      |                                                                         |   |
|      | **Part II**                                                                  |   |
| Item 13.  | Defaults, Dividend Arrearages and Delinquencies                              | 56     |
| Item 14.  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 56     |
| Item 15.  | Controls and Procedures                                                      | 57     |
| Item 16A. | Audit Committee Financial Expert                                             | 58     |
| Item 16B. | Code of Ethics                                                               | 58     |
| Item 16C. | Principal Accountant Fees and Services                                       | 58     |
| Item 16D. | Exemptions From the Listing Standards for Audit Committees                   | 60     |
| Item 16E  | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 60     |
|      |                                                                         |   |
|      | **Part III**                                                                 |   |
| Item 17.  | Financial Statements                                                         | 60     |
| Item 18.  | Financial Statements                                                         | 60     |
| Item 19.  | Exhibits                                                                     | 61     |

 

|   | **Financial Statements**                                                                                                      |   |
|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                          |   |
|   | Reports of Independent Auditors                                                                                               | F-1    |
|   | Consolidated Balance Sheets as of December 31, 2007 and 2006                                                                  | F-3    |
|   | Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005                                        | F-4    |
|   | Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years ended December 31, 2007, 2006 and 2005 | F-5    |
|   | Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005                                    | F-6    |
|   | Notes to Consolidated Financial Statements                                                                                    | F-7    |

 

 

i

 

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**FORWARD-LOOKING STATEMENTS**

 

All statements made in this Annual Report on Form 20-F other than purely historical information are “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements include statements regarding future plans and objectives. These statements may be preceded or followed by or otherwise include the words “believes,”        “expects,” “anticipates,” “intends,” “continues,” “plans,” “estimates,” “projects” or similar expressions or statements that events “will,” “should,” “could,” “might” or “may” occur. These statements are only our current expectations and are based on our management's beliefs and assumptions and on information currently available to our        management. These statements appear throughout this Annual Report on Form 20-F, including under:

 

|   | **•** | “Item 3. Key Information—Risk Factors” and “Item 5 – Operating and Financial Review and Prospects” regarding our management objectives; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | “Item 5. Operating and Financial Review and Prospects” regarding our management objectives, including our 2008 outlook, as well as trends in results, prices, operations and overall market trends; and |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | “Item 8. Financial Information – Dividend Policy” regarding our policy on future dividend payments. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------|

 

Forward-looking statements involve risks, uncertainties and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Actual results may differ materially from those expressed in these forward-looking statements due to a number of uncertainties and risks, including the risks described        in this Annual Report on Form 20-F and other risks, including:

 

|   | **•** | our ability to successfully implement our business strategy; |
|--------|------------|--------------------------------------------------------------|

 

|   | **•** | uncertainties about the future growth in electricity consumption and infrastructure development in the markets in which we operate; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | inability to attract and retain qualified management and personnel; |
|--------|------------|---------------------------------------------------------------------|

 

|   | **•** | increases in the costs of our raw materials; |
|--------|------------|----------------------------------------------|

 

|   | **•** | the impact of existing and new competitors in the markets in which we compete, including competitors that may offer less expensive products and services, more desirable or innovative products or technological substitutes, or have more extensive resources or better financing; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | the effects of rapid technological changes and vigorous competition in the markets in which we operate; |
|--------|------------|---------------------------------------------------------------------------------------------------------|

 

|   | **•** | changes in competition and the pricing environments in the countries in which we operate; |
|--------|------------|-------------------------------------------------------------------------------------------|

 

|   | **•** | the failure to keep pace with technological changes in our industry; |
|--------|------------|----------------------------------------------------------------------|

 

|   | **•** | potential product liability claims; |
|--------|------------|-------------------------------------|

 

|   | **•** | the effects of the higher degree of regulation in the markets in which we operate; |
|--------|------------|------------------------------------------------------------------------------------|

 

 

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|   | ****•   **** | general economic and political conditions in the countries in which we operate or other countries which have an impact on our business activities or investments; |
|--------|----------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | inability to successfully adapt our internal controls over financial reporting to changes in circumstance; |
|--------|------------|------------------------------------------------------------------------------------------------------------|

 

|   | **•** | the monetary and interest rate policies of the countries in which we operate; and |
|--------|------------|-----------------------------------------------------------------------------------|

 

|   | **•** | exchange rates. |
|--------|------------|-----------------|

 

We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 20-F. Except as required by law, we are not under any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

 

All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

 

2

 

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**PART I**

 

**Currency Translation**

 

Unless specifically referenced or the context implies otherwise, the following entities are collectively referred in this annual report as “we”:

 

|   | (1) | Jinpan International Limited (“Jinpan International”), a British Virgin Islands business company; |
|--------|-----|---------------------------------------------------------------------------------------------------------------|

 

|   | (2) | Jinpan International (USA) Limited (“Jinpan USA”), a New York corporation and wholly owned subsidiary of Jinpan International; |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | (3) | Jinpan Electric (China) Company Limited (“Jinpan China”), a foreign funded PRC limited liability company and wholly owned subsidiary of Jinpan International; |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | (4) | Hainan Jinpan Electric Company Limited (“Hainan Jinpan”), a sino-foreign cooperative joint venture owned by Jinpan International and Wuhan Jinpan Electric Company Ltd.; and |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | (5) | Wuhan Jinpan Electric Company Limited (“Wuhan Jinpan”), a Chinese enterprise owned by Jinpan China and Hainan Jinpan. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------|

 

We prepared our financial statements in accordance with United States Generally Accepted Accounting Principles (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 or the PRC. For the reader’s        convenience, some financial information was converted from Renminbi into U.S. Dollars, referred to herein as “US$” or “dollar” using the noon buying rate (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, 2007, of RMB 7.29 = 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.

 

The following table sets forth for the years 2003 to 2007 and for the beginning of 2008 certain information regarding the Noon Buying Rate for Dollars expressed in RMB per US $.

 

3

 

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| Calendar Period                   |   | High   |   | Low    |   | Average(1) |   | At Period end |
|-----------------------------------|--------|--------|--------|--------|--------|------------|--------|---------------|
|                              |   |   |   |   |   |       |   |          |
| 2002                              |   | 8.27   |   | 8.28   |   | 8.28       |   | 12/31/2002    |
| 2003                              |   | 8.28   |   | 8.28   |   | 8.28       |   | 12/31/2003    |
| 2004                              |   | 8.28   |   | 8.28   |   | 8.28       |   | 12/31/2004    |
| 2005                              |   | 8.07   |   | 8.28   |   | 8.18       |   | 12/31/2005    |
| 2006                              |   | 7.80   |   | 8.07   |   | 7.94       |   | 12/31/2006    |
| 2007                              |   | 7.29   |   | 7.77   |   | 7.53       |   | 12/31/2007    |
| 2008 (through June 17, 2008)      |   | 6.89   |   | 7.29   |   | 7.07       |   | 06/17/2008    |
|                              |   |   |   |   |
| Monthly Rates                     |   |   |   |   |   |       |   |          |
|                              |   |   |   |   |   |       |   |          |
| January 2008                      |   | 7.18   |   | 7.29   |   | 7.235      |   | 01/31/2008    |
| February 2008                     |   | 7.11   |   | 7.20   |   | 7.155      |   | 02/29/2008    |
| March 2008                        |   | 7.01   |   | 7.11   |   | 7.06       |   | 03/31/2008    |
| April 2008                        |   | 6.98   |   | 7.01   |   | 7.00       |   | 04/30/2008    |
| May 2008                          |   | 6.94   |   | 7.00   |   | 6.94       |   | 05/31/2008    |
| June 2008 (through June 17, 2008) |   | 6.89   |   | 6.96   |   | 6.92       |   | 06/17/2008    |

 

| (1) | Average of the rates for each month in the relevant period except for June, 2008 for which the dates used are through June 17, 2008. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------|

 

| **Item 1.** | **Identity of Directors, Senior Management and Advisors** |
|-------------|-----------------------------------------------------------|

 

|   | Not Applicable. |
|--------|-----------------|

 

| **Item 2.** | **Offer Statistics and Expected Timetable** |
|-------------|---------------------------------------------|

 

|   | Not Applicable. |
|--------|-----------------|

 

| **Item 3.** | **Key Information** |
|-------------|---------------------|

 

| **A.** | **Selected Financial Data** |
|--------|-----------------------------|

 

The following selected financial data should be read in conjunction with Item 5, “Operating and Financial Review and Prospects” and the consolidated financial statements and the related notes included in this Annual Report on Form 20-F.

 

4

 

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We prepare our historical consolidated financial statements in accordance with U.S. GAAP. The selected financial data, set forth in the table below, have been derived from our audited historical financial statements for each of the years from 2003 to 2007. The selected consolidated statement of income data for the years 2005, 2006, and 2007, and the selected consolidated balance sheet        data at December 31, 2006 and 2007, have been derived from our audited consolidated financial statements set forth in “Item 18 – Financial Statements.” The selected consolidated statement of income data for the years 2003 and 2004, and the selected consolidated balance sheet data at December 31, 2003, 2004 and 2005, has been derived from our previously published audited consolidated financial statements, which are not included in this document. These selected financial        data should be read in conjunction with our consolidated financial statements and the related notes, and are qualified entirely by reference to such consolidated financial statements and the related notes.

 

|                                     |   | **Year ended December 31,** |   |
|------------------------------------------|--------|-----------------------------|--------|
|                                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |
|                                     |   | **2003**                    |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2007** |   |
|                                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |
|                                     |   | **RMB**                     |   | **RMB** |   | **RMB** |   | **RMB** |   | **RMB** |   | **US$(1)** |   |
|                                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Income Statement Data:                   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                    |   | 276,564                     |   | 349,609 |   | 438,219 |   | 653,208 |   | 903,361 |   | 119,623 |   |
| Costs of goods sold                      |   | (157,559                    | )      | (228,519 | ) | (297,818 | ) | (471,403 | ) | (588,941 | ) | (77,988 | ) |
| Gross profit                             |   | 119,005                     |   | 121,090 |   | 140,401 |   | 181,805 |   | 314,420 |   | 41,635 |   |
| Selling and administrative expenses      |   | (86,883                     | )      | (84,772 | ) | (88,407 | ) | (104,200 | ) | (173,434 | ) | (22,966 | ) |
| Income from operations                   |   | 32,122                      |   | 36,318 |   | 51,994 |   | 77,605 |   | 140,986 |   | 18,669 |   |
| Interest Expenses                        |   | (354                        | )      | (423 | ) | (1,499 | ) | (2,231 | ) | (3,515 | ) | (465 | ) |
| Other income                             |   | 4,717                       |   | 3,032 |   | 2,807 |   | 5,052 |   | 3,124 |   | 414 |   |
| Income before taxation                   |   | 36,485                      |   | 38,927 |   | 53,302 |   | 80,426 |   | 140,595 |   | 18,618 |   |
| Income Tax                               |   | (3,727                      | )      | (4,031 | ) | (8,744 | ) | (10,891 | ) | (16,809 | ) | (2,226 | ) |
| Income before Minority Interest          |   | 32,758                      |   | 34,896 |   | 44,558 |   | 69,535 |   | 123,786 |   | 16,392 |   |
| Minority interest                        |   | (5,845                      | )      | (6,032 | ) | (7,482 | ) | (9,876 | ) | — |   | — |   |
| Net income                               |   | 26,913                      |   | 28,864 |   | 37,076 |   | 59,659 |   | 123,786 |   | 16,392 |   |
|                                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per share:                      |   |                        |   |   |   |   |   |   |   |   |   |   |   |
|                                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                    |   | 4.21                        |   | 4.44 |   | 5.70 |   | 9.00 |   | 15.52 |   | 2.05 |   |
| Fully diluted                            |   | 4.15                        |   | 4.33 |   | 5.58 |   | 8.87 |   | 15.30 |   | 2.03 |   |
| Number of shares outstanding: (2)

Basic |   | 6,390,804                   |   | 6,498,178 |   | 6,499,898 |   | 6,625,726 |   | 7,976,755 |   | 7,976,755 |   |
| Fully diluted                            |   | 6,487,116                   |   | 6,663,305 |   | 6,640,396 |   | 6,728,915 |   | 8,090,630 |   | 8,090,630 |   |
|                                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |

 

 

| As of December 31,        |
|---------------------------|
|                      |   |   |   |   |   |   |   |
|                      | 2003 | 2004 | 2005 | 2006 | 2007 | 2007 |   |
|                      | RMB | RMB | RMB | RMB | RMB | US$(1) |   |
| Balance Sheet Data:       |   |   |   |   |   |   |   |
| Cash and cash equivalents | 66,571 | 46,433 | 52,396 | 256,320 | 114,565 | 15,705 |   |
| Total assets              | 283,890 | 351,228 | 411,197 | 707,870 | 884,627 | 121,272 |   |
| Net assets                | 208,854 | 233,857 | 258,807 | 490,219 | 603,574 | 82,743 |   |
| Minority interest         | 6,841 | 5,437 | 6,200 | 8,358 | - | - |   |
| Equity                    | 208,854 | 233,857 | 258,807 | 490,219 | 603,574 | 82,743 |   |

 

 

***____________________***

(1)        For your convenience, conversion of amounts from Renminbi into U.S. dollars has been made at the Noon Buying Rate.

 

| (2) | There are 20,000,000 common shares authorized and 1,000,000 preferred shares authorized. |
|-----|------------------------------------------------------------------------------------------|

 

5

 

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| **B.** | **Capitalization and indebtedness** |
|--------|-------------------------------------|

 

Not applicable.

 

| **C.** | **Reasons for the offer and use of proceeds** |
|--------|-----------------------------------------------|

 

Not applicable.

 

| **D.** | **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**

 

**Our operating results are substantially dependent on one product.**

 

Substantially all of our revenue comes from the sale of cast resin transformers, and we expect this pattern to continue. Accordingly, our future operating results will depend on the demand for this product. We cannot assure you that the market will continue to demand our current product or that we will be successful in marketing any new or enhanced products. If our competitors produce        new products that are superior to our cast resin transformers in performance or price, demand for our product may decline. A decline in demand for our cast resin transformers as a result of competition, technological change, economic conditions in China, restrictions on our ability to market this product or other factors would reduce our total revenues and harm our ability to maintain profitability.

 

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

 

Demand for our products is linked closely to increased demand for electrical power in China. While such demand has experienced strong 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.

 

**Our operating revenues would decline significantly if we lost one or more of our largest customers, which could have a material adverse impact on our business.**

 

A significant portion of our operating revenues are concentrated among our largest customers. Sales to our five largest customers in the aggregate for the fiscal years ended December 31, 2005, 2006, and 2007 accounted for approximately 16.00%, 16.00%, and 23.00% respectively, of our total sales. Sales to our largest customer for those same periods accounted for approximately 5.00%,        6.30%, and 9.60% of our total sales respectively. We cannot assure you 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.

 

6

 

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**We sell****all****of our reactors to one large original equipment manufacturer, or OEM, and any significant decrease of sales of reactors to this large OEM would have a negative effect on the revenues we receive from the sale of reactors.**

 

In 2007, revenue derived from the sale of reactors accounted for approximately 5% of our total revenue, or approximately $5.6 million. Presently, we sell all of our reactors to one large OEM. This is in contrast to a more diversified customer base for our cast resin transformers. Any significant decrease in the sale of reactors to this large OEM could have a material adverse effect on        revenue derived from the sale of reactors. In addition, if we fail to collect large accounts receivable from this large OEM, we could be subject to significant financial exposure.

 

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

 

Our future growth and success will depend in part on our ability to retain key members of our management, who are familiar with our business and the potential markets in which our business competes. We do not have “key person” or similar insurance on any of these individuals. If we lose their services or the services of key personnel, our financial results or business        prospects may be harmed. Additionally, our future growth and success will depend in part on our ability to attract, train, and retain sales, marketing, and management personnel. We cannot be certain that we will be able to attract and retain the personnel necessary to manage our operations effectively. Competition for experienced executives from numerous companies may limit our ability to hire or retain personnel on acceptable terms or at all. In addition, many of the companies with        which we compete for experienced personnel have greater financial and other resources than we do. Moreover, the employment of non-citizens may be restricted by applicable immigration laws.

 

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

 

The principal raw materials we require for our business are (1) silicon steel, which forms the core of our transformers, (2) copper and aluminum foil and wire, which wind around the core to form the coil, and (3) cast resin and electric isolation material, which serve as the insulation medium between coils. Prevailing prices for such commodities are subject to fluctuations due to        changes in supply and demand and a variety of additional factors beyond our control, such as global political and economic conditions. Historically, prices for some of these raw materials have been volatile and unpredictable, and such volatility is expected to continue. Therefore, commodity price changes may result in unexpected increases in raw material costs, and we may be unable to increase our prices to offset these increased costs without suffering reduced volumes, revenues or        operating income. We do not hedge against changes in commodity prices.

 

We maintain at least two suppliers for each of the principal raw materials in order to enhance our ability to obtain an adequate supply of high quality, competitively-priced raw materials. We usually keep a two or three month supply of these raw materials in our inventory. In 2007, the raw materials used in our products were supplied by two principal suppliers. However, if our        suppliers fail to supply these raw materials to us for any reason, including due to adverse financial developments at or affecting the supplier, and/or due to unexpected demand, labor shortages or disputes, it could have a material adverse effect on our results of operations.

 

7

 

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**Increased competition with other large and small transformer manufacturers may result in reduced prices and loss of market share.**

 

The market for cast resin transformers 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 major competitors are partially government owned entities and some 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 our 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.

 

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.

 

**China’s accession into the World Trade Organization has gradually eased, and may continue to ease, restrictions on foreign ownership in our industry and may increase competition in the markets in which we compete.**

 

On December 11, 2001, China officially joined the World Trade Organization, or the WTO. This has led and may continue to lead to increased foreign investment in mainland China, which may in turn increase competition and foreign participation in the markets in which we compete. As a result of China’s entry into the WTO, we may have additional competitors in China such as ABB,        Siemens, and Alstom. These and other potential competitors in China and elsewhere have and may have greater financial and other resources than we do. Increased competition and foreign participation may have a material adverse effect on our financial condition and results of operations as well as our business and prospects.

 

**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. For example, we believe that power distribution solutions for alternative energy sources, including technologies that harness wind and solar energy, hold promising opportunities for future growth. 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.

 

**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. If a litigant were successful against us it could have an adverse effect on our business, financial condition, results of        operations

 

8

 

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and liquidity. Additionally, a well-publicized actual or perceived problem could adversely affect our market reputation which could result in a decline in demand for our products.

 

**We may be subject to trademark 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 much of our success in growing sales and market share is due to our focus on providing high quality products and services. Achieving greater customer recognition of our trademark is also important to our        marketing and expansion effort. 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. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

We have not protected our intellectual property rights outside of China and we cannot be certain that countries will protect proprietary rights to the same extent as do the laws of China.

 

**We may be subject to patent infringement claims by third parties that could subject us to financial liability or limit our product offerings.**

 

We own the rights to four Chinese utility model patent certificates and one invention application pending in China. The four Chinese utility model patent certificates covers aspects of our cast resin technology and our transformers, including coil windings. The pending invention application is directed to a triangular transformer core structure. To date, we have not filed for patent        protection outside of China. The Chinese utility model patent certificates and pending application provide some protection of our technology in China, but they do not provide protection outside of China.

 

We currently hold a license from Schneider Electric (China) Investment Co. Ltd. (“Schneider Electric”), a leading manufacturer of circuit breakers, to the use of its breaker technology, and have developed low- and medium-voltage switchgear products from this licensing arrangement. If our arrangement with Schneider Electric may fail, or expire without renewal, we could        be prevented from selling these products. We may not be able to enter into another license arrangement, or one on commercially reasonable terms, to the use of similar breaker technology or be able to redesign our product to avoid infringement. Any required modification of our products or development of new products could harm our business.

 

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**Because we are a British Virgin Islands company, you may not be able to enforce judgments against us that are obtained in United States courts.**

 

We are incorporated under the laws of the British Virgin Islands. As a result, it may be difficult for investors to effect service of process upon us within the United States or to enforce against us judgments obtained in the United States courts, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States.

 

We have been advised by British Virgin Islands counsel that judgments of United States courts predicated upon the civil liability provisions of the federal securities laws of the United States may be difficult to enforce in British Virgin Islands courts and that there is doubt as to whether British Virgin Islands courts will enter judgments in original actions brought in British        Virgin Islands courts predicated solely upon the civil liability provisions of the federal securities laws of the United States.

 

**Risks Related to Our Chinese Operations**

 

**We may be subject to the political, economic 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 in China.

 

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 or 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

 

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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 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 change as the government seeks to refine and improve them. 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 or enforcement thereof), measures which may be introduced to control ownership of Chinese businesses by non-Chinese companies or investors, 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 1991 and 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

 

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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.

 

**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 generally, or their interpretation and enforcement thereof, |
|--------|------------|----------------------------------------------------------------------------------|

 

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

 

|   | **•** | confiscatory or increased taxation, |
|--------|------------|-------------------------------------|

 

|   | **•** | restrictions on currency conversion and currency devaluations, |
|--------|------------|----------------------------------------------------------------|

 

|   | **•** | regulations of Chinese businesses owned by non-Chinese companies or investment in such businesses by non-Chinese investors, |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | imports, import duties, and sources of supply, |
|--------|------------|------------------------------------------------|

 

|   | **•** | the expropriation of private enterprise, or |
|--------|------------|---------------------------------------------|

 

|   | **•** | inadequate development of China’s infrastructure, transportation and communications. |
|--------|------------|--------------------------------------------------------------------------------------------|

 

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.

 

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. The National People’s Congress has delegated rulemaking authority to the State Council and the State Administration of Taxation. Local governments may continue to        offer tax incentives to attract investment. For Hainan Jinpan, the applicable corporate income tax rate is 18% for fiscal year 2008. This rate will increase by increments of 2% per year, on average, until the tax rate reaches 25% in 2012. Presently, we enjoy preferential tax treatment in Wuhan. Wuhan Jinpan will not be subject to corporate income tax for 2008 and 2009. From 2010 to 2012, the corporate income tax applicable to Wuhan Jinpan would be half of the prevailing rate. We cannot        assure you that the Chinese government will continue to offer preferential tax treatment to foreign funded companies operating out of SEZs and EDZs.

 

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

 

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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.

 

**Despite continued economic reforms, we cannot assure you that the Chinese economy, upon which our products rely for growth, will continue to grow as it recently has done.**

 

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. Based on figures published by the National Bureau of Statistics of China (“NBS”),        China’s GDP grew at an average annual rate of 20% from 1978 to 2006. According to NBS, China’s GDP in 2007 was 24.66 trillion RMB, an increase of 11.40% over the previous year. 2007 marked the fifth consecutive year that China’s GDP recorded double digit growth. NBS data show that China’s GDP in 2003, 2004, 2005, and 2006 grew by 11.40%, 15.00%, 13.00%, and 12.80% respectively. 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 court decisions do not carry precedential value. China does not have a well-developed, consolidated body of laws governing corporations in general or foreign investment enterprises in particular. As a result, the administration of laws and regulations by government agencies may be subject to        considerable discretion in individual cases. As China’s legal system develops, we, like other foreign business entities, may be adversely affected by new laws, changes to existing laws (or new interpretations or enforcement 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 our 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 affect 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 People’s 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.

 

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**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.

 

**The expansion of our operations internationally may be adversely affected by economic, political, legal and other uncertainties of some foreign countries.**

 

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 operations and sales outside of China may be affected by the following risks, which may adversely affect companies operating in China and Chinese companies doing business outside of China:

 

|   | **•** | political and economic risks, including political instability, |
|--------|------------|----------------------------------------------------------------|

 

|   | **•** | currency controls and exchange rate fluctuations, |
|--------|------------|---------------------------------------------------|

 

|   | **•** | regulations of Chinese businesses owned by non-Chinese companies or investment in such businesses by non-Chinese investors |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | 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 rates to certain foreign currencies and may adversely affect our financial performance.**

 

We receive almost all of our revenues in Renminbi. 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. As a result, Renminbi is not freely convertible into foreign currencies. The Renminbi exchange rate to some other currencies can        also be volatile. Yet, we are required to meet foreign currency obligations such as for future purchases of certain equipment and raw materials from Germany. As a result, we face two risks: first, where our revenues are translated into other currencies, the translated revenue may reflect volatility due to the volatility of each rate; and second, we may face higher than anticipated costs for purchases which are required to be made in other currencies.

 

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 such as Hainan Jinpan, Jinpan China, 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.

 

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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 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.

 

According to the National Development and Reform Commission of China, in 2007, the general level of consumer prices in China was up by 4.8% over the previous year. Of this total, the prices for food items were up 12.3%. The retail prices of commodities were up by 3.8 %, while the producers’ prices for manufactured goods increased by 3.1%, and the purchasing prices for raw        materials, fuels and power went up by 4.4 %. The prices for investment in fixed assets were up 3.9%. Producers’ prices of farm products were up by 18.5%. The sales prices for housing in 70 large and medium cities were up by 7.6 %.

 

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.

 

**Any future outbreak of severe acute respiratory syndrome, avian flu or similar adverse public health developments in China may have a material adverse effect on our financial condition and results of operations.**

 

In late 2002 and the first half of 2003, China and certain other countries and regions experienced an outbreak of severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health Organization declared that the SARS outbreak had been contained. Moreover, certain countries and regions, including China, have recently encountered incidents of the H5N1 strain of bird flu, or        avian flu. We are unable to predict the effect, if any, that avian flu may have on our business. In particular, any future outbreak of SARS, avian flu or similar adverse public health developments may, among other things, significantly disrupt our ability to adequately staff our business, and may generally disrupt our operations. Furthermore, an outbreak may severely restrict the level of economic activity in affected areas, which may in turn materially and adversely affect our business        and prospects. As a result, any future outbreak of SARS, avian flu or similar adverse public health developments may have a material adverse effect on our financial condition and results of operations.

 

**Failure to comply with the United States Foreign Corrupt Practices Act could subject us to Penalties and other adverse consequences*****.***

 

We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies and certain non-U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in China        and other foreign countries. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

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**We may have difficulty in establishing adequate management, legal and financial controls in China*****.***

 

Chinese companies have in some cases, been resistant to the adoption of Western styles of management and financial reporting concepts and practices, which include sufficient corporate governance, internal controls and, computer, financial and other control systems. In addition, we may have difficulty in hiring and retaining a sufficient number of qualified employees to work in China.        As a result of these factors, we may experience difficulties in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards with respect to future acquisitions. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls. Any such deficiencies, weaknesses or lack of compliance        could have an adverse effect on our business.

 

**Risks Relating to Our Common Shares**

 

**We may experience volatility in our share 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 shares 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 shares. |
|--------|------------|--------------------------------|

 

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 share price to fall regardless of our performance.

 

**Shares eligible for future sale may depress our share****price.**

 

As of December 31, 2007, we had 8,186,617 common shares outstanding, of which 2,776,912 shares were held by affiliates and, in addition, 151,250 common shares were subject to outstanding options granted under our share option plan, of which 151,250 shares were vested as of December 31, 2007.

 

All of the common shares held by our affiliates are restricted or control securities eligible for resale under Rule 144 promulgated under the Securities Act. The common shares issuable upon exercise of the share options have been registered under the Securities Act. Sales of common shares under Rule 144 or another exemption under the Securities Act or pursuant to a registration        statement could have a material

 

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adverse effect on the price of our common shares and could impair our ability to raise additional capital through the sale of equity securities.

 

**Future issuance of additional common shares could cause dilution of ownership interests and adversely affect our share price.**

 

We may in the future issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of our shareholders. We are currently authorized to issue 20,000,000 common shares. The potential issuance of such additional common shares may create downward pressure on the trading price of our common shares. We may also issue additional common shares        or other securities that are convertible into or exercisable for common shares for capital-raising or other business purposes. Future sales of substantial amounts of common shares, or the perception that sales could occur, could have a material adverse effect on the price of our common shares.

 

**Because we are a British Virgin Islands company, your rights as a shareholder may be less clearly established as compared to the rights of shareholders of companies incorporated in other jurisdictions.**

 

Our corporate affairs are governed by our memorandum of association and articles of association and by the BVI Business Companies Act, 2004. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of management and the rights of our shareholders may differ from those that would apply if we were incorporated in the United States or        another jurisdiction. The rights of shareholders under British Virgin Islands law are not as clearly established as are the rights of shareholders in many other jurisdictions. Under British Virgin Islands corporate law, we may negate or modify the three basic rights of shareholders (the right to vote, the right to an equal share in any dividend paid and the right to an equal share in any distribution of our surplus assets). Thus, our shareholders may have more difficulty protecting        their interests in the face of actions by our board of directors or our controlling shareholder than they would have as shareholders of a company incorporated in another jurisdiction.

 

**We may not continue to pay cash dividends in the future.**

 

We cannot assure that we will continue to pay cash dividends or if we do, that we will do so at the current rate. We may elect at any time to retain all future earnings for use in the operation of our business and to fund future growth. Any future cash dividends will depend upon our results of operations, financial condition, cash requirements, the availability of a surplus and other        factors.

 

**We may be or become a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors.**

 

We may be classified as a passive foreign investment company, or PFIC, by the U.S. Internal Revenue Service for U.S. federal income tax purposes. Such characterization could result in adverse U.S. federal income tax consequences to you if you are a U.S. investor. For example, U.S. investors who owned our common shares during any taxable year in which we were a PFIC generally are        subject to increased U.S. tax liabilities and reporting requirements for that taxable year and all succeeding years, regardless of whether we actually continue to be a PFIC, although a shareholder election to terminate such deemed PFIC status may be available in certain circumstances. The same adverse U.S. federal income tax consequences will apply to U.S. investors who acquire our common shares during the current taxable year of 2008 or any subsequent taxable year if we are treated as        a PFIC for that taxable year.

 

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            The determination of whether or not we are a PFIC is made on an annual basis and depends on the composition of our income and assets, including goodwill, from time to time. Specifically, we will be classified as a PFIC for U.S. tax purposes for a taxable year if either (a) 75% or more of our gross income for such taxable year is        passive income, or (b) 50% or more of the average percentage of our assets during such taxable year either produce passive income or are held for the production of passive income. For such purposes, if we directly or indirectly own 25% or more of the shares of another corporation, we will be treated as if we (a) held directly a proportionate share of the other corporation’s assets, and (b) received directly a proportionate share of the other corporation’s income.

 

| **Item 4.** | **Information on the Company** |
|-------------|--------------------------------|

 

| **A.** | **History and Development** |
|--------|-----------------------------|

 

Jinpan International was incorporated in the British Virgin Islands on April 3, 1997 and its corporate affairs are governed by its Memorandum and Articles of Association and by the BVI Business Companies Act, 2004 (No. 16 of 2004). Jinpan International’s principal executive offices are located at c/o Hainan Jinpan Electric Corporation Ltd., No. 100 Nanhai Avenue, Jinpan        Development Area, Haikou, Hainan China and currently owns 100% of Hainan Jinpan, Jinpan International’s principal operating subsidiary.

 

Hainan Jinpan was established in June 1997 as a sino-foreign cooperative joint venture between Haikou Jinpan Special Transformer Works (“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. Haikou Jinpan was a manufacturer of cast resin transformers in China established in August 1993.

 

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 Jinpan International received an 85% equity interest in Hainan Jinpan in return for our commitment to        contribute capital of US$2.1 million. Hainan Jinpan purchased all the remaining assets and liabilities of Haikou Jinpan in exchange for US$2.1 million. Jinpan International over the management of Hainan Jinpan from Haikou Jinpan after its acquisition of this 85% equity interest.

 

On December 19, 2006, Jinpan International entered into an 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 our 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 to expand manufacturing plant located in Hainan Province, China. We funded these expenditures with our available cash, funds generated from operations and borrowings under 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 common shares and used the net proceeds from the share 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 mid 2008 and (3) to buy equipment for our expanded manufacturing facility in Hainan. We allocated the remainder of the proceeds to operational expenses. See Item 5,        “Operating Financial Review and Prospects – Liquidity and Capital Resources.”

 

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            In February 2007, we purchased approximately 400,000 square feet of land in Wuhan, which is located in central China. This location is closer to our raw material suppliers and provides easy access to highway and railroads. We expect that the land will be used for the construction of our new production facility and the total cost of        the land and construction will be approximately US$6 million. Construction was completed in May 2008 and we expect to begin production by the end of the second quarter of 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 share sale in December 2006 as described in Item 10C – "Additional Information – Material Contracts."

 

We expect to make capital expenditures of approximately RMB 14.5 million in 2008 and that our current cash and funds generated from operations, together with existing credit facilities, will be sufficient to meet our capital expenditures in 2008.

 

| **B.** | **Business Overview** |
|--------|-----------------------|

 

***General overview***

 

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. In 2007, our subsidiary, We had total sales of RMB 903.4 million (US$ 119.6 million) based upon sales of our transformers having a total        capacity of 6 million KVA (Kilovolt-Ampere).

 

Transformers step-up and step-down voltages in electrical energy applications. Large transformers are commonly used at generating facilities to increase voltage and decrease current needs in order to transport electric energy across transmission lines. When the electric energy reaches the end user, a step-down transformer is used 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, including our cast resin transformers, are used to step-down voltages and must contain effective cooling systems. Oil-filled transformers, which are widely used in China and throughout the world, 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 and work effectively, oil-filled transformers have a number of 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, other types of transformers, including cast resin transformers, have been increasingly used in China.

 

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 cast resin transformers are coated with a dry epoxy resin which has the ability to withstand temperatures as high as 188 degrees Celsius. This dry epoxy resin        coating serves as the insulation medium between coils. In order to facilitate 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 such as 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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***Our electric transformer products***

 

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 180 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 all buildings with public access. Currently factories are not subject to this regulation.

 

In the event that our standard size cast resin transformers do not meet our customer’s requirements or a customer seeks to purchase a transformer with a capacity in excess of the maximum KVA capacities of our standard transformers, we offer design, engineering services which enable us to manufacture custom made transformers to fulfill our customer’s particular needs. In        order to customize our transformers, we employ 60 design engineers who utilize 3D design systems and AutoDesk Inventor to design custom made transformers. For example, our team designed and installed a custom-made transformer with a capacity of 25,000 KVA for use in the Beijing subway system. The pricing of our transformers is based upon capacity as measured in KVA. We add to the price of our transformer the cost of engineering 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, such as oil, 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 when operated. |
|--------|------------|-----------------------------------------------------------|

 

We obtained an ISO9001 certification for our cast resin transformers in April 1997. We 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. We have        been able to maintain these ISO certifications since their issuance. Equipment manufactured by us also underwent complete type testing and was certified by KEMA High Power Laboratory in September 1999. Additionally, our transformers have been certified by the Chinese Ministry of Machinery and Ministry of Electric Power, indicating that we have satisfied the required national standards related to product quality.

 

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            We have successfully listed our transformer products with Underwriters Laboratories Inc. (“UL”) with our products 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 product compliance and a UL Listing        requires compliance with 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. A UL listing is considered by the transformer industry to be        necessary for entry into the North American market and, therefore, will improve our capability to address this market.

 

***Other products***

 

Since 2004, we have successfully developed into a supplier of switch gear products. Switch gears enable operators of a power distribution network to switch equipment in and out of the network. Our switch gears used technology is licensed from Schneider Electric.

 

We have also realized successful forward integration through our unit substation business, which began in 1999 and has grown considerably since then. A unit substation is a miniature power generation station comprised of high voltage switchgear, a transformer, a 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 and we offer these products in China together as part of an integrated unit.

 

We first began manufacturing and selling line reactors developed for wind towers in 2006. Our line reactors are critical components within wind towers as they limit currents, filter waveforms, and attenuate electrical noise and harmonics associated with the inverter and driver output of wind powered turbines.

 

Orders for our reactors have climbed steadily through 2007 and revenues derived from the sale of reactors in 2007 reached 5% of our total revenue. Presently, we sell all of our reactors to one large OEM which is in contrast to a more diversified customer base for our cast resin transformers.

 

***Business strategy***

 

In 2007, we focused on promoting our existing product lines, developing new products, continued forward integration and further strengthening our sales force. We expanded our product portfolio to include power distribution equipment for alternative energy sources and we also continued efforts to expand our client base for both conventional and new power distribution products. Finally,        we continued to expand our global reach and, with our UL certification in 2007, made considerable headway into the North American market.

 

Development of New Products

 

In 2007, we expanded our product line by developing new products and applications that extend the use of our cast resin transformers into new markets, including, but not limited to, wind and solar. We view the market for power distribution products geared towards alternative energy applications as one that

 

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presents significant opportunity. We have strengthened our position as a supplier of line reactors for wind towers and have also supplied transformers designed for future generation wind farms. We believe developing such products will greatly enhance our competitiveness as a supplier of electrical equipment in and beyond China.

 

UL Listing

 

In 2007, we received UL certification for our transformer products, which are listed under transformer categories XPRS and XPFS7 for the United States and Canada respectively. UL listing marked a major milestone in our efforts to expand in the North American market, allowing us to participate in opportunities both in the U.S. and Canada. In 2007, we were able to participate in some        high profile projects in New York because our products are UL certified. UL listing has also resulted in cost savings in some markets. For example, we are now able to sell our transformer products in Canada without having to acquire a separate Canadian Standards Association (CSA) label for our transformer products, because our Canadian customers also recognize the UL label. In 2008, we will aim to expand our market share in North America by leveraging our position as one of only two        manufacturers of UL listed cast resin transformers in the world.

 

Integrated Assemblies

 

In 2007, we continued to execute our plan to make, sell, and promote in China higher margin integrated assemblies such as our switchgear and unit substations. Since 2004, we have successfully developed into a supplier of switch gear products, which enable operators of a power distribution network to switch equipment in and out of the network. Our switch gears use technology licensed        from one of the world’s leading manufacturers of circuit breakers. Through these efforts, we have been able to obtain certain large scale projects for switch system equipment. We have also been successful with respect to 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. We create 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.

 

Advance our position in OEM markets

 

In 2007, we expanded our presence in the OEM market, assisted by the UL listing of our transformer products as well as a sustained effort to address the OEM market over the past several years. In recent years, we made significant progress in the large OEM market, having successfully passed the qualification program of one of the world’s largest power generating        equipment manufacturers. This large OEM recognized us with its Best New Supplier Award at its 2005 annual suppliers’ conference. In recognition of the high quality of our products and services, this OEM gave us its Excellence in Quality Award at its 2006 annual suppliers’ conference. In 2008, we aim to further expand our presence in the OEM market by remaining focused on the needs and requirements of our customers, being more responsive to our customer requirements than our        competition, and by leveraging our position as one of only two suppliers of UL listed cast resin transformers in the world.

 

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***Background information relating to the electric transformer industry in China***

 

GDP Growth and Demand for Electricity

 

We believe that China’s fast growing economy drives its demand for electric power. Growth in industrial output, fixed asset investment, urbanization, and rising consumer demand for products that require electric power all contribute to China’s growing demand for electric power.

 

In 2007 China’s economy recorded double-digit growth for the fifth year in a row. According to the National Bureau of Statistics (NBS), China’s GDP in 2007 reached 24.67 trillion RMB, an increase of 11.40% over the previous year. China’s GDP in 2003, 2004, 2005, and 2006 grew by 12.87%, 17.71%, 15.00%, and 14.69% respectively.

 

Electricity consumption in China maintained a high growth rate in 2007 and according to the China Electricity Council ("CEC"), China consumed 3545.80 billion kw-hours with a year-on-year growth of 14.42%. The primary sector, which is comprised of agriculture and other extractive industries, consumed 86.00 billion kw-hour of electricity, a 5.19% increase over the previous year. The        secondary sector, which is comprised of various manufacturing industries, consumed 2484.70 billion kw-hours, a 15.66% increase of the previous year. Within the secondary sector, consumption of electricity by light and heavy industries rose by 9.81% to 450.20 billion kw-hours and by 17.34% to 2006.40 billion kw-hours respectively. The tertiary sector, which is comprised of a range of service industries, consumed 316.70 billion kw-hours, an increase of 10.55% over the previous        year.

 

Supply of Electricity

 

According to the CEC, China’s total electricity supply reached 3.26 trillion kw-hours, an increase of 14.00% over the prior year. Electricity generated through thermal power reached 2,698 billion kw-hours in 2007, an increase of 13.80% over the previous year and accounting for 82.86% of the total electrical output. Electricity generated through hydropower reached 4.88 billion        kw-hours, an increase of 17.60% over the previous year and accounting for 14.95% of the total electrical output. Although China is making progress in developing new alternative energy sources, such as nuclear, wind, and geothermal power, electricity generated from these sources remains a relatively small percentage of the total electricity generated. China generated 62.60 billion kw-hours of electricity using nuclear power in 2007, an increase of 14.10% over the previous year and        accounted for 1.92% of the total electrical output.

 

Power Generation Capacity

 

To meet its growing demand for electric power, China has invested heavily in its power generation capacity. According to the CEC, China’s total installed capacity of electric power reached 713 million kilowatts at the end of 2007, up from 600 million kw-hours at the end of 2006, while maintaining an overall balance of supply and demand. Even though the installed capacity still        maintained a high level of growth in 2007 over 2006, the growth is 6.20% lower than it was in 2006, marking the first time that the growth rate of China’s installed power capacity declined since 2002. China’s installed capacity for hydropower and thermal power climbed to 145 million and 554 million kilowatts, respectively, both up more than 10% over the previous year. The installed capacity of nuclear power rose to 8.85 million kilowatts at the end of 2007.

 

In its Eleventh Five Year Plan issued in 2006, the Chinese government has set a target of shutting down small thermal power generators, with a total capacity of 50 million kw, in order to conserve energy and reduce pollution. According to the National Development and Reform Commission (NDRC), China shut down 553 small thermal power generators in 2007, with total capacity of 14.38        million kilowatts, or 44% above the annual goal. Large thermal power generators (with single unit capacity exceeding 50,000 kw) will replace the decommissioned generators. These large generators will help the country save 18.8 million tons of coal consumption and reduce 290,000 tons and 37.6 million tons of sulfur dioxide and carbon dioxide emissions annually.

 

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Power Distribution Capacity

 

China has sped the expansion of its power grids and transformation capacity. According to the CED, China will have expanded its power transmission lines above 220KV to a length of 327,100 km by the end of 2007, up 14.21% over the previous year. China’s transformation capacity of 220KV reached 1.14 billion KVA, up by 118.71% over the previous year. Several projects to send        electricity from China’s western regions to the eastern regions are fully operational, with total transmission capacity reaching 47.50 million kw in 2007.

 

Electrical Equipment Industry

 

According to NBS statistics, China’s electrical machinery and equipment manufacturing industry, which includes all industrial and home use electrical machinery, achieved total sales of 2,056 billion RMB from January through November 2007, up 32.41% over the corresponding period in 2006, while net profits reached 101 billion RMB, an increase of 41.43% over the previous year. The        electrical generation equipment segment of the industry recorded sales of 197 billion RMB in 2007, up 30.02% over the same period in 2006, and recorded net profits of 12.36 billion RMB, up 50.08% over the same period in 2006. The segment of the industry manufacturing electrical wires, cables, optical lines, and other related materials recorded sales of 529 billion RMB in 2007, up 33.96% over the same period in 2006, and recorded net profits of 23.27 billion RMB in 2007, up 33.11% over        2006.

 

Transformer Industry

 

According to NBS statistics, China’s transformer manufacturers (including manufacturers of rectifiers and inducers) achieved total sales of 145 billion RMB and net profits of 9.26 billion RMB from January to November 2007, representing increases of 36.09% and 61.16%, respectively, over the corresponding period in the previous year.

 

Total production output of China’s transformer industry reached 910.21 million KVA in 2007, an increase of 23.59% compared with the output of 736.45 million in 2006. Jiangsu province contributed most to transformer output, reaching 146.79 million KVA, followed by Shandong and Hebei provinces with outputs of 129.97 million KVA and 90.88 million KVA respectively. The table below        illustrates the transformer output contributed by each province or region in China.

 

| Region / Province | Total Transformer Output in 2007 (in KVA) |
|-------------------|-------------------------------------------|
| Jiangsu           | 146,791,671                               |
| Shandong          | 129,969,871                               |
| Hebei             | 90,881,128                                |
| Shan'Xi           | 74,167,831                                |
| Liaoning          | 72,311,082                                |
| Guangdong         | 65,016,194                                |
| Zhejiang          | 60,363,499                                |

 

 

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| Region / Province | Total Transformer Output in 2007 (in KVA) |
|-------------------|-------------------------------------------|
| Chongqing         | 48,503,754                                |
| Hunan             | 47,711,370                                |
| Anhui             | 28,028,877                                |
| Shanghai          | 25,579,041                                |
| Jiangxi           | 20,958,312                                |
| Xinjiang          | 17,743,299                                |
| Sichuan           | 12,979,188                                |
| Yunnan            | 11,442,109                                |
| Jilin             | 7,194,766                                 |
| Henan             | 6,992,210                                 |
| Guangxi           | 6,952,747                                 |
| Tianjin           | 6,233,668                                 |
| Hainan            | 5,704,813                                 |
| Hei long jiang    | 5,642,247                                 |
| Fujian            | 4,617,475                                 |
| Hubei             | 4,067,692                                 |
| Beijing           | 2,905,831                                 |
| Ninxia            | 2,248,487                                 |
| Guizhou           | 1,873,358                                 |
| Shanxi            | 1,352,231                                 |
| Gansu             | 1,290,176                                 |
| Inner Mongolia    | 658,582                                   |
| Qinhai            | 26,211                                    |
| **Total**         | **910,207,719**                           |

 

 

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            The table below sets forth our consolidated sales, by geographic region, for the years ended December 31, 2005, 2006, and 2007:

 

|                                                | **Year Ended December 31,**    |
|-----------------------------------------------------|--------------------------------|
|                                                |  

**2005**               |  

**2006** |  

**2007** |
|                                                | **(U.S. Dollars in millions)** |
| China                                               |                           |   |   |
| Beijing                                             | 7.14                           | 9.9 | 15.4 |
| Tianjing                                            | 2.49                           | 4.2 | 6.55 |
| Chongqing                                           | 2.09                           | 2.2 | 2.85 |
| Shanghai                                            | 3.61                           | 7.3 | 10.3 |
| North East China (Liao Ning, Ji Lin, Hei Longjiang) | 5.46                           | 9.8 | 20.13 |
| Hubei (Wuhan)                                       | 3.10                           | 5.5 | 6.37 |
|  He Nan                                        | 1.00                           | 1.5 | 1.67 |
|  Hu Nan                                        | 1.15                           | 1.2 | 2.41 |
|  Si Chuan (Cheng Du)                           | 2.87                           | 5.3 | 10.73 |
| Yunnan, Guizhou                                     | 1.88                           | 2.9 | 2.53 |
| Shan Xi                                             | 1.56                           | 3.0 | 5.34 |
| Jiang Su                                            | 6.19                           | 8.1 | 9.13 |
| Jiang Xi                                            | 0.02                           | 0 | 0.47 |
| Zhe Jiang                                           | 2.67                           | 4 | 6.07 |
| Guang Dong                                          | 5.10                           | 3.5 | 3.26 |
| Guang Xi                                            | 1.54                           | 2.6 | 1.63 |
| Fujian                                              | 0.52                           | 1.2 | 2.47 |
| Hainan                                              | 1.32                           | 3 | 2.32 |
| Other                                               | 2.54                           | 0.8 | 3.97 |
| Export                                              | 1.25                           | 6.6 | 6.0 |
| Total:                                              | 53.61                          | 82.6 | 119.60 |

 

***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 at our Haikou facility, we use thirty-two 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 four copper foil winding machine to produce the low voltage        copper foil coils used in our copper foil cast resin transformers. The 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. In order to ensure that the copper coils are properly insulated for safety, the vacuum casting machine removes all moisture and condensation between the copper wire and the resin coating. We use the materials described above in order to ensure        that none of the windings crack when heat is produced in the transformer as 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, which is composed of several rolls of silicon steel, which have been cut on one of our two automated steel cutting machines. The rolls of silicon steel are then 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 for electric energy during the transforming process. Our use of high quality materials and advanced cutting mechanism, coupled with the specific reengineering of our products, allows us to manufacture transformers that operate with minimal energy loss and noise. 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        satisfied. The standard testing is comprised of the following 12 procedures:

 

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|   | 1. | measurement of winding resistance; |
|--------|----|------------------------------------|

|   | 2. | measurement of voltage ratio; |
|--------|----|-------------------------------|

|   | 3. | measurement of impedance voltage; |
|--------|----|-----------------------------------|

|   | 4. | measurement of current; |
|--------|----|-------------------------|

|   | 5. | source voltage tolerance testing; |
|--------|----|-----------------------------------|

|   | 6. | induced over-voltage tolerance testing; |
|--------|----|-----------------------------------------|

|   | 7. | measurement of winding insulation resistance; |
|--------|----|-----------------------------------------------|

|   | 8. | measurement of partial discharge; |
|--------|----|-----------------------------------|

|   | 9. | lightning impulse testing; |
|--------|----|----------------------------|

|   | 10. | temperature raise testing; |
|--------|-----|----------------------------|

|   | 11. | measurement of sound level; and |
|--------|-----|---------------------------------|

|   | 12. | short-circuit testing. |
|--------|-----|------------------------|

 

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

 

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

 

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** |
|----------------------------------------------------------------------------------------------------------|--------------------------------------------------|-------------|
| Cast Resin                                                                                               | Hexion (Backelite AG)                            | U.S.        |
| Xiamen Xiangyu Speed Fair Trading Co., Ltd.

(Chinese distributor for Huntsman Advanced Materials, Inc.) | China                                            |
|                                                                                                     |
| Silicon Steel                                                                                            | Thyssenkrupp Electrical Steel GmbH               | Germany     |
| Legnano Teknoelectric Company S.P.A.                                                                     | Italy                                            |
| Wuhan Steel Processing Co., Ltd.                                                                         | China                                            |
|                                                                                                     |
| Copper

(Rod)                                                                                            | Jiangyin Golden Ball Group Co., Ltd.             | China       |
| 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.

 

Steel and copper prices moderated in 2007 after experiencing marked increase in 2006. In order to limit the impact of rising material costs on our profitability in 2006, we raised prices, cut costs through continued vertical integration, and optimized our manufacturing process. We continued to benefit from

 

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these cost cutting measures in 2007 and combined with the moderation of steel and copper prices in 2007, contributed to higher gross margins in 2007 compared to 2006.

 

Because of strong demand worldwide, we expect the price of steel and copper to rise in 2008. At this point, we are not certain of the magnitude of the price increase for 2008. Rising prices of steel and copper may have an adverse effect on our materials costs. We currently do not engage in any hedging activities, although we may use the futures market to minimize our exposure to sudden        price fluctuations in the future.

 

***Our sales and marketing network***

 

We sell our cast resin transformers through our sales network, which consists of 38 regional sales offices in various cities in China, including Beijing, Shanghai and Chongqing. We employ 99 sales representatives, 61 of whom are based in our regional sales offices and 38 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.

 

***Our significant customers***

 

Sales to our five largest customers in the aggregate for the fiscal years ended December 31, 2005, 2006, and 2007 accounted for approximately 16.00%, 16.00%, and 23.00% respectively, of our total sales. Sales to our largest customer for those same periods accounted for approximately 5.00%, 6.30%, and 9.60% of our total sales.

 

***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 much of our success in growing sales and market share is due to our focus on providing high quality products and services. Achieving greater customer recognition of our trademark is also important to our        marketing and expansion effort. 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. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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***Our competitors in the electric transformer business***

 

We primarily compete in the cast resin transformer market in China with two large transformer manufacturers but also with a large number of small transformer manufacturers. Most of our major competitors are reorganized state owned enterprises with partial government ownership. Although a few of our competitors entered the transformer market before us and may have achieved greater        product recognition than us, we believe that our growing name recognition, product quality and safety and manufacturing efficiency allows us to compete effectively against our competitors. We believe that we operate more efficiently than our competitors do, because, as a fully private company, our operations are subject to less regulation and less political interference than enterprises wholly or partially owned by the Chinese government. Consequently, we have lower product costs and        greater flexibility than our government owned competitors. In addition, we also have established a strong track record of product quality and to the best of our knowledge, none of our transformers have been the cause of any major accident.

 

In addition, we believe that foreign cast resin transformer manufacturers presently do not pose a significant competitive threat to us because of relatively high production costs. However, there can be no assurance that entry into the WTO and the consequent reduction of tariff on imports will not increase competition or that foreign manufacturers 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.

 

***Doing Business in China***

 

Macroeconomic Government Regulation in China

 

In 2007, the Chinese government endeavored to make macroeconomic regulation more proactive, responsive and effective, with a focus on resolving major problems affecting overall economic operations. Some of the specific measures taken by the government included tightening controls on the supplies of land and credit, raising market access requirements, adjusting monetary, financial,        industrial and land policies to address problems such as overheated growth in fixed asset investment, excessive supplies of money and credit, an excessively large trade surplus, weakness in agricultural production, and addressing other problems that could cause economic development to become unstable, unbalanced and unsustainable.

 

Currently, the Chinese government’s primary objectives in macroeconomic regulation are to prevent rapid economic growth from becoming overheated and structural price rises from turning into marked inflation. In order to achieve these objectives, the government will likely follow a prudent fiscal policy and a tight monetary policy as well as continue to rein in excessive growth of        fixed asset investments, to prevent rapid increases in overall levels of prices, to expand overall consumption demand, to promote balance between the supply and demand of coal, electricity, petroleum, transportation, and major raw materials. The government has set a goal of maintaining 8% GDP growth in 2008 and has urged local officials to check excessive growth and pay more attention to the environment. The government is also likely to focus its work and attention on transforming the        pattern of development, improving the quality of economic growth, saving energy and reducing emission in order to achieve sustainable development.

 

China elected its current national leaders during the 11th National People’s Congress on March 5, 2008. The new government has moved to re-organize the national bureaucracy with reforms involving the creation of five “super ministries” to focus on energy, transportation, industries and environment protection. These five "super ministries" are the ministries        of industry and information, human resources and social security, environmental protection, housing and urban-rural construction, and t transport. Through this re-organization, the government aims to streamline bureaucratic functions in order to strengthen

 

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macro-economic regulation, to improve the nation’s energy security, and integrate information development and industrialization.

 

China’s Corporate Income Tax

 

Presently, the corporate income tax rate for companies operating in China is 25%. Prior to January 1, 2008, China imposed an income tax of 33% on domestic companies and 15% on foreign companies operating in China with the preferential tax treatment to foreign companies designed to help attract direct foreign investment. On March 16, 2007 a new Corporate Income Tax Law was passed that        sets a unified corporate income tax rate of 25% which is applicable to both domestic and foreign funded companies. China officially ended its differential corporate tax treatment for foreign and domestic companies when the new law took effect on January 1, 2008.

 

The National People’s Congress has delegated rulemaking authority to the State Council and the State Administration of Taxation regarding corporate taxation. Local governments may continue to offer tax incentives to attract investment. Our headquarters and primary manufacturing facility are located in Hainan province, which has been designated a Special Economic Zone        (“SEZ”) by the Chinese government. Our second manufacturing facility is being built in an Economic Development Zone (“EDZ”) in Wuhan, China.

 

As a result of being located in a SEZ, Haninan Jinpan’s applicable corporate income tax rate for fiscal year 2008 will be 18%. This rate will increase by increments of 2% per year, on average, until the tax rate reaches 25% in 2012.

 

Presently, we enjoy preferential tax treatment in Wuhan as a result of our facility being situated in an EDZ. Consequently, Wuhan Jinpan will not be subject to corporate income tax in 2008 and 2009 and from 2010 to 2012, the corporate income tax applicable to Wuhan Jinpan would be half of the prevailing rate of 25%.

 

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.

 

Chinese Regulation on Dividends

 

Applicable Chinese laws and regulations require that before a sino-foreign equity joint venture enterprise, such as Hainan Jinpan, distributes profits to its parent company, Jinpan International, 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.

 

30

 

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Legal system

 

China’s legal system is a civil law system, which is based on written statutes and legal cases with 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 the        legal system 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.

 

Environmental laws

 

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.

 

| **C.** | **Organizational Structure** |
|--------|------------------------------|

 

We are a British Virgin Islands company whose securities are registered with the U.S. Securities and Exchange Commission and publicly traded on U.S. securities markets. We conduct business through our subsidiaries Jinpan USA, Jinpan China, Hainan Jinpan, and Wuhan Jinpan. Jinpan International owns 100% of the common stock of Jinpan USA, a New York corporation, and Jinpan China, a        foreign funded PRC limited liability company registered in Wuhan, Hubei China. Jinpan International and Wuhan Jinpan jointly own 95% and 5% respectively of Hainan Jinpan, a sino-foreign cooperative joint venture registered in Haikou, Hainan China. Jinpan China and Hainan Jinpan jointly owns 95% and 5% respectively of Wuhan Jinpan, a domestically funded PRC limited liability company registered in Wuhan, Hubei China.

 

| **D.** | **Property, Plant and Equipment** |
|--------|-----------------------------------|

 

Our production facilities are located in Haikou City, Hainan Province in southern China. In this facility, we operate 32 high voltage coil winding machines, 4 low voltage sheet winding machines, 12 curing ovens, 3 bending machines, 2 punching machines, 2 core assembly tables, 3 core lamination lines, 1 core slitting line, and 2 sets of vacuum casting machines. We have procured our        equipment from high quality Chinese, German, Japanese, and Canadian manufacturers.

 

Our headquarters, administrative, and manufacturing facilities are located at 100 Nanhai Ave., Haikou, Hainan Province, China, which encompasses approximately 40,000 square meters of building space. Part of the property was previously purchased by Haikou Jinpan and subsequently was contributed to Hainan Jinpan. The total rent for the leased portion of the property is approximately RMB        125,000 (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 which expires 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 central China, is closer to our material suppliers and provides easy access to the highway and railroad. The new facility being built on this site will be used to expand our annual production by an

 

31

 

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estimated 50%. We expect, based on current estimates, that the land and construction will cost approximately US$6 million. Construction was completed in May 2008 and we expect to begin production by the end of end of the second quarter of 2008. The Wuhan expansion was financed from the net proceeds we received from our share sale in December 2006 as described in Item 10.

 

We lease 36 and own 2 sales offices in China, located in Beijing, Shanghai, Hefei, Nanning, Anshan, Changsha, Hangzhou, Kunming, Tianjin, Wuhan, Chongqing, Chengdu, Suzhou, Taiyuan, 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.

 

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.

 

During year 2007, we manufactured 4,337 units of transformers which equates to approximately 4.9 million KVA. We used approximately 82% of our full manufacturing capacity, 6.6 million KVA, in 2007.

 

**Item 4A. Unresolved Staff Comments**

 

|   | None. |
|--------|-------|

 

| **Item 5.** | **Operating and 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 and Estimates**

 

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 analysis        as described below. We evaluate specific accounts where we have information that certain customers are unable to meet their

 

32

 

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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 reference 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. This analysis requires the Company to make significant estimates, and the changes in fact and circumstances could result in changes in the Provision for Doubtful Accounts. 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.

 

As of December 31, 2006 and 2007, the Provision for Doubtful Accounts was RMB 9.9 million and RMB 16.0 million respectively. For the year ended December 31, 2007, we recorded an additional provision of RMB 6.0 million 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. Cost is determined using the weighted average cost method. 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, 2006 and 2007, we recorded inventory obsolescence allowance in the amount of RMB 1.2 million and RMB 1.1 million, respectively.

 

*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.

 

33

 

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**A.**      **Operating Results**

 

***Overview***

 

We design, manufacture and sell cast resin transformers for voltage distribution equipment in China. Historically, our revenue has fluctuated quarterly and has generally been the highest in the fourth quarter primarily due to the seasonal demand of our customers. We believe this seasonality is likely to continue in the future.

 

We intend to sustain the long-term growth of our businesses through technological innovation, engineering excellence, expanding our presence outside of China and a commitment to delivering high-quality products and services to our customers. As part of our efforts to maximize growth, we continue to focus on research and development to ensure that our products maintain the quality and        efficiency that our customers expect from our brand.

 

|   | We believe that over the last few years we have laid a foundation for long-term growth by: |
|--------|--------------------------------------------------------------------------------------------|

 

|   | **•** | expanding our product line by developing new products and applications that extend the use of our cast resin transformers into new markets, including, but not limited to, wind and solar; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | receiving UL certification for our transformer products, which are listed under transformer categories XPRS and XPFS7 for the United States and Canada, respectively; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | continuing to execute our plan to manufacture, sell, and promote higher margin integrated assemblies such as our switchgear and unit substations in China; and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | expanding our presence in the OEM market by successfully passing the qualification program of one of the world’s largest power generating equipment manufacturers. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Our focus in 2008 is to build on this foundation and continue to execute well in key areas, including responding effectively to customer needs and continuing to focus internally on product excellence, business efficacy, and accountability across our company. For a discussion of trends we expect for 2008, see “Trends” below.

 

***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, 2005, 2006 and 2007.

 

 

|                                         | Year ended December 31, |
|----------------------------------------------|-------------------------|
|                                         | 2005                    | 2006 | 2007 |
| Net sales                                    | 100%                    | 100% | 100% |
| Cost of goods sold                           | (67.96)%                | (72.17)% | (65.19)% |
| Gross profit                                 | 32.04%                  | 27.83% | 34.81% |
| Selling, general and administrative expenses | (20.48)%                | (16.05)% | (19.50)% |
| Other income                                 | 0.6%                    | 0.44% | 0.35% |
| Income tax provision                         | (2.0)%                  | (1.67)% | (1.86)% |
| Income before minority interest              | 10.16%                  | 10.55% | 13.80% |
| Minority interest                            | (1.7)%                  | (1.5)% | - |
| Net income                                   | 8.46%                   | 9.05% | 13.80% |

 

 

34

 

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***Year ended December 31, 2007 compared with the year ended December 31, 2006***

 

**Net Sales.**Net sales increased RMB 250 million (US$37.4 million) or approximately 38% from RMB 653 million (US$82.3 million) for the year ended December 31, 2006 to RMB 903 million (US$119.6 million) for the year ended December 31, 2007. Transformers are our major product, sales of which accounted for approximately 87% of our total net sales. The increase        in the number of transformers sold contributed approximately RMB 166 million to the overall net sales increase. We also raised the standard selling price of transformers during 2007 which accounted for approximately RMB 59.5 million of our sales growth. Sales of reactors contributed RMB 14.5 million to the net sales increase. The sale of switchgear and substations contributed RMB 10.0 million to the net sales increase.

 

**Cost of Goods Sold**. Cost of goods sold increased RMB 117.5 million (US$18.6 million) or approximately 25% from RMB 471.4 million for the year ended December 31, 2006, to RMB 588.9 million for the year ended December 31, 2007. The increase corresponded to the increase in the net sales for the period. Cost of goods sold as a percentage of sales decreased by        7% for the year ended December 31, 2007, from 72.17% for the year ended December 31, 2006, to 65.19% for the year ended December 31, 2007. The decrease was mainly the result of the stabilization of steel and copper prices during 2007.

 

**Gross Profit.**Gross profit increased RMB 132.6 million (US$18.7 million) or approximately 72.9% to RMB 314.4 million for the year ended December 31, 2007 from RMB 181.8 million for the year ended December 31, 2006. As a percentage of sales, gross profit increased from 27.83% for the year ended December 31, 2006, to 34.81% for the year ended December 31,        2007. This increase also resulted from the aforementioned stable steel and copper price and using substituted materials.

 

**Selling and Administrative Expenses**. Selling and administrative expenses, including the provision for doubtful accounts, increased by RMB 69.2 million (US$9.8 million) or approximately 66.4% from RMB 104.2 million for the year ended December 31, 2006, to RMB 173.4 million for the year ended December 31, 2007. The increase of 66.4% was due to an increase        provision for doubtful accounts of RMB 6.5 million, first time costs related to compliance with the Sarbanes-Oxley Act of 2002 of approximately RMB 3 million, and non-cash stock compensation expense for RMB 1.6 million that related to share options issued to directors and employees in 2007. Other increases in selling and administrative expenses included customer services expense which increased by RMB 34.0 million, salary and employee benefits which increased by RMB 3.0 million, travel        related expense which increased by RMB 2.0 million, and freight expenses which increased by RMB 2.0 million. As a percentage of sales, selling and administrative expenses increased approximately 3%, from 16.1% in the year 2006 to 19.2% for the year ended December 31, 2007.

 

**Interest Expense**. Interest expense increased RMB 1.3 million (US$ 183,000) or approximately 59% from RMB 2.2 million for the year ended December 31, 2006, to RMB 3.5 million for the year ended December 31, 2007. This increase was mainly the result of an increase in borrowings under credit facilities to fund our operations.

 

**Income Tax**. Income tax expense increased RMB 5.9 million (US$ 847,000) or approximately 54 % from RMB 10.9 million for the year ended December 31, 2006, to RMB 16.8 million for the year ended December 31, 2007. This increase was primarily the result of an increase in taxable income.

 

**Net Income**. Net income increased RMB 64.1 million (US$8.9 million) or approximately 107.5% from RMB 59.7million (US$7.5 million) for the year ended December 31, 2006 to RMB 123.8 million (US$16.4 million) for the year ended December 31, 2007. The increase in net income resulted from an

 

35

 

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increase in operating income and the fact that no minority interest was recorded due to the Company’s acquisition of minority interest in the beginning of year. As a percentage of sales, net income increased from 9.13% for the year ended December 31, 2006, to 13.70% for the year ended December 31, 2007.

 

**Basic Earnings Per Share**. Earnings per share increased RMB 6.5 (US$0.92) or approximately 72.4% from RMB 9.0 (US$1.13) for the year ended December 31, 2006 to RMB 15.52 (US$2.05) for the year ended December 31, 2007.

 

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

 

**Net Sales.**Net sales increased RMB 215 million (US$28.7 million) or approximately 49% from RMB 438 million (US$53.6 million) for the year ended December 31, 2005 to RMB 653 million (US$82.3 million) for the year ended December 31, 2006. The increase in net sales was mainly attributable to the increase in the sales of the number of transformers which        contributed approximately RMB 130.4 million, and our having 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 net sales growth. The increase was also due to sales of switch gears and substations, which increased by 87% as compared with 2005, which contributed RMB 30.7 million. Finally, the increase in net sales was attributable to the development of certain reactors, which we began to        sell in 2006, which contributed RMB 26.5 million to the net 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 for the year ended December 31, 2005, to RMB 471.4 million for the year ended December 31, 2006. Cost of goods sold as a percentage of sales increased by 4.2% for the year ended December 31, 2006, from 67.96% for the year ended        December 31, 2005, to 72.17% for the year ended December 31, 2006. The increase was a result of worldwide price increases of raw materials associated with copper during the year 2006. The average copper wire price was RMB 68,500 per ton, which was an increase of approximately 49% as compared with 2005. We improved 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%.

 

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

 

**Selling and Administrative Expenses**. Selling and administrative expenses, including the provision for doubtful accounts, increased by RMB 15.8 million (US$2.0 million) or approximately 17.9% from RMB 88.4 million for the year ended December 31, 2005, to RMB 104.2 million for 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 16.0% for the year ended December 31, 2006. The decrease of 4.2% was primary the result of cost reductions in sales agents’ fees, and traveling and meal entertainment expenses.

 

**Interest Expense**. Interest expense increased RMB 0.7 million (US$ 98,400) or approximately 47% from RMB 1.5 million for the year ended December 31, 2005, to RMB 2.2 million for the year ended December 31, 2006. This increase was mainly the result of an increase in borrowings under credit facilities to fund our operations.

 

**Income Tax**. Income tax expense increased RMB 2.2 million (US$ 308,600) or approximately 25% from RMB 8.7 million for the year ended December 31, 2005, to RMB 10.9 million for the year ended December 31, 2006. This increase was primarily the result of an increase in taxable income.

 

36

 

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

 

**Basic Earnings Per Share**. Earnings per share increased RMB3.3 (US$0.43) or approximately 58% from RMB5.7(US$0.70) for the year ended December 31, 2005 to RMB9.00 (US$1.13) for the year ended December 31, 2006.

 

***Impact of Inflation***

 

We do not believe that inflation over the past three years has 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, the conversion of Renminbi into US 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 Chinese interbank foreign exchange market rate with reference to current exchange rates on the world financial markets (the “PBOC Rate”). The Renminbi/US Dollar exchange rate has        been relatively stable since January 1, 1994. However, China revalued the Renminbi against the US Dollar on July 21, 2005 and introduced a basket of currencies to determine the exchange rate rather than pegging the Renminbi to the US Dollar. As a result of adopting a more flexible exchange rate system, China’s financial sector has become more responsive to fluctuations in the international currency market. The Renminbi/US Dollar exchange rate has climbed steadily since July        2005.

 

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 such as Hainan Jinpan and Jinpan China, 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.

 

During 2007, the RMB appreciated 7.05% against the US Dollar. Domestic sales in China account for approximately 95% of our net sales. Sales in China are priced in Renminbi. Exports account for 5% of our net sales. Exports are either priced in US Dollars or Euro Dollars. We procure approximately 87 % of our raw material from China and pay for these materials using RMB. We procure the        remaining 13% of our raw materials from abroad and pay for these materials using US Dollar or Euro Dollar. Because most of our operations are conducted in China using RMB, the RMB’s appreciation against the US Dollar did not have a material adverse effect on our business.

 

37

 

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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.

 

| **B.** | **Liquidity and Capital Resources** |
|--------|-------------------------------------|

 

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

 

As of December 31, 2007, we had the following components of debt representing a total indebtedness of RMB 72 million:

 

|   | **•** | Hainan Jinpan has a credit facility of US$6.0 million with the Nan Yang Commercial Bank. The letter of credit under this credit facility is guaranteed by Jinpan International . The credit facility bears interest at a floating rate of LIBOR plus 1.0% and accrued interest at an average interest rate of 6.4% per annum for the year ended December 31, 2007.                        As of December 31, 2007, there was RMB 11.3 million (US$1.5 million) outstanding under the credit facility. This facility will expire in August 2008, and we intend to extend the facility for another year. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Hainan Jinpan has an unsecured letter of credit facility from the Bank of China for RMB 110 million. The credit facility bears interest at the prime rate set by the Bank of China and accrued interest at an average interest rate of 6.8% per annum for the year ended December 31, 2007. As of December 31, 2007, there was approximately RMB 10.7                        million (US$1.3 million) outstanding under the credit facility. This facility will expire in July 2008 and we intend to extend the facility for another year. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Hainan Jinpan has a working capital credit facility from the Bank of China for RMB 40 million of which the entire RMB 40 million credit line was drawn as of December 31, 2007. The credit facility bears interest at the prime rate set by the Bank of China and accrued interest at an average interest rate of 7.1% per annum for the year ended December                        31, 2007. This facility will expire in July 2008 and we intend to extend the facility for another year. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Hainan Jinpan has a RMB 10 million loan outstanding from World Trade Industrial as of December 31, 2007. The loan bears interest at the prime rate set by the Bank of China and accrued interest at an average interest rate of 7.3% per annum for the year ended December 31, 2007. This credit facility expired in June 2007. We are in the process of                        renewing the credit facility. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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 of our common shares for an aggregate purchase price of approximately US$25.7 million. The sale of the shares closed on December 22, 2006.

 

On December 31, 2007, we had working capital of RMB 437 million compared to RMB 456 million at December 31, 2006.

 

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

 

38

 

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As of December 31, 2007, we had inventories of RMB 187.8 million as compared to RMB 145.1 million as of December 31, 2006. The increase of RMB 42.7 million is primarily as a result of (1) an increase in the price of raw materials of RMB 38.4 million; (2) an increase in work in process of RMB 5.4 million; and (3) a decrease in finished goods of RMB 1.1 million. The build-up in raw        materials was due to our expectation that the price of raw materials will increase in the beginning of 2008.

 

Net cash used in operating activities was RMB 3.0 million for 2007, compared to net cash provided from operating activities of RMB 39.2 million for 2006. Net cash used in operating activities of RMB 3 million during 2007 primarily resulted from increases in accounts receivable of RMB 121 million, inventories of RMB 42.6 million, prepaid expenses of RMB 21.7 million mainly paid to        materials suppliers and net income of RMB 133.4 million after adjusting for non-cash depreciation expense of RMB 9.6 million. Net cash provided from operating activities for 2006 of RMB 39.2 million primary resulted from increases in inventories of RMB 37.8 million, accounts receivable of RMB 27.4 million, accounts payable of RMB 24.4 million, and net income of RMB 59.6 million. Net cash used in investing activities was RMB 146 million for 2007 as compared to RMB 21 million for 2006.        The increase primarily resulted from acquiring minority shareholder interests for RMB 93 million and constructing production facilities and purchasing equipment from RMB 51 million. Net cash used in investing activities of RMB 21 million for 2006 primary resulted from purchasing equipment of RMB 11 million and expanding production facility for RMB 10 million. Net cash provided from financing activities for 2007 was RMB 5.5 million as compared to RMB 186 million for 2006. In 2007, the        net cash provided from financing activities included borrowings of RMB 105 million, payments of bank loans of RMB 80 million and a cash dividend payment of RMB 14.5 million. In 2006, the net cash provided by financing activities of RMB 186 million including proceeds from the issuance of common shares of RMB 185 million, bank borrowings of RMB 122 million, payment of bank loans of RMB 112 million and cash dividend payment of RMB 12.6 million.

 

Our principal commitments consist of a long-term obligation outstanding under operating leases on certain buildings and apartments, employee contracts, capital commitments and bank loans. For more information on these commitments, see “Tabular Disclosure of Contractual Obligations” below.

 

We had capital expenditures of RMB 51 million for 2007. Capital expenditures of RMB 32.7 million were used to expand a new production facility and RMB 18.3 million was used to purchase equipment. We expect an increase in capital expenditures of RMB 14.5 million to purchase equipment in the year 2008.

 

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.

 

| **C.** | **Research and Development** |
|--------|------------------------------|

 

In 2007, we focused on developing products and technologies that we expect to be high margin or that would help us gain market share. We continued to develop equipment peripheral to transformers in an effort expand our product offering. We continued to incorporate the latest manufacturing technologies into our production processes.

 

In 2007, we continued efforts to reduce cost. For example, we reduced the cost of static start isolation transformers by developing steel cores that use new materials. We continue to improve our

 

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integrated assemblies. For example, we developed a new small sized fixed switch gear assembly that better suits our customers’ requirements. Leveraging the UL certification of our cast resin transformers, we developed products for high profile projects as a vehicle to gain brand recognition. For example, we developed transformers for use in the new World Trade Center Building that is currently under        construction in New York.

 

We believe that power distribution solutions for alternative energy sources, including technologies that harness wind and solar energy, hold promising opportunities for future growth. Power distribution solutions for alternative energy sources were a major focus of our research and development in 2007. We plan to continue investing in research and development along these lines in 2008        with the objective of developing technologically advanced products of high quality and performance and that would enable us to reach new markets and create value for our customers.

 

In 2007, 2006 and 2005, we incurred approximately RMB 5.3 million, 5.1 million, and RMB 4.5 million, respectively, in research and development costs.

 

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.

 

| **D.** | **Trends** |
|--------|------------|

 

Based on our increased sales force, we anticipate that sales will continue to grow during 2008. Within China, we expect to see the greatest demand coming from our power generation and industrial sectors. In our international business, we expect to experience greater demand for wind power transformers, which we believe will drive most of our international growth in 2008.

 

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 2008. To counteract the effects of the rising costs of raw materials, we may increase the prices of our        products during 2008, so that sales revenues and net income continue to rise at a steady rate.

 

| **E.** | **Off-Balance Sheet Arrangements** |
|--------|------------------------------------|

 

|   | We do not have any off-balance sheet arrangements. |
|--------|----------------------------------------------------|

 

| **F.** | **Tabular Disclosure of Contractual Obligations** |
|--------|---------------------------------------------------|

 

The Company’s material contractual obligations are composed of operating lease commitments, employees contracts, capital commitments and repayment of bank loans. The table below provides a summary of the Company’s Contractual obligations at December 31, 2007:

 

40

 

----

 

|                        | Payments due by period (RMB in thousands) |
|-----------------------------|-------------------------------------------|
| **Contractual Obligations** | **Total**                                 | **Less than 1 year** | **1-3 Years** | **3-5 years** | **More than 5 years** |
| Operating Lease Obligations | 8,243                                     | 2,170 | 2,132 | 1,073 | 2,868 |
| Employees Contracts (1)     | 10,176                                    | 9,080 | 1,096 | - | - |
| Capital Commitments (2)     | 14,464                                    | 14,464 | - | - | - |
| Bank loans                  | 72,025                                    | 72,025 | - | - | - |
| Total                       | 104,579                                   | 97,410 | 3,228 | 1,073 | 2,868 |

 

(1) Our employees in China include engineers, technicians, management and administrative personnel, marketing and sales personnel and factory personnel, while employees in the United States include management, administrative, and marketing personnel. All of the employees except US employees are contract employees and have entered into renewable employment contracts with us. Terms of the employment        agreements with management, engineers, marketing and sales personnel and technicians range from two to five years and terms of the employment agreements with administrative personnel range from six months to one year.

 

(2) Capital commitments related to the purchase of new office and plant space and machinery.

 

**Item 6. Directors, Senior Management and Employees.**

 

| **A.** | **Directors and Senior Management** |
|--------|-------------------------------------|

 

|   | Our directors and executive officers are as follows: |
|--------|------------------------------------------------------|

 

| **Name**         | **Age** | **Position**                                                               |
|------------------|---------|----------------------------------------------------------------------------|
| Li Zhiyuan       | 53      | Chairman of the Board of Directors, President, and Chief Executive Officer |
| Ling Xiangsheng  | 56      | Vice Chairman of the Board of Directors and Vice President                 |
| Jing Yuqing      | 45      | Secretary                                                                  |
| Mark Du          | 47      | Principal Financial Officer                                                |
| Stephan R. Clark | 54      | Director                                                                   |
| Li-wen Zhang     | 54      | Director                                                                   |
| Donald S. Burris | 64      | Director                                                                   |
|             |    |                                                                       |

 

**Li Zhiyuan**has 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

 

41

 

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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 Xiangsheng**has 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 Yuqing**has served as Corporate Secretary and 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.

 

**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 Environmental Management from the University of Texas at San Antonio.

 

**Dr. Li-Wen Zhang**was elected to our Board of Directors in June 2002. 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

 

42

 

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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.

 

**Family Relationships:**Li Zhiyuan, our Chairman of the Board of Directors and President is married to Jing Yuqing, our Secretary.

 

There is no arrangement or understanding with major shareholders, customers, suppliers or other, pursuant to which any person referred to above was selected as a director or member of senior management.

 

| **B.** | **Compensation of Directors and Officers** |
|--------|--------------------------------------------|

 

The total compensation paid to our officers and directors during fiscal year 2007 was US$929,023 comprised of salaries in the amount of US$689,023 and bonuses in the amount of US$240,000. During 2007, Hainan Jinpan did not reserve for any pension, retirement or similar benefits for directors and officers.

 

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

 

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

 

In January 2004, we entered into share option agreements with three of our independent directors to purchase 30,000 common shares. Options granted are exercisable at the price of US$7.34 per share and, subject to termination of employment, expire ten (10) years from the date of grant. The options are not transferable other than on death and vest on the date of grant.

 

In April 2007, we entered into share option agreements with two of our independent directors and three of our employees to purchase 27,250 common shares. Options granted are exercisable at the price of US$18.07 per share, the market price on the grant date of March 11th, 2007 or the last trading day prior to the grant date, and, subject to termination of employment, expire        five (5) years from the date of grant. The options are not transferable other than on death and vest on the agreement date.

 

In April 2008, we entered into share option agreements with thirty-eight (38) employees to purchase 55,500 common shares. Options granted are exercisable at the price of US$ 23.30 per share, the market price on the grant date of March 20th, 2008 or the last trading day prior to the grant date, and, subject to termination of employment, expire five years from the date of the        agreement. The options are not transferable other than on death. The vesting dates range from the agreement date to January 1, 2011.

 

In April 2008, we also entered into share option agreements with three of our independent directors and three of our employees to purchase 10,750 common shares. Options granted are exercisable at the price

 

43

 

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of $30.57 per share, the market price on the grant date of April 17th, 2008 or the last trading day prior to the grant date, and, subject to termination of employment, expire five (5) years from the date of the agreement. The options are not transferable other than on death and vests on January 1, 2009.

 

A summary of our stock option activities, and related information for the years ended December 31, 2007, 2006 and 2005 are as follows:

 

|                                                           | 2007                            |   | 2006                               |   | 2005                            |
|----------------------------------------------------------------|---------------------------------|--------|------------------------------------|--------|---------------------------------|
|                                                           |  

 

 

Options |   | Weighted

average

exercise

price |   |  

 

 

Options |   | Weighted

average

exercise

price |   |  

 

 

Options |   | Weighted

average

exercise

price |
|                                                           |                            |   | US$                                |   |                            |   | US$ |   |   |   | US$ |
|                                                           |                            |   |                               |   |                            |   |   |   |   |   |   |
| Outstanding at beginning of year                               | 145,000                         |   | 3.542                              |   | 261,300                         |   | 3.143 |   | 262,000 |   | 2.602 |
| Granted                                                        | 27,250                          |   | 18.07                              |   | -                               |   | - |   | - |   | - |
| Exercised                                                      | (21,000)                        |   | 2.340                              |   | (116,300)                       |   | 2.646 |   | (700) |   | 3.55 |
| Cancelled                                                      | -                               |   | -                                  |   | -                               |   | - |   | - |   | - |
| Forfeited                                                      | -                               |   | -                                  |   | -                               |   | - |   | - |   | - |
| Outstanding at the end of year                                 | 151,250                         |   | 6.326                              |   | 145,000                         |   | 3.542 |   | 261,300 |   | 3.143 |
| Exercisable at the year end                                    | 151,250                         |   | 6.326                              |   | 145,000                         |   | 3.542 |   | 261,300 |   | 3.143 |
|                                                           |                            |   |                               |   |                            |   |   |   |   |   |   |
| Weighted average fair value of options granted during the year |  

18.07                   |   |                               |   |  

N/A                     |   |  

  |   |  

N/A |   |   |

 

We recognized approximately RMB 1.6 million of compensation cost related to the granting of stock options for the year ended December 31, 2007. No compensation cost related to the granting of share options was recognized for the years ended December 31, 2006 and 2005. No income tax benefit related to the granting of share options was recognized for the years ended        December 31, 2007, 2006 and 2005. The total intrinsic value of share options exercised during the years ended December 31, 2007, 2006 and 2005 was RMB 2.4 million, RMB 4.9 million and RMB 13,000, respectively. The total fair value of share options vested during the year ended December 31, 2007 was approximately RMB 5.2 million. No share options were vested for the years ended December 31, 2006 and 2005.

 

|   | The following table summarizes information with respect to options outstanding at December 31, 2007: |
|--------|------------------------------------------------------------------------------------------------------|

 

|     |   | Options     | Outstanding               |     |           |   | Options Currently | Exercisable |
|----------|--------|-------------|---------------------------|----------|----------------|--------|-------------------|-------------|
|     |   |        | Weighted Average          | Weighted |           |   |              | Weighted    |
| Exercise |   | Number      | Remaining                 |     | Average        |   | Number            |        | Average |
| Price    |   | Outstanding | Contractual Life in Years |     | Exercise Price |   | Exercisable       |        | Exercise Price |
| $ 1.35   |   | 20,000      | 1.17                      |     | $ 1.35         |   | 20,000            |        | $ 1.35 |
| $ 3.55   |   | 86,000      | 5.66                      |     | $ 3.55         |   | 86,000            |        | $ 3.55 |
| $ 7.34   |   | 18,000      | 7.00                      |     | $ 7.34         |   | 18,000            |        | $ 7.34 |
| $ 18.07  |   | 27,250      | 9.25                      |     | $ 18.07        |   | 27,250            |        | $ 18.07 |
|     |   | 151,250     | 5.87                      |     | $ 6.33         |   | 151,250           |        | $ 6.33 |
|     |   |        |                      |     |           |   |              |        |   |

 

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 share-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

 

44

 

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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 share option plan has been recognized.

 

| **C.** | **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 and also meets the criteria of an “Audit Committee Financial Expert” under the applicable rules and regulations of the SEC. Mr. Stephen R. Clark’s designation as the Audit        Committee’s Financial Expert has been ratified by the Board of Directors. 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 shareholders 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.

 

| **D.** | **Employees** |
|--------|---------------|

 

As of December 31, 2007, we had approximately 632 employees in China, including 100 engineers and technicians, 69 management and administrative personnel, 99 marketing and sales personnel, 364 factory personnel and 7 employees in the United States, including 3 management and administrative personnel, 2 marketing and sales personnel, 1 accounting personnel, and 1 legal personnel. Except        for our U.S. employees, all of our employees are contract 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.

 

45

 

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| **E.** | **Share Ownership** |
|--------|---------------------|

Under the 2006 Stock Incentive Plan, we may issue share or options to our or our subsidiaries’ officers, directors, and consultants. The committee that administers the plan has the discretionary authority to grant share 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 shares 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 shares of us and our affiliates, the exercise price cannot be less than 110% of the fair market value of the common shares on the date of grant. The term of the option may not exceed ten 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 share, of        any of our subsidiaries or a parent.

 

46

 

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**Item 7. Major Shareholders and Related Party Transactions.**

 

| **A.** | **Major Shareholders** |
|--------|------------------------|

 

The following table sets forth specific information as of May 15, 2008, 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 common shares, (ii) each of our directors, and (iii) the number of our common 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 Shares  | Li Zhiyuan (2)                                        | 1,851,431       | 22.62%           |
| Common Shares  | Jing Yuqing (3)                                       | 1,851,431       | 22.62%           |
| Common Shares  | Ling Xiangsheng (4)                                   | 953,314         | 11.64%           |
| Common Shares  | Stephan R. Clark (5)                                  | 4,333           | *                |
| Common Shares  | Li-wen Zhang (6)                                      | 10,750          | *                |
| Common Shares  | Donald S. Burris (7)                                  | 6,000           | *                |
| Common Shares  | All officers and directors as a group (6 persons) (8) | 2,838,578       | 34.67%           |

 

| * | 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 shares beneficially owned by them, unless otherwise noted in these footnotes. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | (2) | Includes: (i) 1,249,363 common shares, (ii) 602,068 common shares beneficially owned by Jing Yuqing, the wife of Mr. Li and a Director and Corporate Secretary, as to which Mr. Li disclaims beneficial ownership. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | (3) | Includes: (i) 602,068 common shares (ii) 1,249,363 common shares 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) | Represents 953,314 common shares. |
|--------|-----|-----------------------------------|

 

|   | (5) | Represents 4,333 common shares issuable upon exercise of currently exercisable share options. |
|--------|-----|-----------------------------------------------------------------------------------------------|

 

|   | (6) | Represents 2,000 common shares and 8,750 common shares issuable upon exercise of currently exercisable share options. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------|

  

|   | (7) | Represents 1,000 common shares and 5,000 common shares issuable upon exercise of currently exercisable share options. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------|

|   | (8) | Includes 30,833 common shares issuable upon exercise of currently exercisable share options issued to all directors and executive officers. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------|

 

To the best of our knowledge, as of May 15, 2008, 8,186,617 common shares were outstanding and all common shares outstanding were held by 18 record holders in the United States.

 

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

 

47

 

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Since February 9, 2005, beneficial ownership percentages for Mr. Li, Ms. Jing, and Mr. Ling have decreased by, 6.48%, 5.91% and 0.08% respectively, to the percentages as indicated in the chart above.

 

| **B.** | **Related Party Transactions** |
|--------|--------------------------------|

 

On February 13, 2007, 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.

 

| **C.** | **Interests of experts and counsel.** |
|--------|---------------------------------------|

 

Not applicable.

 

**Item 8. Financial Information.**

 

| **A.** | **Consolidated Statements and Other Financial Information** |
|--------|-------------------------------------------------------------|

 

|   | See Item 18. |
|--------|--------------|

 

***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. 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 below.

 

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 division of shares 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 made the first distribution of US$0.12 per share on February 22, 2007, to the shareholders of record on February 8, 2007, and we made the second distribution in July of 2007. In February 2008, the board of directors declared a cash dividend of US$0.24 per share. We made the first distribution of        US$0.12 per shares on February 20, 2008 and we will make the second distribution in the second half of 2008.

 

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; |
|--------|------------|-------------------------------------|

 

48

 

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|   | ****•**** | 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**

 

Neither we nor our subsidiaries is a party to, nor is our property or the property of our subsidiaries’ the subject of, any pending legal or arbitration proceeding that is material.

 

| **B.** | **Significant Changes** |
|--------|-------------------------|

 

On February 13, 2007, 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 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 (approximately 400,000 square feet) 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 6.7 million. 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 20.3 million. The construction was scheduled to be completed by October 13, 2007. See Exhibit 4.8 for additional details. The construction was delayed due to our rejection of building        materials procured by the general contractor that did not conform to the requirements of the construction contract and snow storms that severely affected transportation in Wuhan during the winter of 2007. Construction of the Wuhan facility was completed in the middle of May 2008 and we began operations in the middle of June 2008.

 

49

 

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**Item 9. The Offer and Listing.**

 

| **A.** | **Offer and Listing Details** |
|--------|-------------------------------|

 

***Trading Prices and Markets***

 

The following table sets forth the high and low sales prices for our common shares, 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 2007 through June 2008.

 

|   | Common Shares |   |
|--------|---------------|--------|
|   | Year Ended    | High   | Low |
|   | 2003          | 8.0    | 1.585 |
|   | 2004          | 7.9    | 4.92 |
|   | 2005          | 7.20   | 5.29 |
|   | 2006          | 27.75  | 6.02 |
|   | 2007          | 30.90  | 15.36 |
|        |               |        |  |  |  |

 

|               |   |
|--------------------|--------|
| Quarter Ended      | High   | Low |
| March 30, 2006     | 9.53   | 6.02 |
| June 30, 2006      | 10.12  | 7.15 |
| September 30, 2006 | 11.65  | 7.61 |
| December 31, 2006  | 28.75  | 11.10 |
| March 30, 2007     | 24.84  | 15.36 |
| June 30, 2007      | 22.85  | 18.03 |
| September 30, 2007 | 28.70  | 17.75 |
| December 31, 2007  | 30.90  | 22.26 |

 

 

| Six Months                   | High  | Low   |
|------------------------------|-------|-------|
| December, 2007               | 30.90 | 25.01 |
| January, 2008                | 30.74 | 21.14 |
| February, 2008               | 29.99 | 24.00 |
| March, 2008                  | 29.89 | 23.16 |
| April, 2008                  | 38.35 | 29.10 |
| May, 2008                    | 44.98 | 36.10 |
| June, 2008 (through June 17) | 40.98 | 34.26 |

 

| **B.** | **Plan of Distribution** |
|--------|--------------------------|

 

|   | Not applicable |
|--------|----------------|

 

| **C.** | **Markets** |
|--------|-------------|

 

|   | Our common shares has traded on the AMEX since February 8, 1998 under the symbol “JST.” |
|--------|-----------------------------------------------------------------------------------------------------|

 

 

50

 

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| **D.** | **Selling Shareholders** |
|--------|--------------------------|

 

|   | Not applicable |
|--------|----------------|

 

| **E.** | **Dilution** |
|--------|--------------|

 

|   | Not applicable |
|--------|----------------|

 

| **F.** | **Expenses of the Issue** |
|--------|---------------------------|

 

|   | Not applicable |
|--------|----------------|

 

 

51

 

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**Item 10.  Additional Information.**

 

| **A.** | **Share Capital** |
|--------|-------------------|

 

Not Applicable

 

| **B.** | **Memorandum of Association 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 shares 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 common shares 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 shares are distributable        among them according to their respective share holdings. Holders of our common shares 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 shares do not have cumulative voting rights in the election of our directors. The Company’s convertible preferred shares (the “Preferred Shares”) are convertible at any time to common shares and each Preferred Share        entitles its holder to the same number of votes as a common share. Holders of our Preferred Shares are entitled to receive a preferred dividend per share (6% per annum) payable in kind, compounded quarterly. All accrued and unpaid dividends on the Preferred Shares are to be cancelled upon conversion of such Preferred Shares into common shares. In the event of our liquidation, dissolution or winding up, the holders of our Preferred Shares are entitled to a preference over the holders of        our common shares 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 Preferred Shares are entitled, holders of our Preferred Shares and holders of our common shares will be entitled to any further distributions of our assets on a pari passu basis. Each Preferred Share entitles        its holder to the same number of votes as a common share with respect to any vote of our shareholders. Holders of our Preferred Shares are entitled, at any time, to convert their Preferred Shares into common shares, subject to the anti-dilution adjustments described below. Holders of our Preferred Shares have certain anti-dilution protection upon the occurrence

 

52

 

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of certain events including share dividends, divisions, combinations, reclassifications, mergers and issuances of our common shares.

 

The rights attached to any class or series of our shares 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.

 

| **C.** | **Material Contracts** |
|--------|------------------------|

 

On December 19, 2006, we entered into securities purchase agreements (the “Purchase Agreements”) with certain institutional and accredited investors providing for the issuance and sale of 1,350,371 common shares (the “Shares”) 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 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 common shares 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 described above. On

 

53

 

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February 13, 2007, we completed the acquisition. Upon competition, Hainan Jinpan became our wholly owned subsidiary.

 

On December 30, 2006, 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 (approximately 400,000 square feet) 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 6.7 million. See Exhibit 4.7 for additional details.

 

| **D.** | **Exchange Controls and Other Limitations Affecting Security Holders** |
|--------|------------------------------------------------------------------------|

 

There are no exchange control restrictions on payment of dividends 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.

 

Applicable Chinese laws and regulations require that before a Sino-foreign equity joint venture enterprise, such as Hainan Jinpan, distributes profits to its parent company, Jinpan International, 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. To date, these controls have not had and are not expected to have a material impact on our financial results.

 

There are no 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 shares. 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 shares.

 

| **E.** | **Taxation** |
|--------|--------------|

 

The following discussion is a summary of all material anticipated British Virgin Islands and Chinese tax consequences of an investment in our common shares 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 shares 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 shares. The following        discussion is based upon laws and relevant interpretations relating to our common shares currently in effect, all of which are subject to change.

 

54

 

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            British Virgin Islands Taxation Policy. Under the BVI Business Companies Act, 2004 of the British Virgin Islands as currently in effect, a holder of common shares 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 shares and all holders of        common shares are not liable to British Virgin Islands income tax on gains realized during the year on sale or disposal of any common shares. The British Virgin Islands has enacted legislation, the Mutual Legal Assistance (Tax Matters) (Amendment) Bill 2004 (the “EU Act”), 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 EU Act 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 British Virgin Islands, 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:

 

|   | • |   | 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 British Virgin Islands 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. In addition, the common shares 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 shares solely as a result of the purchase, ownership and disposition of common shares or receipt of dividends, if declared.

 

55

 

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**F.**       **Dividends and Paying Agents**

 

|   | Not Applicable |
|--------|----------------|

 

| **G.** | **Statement by Experts** |
|--------|--------------------------|

 

|   | Not Applicable |
|--------|----------------|

 

| **H.** | **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.

 

| **I.** | **Subsidiary Information** |
|--------|----------------------------|

 

|   | Not Applicable |
|--------|----------------|

 

**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. |
|--------|-------|

 

 

56

 

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**Item 15. Controls and Procedures**

 

| **(a)** | **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 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 is 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, 2007, the Company’s Chief Executive Officer and Principal Financial Officer concluded that as of the end of the period covered by this Annual Report such disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by        the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

 

| **(b)** | **Management's annual report on internal control over financial reporting** |
|---------|-----------------------------------------------------------------------------|

 

Management, including our Chief Executive Officer and Principal Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting.

 

Our internal control over financial reporting is a process designed under the supervision of our Principal Executive and Financial Officers to provide reasonable but not absolute assurance regarding the reliability of financial reporting and the preparation of its published financial statements. Internal control over financial reporting includes policies and procedures        that:

 

|   | **•** | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with the generally accepted accounting principles; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Provide reasonable assurance that receipts and expenditures are being made only in accordance with the authorization of our management and directors; and |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Provide reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements would be prevented or detected in a timely manner. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk        that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

 

57

 

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            Management conducted an evaluation of the effectiveness of our internal control over financial reporting on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that our internal control over financial reporting        was effective as of December 31, 2007.

 

Our internal control over financial reporting as of December 31, 2007 was audited by Grant Thornton, an independent registered public accounting firm, as stated in their attestation report beginning on page F-__ of this Annual Report on Form 20-F.

 

| **(c)** | **Attestation Report of the Registered Public Accounting Firm** |
|---------|-----------------------------------------------------------------|

  

The effectiveness of internal control over financial reporting as of December 31, 2007, was audited by Grant Thornton, an independent registered public accounting firm, as stated in their report included under Item 18 of this Annual Report on Form 20-F.

 

| **(d)** | **Changes in Internal Controls Over Financial Reporting** |
|---------|-----------------------------------------------------------|

There have been no significant changes in our internal controls over financial reporting that occurred during the period covered by this Annual Report on Form 20-F that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

| **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

 

58

 

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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 2007 were reported to, and the services proposed to be provided during 2007 were pre-approved by, the Audit Committee in accordance with the procedures outlined above.

 

59

 

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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, 2007 and 2006, respectively.

 

|               | **Year Ended December 31, 2006** | **Year Ended December 31, 2007** |
|--------------------|----------------------------------|----------------------------------|
| Audit Fees         | RMB 1,248,000                    | RMB 2,080,000                    |
| Audit Related Fees | RMB 87,000                       | -                                |
| Tax Fees           | -                                | -                                |
| All Other fees     | -                                | -                                |
| Total              | RMB 1,335,000                    | RMB 2,080,000                    |
|               |                             |                             |

 

“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.

 

60

 

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**Item 19. Exhibits.**

 

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

 

|                                                                    | Page |
|-------------------------------------------------------------------------|------|
| Reports of Independent Registered Public Accounting Firm                | F-1  |
| 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-9  |
| Notes to Consolidated Financial Statements                              | F-10 |

 

|   | (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.(3) |
| 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.(3)                                                  |
| 8.1*            | List of Subsidiaries                                                                                                                                                                                         |
| 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.                                                                                                                                                                        |

 

_______________________________

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

 

61

 

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| (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.                                               |
|                                                            |                                                                                                                                                                                                                              |
| (3)                                                             | Filed as an exhibit to Jinpan International Limited’s Form 20-F for the year ended December 31, 2006, filed with the Securities and Exchange Commission on July 13, 2007, and incorporated herein by reference.             |

 

62

 

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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) |

June 20, 2008

 

63

 

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Financial Statements

 

JINPAN INTERNATIONAL LIMITED AND SUBSIDIARIES

 

Years ended December 31, 2007, 2006 and 2005

 

 

 

----

 

**   **

 

 

 

 

 

 

 

 

 

F-1

 

----

F-2

 

----

 

**Jinpan International Limited and Subsidiaries**

****Consolidated Balance Sheets****

**As of December 31, 2007 and 2006**

 

|                                                                          |   |   |   | December 31,                                                 |   |
|-------------------------------------------------------------------------------|--------|--------|--------|--------------------------------------------------------------|--------|
|                                                                          |   |   |   | 2007                                                         |   | 2007 |   | 2006 |   |
|                                                                          |   | Notes  |   | US$                                                          |   | RMB |   | RMB |   |
|                                                                          |   |   |   | *(In thousands, except number of shares and per share data)* |   |
|                                                                          |   |   |   |                                                         |   |   |   |   |   |
| Assets                                                                        |   |   |   |                                                         |   |   |   |   |   |
| Current assets:                                                               |   |   |   |                                                         |   |   |   |   |   |
| Cash and cash equivalents                                                     |   |   |   | 15,705                                                       |   | 114,565 |   | 256,320 |   |
| Restricted Cash                                                               |   |   |   | 1,417                                                        |   | 10,331 |   | 10,073 |   |
| Investments available for sale                                                |   | 4      |   | 193                                                          |   | 1,412 |   | 1,506 |   |
| Notes receivable                                                              |   |   |   | 1,615                                                        |   | 11,778 |   | 7,521 |   |
| Accounts receivable, net                                                      |   | 5      |   | 43,026                                                       |   | 313,858 |   | 198,868 |   |
| Inventories, net                                                              |   | 6      |   | 25,743                                                       |   | 187,784 |   | 145,153 |   |
| Prepaid expenses                                                              |   |   |   | 7,943                                                        |   | 57,942 |   | 36,215 |   |
| Other receivables                                                             |   |   |   | 1,354                                                        |   | 9,880 |   | 5,575 |   |
| Total current assets                                                          |   |   |   | 96,996                                                       |   | 707,550 |   | 661,231 |   |
|                                                                          |   |   |   |                                                         |   |   |   |   |   |
| Property, plant and equipment, net                                            |   | 7      |   | 9,031                                                        |   | 65,875 |   | 32,446 |   |
| Construction in progress                                                      |   |   |   | 2,889                                                        |   | 21,074 |   | 13,405 |   |
| Goodwill                                                                      |   |   |   | 11,549                                                       |   | 84,245 |   |   |   |
| Deferred tax assets                                                           |   | 8      |   | 807                                                          |   | 5,883 |   | 788 |   |
|                                                                          |   |   |   |                                                         |   |   |   |   |   |
| Total assets                                                                  |   |   |   | 121,272                                                      |   | 884,627 |   | 707,870 |   |
|                                                                          |   |   |   |                                                         |   |   |   |   |   |
| Liabilities and Shareholders’ Equity                                    |   |   |   |                                                         |   |   |   |   |   |
|                                                                          |   |   |   |                                                         |   |   |   |   |   |
| Current liabilities:                                                          |   |   |   |                                                         |   |   |   |   |   |
|                                                                          |   |   |   |                                                         |   |   |   |   |   |
| Short term bank loans                                                         |   | 9      |   | 9,874                                                        |   | 72,025 |   | 46,763 |   |
| Accounts payable                                                              |   |   |   | 6,372                                                        |   | 46,482 |   | 48,270 |   |
| Notes Payable                                                                 |   |   |   | —                                                      |   | — |   | 8,294 |   |
| Income tax                                                                    |   | 8      |   | 2,353                                                        |   | 17,162 |   | 4,583 |   |
| Value added tax                                                               |   |   |   | 2,498                                                        |   | 18,220 |   | 4,190 |   |
| Advance from customers                                                        |   |   |   | 4,638                                                        |   | 33,835 |   | 28,570 |   |
| Commission payable                                                            |   |   |   | 9,142                                                        |   | 66,686 |   | 42,216 |   |
| Accrual employee benefits                                                     |   |   |   | 459                                                          |   | 3,351 |   | 7,934 |   |
| Government grant                                                              |   | 10     |   | 729                                                          |   | 5,321 |   | 5,055 |   |
| Other liabilities                                                             |   |   |   | 988                                                          |   | 7,205 |   | 9,456 |   |
| Total current liabilities                                                     |   |   |   | 37,053                                                       |   | 270,287 |   | 205,331 |   |
| Long Term Liability:                                                          |   |   |   |                                                         |   |   |   |   |   |
| Government grant                                                              |   | 10     |   | 1,476                                                        |   | 10,766 |   | 3,962 |   |
| Minority interest                                                             |   | 17     |   | —                                                      |   | — |   | 8,358 |   |
| Commitments and contingent liabilities                                        |   | 12     |   | —                                                      |   | — |   | — |   |
| Shareholders’ equity:                                                   |   |   |   |                                                         |   |   |   |   |   |
| Common stock, US$0.009 par value:                                             |   |   |   |                                                         |   |   |   |   |   |
| Authorized shares – 20,000,000                                          |   |   |   |                                                         |   |   |   |   |   |
| Issued and outstanding shares – 8,186,617 in 2007 and 8,171,617 in 2006 |   | 18     |   | 73                                                           |   | 602 |   | 602 |   |
| Common Stock-Warrants                                                         |   |   |   | 854                                                          |   | 6,232 |   | — |   |
| Convertible preferred stock, US$0.009 par value:                              |   |   |   |                                                         |   |   |   |   |   |
| Authorized shares - 1,000,000                                                 |   |   |   |                                                         |   |   |   |   |   |
| Issued and outstanding shares – 6,111 in 2006 and 2005                  |   | 18     |   | —                                                      |   | 1 |   | 1 |   |
| Additional paid-in capital                                                    |   |   |   | 33,938                                                       |   | 270,269 |   | 274,779 |   |
| Reserves                                                                      |   | 11     |   | 3,906                                                        |   | 31,451 |   | 29,186 |   |
| Retained earnings                                                             |   | 18     |   | 39,659                                                       |   | 299,489 |   | 192,547 |   |
| Accumulated other comprehensive income                                        |   |   |   | 5,102                                                        |   | 2,055 |   | (160 | ) |
|                                                                          |   |   |   | 83,532                                                       |   | 610,099 |   | 496,955 |   |
| Less: Treasury shares at cost,                                                |   |   |   |                                                         |   |   |   |   |   |
| Common stock –202,470 in 2007 and 208,470 in 2006                       |   |   |   | (789                                                         | )      | (6,525 | ) | (6,736 | ) |
| Total shareholders’ equity                                              |   |   |   | 82,743                                                       |   | 603,574 |   | 490,219 |   |
|                                                                          |   |   |   |                                                         |   |   |   |   |   |
| Total liabilities and shareholders’ equity                              |   |   |   | 121,272                                                      |   | 884,627 |   | 707,870 |   |

 

 

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

 

F-3

 

----

**Jinpan International Limited and Subsidiaries**

**Consolidated Statements of Income**

**For the years ended December 31, 2007, 2006 and 2005**

 

 

|                                 |   |   |   | Year ended December 31,                 |   |
|--------------------------------------|--------|--------|--------|-----------------------------------------|--------|
|                                 |   |   |   | 2007                                    |   | 2007 |   | 2006 |   | 2005 |   |
|                                 |   | Notes  |   | US$                                     |   | RMB |   | RMB |   | RMB |   |
|                                 |   |   |   | *(In thousands, except per share data)* |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| Net sales                            |   | 17     |   | 119,623                                 |   | 903,361 |   | 653,208 |   | 438,219 |   |
| Other income                         |   |   |   | 272                                     |   | 2,052 |   | 4,209 |   | 2,711 |   |
|                                 |   |   |   | 119,895                                 |   | 905,413 |   | 657,417 |   | 440,930 |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| Costs and expenses:                  |   |   |   |                                    |   |   |   |   |   |   |   |
| Cost of products sold                |   |   |   | (77,988                                 | )      | (588,941 | ) | (471,403 | ) | (297,818 | ) |
| Provision for doubtful debts         |   |   |   | (929                                    | )      | (6,123 | ) | 698 |   | (1,347 | ) |
| Selling and administrative           |   |   |   | (22,037                                 | )      | (167,311 | ) | (104,898 | ) | (87,060 | ) |
|                                 |   |   |   | (100,954                                | )      | (762,375 | ) | (575,603 | ) | (386,225 | ) |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| Non operating income(loss):          |   |   |   |                                    |   |   |   |   |   |   |   |
| Gain/(Loss) from sales of investment |   |   |   | —                                 |   | — |   | — |   | (273 | ) |
| Dividend income of investment        |   |   |   | 20                                      |   | 152 |   | 160 |   | 14 |   |
| Interest Income                      |   |   |   | 122                                     |   | 920 |   | 683 |   | 355 |   |
|                                 |   |   |   | 142                                     |   | 1,072 |   | 843 |   | 96 |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| Non operating expenses:              |   |   |   |                                    |   |   |   |   |   |   |   |
| Interest expenses                    |   |   |   | (465                                    | )      | (3,515 | ) | (2,231 | ) | (1,499 | ) |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| Income before income taxes           |   |   |   | 18,618                                  |   | 140,595 |   | 80,426 |   | 53,302 |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| Income taxes                         |   | 8      |   | (2,226                                  | )      | (16,809 | ) | (10,891 | ) | (8,744 | ) |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| Income before minority interest      |   |   |   | 16,392                                  |   | 123,786 |   | 69,535 |   | 44,558 |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| Minority interest                    |   |   |   | —                                 |   | — |   | (9,876 | ) | (7,482 | ) |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| Net income                           |   |   |   | 16,392                                  |   | 123,786 |   | 59,659 |   | 37,076 |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| Earnings per share                   |   |   |   |                                    |   |   |   |   |   |   |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| -Basic                               |   |   |   | US$2.05                                 |   | RMB15.52 |   | RMB 9.00 |   | RMB 5.70 |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| -Diluted                             |   |   |   | US$2.03                                 |   | RMB15.30 |   | RMB 8.87 |   | RMB 5.58 |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| Weighted average number of shares    |   |   |   |                                    |   |   |   |   |   |   |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| -Basic                               |   |   |   | 7,976,755                               |   | 7,976,755 |   | 6,625,726 |   | 6,499,898 |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
| -Diluted                             |   |   |   | 8,090,630                               |   | 8,090,630 |   | 6,728,915 |   | 6,640,396 |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |
|                                 |   |   |   |                                    |   |   |   |   |   |   |   |

 

 

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

 

F-4

 

----

**Jinpan International Limited and Subsidiaries**

**Consolidated Statements of Shareholders’ Equity and Comprehensive Income**

**For the years ended December 31, 2007, 2006 and 2005**

 

|                                        |   | Treasurystockshares |   | Number ofcommonshares |   | Number ofpreferredshares |   | TreasurystockRMB |   | CommonstockRMB |   | ConvertiblepreferredstockRMB |   | Additionalpaid-incapitalRMB |   | ReservesRMB |   | RetainedearningsRMB |   | Accumulatedother com-prehensiveincomeRMB |   | Compre-hensiveincomeRMB |   | TotalRMB |   |
|---------------------------------------------|--------|---------------------|--------|-----------------------|--------|--------------------------|--------|------------------|--------|----------------|--------|------------------------------|--------|-----------------------------|--------|-------------|--------|---------------------|--------|------------------------------------------|--------|-------------------------|--------|----------|--------|
| Balance at January 1, 2005                  |   | (184,270            | )      | 6,702,112             |   | 12,245                   |   | (5,444           | )      | 499            |   | 1                            |   | 87,515                      |   | 19,245      |   | 131,972             |   | 69                                       |   | —                 |   | 233,857  |   |
| Net income                                  |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | —     |   | 37,076              |   | —                                  |   | 37,076                  |   | 37,076   |   |
| Transfer to reserves                        |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | 2,625       |   | (2,625              | )      |                                     |   | —                 |   | —  |   |
| Cash dividends distributed($0.20 per share) |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | —     |   | (10,624             | )      | —                                  |   | —                 |   | (10,624  | )      |
| Reacquired shares                           |   | (28,200             | )      | —               |   | —                  |   | (1,355           | )      | —        |   | —                      |   | —                     |   | —     |   | —             |   | —                                  |   | —                 |   | (1,335   | )      |
| Converted to common stock                   |   | —             |   | 6,134                 |   | (6,134                   | )      | —          |   | —        |   | —                      |   | —                     |   | —     |   | —             |   | —                                  |   | —                 |   | —  |   |
| Exercise of stock options for cash          |   | —             |   | 700                   |   | —                  |   | —          |   | —        |   | —                      |   | 20                          |   | —     |   | —             |   | —                                  |   | —                 |   | 20       |   |
| Unrealized gains on investments             |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | —     |   | —             |   | —                                  |   | —                 |   | —  |   |
|                                        |   |                |   |                  |   |                     |   |             |   |           |   |                         |   |                        |   |        |   |                |   |                                     |   |                    |   |     |   |
| Employee stock-based compensation           |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | —     |   | —             |   | —                                  |   | —                 |   | —  |   |
| Currency translation adjustments            |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | —     |   | —             |   | (187                                     | )      | (187                    | )      | (187     | )      |
|                                        |   |                |   |                  |   |                     |   |             |   |           |   |                         |   |                        |   |        |   |                |   |                                     |   | 36,889                  |   |     |   |
|                                        |   |                |   |                  |   |                     |   |             |   |           |   |                         |   |                        |   |        |   |                |   |                                     |   |                    |   |     |   |
| Balance at December 31, 2005                |   | (212,470            | )      | 6,708,946             |   | 6,111                    |   | (6,779           | )      | 499            |   | 1                            |   | 87,535                      |   | 21,870      |   | 155,799             |   | (118                                     | )      | —                 |   | 258,807  |   |
| Net income                                  |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | —     |   | 59,659              |   | —                                  |   | 59,659                  |   | 59,659   |   |
| Transfer to reserves                        |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | 7,316       |   | (7,316              | )      | —                                  |   | —                 |   | —  |   |
|                                        |   |                |   |                  |   |                     |   |             |   |           |   |                         |   |                        |   |        |   |                |   |                                     |   |                    |   |     |   |
| Cash dividends distributed($0.24 per share) |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | —     |   | (12,658             | )      | —                                  |   | —                 |   | (12,658  | )      |
| Issued shares                               |   | —             |   | 1,350,371             |   | —                  |   | —          |   | 95             |   | —                      |   | 184,891                     |   | —     |   | —             |   | —                                  |   |                    |   | 184,986  |   |
| Exercise of stock options for cash          |   | 4,000               |   | 112,300               |   | —                  |   | 43               |   | 8              |   | —                      |   | 2,353                       |   | —     |   | —             |   | —                                  |   | —                 |   | 2,404    |   |
| Adoption SAB 108(Note 19)                   |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | —     |   | (2,937              | )      | —                                  |   | —                 |   | (2,937   | )      |
| Currency translation adjustments            |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | —     |   | —             |   | (42                                      | )      | (42                     | )      | (42      | )      |
|                                        |   |                |   |                  |   |                     |   |             |   |           |   |                         |   |                        |   |        |   |                |   |                                     |   | 59,617                  |   |     |   |
|                                        |   |                |   |                  |   |                     |   |             |   |           |   |                         |   |                        |   |        |   |                |   |                                     |   |                    |   |     |   |
| Balance at December 31, 2006                |   | (208,470            | )      | 8,171,617             |   | 6,111                    |   | (6,736           | )      | 602            |   | 1                            |   | 274,779                     |   | 29,186      |   | 192,547             |   | (160                                     | )      | —                 |   | 490,219  |   |
|                                        |   |                |   |                  |   |                     |   |             |   |           |   |                         |   |                        |   |        |   |                |   |                                     |   |                    |   |     |   |
| Net income                                  |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | —     |   | 123,786             |   | —                                  |   | 123,786                 |   | 123,786  |   |
| Transfer to reserves                        |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | 2,265       |   | (2,265              | )      | —                                  |   | —                 |   | —  |   |
| Cash dividends distributed($0.24 per share) |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | —     |   | (14,579             | )      |                                     |   | —                 |   | (14,579  | )      |
| Issued warrants                             |   | —             |   | —               |   | —                  |   | —          |   | 6,232          |   | —                      |   | (6,232                      | )      | —     |   | —             |   | —                                  |   | —                 |   | —  |   |
| Exercise of stock options for cash          |   | 6,000               |   | 15,000                |   | —                  |   | 211              |   | —        |   | —                      |   | 146                         |   | —     |   | —             |   | —                                  |   | —                 |   | 357      |   |
| Employee stock-based compensation           |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | 1,576                       |   | —     |   | —             |   | —                                  |   | —                 |   | 1,576    |   |
| Currency translation adjustments            |   | —             |   | —               |   | —                  |   | —          |   | —        |   | —                      |   | —                     |   | —     |   | —             |   | 2,215                                    |   | 2,215                   |   | 2,215    |   |
|                                        |   |                |   |                  |   |                     |   |             |   |           |   |                         |   |                        |   |        |   |                |   |                                     |   | 126,001                 |   |     |   |
|                                        |   |                |   |                  |   |                     |   |             |   |           |   |                         |   |                        |   |        |   |                |   |                                     |   |                    |   |     |   |
| Balance at December 31, 2006                |   | (202,470            | )      | 8,186,617             |   | 6,111                    |   | (6,525           | )      | 6,834          |   | 1                            |   | 270,269                     |   | 31,451      |   | 299,489             |   | 2,055                                    |   | —                 |   | 603,574  |   |

 

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

 

F-5

 

----

**Jinpan International Limited and Subsidiaries**

**Consolidated Statements of Cash Flows**

**For the years ended December 31, 2007, 2006 and 2005**

 

 

|                                                      |   | Year ended December 31, |   |
|-----------------------------------------------------------|--------|-------------------------|--------|
|                                                      |   | 2007                    |   | 2007 |   | 2006 |   | 2005 |   |
|                                                      |   | US$                     |   | RMB |   | RMB |   | RMB |   |
|                                                      |   | *(In thousands)*        |   |
| Operating activities                                      |   |                    |   |   |   |   |   |   |   |
| Net income                                                |   | 16,392                  |   | 123,786 |   | 59,659 |   | 37,076 |   |
| Adjustments to reconcile net income to                    |   |                    |   |   |   |   |   |   |   |
| net cash provided by/(used in) operating activities:      |   |                    |   |   |   |   |   |   |   |
| Depreciation                                              |   | 1,273                   |   | 9,615 |   | 6,834 |   | 6,393 |   |
| Deferred income taxes                                     |   | (675                    | )      | (5,095 | ) | 48 |   | (125 | ) |
| Provision for doubtful debts                              |   | 811                     |   | 6,124 |   | (698 | ) | 1,347 |   |
| Loss/(gain) on disposal of property, plant and equipment  |   | 49                      |   | 369 |   | (106 | ) | (6 | ) |
| Minority interest                                         |   | —                 |   | — |   | 9,876 |   | 7,482 |   |
| Employee stock-based compensation                         |   | 209                     |   | 1,576 |   | — |   | — |   |
| Loss /(Gain) from sales of available-for-sales securities |   | —                 |   | — |   | — |   | 360 |   |
| Changes in operating assets and liabilities               |   |                    |   |   |   |   |   |   |   |
| Restricted Cash                                           |   | (34                     | )      | (258 | ) | 948 |   | (11,021 | ) |
| Accounts receivable                                       |   | (16,038                 | )      | (121,114 | ) | (27,438 | ) | 47 |   |
| Notes receivable                                          |   | (564                    | )      | (4,257 | ) | (259 | ) | 2,927 |   |
| Inventories                                               |   | (5,645                  | )      | (42,630 | ) | (37,833 | ) | (39,706 | ) |
| Prepaid expenses                                          |   | (2,877                  | )      | (21,727 | ) | (18,512 | ) | (8,773 | ) |
| Prepaid tax                                               |   | —                 |   | — |   | 309 |   | (309 | ) |
| Other receivables                                         |   | (558                    | )      | (4,211 | ) | 2,098 |   | (2,453 | ) |
| Accounts payable                                          |   | (237                    | )      | (1,788 | ) | 24,317 |   | 967 |   |
| Income tax                                                |   | 1,666                   |   | 12,579 |   | 4,583 |   | (151 | ) |
| Value added tax                                           |   | 1,858                   |   | 14,030 |   | 3,300 |   | (3,232 | ) |
| Advance from customers                                    |   | 697                     |   | 5,265 |   | 2,181 |   | 21,132 |   |
| Commission payable                                        |   | 3,240                   |   | 24,470 |   | 9,105 |   | 4,719 |   |
| Accrual employee benefits                                 |   | (607                    | )      | (4,583 | ) | 1,175 |   | 651 |   |
| Government grant                                          |   | 936                     |   | 7,070 |   | (837 | ) | (404 | ) |
| Other liabilities                                         |   | (298                    | )      | (2,253 | ) | 453 |   | 2,542 |   |
| Net cash provided by/(used in) operating activities       |   | (402                    | )      | (3,032 | ) | 39,203 |   | 19,463 |   |
| Investing activities                                      |   |                    |   |   |   |   |   |   |   |
| Purchases of property, plant and equipment                |   | (5,777                  | )      | (43,629 | ) | (10,809 | ) | (5,898 | ) |
| Proceeds from sales of property, plant and equipment      |   | 29                      |   | 216 |   | 155 |   | 268 |   |
| Payment for construction in progress                      |   | (1,015                  | )      | (7,667 | ) | (10,422 | ) | (3,358 | ) |
| Acquired minority interest                                |   | (12,624                 | )      | (95,336 | ) | — |   | — |   |
| Proceeds from sales of available-for-sales securities     |   | —                 |   | — |   | — |   | 1,694 |   |
| Net cash provided by (used in) investing activities       |   | (19,387                 | )      | (146,416 | ) | (21,076 | ) | (7,294 | ) |
| Financing activities                                      |   |                    |   |   |   |   |   |   |   |
| Notes Payable                                             |   | (1,098                  | )      | (8,294 | ) | 8,294 |   | — |   |
| Proceeds from bank loans                                  |   | 13,961                  |   | 105,432 |   | 122,288 |   | 143,308 |   |
| Repayment of bank loans                                   |   | (10,616                 | )      | (80,170 | ) | (111,756 | ) | (130,668 | ) |
| Acquisition of treasury stock                             |   | —                 |   | — |   | — |   | (1,336 | ) |
| Issued shares from treasury stock                         |   | 28                      |   | 211 |   | — |   | — |   |
| Proceeds from issued shares                               |   | —                 |   | — |   | 184,986 |   | — |   |
| Proceeds from exercise of stock options                   |   | 19                      |   | 146 |   | 2,403 |   | 20 |   |
| Decrease in dividend payable to minority shareholders     |   | 362                     |   | 2,733 |   | (7,718 | ) | (6,719 | ) |
| Dividends paid                                            |   | (1,931                  | )      | (14,579 | ) | (12,658 | ) | (10,624 | ) |
| Net cash provided by/(used in) financing activities       |   | 725                     |   | 5,479 |   | 185,839 |   | (6,019 | ) |
| Effect of exchange rate changes on cash                   |   | 1,944                   |   | 2,214 |   | (42 | ) | (187 | ) |
| Net increase/(decrease) in cash and cash equivalents      |   | (17,120                 | )      | (141,755 | ) | 203,924 |   | 5,963 |   |
| Cash and cash equivalents at beginning of year            |   | 32,825                  |   | 256,320 |   | 52,396 |   | 46,433 |   |
| Cash and cash equivalents at end of year                  |   | 15,705                  |   | 114,565 |   | 256,320 |   | 52,396 |   |
|                                                      |   |                    |   |   |   |   |   |   |   |
| Interest paid                                             |   | 432                     |   | 3,261 |   | 2,150 |   | 1,500 |   |
|                                                      |   |                    |   |   |   |   |   |   |   |
| Income taxes paid                                         |   | 1,301                   |   | 9,827 |   | 5,957 |   | 8,328 |   |

 

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

 

F-6

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

 

| 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, 2007, the Company had direct interests in the following subsidiaries:

 

| Name of entity                                                  |   | Date ofestablishment |   | Percentage of equityinterest attributable to

the Company |   | Paid-up capital |   | Principal activities                              |
|-----------------------------------------------------------------|--------|----------------------|--------|-----------------------------------------------------------|--------|-----------------|--------|---------------------------------------------------|
|                                                            |   |                 |   |                                                      |   |            |   |                                              |
| Hainan Jinpan Electric Co., Ltd.

(“Jinpan JV” )    |   | June 3, 1997         |   | 95%                                                       |   | RMB62,902,000   |   | Manufacturing and sale of cast resin transformers |
|                                                            |   |                 |   |                                                      |   |            |   |                                              |
| Jinpan International

(USA) Limited

(“Jinpan USA”) |   | February 18, 1998    |   | 100%                                                      |   | US$10,000       |   | Marketing of cast resin transformers              |
|                                                            |   |                 |   |                                                      |   |            |   |                                              |
| Jinpan Electric

(China) Co. Ltd

(Jinpan China)                |   | January 12, 2007     |   | 100%                                                      |   | RMB 93,360,000  |   | Manufacturing andsale of cast resintransformers   |

 

Jinpan International Limited owns 100% of the common stock of Jinpan USA, a New York corporation, and Jinpan China, a foreign funded PRC limited liability company registered in Wuhan, Hubei China. Jinpan International and Wuhan Jinpan jointly own 95% and 5% respectively of Jinpan JV, a sino-foreign cooperative joint venture registered in Haikou, Hainan China. Jinpan China and Jinpan JV        jointly owns 95% and 5% respectively of Wuhan Jinpan, a domestically funded PRC limited liability company registered in Wuhan, Hubei China. The Company, Jinpan JV, Jinpan USA and Jinpan China 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-7

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

| 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, that 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 1978, 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-8

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

| 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 the Renminbi against the US Dollar on July 21, 2005 and introduced a basket of currencies to determine the exchange rate rather than peging the Renminbi to the dollar. As a result of adopting a more flexible exchange rate system, China’s financial sector has become more responsive to fluctuations in the 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.

 

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

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

 

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 RMB7.29 to US$1, the prevailing rate on December 31, 2007. 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.

 

 

 

F-9

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

|   | 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 100 million held in non-US banks or financial institutions as of December 31, 2007. At December 31, 2007, the banks held approximately RMB 10.3 million 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. We evaluate specific accounts where we have information that certain customers are unable to meet their financial obligations. W        make judgments, based on the best available facts and circumstances, including but not limited to, the length of our relationship with the customer, customer’s current credit status and known market factors, to record specific reserve for customers against receivable amounts. These specific reserves are re-evaluated and adjusted as additional information received affects the amounts estimated.

 

|   | (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.

 

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.

 

F-10

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

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

 

|   | (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, 2007 represented office building and manufacturing factory acquired but        not ready for occupancy at year end and machinery under installation.

 

|   | (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 has adopted FIN 48 as of January 1, 2007, as required. Management assessed the impact of FIN 48 in the current year and concluded that there is no 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 government allowed grace periods        for the new tax rate of 25% to take effect gradually. The applicable tax rate is 18% for calendar year 2008, 20% for 2009, 23% for 2010, 24% for 2011, and 25% for 2012.

 

F-11

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

3.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

|   | (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.

 

|   | (l) | Goodwill |
|--------|-----|----------|

 

Under SFAS No. 142, Goodwill and Other intangible Assets(“SFAS No. 142”), goodwill is subject to an annual impairment test. If an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carry value, an interim impairment test would be performed between annual tests. The impairment test        includes a comparison of estimated discounted cash flows associated with the asset’s carrying amount. If the fair value is less than the carrying value of the asset, an impairment charge is recorded to reduce the carrying value of the asset to fair value.

 

|   | (m) | 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.

 

|   | (n) | 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. The operating lease rental incurred by the Group during the years ended December 31, 2007, 2006 and 2005        amounted to RMB2,913,000, RMB2,250,000 and RMB1,671,000, respectively.

 

|   | (o) | 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. Revenue is recognized 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.

 

|   | (p) | Non-Operating Income |
|--------|-----|----------------------|

 

Income is recognized as follows for the Group’s non-operating transactions:

 

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

 

 

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

 

|   | (q) | 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.

 

F-12

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

3.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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

 

Basic earnings per share for the years ended December 31, 2007, 2006 and 2005 have been computed by dividing net income of RMB123,786,000, RMB59,659,000 and RMB 37,076,000 by the weighted average number of 7,976,755, 6,625,726 and 6,499,898 shares of common stock outstanding, respectively.

 

Diluted earnings per share for the years ended December 31, 2007, 2006 and 2005 have been computed by dividing net income of RMB123,786,000, RMB59,659,000 and RMB 37,076,000 by the weighted average number of 8,090,630, 6,728,915 and 6,640,396 shares of common stock outstanding respectively. The weighted average number of shares includes dilutive potential common stocks which reflect the        dilutive effect of stock options and preferred shares. Warrants to purchase 100,000 shares of common stock were not included in diluted earnings per share because the warrants were anti-dilutive based on the treasury stock method. Reconciliation of the denominator is as follows:

 

|                                                                                                         | 2007                      |   | 2006                      |   | 2005                      |
|--------------------------------------------------------------------------------------------------------------|---------------------------|--------|---------------------------|--------|---------------------------|
| Denominator for basic earnings per share – weighted average shares                                     |  

7,976,755         |   |  

6,625,726         |   |  

6,499,898         |
|                                                                                                         |                      |   |                      |   |                      |
| Effect of dilutive securities:                                                                               |                      |   |                      |   |                      |
| Convertible preferred stock                                                                                  | 6,111                     |   | 6,111                     |   | 9,177                     |
| Exercisable stock options                                                                                    | 107,764                   |   | 97,078                    |   | 131,321                   |
| Denominator for diluted earnings per share – adjusted weighted average shares and

assumed conversions |  

 

8,090,630 |   |  

 

6,728,915 |   |  

 

6,640,396 |

 

 

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

 

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

 

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

 

 

|                                                    |   | UnrealizedGains/(loss)on Securities |   | ForeignCurrencyTranslationAdjustments |   | Total  |
|---------------------------------------------------------|--------|-------------------------------------|--------|---------------------------------------|--------|--------|
|                                                    |   | RMB                                 |   | RMB                                   |   | RMB    |   |
|                                                    |   | (*in* *thousands)*             |
|                                                    |   |                                |   |                                  |   |   |   |
| Balance at January 1, 2006                              |   | (74                                 | )      | (44                                   | )      | (118   | ) |
|                                                    |   |                                |   |                                  |   |   |   |
| Foreign currency translation adjustments                |   | —                             |   | (42                                   | )      | (42    | ) |
|                                                    |   |                                |   |                                  |   |   |   |
| Balance at December 31, 2006                            |   | (74                                 | )      | (86                                   | )      | (160   | ) |
|                                                    |   |                                |   |                                  |   |   |   |
| Unrealized Gain/(loss) on available-for-sale securities |   | 5                                   |   | —                               |   | 5      |   |
| Foreign currency translation adjustments                |   | —                             |   | 2,210                                 |   | 2,210  |   |
|                                                    |   |                                |   |                                  |   |   |   |
| Balance at December 31, 2007                            |   | (69                                 | )      | 2,124                                 |   | 2,055  |   |
|                                                    |   |                                |   |                                  |   |   |   |

 

|   | (t) | 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, 2007, 2006 and 2005 amounted to RMB 5,290,000, RMB5,149,000 and RMB4,459,000, respectively.

 

F-13

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

3.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

|   | (u) | Advertising Expense |
|--------|-----|---------------------|

 

The cost of advertising is expensed as incurred. The Group incurred RMB501,000, RMB516,000 and RMB460,000 in advertising costs during 2007, 2006 and 2005, respectively.

 

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

 

The cost of shipping and handling is expensed into selling and administration expenses as incurred. The Group incurred RMB 20.1 million, RMB15.8 million and RMB12.8 million in shipping and handling costs during 2007, 2006 and 2005, respectively.

 

|   | (w) | 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 has 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.

 

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.

 

Prior to January 1, 2006, all the options granted by the Company were vested and there were no options issued during the year 2006; therefore, no expenses were recognized in 2006.

 

|   | (x) | Product Warranty |
|--------|-----|------------------|

 

The Group provides a basic limited warranty, including parts and labor, for all products for one year. The Group incurred RMB2,501,000, RMB2,206,000, and RMB1,748,000 in product warranty expense during the years ended December 31, 2007, 2006 and 2005, respectively.

 

F-14

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

3.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

|   | (y) | New accounting pronouncement |
|--------|-----|------------------------------|

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.

 

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations SFAS No. 141 (R) provides enhanced guidance related to the measurement of identifiable assets acquired, liabilities assumed and disclosure of information related to business combinations and their effect on the Company. SFAS No.141(R) is effective for financial statements issued for fiscal years beginning on or        after December 15, 2008. The Company is currently evaluating the impact of adopting SFAS No. 141 (R) will have on its financial condition and result of operation. We expect the impact to be limited to any business combination transaction that occurs after December 31 2008.

 

FASB issued SFAS No.160, “Noncontrolling Interest in Consolidated Financial- an amendment of ARB No.51” (SFAS 160”). This requires all entities to report noncontrolling interest (previously referred to as minority interest) in subsidiaries as a separate component of equity in the consolidated financial statements. Moreover SFAS 160 eliminate the diversity that currently        exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We expect the impact to be limited to any business combination transaction that occurs after December 31 2008.

 

In December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting for Registration Payment Arrangements (EITF 00-19-2). EITF 00-19-2 addresses an issuer’s accounting for registration payment arrangements. It specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement,        whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. The guidance in EITF 00-19-2 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and FASB        Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to include scope exceptions for registration payment arrangements. EITF 00-19-2 also requires additional disclosure regarding the nature of any registration payment arrangements, alternative settlement methods, the maximum potential amount of consideration and the current carrying amount of the liability, if any. This EITF is        effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issue of this EITF. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of this EITF, this is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within        those fiscal years. The Company implemented EITF 00-19-2 and it did not have a material impact on our financial statements.

 

F-15

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

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

 

Available-for-sale securities held by the Group at December 31, 2007, 2006 are as follows:

 

 

|                                 |   | 2007             |   | 2007   |   | 2006   |   |
|--------------------------------------|--------|------------------|--------|--------|--------|--------|--------|
|                                 |   | US$              |   | RMB    |   | RMB    |   |
|                                 |   | *(In thousands)* |   |
| Corporate bonds                      |   |             |   |   |   |   |   |
| Cost                                 |   | 200              |   | 1,459  |   | 1,562  |   |
| Gross unrealized loss                |   | (7               | )      | (47    | )      | (56    | )      |
| Fair market value                    |   | 193              |   | 1,412  |   | 1,506  |   |
| Total investments available for sale |   | 193              |   | 1,412  |   | 1,506  |   |

 

 

The time periods during which the available-for-sale securities have been in a continuous unrealized loss position as of December 31, 2007 and 2006 are less than 12 months.

 

The net carrying value and estimated fair value of debt and marketable equity securities at December 31, 2007, 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 |
|---------------------------------------|--------|------------------|-----------------------------|
|                                  |   | US$              |                        | RMB |   | US$ |   | RMB |   |
|                                  |   | *(In thousands)* |                        |
|                                  |   |             |                        |   |   |   |   |   |   |
| Due in one year or less               |   | 200              |                        | 1,459 |   | 193 |   | 1,412 |   |
| Due after one year through four years |   | —          |                        | — |   | — |   | — |   |
|                                  |   |             |                        |   |   |   |   |   |   |
| Total                                 |   | 200              |                        | 1,459 |   | 193 |   | 1,412 |   |

 

 

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

 

Accounts receivable comprised:

 

 

|                               |   | 2007             |   | 2007    |   | 2006    |   |
|------------------------------------|--------|------------------|--------|---------|--------|---------|--------|
|                               |   | US$              |   | RMB     |   | RMB     |   |
|                               |   | *(In thousands)* |   |
| Accounts receivable – trade  |   | 45,226           |   | 329,904 |   | 208,790 |   |
| Less: provision for doubtful debts |   | (2,200           | )      | (16,046 | )      | (9,922  | )      |
|                               |   |             |   |    |   |    |   |
| Accounts receivable, net           |   | 43,026           |   | 313,858 |   | 198,868 |   |

 

 

 

|                                                                   |   | 2007                    |   | 2007    |   | 2006    |   | 2005    |   |
|------------------------------------------------------------------------|--------|-------------------------|--------|---------|--------|---------|--------|---------|--------|
|                                                                   |   | US$                     |   | RMB     |   | RMB     |   | RMB     |   |
|                                                                   |   | *(In* *thousands)* |   |
|                                                                   |   |                    |   |    |   |    |   |    |   |
| Movement of provision for doubtful debts      |   |                    |   |    |   |    |   |    |   |
| Balance as at January 1                       |   | (1,271                  | )      | (9,922  | )      | (10,619 | )      | (9,484  | )      |
| Reversal/(provided) during the year           |   | (985                    | )      | (6,535  | )      | (797    | )      | (1,347  | )      |
| Less: Written off during the year             |   | 56                      |   | 411     |   | 1,494   |   | 212     |   |
| Balance as at December 31                     |   | (2,200                  | )      | (16,046 | )      | (9,922  | )      | (10,619 | )      |

 

 

 

F-16

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

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

 

Inventories comprised:

 

|                            |   | 2007             |   | 2007    |   | 2006    |   |
|---------------------------------|--------|------------------|--------|---------|--------|---------|--------|
|                            |   | US$              |   | RMB     |   | RMB     |   |
|                            |   | *(In thousands)* |   |
|                            |   |             |   |    |   |    |   |
| Finished products               |   | 10,105           |   | 73,714  |   | 74,923  |   |
| Products in process             |   | 3,353            |   | 24,458  |   | 19,058  |   |
| Raw materials                   |   | 12,434           |   | 90,700  |   | 51,821  |   |
|                            |   | 25,892           |   | 188,872 |   | 145,802 |   |
| Less: provision for inventories |   | (149             | )      | (1,088  | )      | (649    | )      |
| Inventories                     |   | 25,743           |   | 187,784 |   | 145,153 |   |

 

|                                |   | 2007             |   | 2007    |   | 2006    |   | 2005    |   |
|-------------------------------------|--------|------------------|--------|---------|--------|---------|--------|---------|--------|
|                                |   | US$              |   | RMB     |   | RMB     |   | RMB     |   |
|                                |   | *(In thousands)* |   |
| Movement of provision for inventori |   |             |   |    |   |    |   |    |   |
| Balance as at January 1             |   | (83              | )      | (649    | )      | (1,167  | )      | (1,453  | )      |
| Provided during the year            |   | (66              | )      | (440    | )      | — |   | — |   |
| Less: Written off during the year   |   | —          |   | — |   | 518     |   | 286     |   |
| Balance as at December 31           |   | (149             | )      | (1,089  | )      | (649    | )      | (1,167  | )      |

 

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

 

 

|                                     |   | 2007             |   |   |   | 2007    |   |   |   | 2006    |   |
|------------------------------------------|--------|------------------|--------|--------|--------|---------|--------|--------|--------|---------|--------|
|                                     |   | US$              |   |   |   | RMB     |   |   |   | RMB     |   |
|                                     |   | *(In thousands)* |   |
| Buildings                                |   | 5,250            |   |   |   | 38,294  |   |   |   | 13,214  |   |
| Machinery and equipment                  |   | 8,713            |   |   |   | 63,556  |   |   |   | 56,216  |   |
| Motor vehicles                           |   | 1,679            |   |   |   | 12,245  |   |   |   | 13,981  |   |
| Furniture, fixtures and office equipment |   | 869              |   |   |   | 6,341   |   |   |   | 4,252   |   |
|                                     |   | 16,511           |   |   |   | 120,436 |   |   |   | 87,663  |   |
| Less: accumulated depreciation           |   | (7,480           | )      |   |   | (54,561 | )      |   |   | (55,217 | )      |
|                                     |   | 9,031            |   |   |   | 65,875  |   |   |   | 32,446  |   |

 

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

 

| 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 previous years, which are able to offset the profit generated in year 2007, accordingly no income tax is provided.

 

Jinpan JV, a cooperative joint venture registered in the PRC in which the Company ultimately has an 100% 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% since year 2005.

 

F-17

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

8.        DEFERRED TAX ASSETS AND INCOME TAXES (CONTINUED)

 

Pretax income for the years ended December 31, 2007, 2006 and 2005 was taxed in the following jurisdictions:

 

 

|                                 |   | 2007             |   |   |   | 2007    |   |   |   | 2006   |   |   |   | 2005   |   |
|--------------------------------------|--------|------------------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                 |   | US$              |   |   |   | RMB     |   |   |   | RMB    |   |   |   | RMB    |   |
|                                 |   | *(In thousands)* |   |
| British Virgin Islands               |   | (1,422           | )      |   |   | (10,742 | )      |   |   | (5,856 | )      |   |   | (6,451 | )      |
| United States of America             |   | 868              |   |   |   | 6,552   |   |   |   | 1,851  |   |   |   | (1,119 | )      |
| The People’s Republic of China |   | 19,172           |   |   |   | 144,785 |   |   |   | 83,894 |   |   |   | 60,872 |   |
|                                 |   | 18,618           |   |   |   | 140,595 |   |   |   | 79,889 |   |   |   | 53,302 |   |

 

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

 

 

|       |   | 2007             |   |   |   | 2007    |   |   |   | 2006    |   |   |   | 2005    |   |
|------------|--------|------------------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|
|       |   | US$              |   |   |   | RMB     |   |   |   | RMB     |   |   |   | RMB     |   |
|       |   | *(In thousands)* |   |
| Current    |   |             |   |   |   |    |   |   |   |    |   |   |   |    |   |
| Non-US     |   | (2,787           | )      |   |   | (21,048 | )      |   |   | (11,242 | )      |   |   | (8,878  | )      |
| DeferredUS |   | 561              |   |   |   | 4,239   |   |   |   | — |   |   |   | — |   |
| Deferred   |   |             |   |   |   |    |   |   |   |    |   |   |   |    |   |
| Non-US     |   | —          |   |   |   | — |   |   |   | 351     |   |   |   | 134     |   |
|       |   |             |   |   |   |    |   |   |   |    |   |   |   |    |   |
|       |   | (2,226           | )      |   |   | (16,809 | )      |   |   | (10,891 | )      |   |   | (8,744  | )      |
|       |   |             |   |   |   |    |   |   |   |    |   |   |   |    |   |

 

 

F-18

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

8.        DEFERRED TAX ASSETS AND INCOME TAXES (CONTINUED)

 

Deferred tax assets comprised the following at December 31, 2007 and 2006:

 

 

|                                              |   | 2007             |   |   |   | 2007    |   |   |   | 2006    |   |
|---------------------------------------------------|--------|------------------|--------|--------|--------|---------|--------|--------|--------|---------|--------|
|                                              |   | US$              |   |   |   | RMB     |   |   |   | RMB     |   |
|                                              |   | *(In thousands)* |   |
| Deferred tax assets                               |   |             |   |   |   |    |   |   |   |    |   |
| Provision for doubtful debts                      |   | 272              |   |   |   | 1,983   |   |   |   | 691     |   |
| Inventory Reserved                                |   | 23               |   |   |   | 163     |   |   |   | 97      |   |
| Deferred income                                   |   | —          |   |   |   | — |   |   |   | — |   |
| Net operating loss carry forward of Jinpan USA    |   | 512              |   |   |   | 3,737   |   |   |   | 6,865   |   |
| Total deferred tax assets                         |   | 807              |   |   |   | 5,883   |   |   |   | 7,652   |   |
| Less: Valuation allowance for deferred tax assets |   | —          |   |   |   | (--     | )      |   |   | (6,865  | )      |
|                                              |   | 807              |   |   |   | 5,883   |   |   |   | 788     |   |
|                                              |   |             |   |   |   |    |   |   |   |    |   |
| Deferred tax liabilities                          |   |             |   |   |   |    |   |   |   |    |   |
| Interest income                                   |   | —          |   |   |   | — |   |   |   | — |   |
| Total deferred tax liabilities                    |   | —          |   |   |   | — |   |   |   | — |   |
|                                              |   |             |   |   |   |    |   |   |   |    |   |
| Net deferred tax assets                           |   | 807              |   |   |   | 5,883   |   |   |   | 788     |   |

 

 

Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will be fully realized. Accordingly, the Company did not provide a valuation allowance against its net deferred tax assets at December 31, 2007.At December 31, 2007, the Group has available net operating loss of        RMB9, 022,000, which will expire in the years 2020 to 2025.

 

There were no deferred tax liabilities as at December 31, 2007.

 

Thereconciliationof income tax computed at the PRC statutory 2007 income tax rate of 15% (2006:15% and 2005:15%) in Hainan Province, the PRC to income before minority interests is as follows:

 

 

|                                                  |   | 2007            |   | 2007    |   | 2006   |   | 2005  |   |
|-------------------------------------------------------|--------|-----------------|--------|---------|--------|--------|--------|-------|--------|
|                                                  |   | US$             |   | RMB     |   | RMB    |   | RMB   |   |
|                                                  |   | *(In thousand)* |   |
| Computed Expected Income Tax                          |   | 2,808           |   | 21,204  |   | 11,983 |   | 8,052 |   |
| Impact of Tax holiday of Jinpan JV                    |   | (28             | )      | (210    | )      | (1,177 | )      | (150  | )      |
| Non-Deductiable losses                                |   | —         |   | — |   | (235   | )      | 272   |   |
| Effect of difference between the PRC and USA tax rate |   | (130            | )      | (983    | )      | 543    |   | (280  | )      |
| Change in valuation allowance                         |   | (561            | )      | (4,239  | )      | (44    | )      | 448   |   |
| Others                                                |   | 137             |   | 1,037   |   | (179   | )      | 402   |   |
|                                                  |   | 2,226           |   | 16,809  |   | 10,891 |   | 8,744 |   |

 

In July 2006, FASB issued FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes,” (“FIN48”) an Interpretation of SFAS No. 109, “Accounting for Income Taxes”. The Group adopted the provisions of FIN 48 on January 1, 2007. As required by FIN 48, which clarifies SFAS No. 109, the Company recognizes the financial        statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At January 1, 2007,        the Company applied FIN 48 to all tax positions and determined there were no material unrecognized tax benefits as of that date. In addition, there have been no material changes in unrecognized benefits since January 1, 2007. As a result, the adoption of FIN 48 did not have a material effect on the Company’s financial condition, or results of operation.

 

F-19

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

9.        SHORT TERM BANK LOANS

 

 

| Banks loans comprised: |   | 2007             |   | 2007    |   | 2006    |   |
|------------------------|--------|------------------|--------|---------|--------|---------|--------|
|                   |   | US$              |   | RMB     |   | RMB     |   |
|                   |   | *(In thousands)* |   |
|                   |   |             |   |    |   |    |   |
| Short term bank loans  |   | 6,854            |   | 50,000  |   | 30,000  |   |
| Letters of credit      |   | 3,020            |   | 22,025  |   | 16,763  |   |
| Less: current portion  |   | (9,874           | )      | (72,025 | )      | (46,763 | )      |
|                   |   | —          |   | — |   | — |   |

 

The bank loan is unsecured, bears an interest at the rate of 7.15% per annum and is repayable on October 14, 2008. The total bank loan credit line is RMB 90,000,000.

 

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 6.40%, 6.51% and 5.86% per annum for the years ended December 31, 2007, 2006 and 2005, respectively, and are repayable within 90 days. The total credit facility is RMB43,800,000 (US$6,000,000) from Nan-Yang        Commercial Bank. The Company also received an unsecured letter of credit loan from Bank of China for the total credit facility of RMB110, 000,000. This credit facility will expire in July 2008 and is subject to annual renewal.

 

| 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 RMB1,000,000 in 2007.

 

| 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 maximum amount of reserves is 50% of registered capital. The amount of earnings of        Jinpan JV available for distribution under PRC GAAP was approximately RMB119 million, RMB70 million and RMB49 million for the year ended December 31, 2007, 2006 and 2005. As of December 31, 2007, Jinpan JV have made the maximum reserved required by the law.

 

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 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, 2007, 2006 and 2005, the directors of Jinpan JV approved the following appropriations to reserves.

 

 

|                         |   | 2007             |   | 2007    |   | 2006    |   | 2005    |   |
|------------------------------|--------|------------------|--------|---------|--------|---------|--------|---------|--------|
|                         |   | US$              |   | RMB     |   | RMB     |   | RMB     |   |
|                         |   | *(In thousands)* |   |
|                         |   |             |   |    |   |    |   |    |   |
| Statuory reserve fund        |   | 310              |   | 2,265   |   | 7,316   |   | 2,625   |   |
| Enterprise expansion fund    |   | —          |   | — |   | — |   | — |   |
| Staff welfare and bonus fund |   | —          |   | — |   | — |   | — |   |
| Dividends                    |   | —          |   | — |   | — |   | — |   |
|                         |   | 310              |   | 2,265   |   | 7,316   |   | 2,625   |   |

 

The Group declared a cash dividend of US$0.24 per share of common stock on January 15, 2007, which was paid on February 8, 2007 and July 16, 2007.

 

 

F-20

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

12.      COMMITMENTS AND CONTINGENT LIABILITES

 

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

 

As of December 31, 2007 the Group had bank guarantees to the Nan Yang Commercial Bank for irrevocable Letters of credit of RMB11,304,000 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. These operating leases expire in various years through 2012 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, 2007:

 

|                         | US$                                      | RMB    |
|------------------------------|------------------------------------------|--------|
|                         | *(In thousands)    * |
| 2008                         | 288                                      |   | 2,104 |
| 2009                         | 186                                      |   | 1,358 |
| 2010                         | 66                                       |   | 482 |
| 2011                         | 49                                       |   | 358 |
| 2012 after                   | 540                                      |   | 3,941 |
| Total minimum lease payments | 1,129                                    |   | 8,243 |
|                              |                                          |        |  |  |

 

*Capital commitments*

 

As of December 31, 2007 the Group has commitments of RMB8,930,000 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.

 

Future minimum payments to employees under employment contracts consisted of the following at December 31, 2007:

 

|                                       | US$              | RMB    |
|--------------------------------------------|------------------|--------|
|                                       | *(In thousands)* |
| 2008                                       | 565              |   | 4,125 |
| 2009                                       | 74               |   | 542 |
| 2010                                       | 74               |   | 542 |
| 2011                                       | 42               |   | 308 |
| Total minimum employment contract payments | 755              |   | 5,517 |
|                                            |                  |        |  |  |

 

 

F-21

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

| 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 short-term investments.

 

The Group maintains cash and cash equivalents with the Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Nan-Yang Commercial Bank 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.

 

*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 bank loans*: 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, 2007 is RMB1,412,000, which is based on quoted market prices.

 

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

 

During 2007, 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 1.86% (2006: 1.3%) and 2.02% of total purchases. Additional, the Group was dependent on three major suppliers: Wuhan Steel Processing Co., Ltd., Thyssenkrupp Electrical Steel GmbH, and Legnano Teknoelectric        Company Spa for silicon steel, which accounted for approximately 29.45% (2006:27.5%) , 5.7% (2006: 6.4%) and 0.2%(2006:5.3%) of total purchases. The Group is also dependent on TongLing Nonferrous Metals Group Inc. and Jiangying Jinqiu Group Co.Ltd. for copper foil, which accounted for approximately 12.27% (2006: 17.8%) and 1.54% (2006:4.3%) 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 amounts employees contribute are tax deferred. During the 2006 and 2007, 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, 2007, 2006 and 2005 amounted to RMB1,693,000 (US$224,000), RMB 1,052,000 and RMB 784,000 respectively.

 

F-22

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

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, |
|-----------------------------------------|-------------------------|
|                                    | 2007                    |   | 2007 |   | 2006 |   | 2005 |
|                                    | US$                     |   | RMB |   | RMB |   | RMB |
|                                    | *(In thousands)*        |
| Revenues from external customers:       |                    |   |   |   |   |   |   |
| United States                           | 6,031                   |   | 45,545 |   | 18,606 |   | 12,152 |
| PRC                                     | 113,592                 |   | 857,816 |   | 634,602 |   | 426,067 |
|                                    | 119,623                 |   | 903,361 |   | 653,208 |   | 438,219 |
| Property, Plant, and Equipment by area: |                    |   |   |   |   |   |   |
| United States                           | 44                      |   | 322 |   | 50 |   | 3 |
| PRC                                     | 8,987                   |   | 65,553 |   | 45,801 |   | 34,439 |
|                                    | 9,031                   |   | 65,875 |   | 45,851 |   | 34,442 |
|                                         |                         |  |  |  |  |  |  |  |

 

| 17 | ACQUISITION OF MINORITY INTEREST |
|----|----------------------------------|

 

On February 13, 2007, the Company completed an acquisition of the 15% minority interest in Jinpan JV, for a purchase price of RMB 95 million in cash. Subsequent to the acquisition, the Company owns 100% of Jinpan JV. The purchase was accounted for in accordance with SFAS 141”Business Combination”, with the purchased assets and assumed liabilities recorded at their estimated        fair values at the date of acquisition.

 

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed.

 

|                        | At 02/13/2008   |
|-----------------------------|-----------------|
|                        | RMB in thousand |
| Current assets              | 68,184          |
| Property, plant, equipments | 9,265           |
| Goodwill                    | 84,245          |
| Total assets acquired       | 161,694         |
|                        |            |
| Current liabilities         | (56,843)        |
| Long term liabilities       | (9,515)         |
| Total liabilities assumed   | (66,358)        |
| Net assets acquired         | 95,336          |

 

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

 

Pursuant to the board resolution of the Company dated January 21, 2002, the officers of the Group were authorized 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, 2007, 212,470 (2006: 212,470) shares of the Group’s common stock were purchased 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 2007.

 

The Group issued 4,000 and 6,000 shares respectively in 2006 and 2007 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-23

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

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 “Stock Option Plan”). The Stock Option Plan provides for options to employees, officers, directors and consultants of the Company. The 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 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 accounts for this plan under APB 25 and related interpretations 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. During 2007, one director exercised stock option to purchase 15,000 shares of common stock of the Company at the price of US$1.35 per share. Total amount received from the exercise of the share option was US$ 20,250.

 

|   | (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.

 

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$2,485.00.

 

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$146,615.00.

 

During 2007, one employee exercised 4,000 shares of stock options, total amount received from the exercise of the share option was US$14,200.

 

F-24

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

18.          EQUITY (CONTINUED)

 

|   | (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$ 73,400.00.

 

In October, 2007, one director exercised stock options to purchase 2,000 shares of common stock at the exercise price of US$ 14,680.00.

 

|   | (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 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 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 Stock Option Plan is 10 years. In March,        2007, the Group entered into stock option agreement with two of independent directors and three of its employees, to purchase 27,250 shares of common stock of the Group. Options granted are exercisable at the price of US$18.07 per share. The term of the options is 5 years from the dated granted. The options are not transferable other then death, and are exercisable from the date granted.

 

|   | (f) | Warrants granted to non-employees |
|--------|-----|-----------------------------------|

 

On March, 2007, warrants to purchase 100,000 shares of the Group’s common stock were issued 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. The warrants will expire on March 15, 2012.

 

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

 

|            |   | 2007    |   | 2006    |
|-----------------|--------|---------|--------|---------|
|            |   |    |   |    |
| Warrants        |   | 100,000 |   | -       |
| Stock options   |   | 151,250 |   | 145,000 |
| Preferred stock |   | 6,111   |   | 6,111   |
|            |   |    |   |    |
| Total           |   | 257,361 |   | 151,111 |

 

|   | (h) | Stock Option Activity |
|--------|-----|-----------------------|

 

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, 2007 are US$6.326. The weighted-average remaining contractual life of those options is 5.87 years.

 

F-25

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

18.         EQUITY (CONTINUED)

 

|   | (i) | Option Valuation Assumptions |
|--------|-----|------------------------------|

 

The following assumptions were used for calculating fair value of stock options:

 

|                           |   | December 31 |
|--------------------------------|--------|-------------|
|                           |   | 2007        |
| Risk -free interest rate       |   | 4.00%       |
| Average expected lives (years) |   | 3           |
| Dividend yield                 |   | 1.30%       |
| Expected volatility            |   | 66.14%      |

 

Our calculation of expected volatility for the year ended December 31, 2007 was based on historical volatility of stock price. The computation of expected life was determined based on historical experience of similar awards giving consideration of contractual terms, vesting schedules and expectation of future optionee behavior. The interest rate is based on the similar United States        Treasury yield curve in effect at the time of grant. While we believe that these assumptions are reasonable, actual experience may differ materially from these assumptions.

 

|   | (j) | Option Award Activity |
|--------|-----|-----------------------|

 

A summary of the Group’s stock option activities, and related information for the years ended December 31, 2007, 2006 and 2005 are as follows:

 

 

|                                                           |   | 2007    |   |   |   | 2006                         |   |   |   | 2005     |   |
|----------------------------------------------------------------|--------|---------|--------|--------|--------|------------------------------|--------|--------|--------|----------|--------|
|                                                           |   | Options |   |   |   | Weightedaverageexerciseprice |   |   |   | Options  |   |   |   | Weightedaverageexerciseprice |   |   |   | Options |   |   |   | Weightedaverageexerciseprice |   |
|                                                           |   |    |   |   |   | US$                          |   |   |   |     |   |   |   | US$ |   |   |   |   |   |   |   | US$ |   |
|                                                           |   |    |   |   |   |                         |   |   |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of year                               |   | 145,000 |   |   |   | 3.542                        |   |   |   | 261,300  |   |   |   | 3.143 |   |   |   | 262,000 |   |   |   | 2.602 |   |
| Granted                                                        |   | 27,250  |   |   |   | 18.07                        |   |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Exercised                                                      |   | (21,000 | )      |   |   | 2.340                        |   |   |   | (116,300 | )      |   |   | 2.646 |   |   |   | (700 | ) |   |   | 3.55 |   |
| Cancelled                                                      |   | — |   |   |   | —                      |   |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Forfeited                                                      |   | — |   |   |   | —                      |   |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Outstanding at the end of year                                 |   | 151,250 |   |   |   | 6.326                        |   |   |   | 145,000  |   |   |   | 3.542 |   |   |   | 261,300 |   |   |   | 3.143 |   |
| Exercisable at the year end                                    |   | 151,250 |   |   |   | 6.326                        |   |   |   | 145,000  |   |   |   | 3.542 |   |   |   | 261,300 |   |   |   | 3.143 |   |
|                                                           |   |    |   |   |   |                         |   |   |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average fair value of options granted during the year |   | 18.07   |   |   |   |                         |   |   |   |     | N/A    |   |   |   |   |   |   |   | N/A |   |   |   |   |

 

The Company recognized approximately RMB 1,576,000 of compensation cost for the year ended December 31, 2007. No compensation costs were recognized for the year ended December 31, 2006 and 2005. No income tax benefit was recognized for the year ended December 31, 2007, 2006 and 2005. The total intrinsic value of options exercised during the year ended December 31, 2007, 2006 and 2005 was        RMB 2,385,000, RMB 4,942,000 and RMB 13,000, respectively. The total fair value of shares vested during the year ended December 31, 2007 was approximately RMB 5,168,000. No shares were vested for the year ended December 31, 2006 and 2005.

 

The following table summarizes information with respect to options outstanding at December 31, 2007:

 

 

| ExercisePrice |   |   |   | OptionsNumberOutstanding |   | OutstandingWeighted AverageRemainingContractual Life |   |   |   | WeightedAverageExercise Price |   |   |   | OptionsCurrentNumberExercisable |   |   |   | ExercisabelWeightedAverageExercisePrice |   |
|---------------|--------|--------|--------|--------------------------|--------|------------------------------------------------------|--------|--------|--------|-------------------------------|--------|--------|--------|---------------------------------|--------|--------|--------|-----------------------------------------|--------|
| $ 1.35        |   |   |   | 20,000                   |   | 1.17                                                 |   |   | $      | 1.35                          |   |   |   | 20,000                          |   |   | $      | 1.35                                    |   |
| $ 3.55        |   |   |   | 86,000                   |   | 5.66                                                 |   |   | $      | 3.55                          |   |   |   | 86,000                          |   |   | $      | 3.55                                    |   |
| $ 7.34        |   |   |   | 18,000                   |   | 7.00                                                 |   |   | $      | 7.34                          |   |   |   | 18,000                          |   |   | $      | 7.34                                    |   |
| $ 18.07       |   |   |   | 27,250                   |   | 9.25                                                 |   |   | $      | 18.07                         |   |   |   | 27,250                          |   |   | $      | 18.07                                   |   |
|          |   |   |   | 151,250                  |   | 5.87                                                 |   |   | $      | 6.33                          |   |   |   | 151,250                         |   |   | $      | 6.33                                    |   |

 

 

F-26

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

18.      EQUITY (CONTINUED)

 

|   | (k) | Warrants Valuation Assumptions |
|--------|-----|--------------------------------|

 

We measure the fair value of each warrant at the date of granting using a Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating fair value of traded warrants, including expected volatility, expected life, expected dividend rate and expected risk-free rate of return. The following assumptions were used for calculating fair        value of the warrants.

 

|                           |   | December 31 |
|--------------------------------|--------|-------------|
|                           |   | 2007        |
| Risk -free interest rate       |   | 4.47%       |
| Average expected lives (years) |   | 5           |
| Dividend yield                 |   | 1.03%       |
| Expected volatility            |   | 66.14%      |

 

Our calculation of expected volatility for the year ended December 31, 2007 was based on historical volatility of stock price. The computation of expected life was determined based on historical practice of the investment bank that usually they hold the warrants till the warrants is about to expire, The interest rate is based on the similar United States Treasury yield curve in effect        at the time of grant. While we believe that these assumptions are reasonable, actual experience may differ materially from these assumptions. The fair value of the warrants was RMB 6,231,879 based on the above assumptions.

 

| 19. | SUBSEQUENT EVENT |
|-----|------------------|

 

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

 

On February 06, 2008, the Board of Directors the Group declared a cash dividend of US$.24 per share of common stock for the year 2008. The Group made the first distribution of US$.12 per share on February 20, 2008, to shareholders of record on February 6, 2008. The second distribution will be made during the second half of the year.

 

| 20. | PARENT 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, 2007 and Income statement for the year ended December 31, 2007.

 

Jinpan International Limited

Balance Sheet

 

|                                             | December 31 |
|--------------------------------------------------|-------------|
|                                             | 2007        | 2006 |
|                                             | RMB         | RMB |
| Cash                                             | 24,422,934  | 200,988,012 |
| Investment                                       | 1,412,176   | 1,506,298 |
| Other Receivable                                 | 25,531      | 1,917,949 |
| Prepaid Expense                                  | -           | 336,555 |
| Due from Subsidiaries                            | 9,313,497   | 15,696,650 |
| Investment in Subsidiaries                       | 561,285,702 | 287,122,272 |
| Total Assets                                     | 596,459,840 | 507,567,736 |
|                                             |        |   |
| Accounts Payable                                 | 157,118     | 15,386,817 |
| Bonus Payable                                    | -           | 1,561,740 |
| Professional Fee Payable                         | 904,530     | 218,644 |
| Total Liabilities                                | 1,061,648   | 17,167,201 |
|                                             |        |   |
| Minority Interest                                | -           | 8,357,852 |
|                                             |        |   |
| Common Stock                                     | 601,898     | 600,913 |
| Common Stock-Warrants                            | 6,231,879   |   |
| Preferred Stock                                  | 2,055       | 2,055 |
| Paid In Capital                                  | 262,093,437 | 266,602,652 |
| Reserved                                         | 31,450,949  | 29,185,452 |
| Retained Earnings                                | 299,489,215 | 192,547,401 |
| Accumulated other Comprehensive Income           | 2,054,377   | (159,504) |
| Treasury Stock                                   | (6,525,618) | (6,736,286) |
|                                             | 595,398,192 | 482,042,683 |
| Total Liabilities and Shareholders’ Equity | 596,459,840 | 507,567,736 |

 

F-27

 

----

**Jinpan International Limited and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

| 20. | PARENT ONLY FINANCIAL INFORMATION (CONTINUED) |
|-----|-----------------------------------------------|

 

Jinpan International Limited

Income Statement

 

|                                | For the year ended December 31,2007 |
|-------------------------------------|-------------------------------------|
|                                | 2007                                | 2006 | 2005 |
|                                | RMB                                 | RMB | RMB |
| Earnings from Subsidiaries          | 151,337,199                         | 86,282,299 | 59,753,175 |
| General and Administration Expenses | (11,787,297)                        | (6,456,899) | (6,811,438) |
| Operating profit                    | 139,549,902                         | 79,825,400 | 52,941,737 |
| Other Income                        | 1,045,269                           | 601,106 | 360,158 |
| Net income before Tax               | 140,595,171                         | 80,426,506 | 53,301,895 |
| Income Tax                          | (16,809,009)                        | (10,891,356) | (8,743,920) |
| Income After tax                    | 123,786,162                         | 69,535,150 | 44,557,975 |
| Minority Interest                   | -                                   | (9,875,819) | (7,481,707) |
| Net income after Tax                | 123,786,162                         | 59,659,331 | 37,076,268 |

 

| 21 | 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, 2007                       |                           |                    |                                    |                     |       |                     |
| Reserved deducted from assets to which they apply: |  

-                      |  

-               |  

-                               |  

-                |  

-  |  

-                |
| Provision for doubtful debt                        | 9,922                          | -                       | 6,535                                   | -                        | (411) (1)  | 16,046                   |
| Deferred tax valuation allowance                   | 6,865                          | -                       | -                                       |                     | (6,865)    | 0                        |
| Year Ended December 31, 2006                       |                           |                    |                                    |                     |       |                     |
| Reserved deducted from assets to which they apply: |  

-                      |  

-               |  

-                               |  

-                |  

-  |  

-                |
| Provision for doubtful debt                        | 10,619                         | -                       | 797                                     | -                        | (1,494)(1) | 9,922                    |
| Deferred tax valuation allowance                   | 7,606                          | -                       | -                                       | (741)                    | -          | 6,865                    |
| Year Ended December 31, 2005                       |                           |                    |                                    |                     |       |                     |
| Reserved deducted from assets to which they apply: |  

-                      |  

-               |  

-                               |  

-                |  

-  |  

-                |
| Provision for doubtful debt                        | 9,484                          | -                       | 1,347                                   | -                        | (212)(1)   | 10,619                   |
| Deferred tax valuation allowance                   | 7,158                          | -                       | -                                       | 448                      | -          | 7,606                    |

 

 

(1) Write-off against reserve

 

F-28