Table ofContents

 

**FORM 20-F**

 

| **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2008** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Commissionfile number 000-22113

 
| **EURO TECH HOLDINGS COMPANY LIMITED**                                                               |
|------------------------------------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)                                               |
|                                                                                                 |
| **EURO TECH HOLDINGS COMPANY LIMITED**                                                               |
| (Translation of Registrant’s name into English)                                                 |
|                                                                                                 |
| **British Virgin Islands**                                                                           |
| (Jurisdiction of incorporation or organization)                                                      |
|                                                                                                 |
| **18/F Gee Chang Hong Centre, 65 Wong Chuk Hong  Road, Hong Kong**                                   |
| (Address of principal executive offices)                                                             |
|                                                                                                 |
| **T.C. Leung,  FAX: 852-28734887,  18/F Gee Chang Hong Centre,  65 Wong Chuk Hong Road,  Hong Kong** |
| (Name, telephone, Email and/or Facsimile number and Address of  Company Contact Person)              |

 

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act.

 

Ordinary Shares, $0.01 par value

Name of eachexchange on which registered: NASDAQ

 

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act.

 
| **Not Applicable** |
|--------------------|
| (Title of Class)   |

 

Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act.

 
| ** **       |
|------------------|
| (Title of Class) |

 

Indicatethe number of issued and outstanding shares of each of the issuer’s classes ofcapital or common stock as of the close of the period covered by the annualreport. 
|   | 11,820,339  Ordinary Shares. |
|--------|------------------------------|

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Act.

x Yes   o No

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities 

o Yes   x No

 

Ifthis is an annual or transitional report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934

o Yes   x No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).

o Yes   o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act (checkone).

 

| Large Accelerated filer o |   | Accelerated filer o |   | Non-Accelerated filer x |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicateby check mark which basis of accounting the registrant has used to prepare thefinancial statements included in this filing:

 

| U.S. GAAP x |   | International Financial Reporting Standards as issued  by the International Accounting Standards Board o |   | Other o |
|-------------|--------|----------------------------------------------------------------------------------------------------------|--------|---------|

 

If“Other” has been checked in response to the previous question, indicate bycheck mark which financial statement item the registrant has elected to follow.

o Item 17   x Item 18

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act)

o Yes   x No

 

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Tableof Contents

 

**TABLE OFCONTENTS**

 
| INTRODUCTION                |   | 1                                                        |
|-----------------------------|--------|----------------------------------------------------------|
|                        |   |                                                     |
| FORWARD  LOOKING STATEMENTS |   | 1                                                        |
|                        |   |                                                     |   |   |
| GLOSSARY                    |   |                                                     |   | 2 |
|                        |   |                                                     |   |   |
| PART I                 |   |                                                     |   | 3 |
|                        |   |                                                     |   |   |
| ITEM 3.                     |   | KEY  INFORMATION                                         |   | 3 |
| Item 3A.                    |   | Selected  Financial Data                                 |   | 3 |
| Item 3D.                    |   | Risk  Factors                                            |   | 6 |
|                        |   |                                                     |   |   |
| ITEM 4.                     |   | INFORMATION ON  THE COMPANY                              |   | 13 |
| Item 4A.                    |   | History and  Development of the Company                  |   | 13 |
| Item 4B.                    |   | Business Overview                                        |   | 14 |
| Item 4C.                    |   | Organizational  Structure                                |   | 21 |
| Item 4D.                    |   | Property,  Plant and Equipment                           |   | 21 |
|                        |   |                                                     |   |   |
| ITEM 5.                     |   | OPERATING  AND FINANCIAL REVIEW AND PROSPECTS            |   | 22 |
| Item 5A.                    |   | Operating Results                                        |   | 22 |
| Item 5B.                    |   | Liquidity  and Capital Resources                         |   | 25 |
| Item 5C.                    |   | Research  and Development, Patents and Licenses          |   | 28 |
| Item 5D.                    |   | Trend Information                                        |   | 28 |
| Item 5E.                    |   | Off Balance  Sheet Arrangements                          |   | 29 |
| Item 5F.                    |   | Tabular  Disclosure of Contractual Obligations           |   | 29 |
|                        |   |                                                     |   |   |
| ITEM 6.                     |   | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES              |   | 29 |
| Item 6A.                    |   | Directors  and Senior Management                         |   | 29 |
| Item 6B.                    |   | Compensation                                             |   | 31 |
| Item 6C.                    |   | Board Practices                                          |   | 35 |
| Item 6D.                    |   | Employees                                                |   | 36 |
| Item 6E.                    |   | Share Ownership                                          |   | 37 |
|                        |   |                                                     |   |   |
| ITEM 7.                     |   | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS       |   | 37 |
| Item 7A.                    |   | Major Shareholders                                       |   | 37 |
| Item 7B.                    |   | Related Party  Transactions                              |   | 38 |
|                        |   |                                                     |   |   |
| ITEM 8.                     |   | FINANCIAL  INFORMATION                                   |   | 38 |
| Item 8A.                    |   | Consolidated  Statements and Other Financial Information |   | 38 |
| Item 8B.                    |   | Significant Changes                                      |   | 38 |
|                        |   |                                                     |   |   |
| ITEM 9.                     |   | THE OFFERING AND  LISTING                                |   | 38 |
| Item 9A.                    |   | Listing Details                                          |   | 38 |
| Item 9C.                    |   | Markets                                                  |   | 39 |

 

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| ITEM 10.     |       | ADDITIONAL  INFORMATION                                             |       | 39         |
|--------------|------------|---------------------------------------------------------------------|------------|------------|
| Item 10A.    |       | Share Capital                                                       |       | 39         |
| Item 10B.    |       | Memorandum  and Articles of Association                             |       | 40         |
| Item 10C.    |       | Material Contracts                                                  |       | 42         |
| Item 10D.    |       | Exchange Controls                                                   |       | 42         |
| Item 10E.    |       | Taxation                                                            |       | 42         |
| Item 10H.    |       | Documents on  Display                                               |       | 43         |
| Item  10I.   |       | Subsidiary  Information                                             |       | 44         |
|         |       |                                                                |       |       |
| ITEM 11.     |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK         |       | 44         |
|         |       |                                                                |       |       |
| PART II |       |                                                                |       | 44         |
|         |       |                                                                |       |       |
| ITEM 15.     |       | CONTROLS AND  PROCEDURES                                            |       | 44         |
|         |       |                                                                |       |       |
| ITEM 16.     |       | [RESERVED]                                                          |       |       |
|         |       |                                                                |       |       |
| Item 16A.    |       | Audit  Committee Financial Expert                                   |       | 45         |
| Item 16B.    |       | Code Of Ethics                                                      |       | 45         |
| Item 16C.    |       | Principal  Accountant Fees And Services                             |       | 45         |
| Item 16D.    |       | Exemption  From Listing Standards                                   |       | 46         |
| Item 16E.    |       | Purchases  of Equity Securities by Issuer and Affiliated Purchasers |       | 46         |
|         |       | ** **                                                          | ** ** | ** ** |
|         |       | PART III                                                       | ** ** | ** ** |
|         | ** ** |                                                                |       |       |
| ITEM 17.     |       | FINANCIAL STATEMENTS                                                |       |       |
|         |       |                                                                |       |       |
| ITEM 18.     |       | FINANCIAL  STATEMENTS                                               |       | 47         |
|         |       |                                                                |       |       |
| ITEM 19.     |       | EXHIBITS                                                            |       | 47         |

 

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**INTRODUCTION**

 

In this Form 20-F, reference to “us”, “we”, the “Company”and “Euro Tech” are to Euro Tech Holdings Company Limited and its subsidiariesunless otherwise expressly stated or the context otherwise requires.

 

**ForwardLooking Statements**

 

This annual report contains forward lookingstatements. Additional written or oral forward looking statements may be madeby the Company from time to time in filings with the Securities and ExchangeCommission (the “SEC” or the “Commission”) or otherwise. Such forward lookingstatements are within the meaning of that term in Section 21E of theSecurities Exchange Act of 1934 (the “Exchange Act”).  Such statements may include, but not belimited to, projections of revenues, income, or loss, capital expenditures,plans for future operations, financing needs or plans, and plans relating toproducts or services of the Company, as well as assumptions relating to theforegoing. The words “believe,” “expect,” “anticipate,” “estimate,” “project,”and similar expressions identify forward looking statements, which speak onlyas of the date the statement was made. Forward looking statements areinherently subject to risks and uncertainties, some of which cannot bepredicted or quantified. Future events and actual results could differmaterially from those set forth in, contemplated by, or underlying the forwardlooking statements. Statements in this Annual Report, including those containedin the sections entitled Part I, Item 3D. “Risk Factors” and Item 5. “Operatingand Financial Review and Prospects” and the notes to the Company’s ConsolidatedFinancial Statements, describe factors, among others, that could contribute toor cause such differences.

 

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**GLOSSARY**

 

The following glossary of terms may be helpful inunderstanding the terminology used in this Annual Report.

 
| Ambient Air:                       |   | Atmospheric air (outdoor as opposed to indoor air).                                                                                                                                                                                                                                                                                                                                                              |
|------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Anaerobic:                         |   | Treating waste water biologically in the absence of  air.                                                                                                                                                                                                                                                                                                                                                        |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Atomic Spectrometer:               |   | An analytical instrument used to measure the  presence of an element in a substance by testing a sample which is aspirated  into a flame and atomized. The amount of light absorbed or emitted is  measured. The amount of energy absorbed or emitted is proportional to the  concentration of the element in the sample.                                                                                        |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Coalescer:                         |   | A process that coalesces smaller oil particles to  form larger oil particles that can readily float to a tank’s surface.                                                                                                                                                                                                                                                                                    |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Colorimeter:                       |   | An analytical instrument that measures substance  concentration by color intensity when the substance reacts to a chemical  reagent.                                                                                                                                                                                                                                                                             |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Flow Injection Analyzer:           |   | An analytical instrument with a special sampling  system that uses a continuous stream of reagent(s) into which fluid  samples are injected.                                                                                                                                                                                                                                                                |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Human Machine Interface Software:  |   | A type of software to interface (or coordinate) the  interaction between machine or equipment and a human being.                                                                                                                                                                                                                                                                                                 |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Lamella:                           |   | Synthetic media installed in a clarifier tank to  assist in particle flocculation (coming together in a “floc” or “flakes”)                                                                                                                                                                                                                                                                  |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Mass Spectrometer:                 |   | An analytical instrument that separates and  identifies chemical constituents according to their mass-to-charge ratios and  is used to identify organic compounds.                                                                                                                                                                                                                                               |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Membrane Biological Reactor (MBR): |   | A suspended-growth bioreactor combined with a  membrane liquid/solids separation unit. The “MBR” uses an advanced membrane  technology that treats biological wastes to a quality level which in many  industries is sufficient for reuse or low-cost disposal to sewers.                                                                                                                              |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Moving Bed Biofilm Reactor (MBBR)  |   | A biological wastewater treatment process that uses  synthetic plastic media floating or fixed in the aeration stage of the  treatment process to increase the contact area between the wastewater and the  biomass (bacteria). The result is a higher efficiency of treatment in a unit  volume of wastewater, hence smaller footprint. An additional advantage is  reduction of the amount of sludge produced. |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Multi-Channel Digital Recorder:    |   | A device that measures and records more than one  input of a digitized signal (signal in the form of pulses).                                                                                                                                                                                                                                                                                                    |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| pH Controller:                     |   | A process instrument that measures and controls the  acidity or alkalinity of a fluid.                                                                                                                                                                                                                                                                                                                           |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Reagent:                           |   | A chemical substance used to cause a chemical  reaction and detect another substance.                                                                                                                                                                                                                                                                                                                            |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| Sequential Batch Reactor (SBR):    |   | A waste-water treatment process that combines  aeration and settling in one reactor tank thus saving on space. Used for the  treatment of industrial waste-water as well as municipal sewage. The SBR is a  batch process that is ideal for waste-waters of changing characteristics.                                                                                                                            |

 

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** **

**PART I**

 

**ITEM 3.             KEY INFORMATION**

 

***Item 3A.               SelectedFinancial Data***

 

**SELECTED FINANCIAL INFORMATION**

(Amounts expressed in thousands, except share and

per share data and unless otherwise stated)

 

Theselected consolidated income statement data for years ended December 31,2008, 2007 and 2006, and the selected consolidated balance sheet data as of December 31,2008 and 2007 set forth below are derived from audited consolidated financialstatements of the Company included herein and should be read in conjunctionwith, and are qualified in their entirety by reference to such financialstatements, including the notes thereto and Item 5. “Operating and FinancialReview and Prospects.” The selected consolidated income statement data for theyears ended December 31, 2005 and 2004 and the selected consolidatedbalance sheet data as of December 31, 2006, 2005 and 2004 set forth beloware derived from audited consolidated financial statements of the Company whichare not included herein.

 
| ** **                | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| ** **                | ** ** | **US$**  | ** ** | **US$**  | ** ** | **US$**  | ** ** | **US$**  | ** ** | **US$**  | ** ** |
| **Balance Sheet Data:**   |       |     |       |     |       |     |       |     |       |     |       |
| Cash and cash equivalents |       | 7,146    |       | 9,387    |       | 9,160    |       | 5,362    |       | 5,242    |       |
| Working capital(1)        |       | 8,583    |       | 10,099   |       | 10,267   |       | 6,931    |       | 5,457    |       |
| Total assets              |       | 28,278   |       | 25,482   |       | 19,975   |       | 17,377   |       | 15,699   |       |
| Short-term debt(2)        |       | 0        |       | 0        |       | 0        |       | 0        |       | 0        |       |
| Net assets                |       | 18,979   |       | 17,958   |       | 12,990   |       | 9,754    |       | 7,837    |       |
| Capital Stock             |       | 122      |       | 120      |       | 94       |       | 74       |       | 68       |       |

 

----

(1)    Current assets minus current liabilities.

(2)    Short-term debt includes short-termborrowings and current portion of long-term bank loans.

 
|                                                    |   | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------|--------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|                                                    |   | **US$**    | ** ** | **US$**    | ** ** | **US$**    | ** ** | **US$**    | ** ** | **US$**    | ** ** |
| **Income  Statement Data:**                             |   |       |       |       |       |       |       |       |       |       |       |
| Revenue                                                 |   | 31,738     |       | 27,230     |       | 27,161     |       | 31,250     |       | 32,282     |       |
| Cost of revenue                                         |   | (24,154    | )          | (20,398    | )          | (20,606    | )          | (24,681    | )          | (27,033    | )          |
| Gross profit                                            |   | 7,584      |       | 6,832      |       | 6,555      |       | 6,569      |       | 5,249      |       |
| Selling and  Administrative Expenses                    |   | (7,213     | )          | (6,585     | )          | (5,961     | )          | (5,418     | )          | (4,801     | )          |
| Operating income                                        |   | 371        |       | 247        |       | 594        |       | 1,151      |       | 448        |       |
| Interest Income                                         |   | 45         |       | 256        |       | 95         |       | 35         |       | 17         |       |
| Other income,  net                                      |   | 144        |       | 161        |       | 146        |       | 172        |       | 104        |       |
| Income before  taxes                                    |   | 560        |       | 664        |       | 835        |       | 1,358      |       | 569        |       |
|                                                    |   |       |       |       |       |       |       |       |       |       |       |
| Income taxes                                            |   | (321       | )          | (144       | )          | (156       | )          | (328       | )          | (167       | )          |
|                                                    |   |       |       |       |       |       |       |       |       |       |       |
| Minority  Interest in profits of subsidiaries           |   | (363       | )          | (345       | )          | (318       | )          | (318       | )          | —     |       |
|                                                    |   |       |       |       |       |       |       |       |       |       |       |
| Equity in profit  of affiliates                         |   | 273        |       | 247        |       | —     |       | 21         |       | 192        |       |
| Net income                                              |   | 149        |       | 422        |       | 361        |       | 733        |       | 594        |       |
| Net income per  Ordinary Share Basic                    |   | 0.01       |       | 0.04       |       | 0.04       |       | 0.11       |       | 0.09       |       |
| Diluted                                                 |   | 0.01       |       | 0.03       |       | 0.03       |       | 0.07       |       | 0.06       |       |
| Weighted Average  Number of Ordinary Shares Outstanding |   |       |       |       |       |       |       |       |       |       |       |
| Basic                                                   |   | 11,824,153 |       | 11,105,556 |       | 8,047,911  |       | 6,598,201  |       | 6,434,667  |       |
| Diluted                                                 |   | 12,212,058 |       | 12,095,335 |       | 10,787,420 |       | 10,698,482 |       | 10,034,687 |       |

 

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The Companymaintains its books and records in United States dollars (“US$”). Itssubsidiaries, retail shops and affiliates maintain their books and recordseither in US$, Hong Kongdollars (“HK$”) or in Chinese Renminbi (“RMB”).

 

The Hong Kongdollar is freely convertible into other currencies (including the US dollar).Since 1983, the Hong Kong dollar has effectively been officially linked to theUS dollar at the rate of approximately HK$7.80 = US$1.00.  However, themarket exchange rate of the Hong Kong dollar against the US dollar continues tobe influenced by the forces of supply and demand in the foreign exchangemarket. Exchange rates between the Hong Kong dollar and other currencies areinfluenced by the rate between the US dollar and the Hong Kong dollar.

 

Since 1994, the conversion of Renminbi into foreigncurrencies, including U.S. dollars, has been based on rates set by the People’sBank of China, which are set daily based on the previous day’s interbankforeign exchange market rates. From 1994 through 2004, the official exchangerate for the conversion of Renminbi to U.S. dollars has generally been stableand maintained at the rate of approximately RMB8.30 = US$1.00. However, in 2007and 2008, the Renminbi appreciated and at the end of 2008 and 2007, the exchange rates were approximately RMB 6.8251 = US$1.00 and RMB 7.3141 = US$1.00, respectively. The value of the Renminbi fluctuatesand is subject to changes in PRC political and economic conditions.

 

The high, low and average exchange rate set forthbelow:

 
| ** **      | ** ** | **Rate at Period End** | ** ** | **Low** | ** ** | **High** | ** ** | **Average** | ** ** |
|-----------------|------------|---------------------------------------|------------|---------|------------|----------|------------|-------------|------------|
| US$ to RMB |       |                                  |       |    |       |     |       |        |       |
|            |       |                                  |       |    |       |     |       |        |       |
| Fiscal 2004     |       | 8.2865                                |       | 8.2354  |       | 8.2870   |       | 8.2782      |       |
| Fiscal 2005     |       | 8.0734                                |       | 8.0566  |       | 8.2666   |       | 8.2033      |       |
| Fiscal 2006     |       | 7.8175                                |       | 7.7845  |       | 8.0715   |       | 7.9819      |       |
| Fiscal 2007     |       | 7.3141                                |       | 7.2941  |       | 7.8062   |       | 7.6172      |       |
| Fiscal 2008     |       | 6.8251                                |       | 6.7480  |       | 7.2941   |       | 6.9623      |       |
|            |       |                                  |       |    |       |     |       |        |       |
| US$ to HK$ |       |                                  |       |    |       |     |       |        |       |
|            |       |                                  |       |    |       |     |       |        |       |
| Fiscal 2004     |       | 7.7760                                |       | 7.7511  |       | 7.8063   |       | 7.7893      |       |
| Fiscal 2005     |       | 7.7535                                |       | 7.7431  |       | 7.8116   |       | 7.7779      |       |
| Fiscal 2006     |       | 7.7794                                |       | 7.7502  |       | 7.7946   |       | 7.7690      |       |
| Fiscal 2007     |       | 7.8049                                |       | 7.7488  |       | 7.9102   |       | 7.8026      |       |
| Fiscal 2008     |       | 7.7507                                |       | 7.7480  |       | 7.8174   |       | 7.7874      |       |

 

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| **The Following Months** | ** ** | **Low** | ** ** | **High** | ** ** | **Average** | ** ** |
|--------------------------|------------|---------|------------|----------|------------|-------------|------------|
| US$ to RMB          |       |    |       |     |       |        |       |
|                     |       |    |       |     |       |        |       |
| July 2008           |       | 6.8005  |       | 6.8592   |       | 6.8475      |       |
| August 2008         |       | 6.8061  |       | 6.8702   |       | 6.8613      |       |
| September 2008      |       | 6.7926  |       | 6.8405   |       | 6.8500      |       |
| October 2008        |       | 6.7480  |       | 6.8443   |       | 6.8504      |       |
| November 2008       |       | 6.8028  |       | 6.8343   |       | 6.8413      |       |
| December 2008       |       | 6.8045  |       | 6.8810   |       | 6.8676      |       |
|                     |       |    |       |     |       |        |       |
| US$ to HK$          |       |    |       |     |       |        |       |
| July 2008           |       | 7.7946  |       | 7.8048   |       | 7.8006      |       |
| August 2008         |       | 7.7998  |       | 7.8146   |       | 7.8086      |       |
| September 2008      |       | 7.7569  |       | 7.8099   |       | 7.7908      |       |
| October 2008        |       | 7.7481  |       | 7.7748   |       | 7.7611      |       |
| November 2008       |       | 7.7485  |       | 7.7573   |       | 7.7515      |       |
| December 2008       |       | 7.7480  |       | 7.7528   |       | 7.7512      |       |

 

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***Item 3D.            RiskFactors***

 

You should carefully consider all of the informationset forth in this annual report and the following risk factors. The risks beloware not the only ones we face. Additional risks not currently known by us orthat we deem immaterial may also impair our business operations. Our business,financial condition or results of operations could be materially adverselyeffected by any of these risks. This annual report also contains forwardlooking statements that involve risks and uncertainties. Our results couldmaterially differ from those anticipated in these forward looking statements asa result of certain factors, including the risks we face as described below andelsewhere. See “Forward Looking Statements.”

 

**Certain Risks Relating To DoingBusiness In Hong Kong And The People’s Republic Of China (the “PRC” or “China”).**

 

**PRC Sovereignty Over Hong Kong StillDeveloping.**

 

The Company’s executive and principal offices arelocated in Hong Kong, a Special Administrative Region of China (or “SAR”; HongKong is sometimes herein referred to as the “Hong Kong SAR”).

 

As provided in the Sino-British Joint Declaration onthe Question of Hong Kong (the “Joint Declaration”) and the Basic Law ofthe Hong Kong SAR of China (the “Basic Law”), the Hong Kong SAR is provided ahigh degree of autonomy except in foreign and defense affairs. The PRC’spolitical system and policies are not practiced in Hong Kong. Under thisprinciple of “one country, two systems”, Hong Kong maintains a legal systemthat is based on common law and is different from that of the PRC.

 

The Company’s results of operations and financialcondition may be influenced by the political situation in Hong Kong and by thegeneral state of the Hong Kong economy. See “ — Economic Stability Uncertain.”

 

There can be no assurance that these past or anyprospective future changes in political, economic or commercial conditions inHong Kong and the PRC will not result in a material adverse effect upon theCompany.

 

**EconomicStability Uncertain.**

 

Most economies in the Far East had suffered from aneconomic instability. There can be no assurance that there be a recovery, mostespecially in light of the recent global economic downturn.  Continuedgrowth in the PRC is dependent upon an adequate supply of energy.  Thereis no assurance that adequate supplies of energy can be developed or found tofuel the PRC’s continued economic growth.

 

**The PRC’s Economic, Political AndSocial Conditions.**

 

The PRC economy differs from the economies of mostdeveloped countries in many respects, including the amount of governmentinvolvement, level of development, growth rate, control of foreign exchange andallocation of resources.  While the PRC economy has experiencedsignificant growth in the past twenty years, growth has been uneven, bothgeographically and among the various sectors of the economy.  The PRCgovernment has implemented various measures to encourage economic growth andguide the allocation of resources.  Some of these measures benefit theoverall PRC economy, but may also have a negative effect on us.  Forexample, our financial condition and results of operations may be adverselyaffected by changes in applicable tax regulations.

 

The PRC economy appears to be moving from a plannedeconomy to a more market-oriented economy.  Although the PRC governmenthas implemented measures since the late 1970s emphasizing the utilization ofmarket forces for economic reform, the reduction of state ownership ofproductive assets and the establishment of improved corporate governance inbusiness enterprises, a substantial portion of productive assets in the PRC arestill owned by the PRC government.  In addition, the PRC governmentcontinues to play a significant role in regulating industry development byimposing industrial policies.  The PRC government also exercisessignificant control over the PRC’s economic growth through the allocation ofresources, controlling payment of foreign currency-denominated obligations,setting monetary policy and providing preferential treatment to particularindustries or companies.  These actions, as well as future actions andpolicies of the PRC government, could materially and adversely effect ourbusiness and operations.

 

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The success of the Company’s activities in the PRCdepends on the Company’s continued ability to overcome circumstancesspecifically effecting the industrial sector, including the relatively poorinfrastructure, road transportation and communications network and an uncertainlegal and regulatory environment.

 

**Economic Reforms May Not ContinueOr Impact Positively On The Company; Changing Business Environment.**

 

Over the past several years, the PRC’s government haspursued economic reform policies including encouraging private economicactivities and decentralization of economic deregulation. The PRC governmentmay not continue to pursue these policies or may significantly alter them toour detriment from time to time without notice. Changes in policies by the PRCgovernment resulting in changes in laws, regulations, or their interpretation,or the imposition of confiscatory taxes, restrictions on currency conversionand imports could materially and adversely effect our business and operatingresults. The nationalization or other expropriations of private enterprises bythe PRC government could result in a loss of our investments in actual fundsand time and effort, in China.

 

The Company’s results at times may also be adverselyeffected by: (1) changes in political, economic and social conditions inthe PRC; (2) changes in government policies such as changes in laws andregulations (or their interpretation); (3) the introduction of additionalmeasures to control inflation; (4) changes in the rate or method oftaxation; (5) imposition of additional restrictions on currency conversionremittances abroad; (6) reduction in tariff protection and other importrestrictions; and (7) a return to the more centrally-planned economy thatexisted previously.

 

**We Are Subject To InternationalEconomic And Political Risks, Over Which We Have Little Or No Control.**

 

Doing business outside the United States subjects usto various risks, including changing economic and political conditions,exchange controls, currency fluctuations, armed conflicts and unexpectedchanges in United States and foreign laws relating to tariffs, traderestrictions, transportation regulations, foreign investments and taxation. Wehave no control over most of these risks and other unforeseeable risks and maybe unable to anticipate changes in international economic and political conditionsand, therefore, unable to alter our business practice in time to avoid theadverse effect of any of these changes.

 

**The Current Financial Crisis and DeterioratingEconomic Conditions May Have A Material Adverse Impact on Our Business andFinancial Conditions.**

 

Worldwide economies have been deterioratingrecently.  Global markets have experienced significant turmoil andupheavals characterized by extreme volatility and declines in prices andsecurities and commodities, diminished credit availability, inability to accesscapital markets, waves of bankruptcies, rising unemployment and decliningconsumer and business confidence.

 

We cannot predict the short and long-term impact ofthese events on our business and financial condition that may be materially andadversely effected.

 

**Uneven Economic Growth.**

 

The PRC’s economy has experienced significant growthin recent years, but that growth has been uneven among various geographicregions and economic sectors. Economic reforms and growth in the PRC have beenmore successful in certain provinces than in others, and the continuation orincrease of such disparities could adversely effect political or socialstability.

 

**PRC Inflation**.

 

In recent years, the PRC has not experiencedsignificant inflation, and thus inflation has not had a significant effect onour business historically.  In response to the increased inflation rateduring 2004, the Chinese government announced measures to restrict lending andinvestment in the PRC in order to reduce inflationary pressure on the PRC’seconomy; and the inflation rate was reduced in 2005 and 2006, but escalated in2007 and 2008 at a rate of 5.9%.  If the PRCrate of inflation continues to increase, the Chinese government may introducefurther measures intended to reduce the inflation rate in the PRC.  Anysuch measures adopted by the Chinese government may not be successful inreducing or 

 

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slowing the increase in the PRC’s inflation rate.  Sustained orincreased inflation in the PRC may have an adverse impact on the PRC’s economyand may materially and adversely affect our business and financial results.

 

**Uncertain Legal System And ApplicationOf Laws.**

 

The legislative trend in the PRC over the past decadehas been to enhance the protection afforded to foreign investment and allow formore active control by foreign parties of foreign invested enterprises. Therecan be no assurance that this will continue. In addition, as the PRC economy,business and commercial framework and legal system all continue to develop,that development may adversely affect the Company’s activities in the PRC orthe ability of the Company to enter into Sino-foreign agreements.

 

**PRC Legal System Business LawsDeveloping.**

 

The PRC does not yet possess a comprehensive body ofbusiness law or a consolidated body of laws governing foreign investmententerprises. As a result, the enforcement, interpretation and implementation ofexisting laws, regulations or agreements may be sporadic, inconsistent andsubject to considerable discretion. The PRC’s judiciary has not had sufficientopportunity to gain experience in enforcing laws that exist, leading to ahigher than usual degree of uncertainty as to the outcome of any litigation. Asthe legal system develops, entities such as the Company may be adverselyaffected by new laws, changes to existing laws (or interpretations thereof) andpreemption of provincial or local laws by national laws. Even when adequate lawexists in the PRC, it may not be possible to obtain speedy and equitableenforcement of the law.

 

**Government Currency Controls.**

 

The PRC government imposes control over its foreigncurrency reserves in part through direct regulation of the conversion of itscurrency, Renminbi (“RMB”) into foreign exchange and through restrictions onforeign imports. The conversion of RMB into Hong Kong and United States Dollars(“U.S. Dollars”) must be based on rates set by the People’s Bank of China (“PBOC”),which rates are set daily based on the previous day’s Chinese interbank foreignexchange market rate with reference to current exchange rates on the worldfinancial markets.

 

Although the RMB to U.S. dollar exchange rate hasgenerally been stable from 1994 through 2004, in 2008, the RMB appreciatedagainst the U.S. Dollar.  The PRC government has stated its intention tointervene in the future to support the value of the RMB, there can be noassurance that exchange rates will not become volatile. Exchange ratefluctuations may adversely effect the Company because of foreign currencydenominated liabilities, and may materially adversely effect the value,translated into U.S. dollars, of the Company’s net fixed assets situated and tobe situated in the PRC, earnings and dividends.

 

**Foreign Currency Risk.**

 

The Company operates in Hong Kong, the PRC and tradeswith both local and overseas customers, and is exposed to foreign exchange riskarising from various currency exposures, primarily with respect to purchasesin, Hong Kong dollar, Renminbi and Euro.  Foreign exchange risk arisesfrom committed and unmatched future commercial transactions, such as confirmedimport purchase orders and sales orders, recognized assets and liabilities, andnet investment in the PRC operations.  The Company uses derivativefinancial instruments such as foreign exchange contracts to hedge certainforeign currency exposures.  There can be no assurances that the Company’shedging strategies will be adequate to avoid this foreign exchange risk.

 

**Turbulent Relations With The UnitedStates Of America (“United States”).**

 

Differences between the United States and PRCgovernments on some political issues, as the recent political conflicts overMyanmar, continue occasionally to color the relationship. These occasionalcontroversies could materially and adversely effect our business andoperations. Political or trade friction between the two countries could alsomaterially and adversely effect the market price of our Ordinary Shares,whether or not they adversely effect our business.

 

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**CertainRisks Relating To The Company’s Business**

 

**We HaveMade And May Make Further Acquisitions Without Your Approval.**

 

Although weendeavor to evaluate the risks inherent in any particular acquisition, therecan be no assurance that we will properly or accurately ascertain all suchrisks. We will have virtually unrestricted flexibility in identifying andselecting prospective acquisition candidates and in deciding if they should beacquired for cash, equity or debt, and in what combination of cash, equityand/or debt.

 

We have taken and are seeking to take equity positionsin related businesses.  We will not seek stockholder approval for anyadditional acquisitions unless required by applicable law and regulations. Ourstockholders will not have an opportunity to review financial and other informationon acquisition candidates prior to consummation of any acquisitions underalmost all circumstances.

 

Investors will be relying upon our management, uponwhose judgment the investor must depend, with only limited informationconcerning management’s specific intentions.

 

There can be no assurance that the Company will locateand successfully complete any such additional acquisitions, or any acquisitionwill perform as anticipated, will not result in significant unexpectedliabilities or will ever contribute significant revenues or profits to theCompany or that the Company will not lose its entire investment in anyacquisition.

 

**DependenceUpon Management.**

 

The Company is dependent upon the services of itsexecutive officers, in particular Mr. T.C. Leung, the Chairman of theCompany’s Board of Directors and its Chief Executive Officer. The business ofthe Company could be adversely effected by the loss of services of, or amaterial reduction in the amount of time devoted to the Company by itsexecutive officers. The Company does not maintain “Key Man” life insurance onthe lives of any of its officers and directors.  See Item 6. “Directors,Senior Management and Employees.”

 

**Adverse Impact Upon The Company OfPRC’s Credit Restrictions.**

 

The Company faces increasing competition from otherdistributors of substantially similar products and manufacturers themselves,both foreign and Chinese. The Company faces its principal competition fromforeign manufacturers and other distributors of their products situated in HongKong and the PRC. Competition may cause purchaser demands for price reductionsand reduced profit margin.

 

**CompetitionWith Vendors.**

 

As the Company assembles products of the kind that itpresently distributes, the Company may directly compete with certain of itsvendors. Any such direct competition may adversely affect its relationship withits vendors. See Item 4. “ Information on the Company.”

 

**Dependence On Vendors; Lack Of LongTerm Agreements; Loss of Vendors**

 

The Company distributes supplies manufactured by anumber of vendors, including Hioki E.E. Corp. (“Hioki”), Thermo Fisher Scientific Group (“Thermo”)and Caliper Life Sciences Inc (“Caliper”)**,** that are the Company’s largest suppliers . TheCompany has only a letter from Hioki appointing the Company as Hioki’s salesrepresentative in the PRC, Hong Kong and Macau. Although alternative sources ofsupply exist, there can be no assurance that the termination of the Company’srelationship with any of the above or other vendors would not have a short-termadverse effect on the Company’s operations due to the Company’s dependence onthese vendors.  A substantial number of the Company’s suppliers have beenselling their products into China directly and through other distributors. Aloss of a substantial number of our vendors and/or our competing with themwould have a material adverse effect on our revenues from trading activities.

 

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**RisksRelating To The Company Itself; Control By T.C. Leung; Potential Conflict OfInterests.**

 

T.C. Leung, theCompany’s Chairman of the Board and Chief Executive Officer, as a practicalmatter, is able to nominate and cause the election of all the members of theCompany’s Board of Directors, control the appointment of its officers and theday-to-day affairs and management of the Company. As a consequence, Mr. Leungcan have the Company managed in a manner that would be in his own interests andnot in the interests of the other shareholders of the Company. See Item 7. “MajorShareholders and Related Party Transactions” and  Item 6. “ Directors, Senior Management andEmployees.”

 

**Certain Legal Consequences Of  Incorporation In The British Virgin Islands;Rights Of Shareholders Not As Extensive As In U.S. Corporations.**

 

Principles of British Virgin Islands (“BVI”) corporatelaw relating to such matters as the validity of the Company procedures, thefiduciary duties of management and the rights of the Company’s shareholders maydiffer from those that would apply if the Company were incorporated in ajurisdiction within the United States.

 

The rights of shareholders under British VirginIslands law are not as extensive as the rights of shareholders underlegislation or judicial precedent in many United States jurisdictions. UnderUnited States law, majority and controlling shareholders generally have certain“fiduciary” responsibilities to the minority shareholders. United Statesshareholder action must be taken in good faith and actions by controllingshareholders in a United States jurisdiction and executive compensation whichare obviously unreasonable may be declared null and void.

 

The BVI law protecting the interests of the minorityshareholders is not as protective in all circumstances as the law protectingminority shareholders in United States jurisdictions. The shareholders of theCompany may have more difficulty in protecting their interests in the face ofactions by the Company’s Board of Directors, and may have more limited rights,than they might have as shareholders of a company incorporated in many UnitedStates jurisdictions.

 

**Anti-TakeoverProvisions.**

 

The Company has 5,000,000 shares of “blank checkpreferred stock” authorized. The “blank check preferred stock” is intended tostrengthen the Company’s ability to resist an unsolicited takeover bid and maybe deemed to have an anti-takeover effect. The Board of Directors has the rightto fix the rights, terms and preferences at the time of issue of “blank checkpreferred stock” without further action by our shareholders.

 

**Uncertainty Of Enforcing UnitedStates Judgments.**

 

There is some uncertainty whether BVI courts wouldenforce judgments of the courts of the United States and of other foreignjurisdictions, or enforce actions brought in the BVI which are based upon thesecurities laws of the United States. A final monetary judgment obtained in theUnited States will be treated as a cause of action in itself by the BVI courtsso that no retrial of the issues would be necessary, provided that materialpreconditions are met and the proceedings pursuant to which judgment wasobtained were not contrary to the rules of natural justice.

 

All of the Company’s directors and executive officersreside outside of the United States, service of process upon the Company andsuch persons may be difficult to effect in the United States upon all suchdirectors and officers.

 

All of the Company’s assets are and will be locatedoutside of the United States, in Hong Kong and the PRC, and any judgmentobtained in the United States may not be enforced in those jurisdictions. HongKong courts will not directly enforce against the Company or such personsjudgments obtained in the United States. There is also substantial doubt as tothe enforceability in the PRC of actions to enforce judgments of the UnitedStates’ courts arising out of or based on the ownership of the securities,including judgments arising out of or based on the civil liability provisionsof United States federal or state securities laws or otherwise. See “— CertainLegal Consequences of Incorporation in the British Virgin Islands; Rights ofShareholders not as Extensive as in U.S. Corporations.”

 

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**Being AForeign Private Issuer Exempts Us From Certain Securities And ExchangeCommission (“Commission”) And NASDAQ Capital Markets (“NASDAQ”) Requirements.**

 

We are a foreignprivate issuer within the meaning of rules promulgated under theSecurities Exchange Act of 1934 (the “Exchange Act”). As such, with certainlimitations, we are exempt from certain provisions applicable to United Statespublic companies including: (1) the rules under the Exchange Actrequiring the filing with the Commission of quarterly reports on Form 10-Qor current reports on Form 8-K; (2) the sections of the Exchange Actregulating the solicitation of proxies, consents or authorizations in respectof a security registered under the Exchange Act; (3) the provisions ofRegulation FD aimed at preventing issuers from making selective disclosures ofmaterial information; and (4) the sections of the Exchange Act requiringinsiders to file public reports of their stock ownership and trading activitiesand establishing insider liability for profits realized from any “short-swing”trading transaction (i.e., a purchase and sale, or sale and purchase, of theissuer’s equity securities within less than six months); (5)Because of theseexemptions, investors are not afforded the same protections or informationgenerally available to investors holding shares in public companies organizedin the United States.

 

**Our Securities Must Continue To MeetQualitative And Quantitative Listing Maintenance Criteria For NASDAQ.**

 

Our securities are quoted and traded on the NASDAQCapital Market.  There can be noassurance that we will continue to meet both the qualitative and quantitativecriteria for continued quotation and trading of our securities on the NASDAQCapital Market.  One of NASDAQ’s listingrequirements is the maintenance of a $1.00 closing bid price.  From in or about January 2009 until April 2009,the Company did not meet this requirement. However, NASDAQ has suspended the $1.00 closing bid and otherrequirements until July 20, 2009. That criteria undergoes periodic review.

 

If we are unable to meet the continued quotationcriteria of the NASDAQ Capital Market and are suspended from trading on thesemarkets, our securities could possibly be traded in the over-the-counter marketand be quoted in the so-called “pink sheets” or, if then available, the OTCBulletin Board. In such an event, an investor would likely find it moredifficult to dispose of, or even obtain accurate quotations of, our securities.See “- We Are Also Required To Meet Certain, But Not All Corporate GovernanceCriteria” Applicable to NASDAQ Listed Issuers.

 

**We Are Also Required To Meet Certain,But Not All, Corporate Governance Criteria Applicable To NASDAQ Listed Issuers.**

 

Although, in the past, we have been able to satisfycorporate governance criteria applicable to NASDAQ’s Capital Market, thosecriteria are difficult to comply with and include, among other things: (a) aheightened degree of independence of members of the board of directors withindependent directors to, among other things: hold regular meetings amongthemselves only; (b) establishment of a code of conduct addressingcompliance with laws; and (c) a limit on payments to independent directorsand their family members (other than for services on the board of directors).

 

These corporate governance requirements and a strictdefinition of “independent director” make it more difficult to find independentdirectors for our Board of Directors. There is intense competition forqualified independent directors, including those persons with accountingexperience and financial statement acumen to serve on audit committees. Webelieve that continued compliance with the corporate governance requirementsapplicable to NASDAQ listed issuers may be difficult and increase our costs andexpenses as the costs of finding and compensating independent directorsescalate and the costs of administering their new powers and responsibilitiesis an added financial burden. If we are unable to attract and keep a sufficientnumber of independent directors willing to take on the responsibilities imposedby such rules on what we believe to be commercially reasonable terms, oursecurities may be delisted from NASDAQ.  (See “-Being a ‘ControlledCompany’ Exempts Us From Certain Other Corporate Governance Criteria Applicableto NASDAQ Listed Issuers.”)

 

**Being A “Controlled Company” ExemptsUs From Certain Other Corporate Governance Criteria Applicable To NASDAQ ListedIssuers.**

 

As a result of T.C. Leung, the Company’s Chairman ofthe  Board and Chief Executive Officer beneficially owning in excessof the majority voting power of our Ordinary Shares, we are a “controlledcompany” as that term is defined in rules and regulations applicable toNASDAQ listed issuers. As a “controlled company”, we are not required to complywith certain NASDAQ corporate governance criteria including, among otherthings, the requirements that the 

 

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majority of our Board be independent directors, and their having theauthority to approve director nominations and executive officer compensation.

 

**We Are Not Subject To VariousCorporate Governance Measures, Which May Result In Shareholders HavingLimited Protections.**

 

Recent Federal legislation, including theSarbanes-Oxley Act of 2002 (“SOX”), has resulted in the adoption of variouscorporate governance measures by securities exchanges and NASDAQ designed topromote the integrity of the corporate management and the securitiesmarkets.  Being a “controlled company,” we are exempt from many, but notall, of those requirements.  Furthermore, the absence of such practices withrespect to our Company may leave our shareholders without protections againstinterested director transactions, conflicts of interest and similar matters.

 

**We May Be Exposed To PotentialRisks Relating To Our Internal Controls Over Financial Reporting And HavingThose Controls Attested To By Our Independent Auditors.**

 

Pursuant to Section 404 of SOX, the SEC adopted rules requiringpublic companies to include a report of management on the company’s internalcontrols over financial reporting in their annual reports, including Form 20-F. In addition, the independent registered public accounting firm auditing acompany’s financial statements must also attest to and report on management’sassessment of the effectiveness of a company’s internal controls over financialreporting as well as the operating effectiveness of a company’s internalcontrols.  We were not subject to these requirements for the fiscal yearended December 31, 2008 as a result of temporary rules adopted by theSEC.  We are evaluating our internal control systems in order to allow ourindependent auditors attest to, our internal controls, as a required part ofour Annual Report on Form 20-F beginning with that report required whenthe temporary rules cease being effective.

 

While we expect to expend significant resources indeveloping the necessary documentation and testing procedures required by SOX,there is a risk that we will not comply with all of these requirements. At present, there is no precedent available with which to measure complianceadequacy.  Accordingly, there can be no assurance that we will receive apositive attestation from our independent auditors.

 

In the event we identify significant deficiencies ormaterial weaknesses in our internal controls that we cannot remediate in atimely manner or we are unable to receive a positive attestation from ourindependent auditors with respect to our internal controls, investors andothers may lose confidence in the reliability of our financial statements, ourability to obtain equity or debt financing could suffer and the market price ofour shares could decline.

 

**TheMarket Price Of Our Securities Has Been Fluctuating Widely.**

 

During the past several years, the market price of ourOrdinary Shares has fluctuated widely on occasion.  Except for the recent price declines that theCompany attributes to the current global economic downturn, the Company knowsof no reason for these wide fluctuations. See Item 9.C- “Markets.”

 

**There Are Risks In PurchasingLow-Priced Securities.**

 

If our securities were to be suspended or delistedfrom the NASDAQ Capital Market, they could be subject to rules under theExchange Act which impose additional sales practice requirements onbroker-dealers who sell such securities to persons other than establishedclients and “accredited investors” (for example, individuals with a net worthin excess of US$1,000,000 or an annual income exceeding US$200,000 orUS$300,000 together with their spouses). For transactions covered by suchrules, a broker-dealer must make a special suitability determination of thepurchaser and have received the purchaser’s written consent to the transactionprior to the sale. Consequently, such rules may affect the ability ofbroker-dealers to sell our securities and the ability to sell any of oursecurities in any secondary market that may develop for such securities.

 

In the event our securities are no longer listed onthe NASDAQ Capital Market or are not otherwise exempt from the provisions ofthe SEC’s “penny stock” rules, such rules may also affect the ability ofbroker-dealers and investors to sell our securities.

 

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**There Is No Assurance Of A Continued Public Market ForOur Securities.**

 

Therecan be no assurance that a trading market for our Ordinary Shares willcontinue.

 

**ITEM4.              INFORMATION ON THE COMPANY**

 

***Item 4A.            Historyand Development of the Company***

 

The Company was organized under the laws of theBritish Virgin Islands on September 30, 1996 for the purposes of raisingcapital and for acquiring all the outstanding capital stock of Euro Tech (FarEast) Limited, a Hong Kong corporation involved in the distribution of advancedwater treatment equipment (“Far East”). In March 1997, the Companyacquired all the issued and outstanding capital stock of Far East and it becamea wholly-owned subsidiary and was the primary operational entity of theCompany.

 

During Fiscal 2005, we completed our plan to increaseour equity position in Yixing Pact Environmental Technology Company Limited (“Yixing”)and Pact Asia Pacific Limited (“Pact”), a company engaged in water andwaste-water treatment solution business.  We had previously owned thirty(30%) percent of their capital stock.  With the addition of twenty-one(21%) percent of Pact’s and Yixing’s capital stock in October 2005, theybecame our majority-owned subsidiaries.

 

During Fiscal 2007, we purchased twenty (20%) percentof the equity in a company engaged in the air pollution control business. In January 2008, we purchased twenty (20%) percent of the equity inanother related industry business.  China’srapid economic growth had led it to become one of the world’s largest emittersof sulfur dioxide.  The damage due to acid rain caused by sulfur dioxideis vast, and is also affecting the neighboring countries as air currentstransport sulfur dioxide.  To tackle these environmental and geo-politicalissues, China has established targets to reduce key pollutants, namely, sulfurdioxide, nitrogen oxides and suspended particulates.  Heavy polluters arebeing warned to reduce their emissions or face penalties.  We believe thatas a result, the demand of desulphurization and dust removal equipment willincrease accordingly.

 

We are in the process of shifting our emphasis fromthe distribution of instruments and equipment to engineering and manufacturingactivities.  Revenues from our “trading” activities have fallen-off as asubstantial number of our suppliers have been selling their products into Chinadirectly and through other distributors.  Revenues and net incomegenerated from our environmental engineering department and our majority ownedsubsidiaries, Pact and Yixing (companies engaged in the water and waste watertreatment solution business), have more than offset our falling “trading”revenues.

 

In November of 2006 we established Shanghai EuroTech Environmental Engineering Company Ltd. (“Shanghai — Environmental”) as awholly-owned subsidiary under the laws of the People’s Republic of China, tocarry on our environmental engineering department with that line of businessand its personnel transferred from our subsidiary, Euro Tech (Far East)Ltd.  Shanghai — Environmental is focusing on our water and waste-watertreatment engineering business and is planned to be the home of our plannedexpansion into the air pollution control business.

 

In August 2007,Far East acquired a 20% equityinterest in Zhejiang Tianlan Desulfurization and Dust-Removal Co. Ltd. (“BlueSky”),a company engaged in flue gas desulphurization, flue gas de-nitration, dustremoval and purification of industrial waste gases, for approximatelyUS$4,648,000.

 

In January 2008, we acquired a 20% equityinterest in Zhejiang Jia Huan Electronic Co. Ltd., (“Jia Huan”) forapproximately US$2,610,000. Jia Huan has been in the environmental protection business since1969 and is based in Jin Hua, Zhejiang.

 

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***Item 4B.            Business Overview***

 

The Company isengaged in three different major activities:

 

(1)                                        *Equipment andInstrument Distribution.*

 

The Company hadbeen primarily a distributor of a wide range of advanced water treatmentequipment (including chlorination equipment), laboratory instruments,analyzers, test kits and related supplies and power generation equipment(including recorders and power quality analyzers). The Company acts as an exclusiveand non-exclusive distributor for well-known manufacturers of such equipment,primarily to commercial customers and governmental agencies orinstrumentalities in Hong Kong and the PRC. During its fiscal year ended December 31,2008 (“Fiscal 2008”) the Company distributed products to in excess of 1,000customers, including the Hong Kong Environmental Protection Department, HongKong Water Supplies Department, Government Laboratory, Drainage ServicesDepartment China’s National Environmental Protection Agency, various Environmental Monitoring Centers in the PRC, and to sub-distributors located in HongKong, the PRC and Macau. These products are manufactured by a substantialnumber of major American, European and Japanese corporations, including Hioki, Thermo and Caliper, which are the Company’s largestsuppliers, with purchases from them accounting for approximately 32%, 5% and 6%, respectively, of the Company’s salesduring Fiscal 2007 and approximately 15%, 10%, and 10%, respectively of the Company’s salesduring Fiscal 2008.

 

The Company distributes products through its Hong Kongheadquarters, its retail shops and representative offices located in Beijing,Shanghai, Guangzhou, Chongqing, Xi ́An, Shenyang, Wuhan, Fuzhou, Chengdu andUrumqi and through non-exclusive arrangements with independent sub-distributorslocated in Hong Kong, the PRC and Macau.

 

(2)                                       *Manufacturing.*

 

The Company believes that by assembling the productsit distributes, it may realize increased gross profit margins and greaterrevenues and net income than if it remains only a distributor of such productswith sales of the Company first product offering, an Infrared Photometric OilAnalyzer in 2003. Similarly, the Company believes that by using its existingregional sales efforts in the PRC, it may be better able to compete withincreased competition from our own suppliers and other distributors.

 

(3)          *Environmental Services.*

 

In January 2002, we acquired a 30% equityinterest in Pact and Yixing.  Pact and Yixing were privately ownedengineering firms situated in Shanghai specializing in the design, manufactureand operation of water and waste-water treatment plant in several industriessituated in China, Pact and Yixing, through associates and business alliances,also conduct similar operations in the Middle East.  In October 2005,through our subsidiary Euro Tech (Far East) Limited (“Far East”) we purchasedapproximately 21% of the issued and outstanding shares of Pact and Yixing forapproximately US$1,000,000 from Tamworth Industrial Limited (“Tamworth”).

 

Blue Sky, founded in 2000, is a growing concern thatwe believe provides a comprehensive service for design, general contract,equipment manufacturing, installation, testing and operation management of thetreatment of waste gases emitted from various boilers and industrial furnacesof power plants, steel works and chemical plants.

 

We expect that bysecuring an equity stake in BlueSky’s business, we have a strategic partner towork within China’s environmental protection business.  With BlueSky’stechnology and technical support, we believe we are able to provide servicesand environmental solutions not only for water and waste-water treatment butalso for air pollution control for industrial clients in China.

 

**Expansion Efforts and Future Plans.**

 

Acid rain and sulfur dioxide emissions are seriousproblems in China. We are planning to expand our activities in the airpollution control business by forming joint ventures, investing or acquiringsome interest in companies, such as Blue Sky, involved in (i) the dustremoval and/or (ii) the flue gas desulphurization for power plantindustries and other similar industries.

 

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We continuously search for other companies engaged inmanufacturing these products and equipment and in engineering companies whichdesign and build pollution control systems.  We anticipate that the costsof any such acquisition would be drawn from our general working capital and,possibly, by private sales of our securities including the potential exerciseby officers and directors of their options.  We have no commitments orindications of interest for the private sales of our securities.

 

In June 2006, PACT entered into a letter ofintent with Pact Engineering FZC (“PACTFZC”), a Middle Eastern water treatmentcompany based in Dubai, and Ecomacchine S.p.A. (“ECO”), an Italian basedcompany engaged in the manufacture of sludge and dewatering equipment.  InJune 2007, the joint venture, Pact Environmental Equipment Co.Limited, was registered in the PRC. PACT invested US$300,000 and has a 60%controlling interest of the JV, and ECO and PACTFCZ, (a company majority ownedby George Hayek, the Company’s Managing Director), each invested US$100,000 inconsideration for 20% interests.

 

Revenue and income from distribution activities aredeclining gradually due to a greater number of our significant suppliersmarketing and selling their products into the China market through otherdistributors as well as the Company.  Many of these other distributors arelocal Chinese companies and can operate with a lower overhead.

 

Our plans for the near term also include:  (a) continueduse of our retail shops to sell “low-tech” products and our own products. We believe that these shops are operating with a lower overhead than the restof the Company; and (b) we believe that the continued “low-tech” productsales through our retail shops coupled with our “on-line” product sales willallow us to continue to offer products at lower prices than our competitors.

 

Having “low-tech” products offered through our retailshops and the availability of “on-line” product offering are anticipated toallow our sales force to focus on “high-tech” and other products requiringpersonal or telephone contact directly with customers and potential customers.

 

Manufacturing

 

Sales of the Infrared Photometric Oil Analyzercommenced in 2003.  During 2004, we began selling turbidity instrumentsand spectrometers that we developed and manufactured ourselves and beganassembling and selling the Total Organic Analyzer of O.I. Corporation. In November 2006,we began actively marketing our Total Organic Carbon (TOC) analyticalinstrument that measures the degree of the pollution level of drinking water,ground water and waste water. Our TOC analyzer has been three and a half yearsin research, development and field testing of prototypes sold to our customers.We had made some modifications to this product to improve the quality andobtained updated Chinese Metrology Certification, a certificate issued byBureau of Quality and Technical Supervision in November 2007 and beganselling this modified TOC in 2008. We have also upgraded other existing instruments anddeveloped a quick response Chemical Oxygen Demand (“COD”) test instrument foruse on surface water, underground water and domestic and industrial wastewater.

 

In 2005, the Company also began offering two newcompany manufactured turbidimeters.  One of the new turbidimeters isdirected at water treatment plants, environmental monitoring status,hydrological stations and the second is directed at beer and other beverageprocessing facilities and it analyzes the particles contained in the beverage. See “- Product Assembly Operations”. During the next twelve months, we intendto assemble and/or manufacture additional products in the future and seekopportunities with our suppliers to assemble their products, securemanufacturing and/or assembly facilities and seek another manufacturer ofanalytical instruments to acquire.

 

Environmental Services

 

To allow the Company to bid on larger water,waste-water and power generation projects, we acquired Pact and Yixing  (“Pact-Yixing”)and continue our search for other engineering companies and/or a systemintegrator (a company that provides hardware, software and solutions in thefield of engineering) or enter into a joint venture with a third party to workin connection with our process control and engineering department.

 

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Pact-Yixing havecompleted a substantial number of industrial water and waste-water treatmentprojects in the PRC.  The majority of these projects are for large multinationalmanufacturing facilities for clients from the USA, Europe and Japan. Process design as well as mechanical and electrical engineering are completedin-house and manufacturing contracted to approved fabricators ofcomponents.  Fabrication drawings are also done in-house for submittal tosaid fabricators under the supervision of Pact-Yixing’s quality controlengineers.

 

Pact-Yixing clients cover a varied spectrum ofindustries covering semiconductor, pharmaceutical, petrochemicals, auto andauto parts, steel, food and beverage and beauty products.

 

The water and waste-water treatment processes appliedat Pact-Yixing cover chemical, physical, biological and membraneseparation.  A combination of those processes are normally used to treat aspecific industrial process feed or effluent.  With respect to the watertreatment side of Pact-Yixing’s business, they design and build filtrationequipment, ion-exchange softeners and demineralizers, reverse osmosis,electro-deionization, chemical treatment systems and package type mobile watertreatment plants.  As for waste-water treatment, Pact-Yixing design andbuild biological treatment systems, oil coalescers, dissolved air flotation,lamella clarifiers, chemical reactor tanks, ultrafiltration, microfilitration,dewatering systems and package type mobile sewage treatment plants. Biological treatment plants cover both aerobic and anaerobic processes. State-of-the-art aerobic processes of SBR (sequential batch reactors) and MBR(membrane biological reactors) are technologies also covered byPact-Yixing.  See**“**Glossary**.”**

 

In 2006, Pact-Yixing commenced selling water andwaste-water treatment equipment.  The equipment are components of systemstraditionally marketed by Pact-Yixing.  The equipment are partially manufacturedto Pact-Yixing’s in-house design and partially procured from approved Chinesesuppliers.  It is contemplated that Pact-Yixing’s trading operation willmainly sell equipment to clients from outside China, starting with the MiddleEast, Africa and European and American companies operating in the Middle Eastand Africa.

 

The Company believes that the Pact-Yixing business iscomplementary to the Company’s business as the Company continues to sell andmarket products of others. The Company expects that with this acquisition itmay be able to gain a competitive advantage by offering customers and potentialcustomers not only hardware but solutions to engineering problems as well.Also, the Company believes that its equity stake in Pact-Yixing enhances itsposition as a supplier to Pact. The Company continues to seek to make a similaracquisition of an engineering company specializing in air pollution control orother complementary environmental protection fields or in the power generationfield.

 

A purpose of this acquisition was to reconfirm ourdirection to place a greater emphasis on developing an engineering solutionbusiness, instead of relying on its then current activities.

 

During Fiscal 2008, Fiscal 2007 and Fiscal 2006,Environmental Services revenue represented 32%, 25% and 15%, respectively, of ourrevenue.

 

**Equipment and Instrument Distribution**

 

**EnvironmentalProtection Equipment.**

 

Laboratory instruments, analyzers and test kits areused to analyze the chemical content and ascertain the level of impurities orother contaminants in water. The Company distributes analytical re-agents andchemicals to support testing systems of laboratory and portable instruments,process analyzers and portable test kits and assist in the analysis process.The Company offers a wide variety of test kits to test water quality. TheCompany believes that these portable test kits are easy to use and preadaptedfor rugged field use. These test kits are used to monitor drinking waterdistribution systems.

 

Laboratory and portable instruments generally consistof analytical instruments including, but not limited to the following:spectrophotometers, colorimeters, turbidimeters, ion-selective electrodes,chemical oxygen demand apparati, digestion apparati, and precision re-agentdispensing devices which are used to test and monitor impurities andcontaminants in water systems. See “Glossary.”

 

The Company also distributes continuous-readingprocess analyzers, process turbidimeters, pH controllers and analyzeraccessories. These products are generally used to monitor and control drinkingwater quality to ensure that water treatment procedures comply with regulatorystandards. See “Glossary.”

 

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*ScientificInstruments.* TheCompany distributes analytical instruments, environmental monitoringinstruments and general purpose laboratory instruments. Analytical instrumentsinclude, but are not limited to, chromatographs, mass spectrometers, flowinjector analyzers, refractometers and atomic spectrometers. Environmentalmonitoring instruments include both air and water quality monitoringinstruments. Air quality monitoring instruments are generally divided intothose which monitor ambient (i.e., atmospheric) air, and those which monitorpollution sources. Additionally, the Company offers general purpose laboratoryinstruments including a variety of water quality monitoring and analysis equipment,such as continuous reading process analyzers, process turbidimeters ,pHcontrollers, and test kits for monitoring chemical content in water (i.e.,chlorine, fluorides, etc.). See “Glossary.”

 

Customers for the analytical instruments includegovernment agencies, academic and research institutions and major laboratories.The Company also distributes products to beverage producers and restaurants,including water quality test kits to more than twelve bottling plants of a wellknown United States soft drink producer, which are located in the PRC; waterquality monitoring instruments to well known United States fast food franchisor’srestaurants located in Hong Kong and the PRC, and package analyzers to the PRC Fujian and Zhejiang plants ofa substantial worldwide Belgian brewer. Each such soda producer, restaurant and beer bottler does not accountfor a significant portion of our sales.

 

Customers for air and water quality monitoringinstruments also include government agencies such as the Hong Kong EnvironmentalProtection Department, which uses a Company distributed water qualitymonitoring system to monitor the water quality of Hong Kong’s Victoria Harbor,more than ten water treatment plants located in the PRC (including sites atBeijing, Tianjin, Guangzhou and Wuhan), and supplied toxicityanalyzers to various environmental monitoring centres throughout Chinathrough China’s Ministry of EnvironmentalProtection (“MEP”).

 

The Company derived approximately 52.4%, 38.7% and 33.2% of its revenues fromthe sale of Scientific Instruments during Fiscal 2008, Fiscal 2007 and Fiscal2006, respectively.

 

**EnergyConservation, And Related Products.** The Company distributes general testing and measuringequipment including multi-channel digital and analogue recorders, signalamplifiers and calibration equipment for energy conservation, renewable energyequipment, power quality analyzers, continuous emissionsmonitoring systems and air pollution control systems to industries including power plants, railway andaero-space industries, utilities, educational institutions andtelecommunications companies. The Company derived approximately 27.1 %, 36.9% and 45.7% of its revenues fromthe sale of these Energy Conservation and Related Products during Fiscal 2008,Fiscal 2007 and Fiscal 2006, respectively.

 

**Process****Control and EngineeringProducts*.***The Company provides process controlsystems specifically designed for the industrial needs of clients includingsensors, temperature gauges, pressure gauges, power and energy consumptionmeters, flow meters, valves, temperature and pressure transmitters and controldevices, temperature and pressure calibrators, moisture, power, energy andharmonic analyzers. Chlorination disinfection systems are also distributed byFar East in conjunction with water treatment, sewage discharge and swimmingpool water treatment. Customers for the foregoing distributed products includegovernment water supply agencies, water treatment facilities, power andelectric companies, petrochemical plants and instrument manufacturers. Forexample, the Company distributes chlorination disinfection systems to water plantslocated in Guangdong, PRC.

 

The Company derived approximately 16.8%, 18.9% and 13.1% of its revenues fromthe sale of Process Control and Engineering Products during Fiscal 2008, Fiscal2007 and Fiscal 2006, respectively.

 

**SpecialProjects And Engineering Department.** In conjunction with the distribution of products suchas programmable logic controllers, telemetry units and SCADA systems andsoftware, the Company also provides systems engineering to government agencies,waste-water treatment and power generation plants and beverage producers.

 

The Company derived approximately 2.5%, 4.1% and 6.9% of its revenue from itsSpecial Project Operation during Fiscal 2008, Fiscal 2007 and Fiscal 2006,respectively. This revenue was derived primarily from sales of products andsupply systems.

 

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Our special projects and engineering department isbelieved by the Company to be the main contractor and system integrator of alarge number of industrial and municipal waste-water, water treatment and powergeneration plants in the PRC. Specific services provided by this group includeautomated control system design, the operation and management of variouswaste-water, water and power generation projects. We endeavor to introduce,develop, and promote new and advanced technologies, products, and appropriatetechnical developments from abroad. We have also been cooperating withestablished technology companies and engage in systems and special projects inProgrammable Logic Control, Telemetry unit, SCADA systems, Human Machine InterfaceSoftware and Sequential Event Recording.

 

**TechnicalSupport.** TheCompany’s technical support staff provides customers with maintenance,installation assistance, and calibration services, and assists sales personnelin giving technical advice to and performing product demonstrations forcustomers. Technical Support services derived approximately 1.2%, 1.4% and 1.1% of its revenues from Technical SupportOperations during Fiscal 2008, Fiscal 2007 and Fiscal 2006, respectively.

 

**Customers.** During Fiscal 2008, the Companydistributed products to in excess of 1,000 customers, includingsub-distributors, located in Hong Kong, the PRC and Macau. No single customeraccounted for more than 5% of the Company’s revenues during Fiscal 2008. TheCompany does not believe that any single customer or sub-distributor ismaterial to its operations.

 

**Product Assembly Operations**

 

The Company, through its PRC Corporation, ShanghaiEuro Tech Limited established in 1999 in the Pudong Jin Qiao Export ProcessingZone of Shanghai, engages in the development, production, sales and servicingof environmental equipment, including the development of modern laboratoryanalyzers, on-line measuring equipment and other analyzers for chemicals. Ourproducts are “tailor-made” for the diversified needs of equipment users. Mainproducts include Infrared Photometric Oil Analyzer (IPOA), COD analyzers, TotalOrganic Carbon Analyzer, turbidity meters, total suspended solid analyzers,dissolved oxygen analyzers, various types of spectrophotometers as well as afull spectrum of matching chemical reagents. In late 2005, we began offeringtwo new turbidity meters, manufactured by the Company.** ** In 2008 we introduced a Flue Gas Emissions Analyzer for use in environmentalcompliance monitoring. We also developed energy meters (devices measuring electric energy consumptionand corresponding carbon dioxide emissions) and water toxicity analysisinstruments.  In 2009, we plan to develop Continuous Emission Monitoring Systemsfor flue gases.

 

The Company believes that by establishing productassembly operations in the PRC will not only increase revenues, expand itscustomer base, but also its net income since the Company believes it will enjoyhigher overall profit margins by assembling certain products which it nowdistributes rather than by only purchasing the finished product from vendors.

 

**Sources of Supply**

 

The Company distributes products manufactured by anumber of vendors, including Hioki, Thermo and Caliper, which are the Company’s primarysuppliers, see “- Business Overview”. The Company has exclusivity agreementsfor specified geographic areas with many of its suppliers for certain products.Those agreements do not encompass all products distributed by the Company orall of the market areas serviced by the Company. In addition, some of theseagreements are memorialized not as formal contracts but rather through otheracknowledgements or correspondence which may contain a vague, if any,description of the terms and conditions of such agreement or arrangement, andtherefore may be unenforceable.  The Company has only a letter from Hiokiappointing the Company as Hioki’s sales representative in the PRC, Hong Kongand Macau.  Hioki has its own PRC distribution company and appointed aJapanese trading company and other distributors to sell its products inChina.  The Company continues to be one of Hioki’s non-exclusivedistributors.  The Company’s agreement with Thermo continues in effect forsuccessive renewal terms of one year each, unless either party gives writtennotice of non-renewal at least 30 days prior to the end of any renewalterm.  The Company’s agreement with Caliper is terminable on ninety daysnotice by either party.   Althoughalternative sources of supply exist, there can be no assurance that thetermination of the Company’s relationship with any of the above or othervendors would not have a short-term adverse effect on operations.

 

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**Expansion**

 

The Company continues to seek: development ofmanufacturing and engineering operations as part of its core business through (a) thedevelopment and assembly of more of the Company’s own energy and environment-relatedequipment (see “ — Product Assembly Operations”), (b) forming jointventures with some of our suppliers, (c) potential acquisitions ofmanufacturing plants in the water, air pollution and energy conversation andrelated businesses, and (d) potential acquisitions of engineeringcompanies to enhance our ability to bid for and take on larger engineeringprojects.

 

**RegulatoryEnvironment**

 

*Concerns about and awareness of pollution problems andenvironmental issues have grown at all levels of PRC government as the PRCexperienced economic growth. Environmental protection laws and strictregulations have been enacted and are buttressed by increased budgetallocations for environmental regulation, monitoring and enforcement. The PRC’sprimary environmental protection agency is the**Ministryof**Environmental Protection****(**MEP**), under which there are EnvironmentProtection Bureaus in each city and county. According to oral informationreceived by management from**MEP**, under bureau management, there aretwo environment monitoring systems: one system consists of over 2,200monitoring stations to collect and analyze the environmental data of each cityand county; another system consists of over 2,500 stations to monitor specificindustrial districts or factories which have been identified as major pollutionsources due to their non-compliance with environmental regulations. The PRCgovernment has established ambitious targets in its 11th Five-Year Program(2006-2010) to slash emissions of pollutants, including sulfur dioxideemissions**and COD**, by 10%.  The PRC governmentpassed a law requiring power distributors to combat global warming.  Acentral government fund, financed by a national tariff increase, will subsidethe tariff gap between more expensive renewable energy and the national averagetariff.    Preferential policiesalso encourage construction of renewable energy projects, projects in poorerinterior regions that are often rich in water, solar and wind resources. The Company has supplied water and air quality monitoring and analyticinstruments to these monitoring stations for several years. There can be noassurance that the agencies will continue to use the Company’s products forthese purposes, or that other market competitors will not enter the market withsuperior products, distribution systems or more competitive prices. See “Competition.”*

 

**Competition**

 

The Company faces competition from other distributorsof substantially similar products as well as the manufacturers of suchproducts, and in both foreign and Chinese markets.  The Company faces itsprincipal competition from manufacturers and other distributors of its coreproducts located in Hong Kong and the PRC.  Moreover, the Company hasimplemented plans to assemble products of the kind that it presentlydistributes (see “-Product Assembly Operations”).  Assembly operationshave developed to the stage where some products have already been presented tothe market and the Company is in direct and unavoidable competition withcertain of its vendors.  There can be no assurance that the existence ofthis direct competition will not impair the Company’s ability or suchcompetitor’s willingness to continue providing other products for continueddistribution by the Company and that such a development would not materiallyadversely effect the Company’s core business.

 

During Fiscal 2008, Fiscal 2007 and Fiscal 2006, theCompany’s gross profit margins were approximately 24%, 25% and 24.1%, respectively. The Company believesthat it competes with the PRC manufacturers on the basis of quality andtechnology. The Company believes it offers foreign-manufactured products whichare of higher quality and use more advanced technology than productsmanufactured in the PRC. The Company believes that it competes with foreign manufacturersand other distributors of their products on the basis of the Company’s moreextensive distribution network and an established reputation. Pact-Yixingfocuses on a market of providing water and waste water treatment services tomultinational companies.  The Company competes in this market based uponthe quality of its products and having knowledgeable staff.

 

**Website**

 

The Company, through its subsidiary, ChinaH2O.comLimited, a Hong Kong corporation, has a internet platform. The website is locatedat (http://www.chinah2o.com). The website is directed at environmentalbusinesses in China.  The website provides environmental news, directoriesof western suppliers, potential clients in China, advertisement space andbusiness opportunities.  The business and other activities generated byChinaH2O.com Limited have had a synergistic effect with those of the Companyindirectly by feeding market information, sales leads and tender information tothe 

 

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Company.

 

**Sales and Marketing**

 

The Company distributes products through its principaloffice located in Hong Kong and its representative PRC offices located in Beijing,Shanghai and Fuzhou.  During 2007, the Company closed one representativeoffice and consolidated their personnel into our retail shop, as the office didnot financially contribute to the Company as anticipated. The Company has amarketing and sales force of 69 people who are paid a salary plus a sales basedcommission. The Company’s offices also coordinate the sales efforts ofapproximately fifty other companies located in the PRC which act assub-distributors. These sub-distributors are engaged on a non-exclusive basisto distribute the products of other distributors. Each of the fiftysub-distributors accounted for less than two percent of the Company’s salesduring Fiscal 2006 through Fiscal 2008. .

 

Following the opening of our first retail shop in Shanghaiin 2001, (closed in 2007 but absorbed into our own Shanghai Euro Tech Trading (“ShanghaiLimited”), Euro Tech retail outlets are now found in a number of major citiesin the PRC, including Beijing and Guangzhou. Our staff at these shops assistscustomers in selecting the equipment, auxiliary parts and products to suitcustomer specifications. Equipment that needs to be repaired or provided withroutine maintenance can be returned to us via these shops, as our retail shops,except for the Beijing shop, are also maintenance centers. The Company hasfound the six existing shops to be useful as demonstration locations easilyaccessed by local customers who can pay in local currency while “off the shelf”sales are made which move its inventory more readily. In addition to the shops,we also have four branches or representative offices of these shops.  Allof the foregoing are perceived by the Company to have had a positive impact onits business reputation while reducing the Company’s dependency on sub-distributorswho may not be loyal to the Company and distribute products of our competitors.As foreign entities are not generally permitted to own these facilities, theseshops are owned by non-officer/director, employees of the Company with fundsfrom the Company through non-fixed term loans aggregating approximately US$219,000 bearing a nominal rate of interest.The shops do not have financing from other sources. There can be no assurancethat these shops will continue to be economically viable, that the Company willnot sustain losses in connection with the loans to the shops; or the shops willresult in any significant revenues or profits for the Company. Also, similarshops may be established by our competitors and/or third parties.

 

Foreign entities are now permitted to own retail shopsin some regions of PRC.  The Company has established three wholly-owned retail shops in Chongqing, Xi’An and Guangzhou. We are closing the current retail shop in Guangzhouowned by non-officer/director, employees of the Company.  During 2007, weclosed the Wuhan representative office, merging personnel into our Wuhan shop.During 2008, we closed a Guangzhou representative office, merging personnel into ourCompany owned retail shop in that city. We will continue to consolidate our operations by combining the retailshops and representative offices in the same cities or close shops and officesthat do not appear to be contributing to the Company as expected.

 

These shops (or their representative offices) were opened on the followingdates:

 

Retail Shops

 

Owned by non-officer/director, employees of the Company:

 
| Beijing   |   | October 2001  |
|-----------|--------|--------------------|
| Guangzhou |   | June 2002     |
| Wuhan     |   | November 2002 |
| Shenyang  |   | December 2002 |

 

Owned by the Company:

 
| Chongqing  |   | November 2006 |
|------------|--------|--------------------|
| Xi’An |   | April 2007    |
| Guangzhou  |   | April 2008    |

 

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RepresentativeOffices

 
| ChengDu |   | March 2007   |   |
|---------|--------|-------------------|--------|
| Urumqi  |   | October 2007 |   |

 

***Item 4C.            Organizational Structure***

 

The Companypresently wholly owns Far East, a Hong Kong corporation, which, in turn, ownsthe following corporations:

 

**Wholly-Owned**

 

·      Euro Tech Trading (Shanghai) Limited — aPeople’s Republic of China corporation

·      Euro Tech (China) Limited — a Hong Kongcorporation

·      ChinaH2O.com Limited — a Hong Kongcorporation

·      Shanghai Euro Tech Limited — a People’sRepublic of China corporation

·      Shanghai Euro Tech EnvironmentalEngineering Company, Ltd. — a People’s Republic of China corporation

·      Chongqing Euro Tech Rizhi TechnologyCompany, Limited — a People’s Republic of China corporation

·      Rizhi Euro Tech Instrument (Shaanxi)Company Limited— a People’s Republic of China corporation

·     Guangzhou Euro Tech Environmental Equipment Company Limited— a People’s Republic ofChina corporation

 

**MajorityOwned**

 

·      Yixing Pact Environmental TechnologyCompany Limited — a PRC corporation

·      Pact Asia Pacific Limited — a BVIcorporation

 

The Company’s wholly-owned subsidiary and primaryoperational arm is Far East, which it acquired in March 1997. Far East hasengaged in the distribution of various industrial control equipment, whichcontinues to be the core business of the Company, since its inception in 1971.

 

***Item 4D.            Property,Plant and Equipment***

 

The Company maintains an executive office at 18/F GeeChang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The Company occupiesapproximately 12,800 square feet of office and warehouse storage space under atwo (2) year lease that expired in May 2009 and has been renewed foran additional two (2) years with monthly rental payments of approximatelyUS$8,140. The warehouse storage space is used to hold products for distributionto our customers via common carriers.

 

In August 1995, the Company purchasedapproximately 1,200 square feet of space in a building in Hong Kong. Thisproperty is now rented out to a third party.

 

The Company also maintains representative officeswithin the PRC in the cities of Beijing, Shanghai and Fuzhou. The Beijing andShanghai sales offices are owned by the Company. The Fuzhou sales office is rented pursuant to a short-term lease ofapproximately US$509 per month**.**

 

Euro Tech Trading (Shanghai) Ltd. has two officesrented pursuant to short term leases, at an aggregate monthly rental ofapproximately US$1,962.  Shanghai Euro Tech Limited’s premises arerented pursuant to a short term lease for a monthly rental of approximatelyUS$2,458.  Shanghai Euro Tech Environmental EngineeringCompany, Ltd’s premises are also rented pursuant to a short term lease fora monthly rental of approximately US$1,128.

 

Pact occupies a 700 square meter facility in Shanghai,pursuant to a 3 year lease expiring in January 2012, providing for a monthly rental ofapproximately US$6,542.

 

The Company’s registered office in the British VirginIslands is located at TrustNet Chambers, P.O. Box 3444, 

 

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Road Town, Tortola, British Virgin Islands and its telephone number is(284) 494-5296.

 

**ITEM5.              OPERATING AND FINANCIALREVIEW AND PROSPECTS**

 

**Overview**

 

The Company is engaged in three different majoractivities, namely Equipment and Instrument Distribution, Manufacturing, andEnvironmental Services.

 

The Company is primarily a distributor of a wide rangeof advanced water treatment equipment (including chlorination equipment),laboratory instruments, analyzers, test kits and related supplies and powergeneration equipment (including recorders and power quality analyzers).

 

The Company, through its PRC corporation, ShanghaiEuro Tech Limited established in 1999 in the Pudong Jin Qiao Export ProcessingZone of Shanghai, engages in the development, production, sales and servicingof environmental protection equipment, and energy conservation and relatedproducts.

 

The Company, through its majority owned subsidiaries,Pact and Yixing, its wholly-owned subsidiary, Shanghai — Environmental, and itsaffiliate, BlueSky, engages in water and waste-water treatment engineeringbusiness and air pollution control business.

 

The Company’s operations are located almost entirelywithin, and revenues are almost entirely generated from Hong Kong and the PRC.The Company derived approximately 18% and approximately 80% of its revenue from Hong Kong and thePRC, respectively in Fiscal 2008. Net income decreased approximately US$273,000, or 64%, in Fiscal 2008 to US$149,000, compared to US$422,000 in Fiscal2007, primarily due to a decrease in interest income of approximately US$211,000and an increase in selling and administrative expenses of approximately US$628,000,partially offset by the increase in gross profits.

 

The Company continued to consolidate its tradingbusiness by combining some of its regional sales efforts in the PRC with theretail shops and using online ordering in the PRC to sell the Company’sproducts. The Company manufactures and sells its own developed products such asInfrared Photometric Oil Analyzer, turbidity instruments, spectrophotometersand the Total Organic Analyzer. The Company intends to assemble and/ormanufacture additional products in the future and seek opportunities with itssuppliers to assemble their products, secure manufacturing and/or assemblyfacilities and seek another manufacturer of analytical instruments to acquire.

 

The Company continued to accept more engineeringprojects in water and waste-water industries and also in power generationindustries.  The Company intends to continue its search for acquisitioncandidates of other firms engaged in engineering and/or system integration orenter into a joint venture with a third party to work in connection with itsprocess control and engineering department.

 

***Item 5A.            OperatingResults***

 

**Background - Political and EconomicConditions in Hong Kong and the People’s Republic of China**

 

The Company’s operations are located almost entirelywithin, and revenues are almost entirely generated from Hong Kong and the PRC.Set forth below are the approximate percentage of the Company’s sales made tocustomers in the PRC and Hong Kong for the fiscal years indicated:

 
| **Fiscal Year** | ** ** | **PRC** | ** ** | **Hong Kong** | ** ** |
|----------------------|------------|---------|------------|--------------------|------------|
|                 |       |    |       |               |       |
| 2006                 |       | 83      | %          | 16                 | %          |
| 2007                 |       | 79      | %          | 20                 | %          |
| 2008                 |       | 80      | %          | 18                 | %          |

 

Sales to customers situated in Macau and elsewherethrough Fiscal 2008 were nominal. This makes the Company particularlysusceptible to changes in the political and economic climate of either HongKong or the PRC.

 

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**HongKong.** Hong Konghas been one of the prime centers for commercial activity and economicdevelopment recently in Southeast Asia. On July 1, 1997, sovereignty overHong Kong was transferred from the United Kingdom to the PRC. As provided inthe Sino-British Joint Declaration and the Basic Law, the Hong Kong SAR isprovided a high degree of autonomy except in foreign and defense affairs. TheBasic Law provides that the Hong Kong SAR is to have its own legislature, legaland judicial system and full economic autonomy for 50 years after the transferof sovereignty. Based on the current political conditions and the Company’sunderstanding of the Basic Law, the Company does not believe that the transferof sovereignty over Hong Kong has had or will have an adverse impact on itsfinancial and operating environment. Although the Chinese government haspledged to maintain the economic and political autonomy of Hong Kong over itsinternal affairs, there is no assurance that such pledge will continue to behonored if there are changes in the Chinese political or economic climate. SeeItem 3D. “Key Information — Risk Factors.”

 

**PRC.** The PRC has been a socialist state since1949. For more than half a century, the PRC’s economy has been, and presentlycontinues to be, a socialist economy operating under government controlspromulgated under various State Plans adopted by central Chinese governmentauthorities and implemented, to a large extent, by provincial and localauthorities which may set production and development targets. However, sinceapproximately the early 1980s, the PRC’s national government has undertakencertain reforms to permit greater provincial and local economic autonomy andprivate economic activities. Any change in political or economic conditions maysubstantially adversely affect these reform initiatives and, in turn, the Company.See Item 3D. “Key Information — Risk Factors.”

 

**Results from Operations**

 

The following operating and financial review should beread in conjunction with the Consolidated Financial Statements and notesthereto appearing elsewhere in this Annual Report. All financial data referredto in the following discussion has been prepared in accordance with accountingprinciples generally accepted in the United States (“US GAAP”).

 

The following table presents selected statement ofoperations data expressed in thousands of US$ and as a percentage of revenuefor the Company’s fiscal years indicated below:

 
| ** **                                  | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Revenue                                     |       | 31,738   |       | 100      | %          | 27,230   |       | 100      | %          | 27,161   |       | 100 | % | 31,250 |   | 100 | % | 32,282 |   | 100 | % |
| Cost of revenue                             |       | 24,154   |       | 76.1     | %          | 20,398   |       | 74.9     | %          | 20,606   |       | 75.9 | % | 24,681 |   | 79.0 | % | 27,033 |   | 83.7 | % |
| Gross Profit                                |       | 7,584    |       | 23.9     | %          | 6,832    |       | 25.1     | %          | 6,555    |       | 24.1 | % | 6,569 |   | 21.0 | % | 5,249 |   | 16.3 | % |
| Selling and administrativeExpenses          |       | 7,213    |       | 22.7     | %          | 6,585    |       | 24.2     | %          | 5,961    |       | 21.9 | % | 5,418 |   | 17.3 | % | 4,801 |   | 14.9 | % |
| Income before incomeTaxes                   |       | 560      |       | 1.8      | %          | 664      |       | 2.4      | %          | 835      |       | 3.1 | % | 1,358 |   | 4.3 | % | 569 |   | 1.8 | % |
| Income taxes                                |       | 321      |       | 1.0      | %          | 144      |       | 0.5      | %          | 156      |       | 0.6 | % | 328 |   | 1.0 | % | 167 |   | 0.5 | % |
| Minority Interest in profitsof subsidiaries |       | (363     | )          | 1.1      | %          | (345     | )          | 1.3      | %          | (318     | )          | 1.2 | % | (318 | ) | 1.0 | % | — |   | 0.0 | % |
| Equity in profit ofAffiliates               |       | 273      |       | 0.9      | %          | 247      |       | 0.9      | %          | —   |       | 0.0 | % | 21 |   | 0.0 | % | 192 |   | 0.6 | % |
| Net income                                  |       | 149      |       | 0.5      | %          | 422      |       | 1.5      | %          | 361      |       | 1.3 | % | 733 |   | 2.3 | % | 594 |   | 1.8 | % |

 

**Fiscal Year Ended December 31,2008 Compared to Fiscal Year Ended December 31, 2007**

 

*Revenue;Gross Profit and Cost of Revenue.* Revenue increased by approximately US$ 4,508,000 or 16.5% to approximately US$31,738,000 in Fiscal 2008 from approximately US$27,230,000 in Fiscal 2007. The revenue from engineering activities increased by approximately US$3,079,000 as a result of an increasein the number of engineering contracts completed, whilst revenuesfrom trading and manufacturing activities increased by approximately US$1,429,000 resulting from increasesin sales of products for environmental pollution and food safety analysis application.  Pact-Yixing’srevenues of approximately US$$9,260,0000 and US$6,981,000 were included in our revenuesin Fiscal 2008 and Fiscal 2007, respectively.

 

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Gross profits increased by approximately US$752,000 or 11.0% to approximately US$7,584,000 for Fiscal 2008 as compared to approximately US$6,832,000 for Fiscal 2007. During Fiscal 2008, the Company’s cost of revenue wasapproximately US$24,154,000, or 76.1% of revenues, in comparison toapproximately US$20,398,000, or 74.9% for Fiscal 2007.  Cost of revenue expressed as apercentage of revenue increased by 1.2% in Fiscal 2008 as compared with Fiscal 2007.  The gross profit marginpercentage decrease wasdue principally to a decrease in gross profit marginpercentage for engineeringactivities as material prices generally increased in Fiscal 2008. Yixing-Pact contributed approximately US$2,610,000 to our gross profit margin in Fiscal2008, an increase of approximately US$484,000 from Fiscal 2007.

 

*Sellingand Administrative Expenses.* Selling and administrative expenses wereapproximately US$7,213,000 inFiscal 2008, an increaseof approximately US$628,000 or 9.5% from approximately US$6,585,000 in Fiscal 2007. The increase was principally due to theincrease of Yixing-Pact expenses of approximately US$307,000 as a result of increases in expenses related to its increasedrevenue.  These expenses included a staffincrease from 57 in Fiscal 2007 to 76 in Fiscal 2008.  The PRC inflation rate of 5.9%, the averageappreciation rate of 6% for RMB against the US$ in 2008 and increases instock-based compensation expenses of US$69,000 also contributed to the increasein selling and administrative expenses.

 

*Equityin Profit of Affiliates.* Equity in profit of affiliates of approximately US$273,000 represented our share of net profitafter taxes of BlueSky and Jia Huan.

 

*InterestIncome.* Interestincome decreased byapproximately US$211,000 or 82.4% to approximately US$45,000 in Fiscal 2008 from approximately US$256,000 for Fiscal 2007. The decrease was primarily due to the significantdrop in interest rates and decrease in average bank deposit balances during Fiscal 2008 comparedto Fiscal 2007 resulting from funds used in acquiring affiliates.

 

*OtherIncome.* Otherincome decreased byapproximately US$17,000 or 10.6% to approximately US$144,000 in Fiscal 2008 from approximately US$161,000 in Fiscal 2007. The decrease in other income was principallydue to a gain ofdisposal of plant and equipment of approximately US$19,000for Fiscal 2007 while there was no such gain in Fiscal 2008.

 

*IncomeTaxes.* Taxesincreased by US$177,000 to approximately US$321,000 in Fiscal 2008 fromapproximately US$144,000 in Fiscal 2007. This increase was primarily the resultof increased taxable profits.

 

*NetIncome.* Incomefrom continuing operations decreased by approximately US$273,000 or 65% toapproximately US$149,000 in Fiscal 2008 from approximately US$422,000 in Fiscal2007.   The decrease was primarily due to the decrease in interestincome and the increase in selling and administrative expenses, partiallyoffset by the increase in gross profit.

 

**Fiscal Year ended December 31,2007 compared to Fiscal Year Ended December 31, 2006**

 

*Revenue;Gross Profit and Cost of Revenue.* Revenue increased by approximately US$ 699,000 or0.3% to approximately US$27,230,000 in Fiscal 2007 from approximatelyUS$27,161,000 in Fiscal 2006. The increase in revenues was primarily due toincreasing revenues of approximately US$2,302,000 from engineering activitiesas there was an increase in the number of engineering jobs completed in Fiscal2007, as a result of Pact and Yixing having established operations in the PRCand they have been receiving a greater volume of orders in the recent years,despite declining revenues of approximately US$2,233,000 from tradingactivities as a greater number of our key or exclusive suppliers have beenmarketing their products or selling into the China market, either directly orthrough distributors other than the Company.  After the Company acquiredits majority interest in Pact-Yixing in October 2005, Pact-Yixing’srevenues of approximately US$$6,981,000 and US$3,953,000 were included in ourrevenues in Fiscal 2007 and Fiscal 2006, respectively.

 

Gross profits increased by approximately US$277,000 or4.2% to approximately US$6,832,000 for Fiscal 2007 as compared to approximatelyUS$6,555,000 for Fiscal 2006.

 

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During Fiscal 2007, the Company’s cost of revenue wasapproximately US$20,398,000, or 74.9% of revenue, in comparison to approximatelyUS$20,606,000, or 75.9% for Fiscal 2006.  Cost of revenue expressed as apercentage of revenue decreased by 1.0% in Fiscal 2007 as compared with Fiscal2006.  The gross profit margin percentage increase was due principally toan increase in revenue from engineering activities which are of higher grossmargin percentage than those of trading activities.  Yixing-Pactcontributed approximately US$2,126,000 to our gross profit margin in Fiscal2007.

 

*Sellingand Administrative Expenses.* Selling and administrative expenses wereapproximately US$6,585,000 in Fiscal 2007, an increase of approximatelyUS$624,000 or 10.5% from approximately US$5,961,000 in Fiscal 2006. Theincrease was principally due to the increase of Yixing-Pact expenses ofapproximately US$512,000 due to expenses of approximately US$211,000 for themanufacturing joint venture and increase in expenses related to increase inrevenue. The PRC inflation rate of 4.8% and average appreciation rate of 6% forRMB against the US$ in 2007 also accounted for the increase in selling andadministrative expenses.

 

*Equityin Profit of Affiliates.* Equity in profit of affiliates of approximately US$247,000 representedthe share of net profit after tax of BlueSky after its acquisition in August 2007.

 

*InterestIncome.* Interestincome increased by approximately US$161,000 or 169.5% to approximatelyUS$256,000 in Fiscal 2007 from approximately US$95,000 for Fiscal 2006. Theincrease was primarily due to the increase in average bank deposit balances during Fiscal 2007compared to Fiscal 2006.

 

*OtherIncome.* Otherincome increased by approximately US$15,000 or 10.3% to approximatelyUS$161,000 in Fiscal 2007 from approximately US$146,000 in Fiscal 2006. Theincrease in other income was principally due to increase in gain of disposal ofplant and equipment.

 

*IncomeTaxes.* Taxesdecreased by US$12,000 to approximately US$144,000 in Fiscal 2007 fromapproximately US$156,000 in Fiscal 2006. This decrease was primarily the resultof decreased taxable profits and an increase in income which are not subject toincome taxes, such as offshore income and interest income.

 

*NetIncome.* Incomefrom continuing operations increased by approximately US$61,000 or 17% toapproximately US$422,000 in Fiscal 2007 from approximately US$361,000 in Fiscal2006.   The increase was primarily due to the contribution fromshares of equity in BlueSky’s net income of approximately US$247,000, partiallyoffset by the increase in selling and administrative expenses.

 

***Item 5B.            Liquidityand Capital Resources***

 

The Company has primarily used its funds to financeaccounts receivable, inventories, and capital expenditures including purchasesof property, office furniture and equipment, computers and calibrationequipment. The Company has historically met its cash requirements from cashflows from operations, short-term borrowings, bank lines of credit, andlong-term mortgage bank loans. The Company expects, but can make no assurancesthat its present cash reserves, cash from operations, existing available bankcredit facilities and proceeds from the issuance of our ordinary sharespursuant to stock option exercises would be sufficient to fund its futurecapital expenditure requirements. Working capital at the end of Fiscal 2008 andFiscal 2007 were approximately US$8,583,000 and US$10,099,000, respectively.

 

At the end of Fiscal 2008 and Fiscal 2007, the Company’saccounts receivable were approximately US$6,707,000 and US$4,968,000, respectively. During Fiscal 2008, the Company generated net cash of approximately US$644,000 from its operating activities from netincome and increase in accounts payable while funding an increase in inventories,accounts receivable, prepayments and other current assets and decrease in otherpayables and accrued expenses.

 

During Fiscal 2008 and Fiscal 2007, the Company usedapproximately US$$3,163,000 and US$4,415,000in investing activities,respectively.  The Company used approximately US$99,000 and US$250,000 to purchase facilities and equipmentin Fiscal 2008 and Fiscal 2007, respectively.  During Fiscal 2008 andFiscal 2007, the Company used approximately US$56,000 and released US$83,000, respectively, as restrictedcash to issue performance guarantees to its customers through its banks. During Fiscal 2008 and Fiscal 2007, Yixing-Pact paid dividends of approximatelyUS$ Nil andUS$140,000,respectivelyto minority interest shareholders. During Fiscal 2008, the Company used approximately US$2,610,000 to acquire a 20% equity interest in Jia Huan. During Fiscal 2007, the Company usedapproximately

 

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US$4,151,000 to acquire20% equity interest in Blue Sky. Additionally, a final payment of US$692,000 was made in June 2008, based on Blue Sky’s netprofits for its fiscal year ended December 31, 2007. During Fiscal2008, the Company received dividends of approximately US$294,000 from Blue Sky.

 

The Company received approximately US$51,000 and US$3,720,000, respectively, inFiscal 2008 and Fiscal 2007 from financing activities resulting from theissuance of its ordinary shares resulting from the exercise of stock options.The Company had various banking facilities available for overdraft, import andexport credits and foreign exchange contracts from which the Company couldhave accessed up to approximately US$2,564,000 at December 31, 2008. The aforementioned available creditfacilities were obtained on the conditions that, among other things, theCompany not create a charge or lien on its other assets in favor of thirdparties without such bank’s consent, and the Company maintaining a certainlevel of net worth.

 

Cash decreased from approximately US$9,387,000 at theend of Fiscal 2007 to approximately US$7,146,000 at the end of Fiscal 2008. The principalreasons for the decrease in cash were the increase in accountsreceivable byapproximately US$1,739,000 and the use of approximately US$3,302,000 to purchaseinterests in its affiliates.  However,the Company was able to partially offset the increase in its accounts receivableand to the funds provided to affiliates by an increase in accounts payables ofapproximately US$2,726,000.  The Company plans to use cash on handprimarily to expand its manufacturing plant and environmental engineeringbusiness.

 

The Company’s netaccounts receivable increased from approximately US$4,968,000 at the end ofFiscal 2007 to approximately US$6,707,000 at the end of Fiscal 2008. This increasewas principally the result of the receipt of substantial sales orders receivednear the end of Fiscal 2008.

 

The Company’s inventory increased from approximately US$2,012,000 at theend of Fiscal 2007 to approximately US$2,600,000 at the end of Fiscal 2008 due to an increasein Pact- Yixing’s sales orders.

 

The Company’s capitalexpenditures were approximately US$250,000 and US$99,000 in Fiscal 2007 and Fiscal 2008,respectively. Capital expenditures during Fiscal 2007 and Fiscal 2008 wereincurred primarily in connection with the purchase of office equipment,furniture and fixtures.  The Company continues to seek targets foracquisition and facilities for assembly operations or engineering companies. Ifsuch acquisitions are indeed made, the Company may expect to incursignificantly larger capital expenditures, for which the Company presentlyintends, but as to which no assurance can be made, to use existing cashreserves, cash from operations, available bank credit facilities and proceedsfrom the issuance of our ordinary shares to fund such capital expenditures.

 

**AnticipatedFuture Resources and Uses of Cash**

 

The Company hashistorically funded its working capital, capital expenditure, investing andexpansions needs from operations, available bank credit facilities and proceedsfrom the issuances of our ordinary shares and expects to continue funding itsFiscal 2008 these requirements from operations, available bank creditfacilities and proceeds from the exercise of options. The Company may use itsfunds to acquire other businesses, make equity investments in related business,form strategic alliances with third parties, invest in product research anddevelopment, or expand its sales offices and retail shops or, with thirdparties, seek to acquire new products or businesses or form strategicalliances. The Company expects, but can make no assurances that its presentcash reserves, cash from operations and existing available bank creditfacilities would be sufficient to fund its future cash requirements.

 

**Inflation**

 

The Company believesgenerally declining rates of inflation in the PRC have had a positive effect onits results from operations.  As a result of the recent rise in the rateof inflation in the PRC, we anticipate increases in the overhead costs of ourPRC affiliates and offices.  The Company believes, although no assurancecan be given, that as credit restrictions are gradually lifted, it will be ableto increase prices in the market for its products and thus realize increasedprofit margins.

 

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**CriticalAccounting Policies**

 

*RevenueRecognition*

 

Pursuant to the revenue recognition criteria set forthin Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 104:“Revenue Recognition”, the Company recognizes revenue when it is realized orrealizable and earned. The Company considers revenue realized or realizable andearned when it has persuasive evidence of an arrangement, the product has beendelivered, the sales price is fixed or determinable and collectibility isreasonably assured. For certain products where installation is necessary,revenue is recognized upon completion of installation.  Revenue earnedfrom customer support, which represents a minor percentage of total revenues,it is recognized when such services are provided.

 

Revenues and profits inlong term fixed price contracts or the engineering income are recorded underthe percentage of completion method in accordance with SOP 81-1, “Accountingfor Performance of Construction-Type and Certain Production-Type Contracts”. This approach relies on estimates of total expected direct costs of completion,which are compared to actual direct costs incurred to date to arrive at anestimate of revenue and profit earned to date.  Recognized revenue andprofit are subject to revisions as the contract progresses to completion. Revisions to profit estimate are reflected in income in the period in which thefacts that give rise to the revision become known. For any contract where it isidentified that a loss will be incurred, the full loss will be recognizedimmediately. 

 

*InventoryValuation*

 

The Company writes downits inventory for estimated obsolescence or unmarketable inventory equal to thedifference between the cost of inventory and the estimated market value basedupon assumptions about future demand and market conditions. If actual futuredemand or market conditions are less favorable than those projected bymanagement, additional write-downs may be required.

 

*DeferredTaxes*

 

As part of the process ofpreparing its consolidated financial statements, the Company is required toestimate its income taxes and tax bases of assets and liabilities in each ofthe jurisdictions in which it operates. This process involves the Company estimatingits current tax exposure together with assessing temporary differencesresulting from its differing treatment of items for tax and accountingpurposes. These differences result in deferred tax assets and liabilities,which are included in the Company’s consolidated balance sheet. The Companymust then assess the likelihood that its deferred tax assets will be recoveredfrom future taxable income, and, to the extent the Company believes thatrecovery is more unlikely than likely, it must establish a valuation allowance.To the extent the Company establishes a valuation allowance or increases thisallowance in a period, it must include an expense within the tax provision inthe statement of operations.

 

*RecentAccounting Pronouncements*

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests inConsolidated Financial Statements—an amendment of ARB No. 51.” (SFAS No. 160)SFAS No. 160 establishes accounting and reporting standards fornoncontrolling interests in subsidiaries. This statement requires the reportingof all noncontrolling interests as a separate component of stockholders’equity, the reporting of consolidated net income (loss) as the amountattributable to both the parent and the noncontrolling interests and theseparate disclosure of net income (loss) attributable to the parent and to thenoncontrolling interests. In addition, this statement provides accounting andreporting guidance related to changes in noncontrolling ownership interests.Other than the reporting requirements described above which requireretrospective application, the provisions of SFAS No. 160 are to beapplied prospectively in the first annual reporting period beginning on orafter December 15, 2008. The Company is currently evaluating the potentialimpact, if any, of the adoption of FAS No. 160 on the consolidatedfinancial statements.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,”(FAS No. 141(R)), which replaces FASB Statement No. 141. FAS No. 141(R) establishesprinciples and requirements for how an acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,any noncontrolling interest in the acquiree and the goodwill acquired. TheStatement also establishes disclosure requirements 

 

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which will enable usersto evaluate the nature and financial effects of the business combination. FAS No. 141(R) iseffective as of the beginning of an entity’s fiscal year that begins after December 15,2008, which is our year beginning January 1, 2009. An entity is precludedfrom implementing Statement 141R early. We are currently evaluating thepotential impact, if any, of the adoption of FAS No. 141(R) on theconsolidated financial statements.

 

In March 2008, theFASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities - an amendment of FASB Statement No. 133” (SFAS No. 161).  SFASNo. 161 requires additional disclosures about the objectives of usingderivative instruments, the method by which the derivative instruments andrelated hedged items are accounted for under Statement No. 133 and itsrelated interpretations, and the effect of derivative instruments and relatedhedged items on financial position, financial performance, and cashflows.  SFAS No. 161 also requires disclosure of the fair valuesof derivative instruments and their gains and losses in a tabularformat.  SFAS No. 161 is effective for financial statementsissued for fiscal years and interim periods beginning after November 15,2008.  The Company has no derivative instruments or hedgingactivities and this pronouncement is only disclosure-related; accordingly, SFAS161 has no impact on the Company’s financial position, consolidated results ofoperations or cash flows.

 

In April 2008, the FASBissued Staff Position (FSP) No. FAS 142-3, “Determination of the UsefulLife of Intangible Assets (FSP FAS No. 142-3)”.  FSP FAS No. 142-3amends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, Goodwill and Other Intangible Assets.  It iseffective for financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years and should be appliedprospectively to intangible assets acquired after the effectivedate.  Early adoption is not permitted. FSP FAS No. 142-3 alsorequires expanded disclosure related to the determination of intangible assetuseful lives for intangible assets and should be applied to all intangibleassets recognized as of, and subsequent to the effective date.  Theimpact of FSP FAS No. 142-3 will depend on the size and nature of acquisitionson or after January 1, 2009.

 

In May 2009, the FASBissued SFAS No. 165, “Subsequent Events” (SFAS No. 165). SFAS No. 165 provides generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. SFAS No. 165 is applicable for interim or annual periods after June15, 2009. The application of SFAS No. 165 is not expected to have a material effecton the Company’s consolidated financial statements.

 

In June 2009, the FASBissued SFAS No. 166, “Accounting for Transfers of Financial Assets - anamendment of FASB Statement No. 140” (SFAS No. 166). SFAS No. 166 seeks toimprove the relevance, representational faithfulness, and comparability of theinformation that a reporting entity provides in its financial statements abouta transfer of financial assets; the effects of a transfer on its financialposition, financial performance, and cash flows; and a transferor’s continuinginvolvement, if any, in transferred financial assets. SFAS No. 166 is applicablefor annual periods after November 15, 2009 and interim periods therein andthereafter. The Company is currently evaluating the potential impact, if any,of the adoption of SFAS No. 166 on the consolidated financial statements.

 

In June 2009, the FASBissued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS No. 167).SFAS No. 167 seeks to improve financial reporting by enterprises involved withvariable interest entities. SFAS No. 167 is applicable for annual periods afterNovember 15, 2009 and interim periods therein and thereafter. The Company iscurrently evaluating the potential impact, if any, of the adoption of SFAS No. 167on the consolidated financial statements.

 

The Company does notbelieve that any other recently issued and adopted, but not yet effective,accounting standards should have a material effect on the accompanyingfinancial statements.

 

***Item 5C.******         *****Research andDevelopment, Patents and Licenses**

 

During Fiscal 2008,Fiscal 2007 and Fiscal 2006, the Company expensed approximately US$89,000, US$47,000 and US$55,000, respectively,on the development of its products.  It is anticipated that an additionalUS$250,000 inresearch and development costs will be expended on similar projects andpotential research and development projects for the development of air andwater testing equipment and monitoring equipment during Fiscal 2009.

 

***Item 5D.******         *****Trend Information**

 

There are increasingdemands in the PRC for clean water, clean air, greater industrial pollutioncontrols, waste management and electricity.  We also see additionaldistributors competing with us.  However, given the political situation inthe PRC, trends could quickly disappear and we do not know if they willcontinue in the future.  We note that, as evidenced by our acquisition ofPact-Yixing, we are placing greater emphasis on developing our engineeringsolution business in an effort to capitalize on these increased demands (cleanwater, pollution controls and waste management).

 

The Company believes thatthe expenses incurred in product development may result in increases in revenuebut such increases are unlikely to allow for a recovery of the expenses forapproximately the next two years.

 

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***Item 5E.******         *****Off Balance Sheet Arrangements**

 

None.

 

***Item 5F.******         *****Tabular Disclosure ofContractual Obligations**

 
| **Contractual  Obligations**        | ** ** | **Total**  | ** ** | **Less  than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
|-------------------------------------|------------|------------|------------|------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | ** **             | ** ** | ** **         | ** ** | ** **         | ** ** | ** **         | ** ** |
| Operating Leases                    |       | US$        | 177,000    |                   | US$        | 154,000            |       | US$                | 23,000     |               | —     |   | — |   |
|                                |       |       |       |                   |       |               |       |               |       |               |       |
| Total  Contractual Cash Obligations |       | US$        | 177,000    |                   | US$        | 154,000            |       | US$                | 23,000     |               | —     |   | — |   |

 

**6.****          ****DIRECTORS, SENIORMANAGEMENT AND EMPLOYEES**

 

***Item 6A.******         *****Directors and SeniorManagement**

 

Information concerningthe Directors and Executive Officers of the Company are as follows:

 
| **Name**        | ** ** | **Age** | ** ** | **Position**                                                    |
|-----------------|------------|---------|------------|-----------------------------------------------------------------|
|            |       |    |       |                                                            |
| T.C. Leung      |       | 65      |       | Chairman of the Board  of Directors and Chief Executive Officer |
|            |       |    |       |                                                            |
| Jerry Wong      |       | 50      |       | Director and Chief  Financial Officer                           |
|            |       |    |       |                                                            |
| Alex Sham       |       | 45      |       | Director                                                        |
|            |       |    |       |                                                            |
| Y.K. Liang      |       | 79      |       | Director                                                        |
|            |       |    |       |                                                            |
| Ka Chong Cheang |       | 80      |       | Director                                                        |
|            |       |    |       |                                                            |
| Xu Hong Wang    |       | 41      |       | Director                                                        |
|            |       |    |       |                                                            |
| Li Da Weng      |       | 64      |       | Director                                                        |

 

Set forth below is abrief background of the executive officers and directors based upon theinformation supplied by them to the Company:

 

**T.C.Leung** has beenChief Executive Officer and Chairman of the Board of Directors of both theCompany and Far East since their inception. Before establishing Far East, Mr. Leungwas an engineer for English Electric in England, from 1965 to 1968, andLockheed Aircraft in Hong Kong, from 1968 to 1970. Mr. Leung also servedas managing director of Eurotherm (Far East) Ltd. (“Eurotherm”) between 1971and 1992. From 1988 until he retired in February 2005, Mr. Leung hadalso served as managing director of Eurotherm Hong Kong. Mr. Leungreceived a Masters degree in Business Administration from the University ofEast Asia, Macau in 1986 and is a Chartered Engineer, a title bestowed upon amember of the Council of Engineering Institutions in the United Kingdom.

 

**Jerry Wong** has served as Director and ChiefFinancial Officer of Far East since 1994 and has been with Far East since 1987.Mr. Wong has been the Chief Financial Officer and a Director of theCompany since its inception. From 1985 until 1987, Mr. Wong worked for MUAAgencies Ltd., a subsidiary of a Hong Kong publicly listed company engaged inthe insurance business, as deputy manager of its secretarial, legal andaccounting department. From 1981 until 1985, Mr. Wong served as a senioraccountant in Price Waterhouse-Hong Kong. He is a Fellow of the Association ofChartered Certified Accountants in the United Kingdom and a Certified PublicAccountant in Hong Kong.

 

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**Alex Sham** has been a Director of the Company sinceits inception. Mr. Sham joined Far East in 1988 and has been its SalesManager since 1993 and became a Director of Far East in 1996. Mr. Shamreceived a Bachelor of Science in Applied Chemistry from Hong Kong BaptistUniversity in 1990. Prior to joining Far East, Mr. Sham was employed bythe Environmental Protection Department of the Hong Kong Government from 1986until 1988.  Mr. Sham received a Master’s Degree in BusinessAdministration from the University of Adelaide in 2003.

 

**Y.K.Liang** has been aDirector of the Company since February 1998. Mr. Liang is a directorof Wong Liang Consultants Ltd. (“Consultants”) and a member of the certifiedpublic accounting firm of Y.K. Liang & Co. (“LCO”). Mr. Liang hasbeen associated with both Consultants and LCO for more than the past fiveyears. Consultants is a general business consulting firm.

 

**KaChong Cheang** hasbeen a Director of the Company since December 2005. From 1952 until 1977,he had been shipping manager for John Swire & Sons (Hong Kong) Ltd., afirm engaged in the importing and exporting shipping industry.  For morethan the past five years, Mr. Chong has been a business consultant.

 

**XuHong Wang** hasbeen a director of the Company since August 2002. Mr. Wang is theEast China sales manager of Euro Tech (Far East) Limited, a wholly-ownedsubsidiary of the Company, since mid 1994. From mid 1997 until joining EuroTech, he was employed as a Research Associate and Lecturer at the Analysis andResearch Center of Shanghai’s Tongji University. Wang Xu Hong received Bachelor’sand Master’s degrees in Science from Fudan University in 1984 and 1988,respectively.

 

**LiDa Weng**, from1993 until January 2005, was the General Director of the Yangtze ValleyWater Resources Protection Bureau (“YVWRPB”).  He was employed by theYVWRPB in various positions, for more than 25 years, before he became theGeneral Director in 1993.  Since 2005, he has been the Secretary Generalof Yangtze Forum, a group of governments, businesses, universities and researchinstitutes meeting on occasion to discuss issues on protecting and developingthe Yangtze River, and since 1994 he has been a member of the Science andTechnical Committee of Changjiang Water Resources Commission.  Mr. LiDa Weng graduated from Hengyang Mining and Metallurgy College (now known asNanhua University) in 1965 with a Bachelor’s Degree in AnalyticalChemistry.  From December 1981 to December 1983, he was avisiting scholar at the Canada’s Centre for Inland Waters, National WaterResearch Institute.

 

Directors of the Companyserve until the next annual meeting of shareholders of the Company and untiltheir successors are elected and duly qualified. Officers of the Company areelected annually by the Board of Directors and serve at the discretion of theBoard of Directors.

 

None of the Company’sdirectors, officers or beneficial owners of ten percent or more of its CommonStock are required to file any reports pursuant to Section 16(a) ofthe Exchange Act.

 

The Company had 3meetings of its Board of Directors during Fiscal 2008, while its AuditCommittee had 3 meetings during Fiscal 2008.

 

There are no materiallegal proceedings involving any director, officer or affiliate of the Company,owner of record or beneficially of more than five percent of the Company’sCommon Stock or any associate of any of the foregoing.

 

**KeyEmployees**

 

**GeorgeHayek**, ManagingDirector.  He is the founder of Pact and Yixing and is a civil engineer(1967) and post-graduate certificate holder in sanitary engineering andenvironmental management from the American University of Beirut and theUniversity of California at Irvine (in 1971 and 1988, respectively). Since 1971, he has occupied several key posts in water and waste-watertreatment companies in the USA, the UK, Spain, Cyprus, The Middle East,Southeast Asia and the last 14 years in the PRC.  From 1998 to date, hehas been the managing director of Pact.  His international experiencehelped Pact in securing most of the contracts with European and Americanmultinational industries in the PRC.

 

**YvonneXia** manages Pactand Yixing’s Procurement Department, as well as assisting the managing directorin management of the various departments.  She joined Pact-Yixing at thetime of their formation in 1998.  Ms. Xia is an environmentalengineering graduate from Qing Hua University of Beijing (1989) and an EMBAgraduate from the Olin School of Management of the Washington University(2003).  She has several positions of increasing responsibility, 

 

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including management ofengineering, sales, procurement and projects while with Pact-Yixing.

 

***Item 6B.******         *****Compensation**

 

The following table sets forth certain summaryinformation with respect to the compensation paid by the Company and itssubsidiaries, for services rendered in all capacities to the Company and itssubsidiaries during Fiscal 2008, Fiscal 2007 and Fiscal 2006 to the Chairman ofthe Board and Chief Executive Officer and a Key Employee of the Company**. **No other **e**xecutiveofficer or employee received in excess of US$100,000 as cash compensationduring those fiscal periods.

 

***SUMMARY COMPENSATION TABLE***

 

**Compensationof Directors.**Directors of the Company do not receive compensation for their services asdirectors; however, the Board of Directors may authorize the payment ofcompensation to directors for their attendance at regular and annual meetingsof the Board and for attendance at meetings of committees of the Board as iscustomary for similar companies. Directors will be reimbursed for theirreasonable out-of-pocket expenses incurred in connection with their duties tothe Company.

 
| ** **                                                                       | ** ** | ** ** | ** ** | **Salary US$** | ** ** | **Bonus US$**  | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|
|                                                                             |       |       |       |           |       |           |       |
| T.C. Leung,  Chairman of the Board of Directors and Chief Executive Officer |       | 2008  2007 |       | 154,000155,000 |       | —  — |       |
|                                                                             |       | 2006       |       | 159,000        |       | —         |       |
|                                                                             |       |       |       |           |       |           |       |
| George  Hayek                                                                    |       | 2008       |       | 110,000        |       | —         |       |
|                                                                             |       | 2007       |       | 110,000        |       | —         |       |
|                                                                             |       | 2006       |       | 110,000        |       | —         |       |

 

**PensionPlan.** Prior to December 1,2000, the Company had only one defined contribution pension plan for all itsHong Kong employees. Under this plan, all employees were entitled to pensionbenefits equal to their own contributions plus 50% to 100% of individual fundaccount balances contributed by the Company, depending on their years ofservice with the Company. The Company was required to make specificcontributions at approximately 10% of the basic salaries of the employees to anindependent fund management company.

 

With the introduction ofthe Mandatory Provident Fund Scheme, a defined contribution scheme managed byan independent trustee on December 1, 2000, each of the Company and itsemployees who joined the Company subsequently makes monthly contributions tothe scheme at 5% of the employee’s cash income as defined under the MandatoryProvident Fund legislation. Contributions of both the Company and its employeesare subject to a maximum of HK$1,000 per month and thereafter contributions arevoluntary and are not subject to any limitation. The Company and its employeesmade their first contributions in December 2000.

 

As stipulated by the rules and regulations in the PRC, the Companycontributes to state-sponsored retirement plans for its employees in the PRC.The Company contributes approximately 10% to 22% of the basic salaries of itsemployees, and has no further obligations for the actual payment of pension orpost-retirement benefits beyond the annual contributions. The state-sponsoredretirement plans are responsible for the entire pension obligations payable toretired employees.

 

During the years ended December 31,2008, 2007 and 2006, the aggregate contributions of the Company to the 

 

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aforementioned pensionplans and retirement benefit schemes were approximately US$291,000, US$245.000 and US$202,000,respectively.

 

**Management Option Plan.** The Company had authorized the issuanceof Options to purchase up to an aggregate of 4,586,400 Ordinary Shares (the “ManagementOptions”) to its officers, directors and employees as the Company’s Chairman ofthe Board and Chief Executive Officer may direct. The Management Options becameexercisable on March 14, 1998 and expired on March 14, 2007.

 

The following executiveofficers and directors of the Company had exercised the Management Options atprices/price ranges as indicated below prior to the end terms of the options.

 
| **Name of  Executive  Officers and Directors** | ** ** | **Number  of Shares  Exercised** | ** ** | **Price Range**    | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | ** **                       | ** ** | ** **              | ** ** |
| T.C.  Leung                                    |       | 3,423,600                        |       | US$1.221 –  1.6789 |       |
|                                           |       |                             |       |                    |       |
| Alex  Sham                                     |       | 163,800                          |       | US$1.221 –  1.6789 |       |
|                                           |       |                             |       |                    |       |
| Jerry  Wong                                    |       | 173,204                          |       | US$1.221 –  1.6789 |       |
|                                           |       |                             |       |                    |       |
| C.P.  Kwan                                     |       | 24,570                           |       | US$1.221                |       |

 

**CompanyOption Plans.**The Company’s 2000 Officers and Directors Plan and 2002 Officers and DirectorsPlan (collectively referred to as the “Officers Plans”) provide for the grantof options to acquire Ordinary Shares to the Company’s executive officers anddirectors and persons holding the same positions with the Company’ssubsidiaries. The 2000 Employees Plan and 2002 Employees Plan (collectivelyreferred to as the “Employees Plan”) provides for the grant of options to acquireOrdinary Shares to key employees of the Company and its subsidiaries. All fourplans are collectively referred to as the “Plans”.

 

692,580 and 1,637,160shares had been originally authorized for issuance under the Employees Plan andthe Officers Plans, respectively.

 

The Board of Directors ora committee (the “Committee”) appointed by the Board of Directors administersthe Plans. The Board of Directors or the Committee also has the authority todelegate decisions with respect to Options granted to key employees under theEmployees Plan who are not elected officers or directors of the Company or itssubsidiaries and to delegate decisions with respect to key employees to theChief Executive Officer.

 

Any decision by theCommittee or the Chief Executive Officer to grant an award under the Plans issubject to ratification by the Board of Directors of the Company. The Board isalso to ratify any decision that effects the terms or conditions of optionsawarded to elected officers or directors of the Company or its subsidiaries.

 

In the event that theOrdinary Shares of the Company are subdivided or consolidated as a result of areorganization, stock split, payment of a stock dividend, reverse stock splitor other change in the Company’s capitalization, the Committee or the Board ofDirectors has the authority to make appropriate adjustments in the OrdinaryShares available for issuance under the Plans, the number of shares subject tooptions that may have been or may be awarded to any participant in any 12 monthperiod, the price, number of Ordinary Shares or kind of securities subject tooutstanding options, or the terms of such options in order to prevent dilutionor enlargement of rights under the options. In addition, the Board may alsochange the kind of securities available for grant under the Plans to reflectany such corporate changes.

 

The Committee or theChief Executive Officer has the discretion to determine which employeesconstitute key employees to whom options will be awarded under the Employees Plan.

 

The Committee or ChiefExecutive Officer, as the case may be, determines the number of Ordinary Sharessubject 

 

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to options to be granted.

 

The purchase price pershare of the Ordinary Shares to be paid upon the exercise of the option must beat least 100% of the fair market value of an Ordinary Shares on the date onwhich the option was granted. Under the Plans, if the Ordinary Shares areprincipally traded on a national securities exchange or the Nasdaq GlobalMarket or Capital Market at the time of grant, the Company is required to use,at fair market value, the average of the closing prices of the Ordinary Sharesfor the ten consecutive trading days immediately before the date of grant. Ifthe Ordinary Shares are traded on a national securities exchange or the NasdaqStock Global Market or Capital Market, but no closing prices are reported forsuch ten-day period, or if the Ordinary Shares are principally traded in theover-the-counter market, the Company is required to use, as fair market value,the average of the mean between the bid and asked prices reported for theCompany’s Ordinary Shares at the close of trading during such ten-day periodbefore the date of grant. If the Ordinary Shares are traded neither on anational securities exchange, one of the Nasdaq’s Markets nor in theover-the-counter market or if bid and asked prices are otherwise not available,the fair market value of the Ordinary Shares on the date of grant will bedetermined in good faith by the Committee or the Board of Directors, as thecase may be.

 

The Board of Directors orthe Committee, as the case may be, or, to the extent that such authority hasbeen delegated to the Chief Executive Officer, the Chief Executive Officerdetermines, at the time of grant, when each option granted under the Plans willbecome exercisable. Notwithstanding the foregoing, all options held by a keyemployee of the Company or its subsidiaries become immediately exercisable,whether or not exercisable at the time, upon the death or disability.

 

No option is to beexercisable more than ten years from the date the option is granted.

 

Payment ofExercise Price for Options. Under the Plans, payment for shares purchased uponexercise of an option may be made by any of the following methods, subject tocertain requirements: (1) in cash, paid by either the optionholder or abroker to whom the optionee has tendered the option; (2) in OrdinaryShares valued at the fair market value of such shares on the date of exercise,provided that such shares were held by the optionholder for not less than sixmonths prior to the date of exercise of the option; (3) by any othermedium of payment that the Board, Committee or the Chief Executive Officer, asapplicable, has authorized at the time of grant (other than the withholding ofshares issuable upon the exercise of options); or (4) by any combinationof the preceding methods.

 

Transfer OfOptions. Underthe Plans, an option may not be sold, assigned or otherwise transferred exceptto:

** **
| · |   | the spouse or lineal  descendant of a plan participant;                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                      |
| · |   | the trustee of a trust  for the primary benefit of a plan participant’s spouse or lineal descendant; |
|   |   |                                                                                                      |
| · |   | a partnership of which  a plan participant and lineal descendants are the only partners; or               |
|   |   |                                                                                                      |
| · |   | a charitable  organization.                                                                               |

 

These assignments areonly permitted if the assigning optionee does not receive any compensation inconnection with the assignment and the assignment is expressly approved by theBoard or Committee, as the case may be.

 

The Company indemnifiesthe members of any Committee and its delegates and the Chief Executive Officeragainst (1) reasonable expenses incurred in connection with the defense ofany action, suit or proceeding to which they may be a party by reason of anyaction taken or failure to act in connection with the Plans, and (2) allamounts paid by them in settlement of or satisfaction of a judgment entered inany such action, suit or proceeding, except in cases where such a person isadjudged liable for gross negligence or gross misconduct in the performance ofhis or her duties.

 

The Board may terminate,suspend, or amend the Plans at any time without the authorization ofshareholders to the extent allowed by law or the rules of any market onwhich the Company’s shares are then listed or quoted.

 

During Fiscal 2000 and inJanuary 2002, the Company granted options to certain of its officers anddirectors pursuant to the 2000 Officers and Directors Plan and, in November 2002,options were granted to certain of its officers and

 

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directors pursuant to the2002 Officers and Directors Plan. The table below shows, as to each of theexecutive officers and directors of the Company and as to all executiveofficers and directors of the Company as a group, the aggregate amounts ofOrdinary Shares remaining (unexercised), subject to such options.

 
| **Names of Executive  Officers and Directors** | ** ** | **Shares Subject  To the (Remaining)******** Officers Plans Options** | ** ** | **Per Share******** Exercise  Price** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                                                                          | ** ** | **(US$)**                                       | ** ** |
| T.C. Leung                                               |       | 170,000                                                                                             | (1)        | 0.5857                                          |       |
|                                                     |       |                                                                                                |       |                                            |       |
| Xu Hong Wang                                             |       | 10,000                                                                                              | (1)        | 0.5857                                          |       |
|                                                     |       | 10,920                                                                                              | (2)        | 0.5787                                          |       |
|                                                     |       |                                                                                                |       |                                            |       |
|                                                     |       | 31,500                                                                                              | (2)        | 0.8191                                          |       |
|                                                     |       |                                                                                                |       |                                            |       |
| All executive  officers and Directors as a group         |       | 222,420                                                                                             |       | 0.5787-0.8191                                   | (3)        |

 

----

(1)     Granted pursuant to the 2002 Officersand Directors Plan.

 

(2)     Granted pursuant to the 2000 EmployeesPlan.

 

(3)     Price range.

 

The foregoing optionswill expire in August 2010.

 

Pursuant to its 2000Employees Plan, the Company had originally granted options to 32 of itsnon-officer/director employees to purchase an aggregate of 398,580 of itsOrdinary Shares exercisable at a price of US$0.5787 per share for a ten yearterm expiring in February 2011.

 

Pursuant to its 2002Employees Plan, the Company had originally granted options to 32 of itsnon-officer/director employees to purchase an aggregate of 294,000 of itsOrdinary Shares exercisable at a price of US$0.7618 per share for a ten yearterm expiring in April 2012.

 

As of December 31,2008, 1,531,920options had been exercised, including 300,300 options, 397,300 options and 205,800 optionsexercised by Mr. Leung at prices of US$0.5787, US$0.5857 and US$0.8191 per share,respectively.

 

2007 Officers’ andDirectors’ Stock Option and Incentive Plan

 

A total of 880,000ordinary shares have been reserved for issuance under the Company’s 2007Officers’ and Directors’ Stock Option and Incentive Plan (the “2007 D&OStock Options”).  The 2007 D&O Stock Options provide for the grant ofoptions to its directors and officers as the Company’s Chairman of the Board ofDirectors and Chief Executive Officer may direct.  The management, termsand conditions of the 2007 Officers’ and Directors’ Stock Option Plan aresubstantially similar to the Company’s 2000 Officers and Directors Plan.  All the 672,000options granted tothe executive officers and directors of the Company were surrendered andcancelled in 2008.

 

2000 Stock Options Plan 

 

A total of 1,195,740shares of ordinary share have been reserved for issuance under the Company’s2000 Stock Option Plan (the “2000 Stock Options”). The 2000 Stock Optionsprovide for the grant of options to its officers, directors and employees asthe Company’s Chairman of the Board of Directors and Chief Executive Officermay direct.

 

During the year endedDecember 31, 2006, 16,380 options with exercise price of US$0.5787 werecancelled. The Company further granted 40,000 options and 5,000 options underthe 2000 Stock Options with an exercise price of US$3.33 and US$2.02 per share,respectively, to its officers, directors and employees, which allow them topurchase up to 45,000 shares of ordinary share. The options vested within asix-month period and will expire in August 2010. During the same year, 40,950options and 214,200 options with exercise price of US$ 0.5787 and US$0.8191 pershare, respectively, were exercised.

 

During the year endedDecember 31, 2007, 16,380 options and 6,300 options with exercise price ofUS$0.5787 and US$0.6809, respectively, were cancelled. During the same year,46,410 options and 101,430 options with exercise price of US$ 0.5787 andUS$0.8191 per share, respectively, were exercised.

 

During the year endedDecember 31, 2008, 32,000 options with an exercise price of US$2.56 per sharewere granted to its employees.  Theseoptions were subsequently surrendered and cancelled during the vestingperiod.  During the same year, 24,570options with exercise price of US$ 0.5787 per share were exercised.

 

The Company has set forth in this Report all required disclosure ofadditional compensation to its executive officers and directors includingpersonal benefits and securities or properties paid or distributed which wasnot offered on the same terms to all full time employees during Fiscal 2008.

 

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Changes in outstanding options under various plansmentioned above were as follows:

 
| ** **                     | ** ** | **As of December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **Number  of  Options**               | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  of  Options** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  of  Options** | ** ** | **Weighted  average  exercise  price** | ** ** |
|                           |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding, beginning of year |       | 1,290,840                             |       | 1.74 |   | 3,938,296 |   | 1.32 |   | 5,978,806 |   | 1.31 |   |
| Granted                        |       | 205,000                               |       | 2.56 |   | 499,000 |   | 3.27 |   | 55,000 |   | 2.91 |   |
| Cancelled                      |       | (704,000                              | )          | (3.07 | ) | (451,210 | ) | (1.58 | ) | (46,620 | ) | (1.13 | ) |
| Exercised                      |       | (208,370                              | )          | (0.60 | ) | (2,695,246 | ) | (1.44 | ) | (2,048,890 | ) | (1.33 | ) |
|                           |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding, end of year       |       | 583,470                               |       | 0.84 |   | 1,290,840 |   | 1.74 |   | 3,938,296 |   | 1.32 |   |
|                           |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable, end of year       |       | 583,470                               |       | 0.84 |   | 791,840 |   | 0.78 |   | 3,923,296 |   | 1.32 |   |

 

As of December 31,2008, the options outstanding and exercisable had exercise prices in the rangeof US$0.5787 to US$3.33 and a weighted average unexpired life ofapproximately 2.7 years.

 
| **As of December 31, 2008**        | ** ** | **Shares** | ** ** | **Intrinsic Value** | ** ** |
|-----------------------------------------|------------|------------|------------|---------------------|------------|
|                                    |       |       |       | **US$’ 000**   |       |
|                                    |       |       |       |                |       |
| Total  outstanding in-the-money options |       | 538,470    |       | 119,000             |       |
|                                    |       |       |       |                |       |
| Total  vested in-the-money options      |       | 538,470    |       | 119,000             |       |

 

The Total intrinsic valueof share option exercised for the twelve months ended December 31, 2008and 2007 were approximately $374,000 and $3,492,000, respectively. At of December 31,2008, there was no unrecognized stock-based compensation expense related tounvested stock options.

 

The Group adopted theprovisions of Statement 123 (revised 2004) (Statement 123(R), Share-BasedPayment, which revises Statement 123, Accounting for Stock-Based Compensationusing the modified prospective application transitionmethod.  Statement 123(R) requires us to recognize expenserelated to the fair value of our stock-based compensation awards, includingemployee stock options.

 

The Black-Scholesoption-pricing model requires the input of subjective assumptions, includingthe expected volatility of stock price.  Because changes in subjectiveinput assumptions can materially effect the fair value estimate, in directors’opinion, the existing model may not necessarily provide a realizable measure ofthe fair value of the stock options.

 

***Item 6C.******                                                *****Board Practices**

 

The term of each of theCompany’s directors expires at the election and qualification of theirsuccessors at the next annual meeting of the Company’s shareholders,anticipated to be held in August of this year. Of the Company’s sevendirectors, all were re-elected at the Company’s last annual meeting ofshareholders in September 2008.

 

The Board has a standing Audit Committee to assist the Board incarrying out its duties. The Audit Committee has a written charter approved bythe Board. The chair of the Audit Committee determines the meeting agenda ofthe Audit Committee. The Audit Committee members receive materials in advanceof Committee meetings allowing them to prepare for the meeting.

 

During Fiscal 2008, theAudit Committee met 3 times, being attended by all members.

 

The Audit Committeeassists the Board in monitoring the Company’s financial accounting, controls,planning and reporting. Among its duties, the Audit Committee:

 
| · |   | reviews the Company’s  auditing, accounting and financial reporting process; |
|--------|--------|-----------------------------------------------------------------------------------|
|   |   |                                                                              |
| · |   | reviews the adequacy of  the Company’s internal controls;                    |

 

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| · |   | reviews the  independence, fee arrangements, audit scope, and performance of the Company’s  independent auditors, and recommends the appointment or replacement of  independent auditors to the Board of Directors;                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                          |
| · |   | reviews and approves  all non-audit work, if any, to be performed by the auditors;                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                          |
| · |   | reviews the scope of  our internal auditing and the adequacy of the organizational structure and  qualifications of the internal auditing staff;                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                          |
| · |   | reviews, before release,  the audited financial statements and operating and financial review and  prospects contained in the Company’s Annual Report on Form 20-F, and  recommends that the Board of Directors submit these items to the  shareholders’ meeting for approval; |
|   |   |                                                                                                                                                                                                                                                                                          |
| · |   | provides an open avenue  of communication among the Company’s independent auditors, financial and  senior management, the internal audit function and the Board of Directors;                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                          |
| · |   | reviews and updates the  Company’s Code of Business Conduct and Ethics and ensure that there is a  system to enforce same and that this Code complies with all applicable  rules and regulations;                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                          |
| · |   | ensures that the  Company’s management and auditors assess current financial reporting issues  and practices; and                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                          |
| · |   | reviews and  pre-approves both audit and non-audit services to be provided by the  Company’s auditors.                                                                                                                                                                                   |

 

The Audit Committee iscurrently composed of Y.K. Liang, Ka Chong Cheang and Li Da Weng.  TheAudit Committee’s “financial expert” is Y.K. Liang.  The Board has determinedthat the membership of the Audit Committee meets the current independencerequirements of the NASDAQ listing standards as same applies to private foreignissuers and the applicable rules and regulations of the SEC.

 

***Item 6D.******                                             *****Employees**

 

The Company(exclusive of Yixing-Pact) has approximately 149 full-time employees. At December 31,2008, 2007 and 2006, staffing levels were approximately as follows:

 
| ** **                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                       |       |     |       |     |       |     |       |
| Marketing and  sales       |       | 61       |       | 65       |       | 71       |       |
|                       |       |     |       |     |       |     |       |
| Administrative             |       | 49       |       | 49       |       | 55       |       |
| Technical                  |       | 39       |       | 32       |       | 32       |       |
|                       |       |     |       |     |       |     |       |
| Total  full time employees |       | 149      |       | 146      |       | 158      |       |

 

Pact and Yixing haveapproximately 76 full-time employees. At December 31, 2008, 2007and 2006, respectively, staffing levels were approximately as follows:Engineers; 54, 35 and 24,Administrative Persons; 22, 22 and 11.

 

The Company is not subject to any collective bargaining agreement andbelieves that its relations with its employees are good. The Company’sManagement consists of its officers and directors.

 

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***Item6E.         *****Share Ownership**

 

With respect to the share ownership of the directorsand senior management of the Company, reference is made to Item 7. “MajorShareholders and Related Party Transactions.”

 

**ITEM7.           MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

 

***Item7A.         *****Major Shareholders**

 

The following table setsforth, as of June 1, 2009, certain information concerning beneficialownership of the Company’s voting shares on that date, with respect to (i) eachperson known to the Company to own 5% or more of the outstanding OrdinaryShares, (ii) each director and executive officer of the Company, and (iii) allofficers and directors of the Company as a group:

 
| ** **                                                                               | ** ** | **Amount  and  Nature of  Beneficial  Ownership(3)** | ** ** | **Approximate  Percentage  Of Ordinary  Shares Owned** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                               | ** ** | ** **                                           | ** ** | ** **                                             | ** ** |
| T.C.  Leung (1)(2)(3)                                                                    |       | 6,118,998                                            |       | 51.9                                                   | %          |
|                                                                                     |       |                                                 |       |                                                   |       |
| Pearl  Venture Ltd.(1)(2)                                                                |       | 1,478,675                                            |       | 12.7                                                   | %          |
|                                                                                     |       |                                                 |       |                                                   |       |
| Alex  Sham(1)                                                                            |       | 342,300                                              |       | 2.9                                                    | %          |
|                                                                                     |       |                                                 |       |                                                   |       |
| Jerry  Wong(1)                                                                           |       | 191,766                                              |       | 1.7                                                    | %          |
|                                                                                     |       |                                                 |       |                                                   |       |
| Y.K.  Liang(1)                                                                           |       | *                                                    |       | *                                                      |       |
|                                                                                     |       |                                                 |       |                                                   |       |
| Xu  Hong Wang(1)(3)                                                                      |       | 84,420                                               |       | 0.7                                                    | %          |
|                                                                                     |       |                                                 |       |                                                   |       |
| Ka  Chong Cheang(1)                                                                      |       | *                                                    |       | *                                                      |       |
|                                                                                     |       |                                                 |       |                                                   |       |
| Li  Da Weng(1)                                                                           |       | *                                                    |       | *                                                      |       |
|                                                                                     |       |                                                 |       |                                                   |       |
| All  Executive Officers And Directors of the Company as a group (7  persons)(2) (3) |       | 6,737,484                                            |       | 56.9                                                   | %          |

 

----

| *      |   | Denotes Nil                                                                                                                                                                                                                                                                                                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                        |
| (1)    |   | The address for the  Company’s officers and directors is c/o Euro Tech (Far East) Ltd., 18/F Gee  Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The address for Pearl  is Columbus Centre Building, Wichhams Cay, Road Town, Tortola, British Virgin  Islands.                                 |
|   |   |                                                                                                                                                                                                                                                                                                        |
| (2)    |   | Includes shares of the  Company’s Common Stock owned of record by Pearl, which is a trust established  for the benefit of Mr. Leung. Also includes those Company Ordinary  Shares owned of record by Regent, of which Pearl is the majority shareholder.                                          |
|   |   |                                                                                                                                                                                                                                                                                                        |
| (3)    |   | Gives effect to the  exercise of the 2000 Officers and Directors Plan, 2000 Employees Plan and 2002 Officers and Directors Plan  Options owned of record by such persons and which have vested or will vest  within six (6) months of the date of this Report. See Item 6B.  “Compensation.” |

 

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***Item 7B.******         *****Related PartyTransactions**

 

See Item 6B.Compensation.

 

**I****TEM 8.****          ****FINANCIAL INFORMATION**

 

***Item 8A.******         *****Consolidated Statementsand Other Financial Information**

 

Item 8A.1               See Item 18.

 

Item 8A.2               See Item 18.

 

Item8A.3               See Report of Independent RegisteredPublic Accounting Firms, pages F-2 and F-3.

 

Item 8A.4               We have complied with this requirement.

 

Item 8A.5               Not applicable.

 

Item 8A.6               Not applicable.

 

Item 8A.7               Legal Proceedings.

 

The Company is not aparty to any material legal proceedings.

 

Item 8A.8               Dividend Policy.

 

The Company has not paidcash dividends to date. The payment of cash dividends, if any, in the future iswithin the discretion of the Board of Directors. The payment of cash dividends,if any, in the future will depend upon the Company’s earnings, capitalrequirements and financial conditions and other relevant factors. The Company’sBoard of Directors does not presently intend to declare any cash dividends inthe foreseeable future, but instead intends to retain all earnings, if any, foruse in the Company and Far East’s business operations.

 

***Item 8B.******         *****Significant Changes**

 

There has not been anysignificant change since the date of the annual financial statements includedin this Report.

 

**ITEM 9.*****         *****THE OFFERING ANDLISTING**

 

***Item 9A.******         *****Listing Details**

 

The Company has one classof securities presently registered: Ordinary Shares. These securities arepresently traded on the NASDAQ’s Capital Market under the trading symbols “CLWT”,and have so traded since the Company’s Public Offering in March 1997.

 

The following prices arenot adjusted to reflect a stock dividend of 50% issued in August 2004.

 

The high and low prices for the Ordinary Shares in theperiods indicated, as reported by NASDAQ, are set forth below:

 
| **Years Ended December 31,** | ** ** | **Low** | ** ** | **High** | ** ** |
|---------------------------------------------|------------|---------|------------|----------|------------|
| ** **                                  | ** ** | **US$** | ** ** | **US$**  | ** ** |
|                                        |       |    |       |     |       |
| 2004                                        |       | 0.933   |       | 7.327    |       |
| 2005                                        |       | 2.700   |       | 6.590    |       |
| 2006                                        |       | 1.680   |       | 5.740    |       |
| 2007                                        |       | 1.81    |       | 5.14     |       |
| 2008                                        |       | 0.66    |       | 3.15     |       |

 

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| **Quarters Ended**       | ** ** | **Low** | ** ** | **High** | ** ** |
|--------------------------|------------|---------|------------|----------|------------|
| ** **               | ** ** | **US$** | ** ** | **US$**  | ** ** |
|                     |       |    |       |     |       |
| March 31,  2007     |       | 2.450   |       | 4.520    |       |
| June 30,  2007      |       | 2.18    |       | 3.70     |       |
| September 30,  2007 |       | 1.81    |       | 3.97     |       |
| December 31,  2007  |       | 2.21    |       | 5.14     |       |
| March 31,  2008     |       | 1.93    |       | 3.04     |       |
| June 30,  2008      |       | 1.70    |       | 3.15     |       |
| September 30,  2008 |       | 1.13    |       | 2.30     |       |
| December 31,  2008  |       | 0.66    |       | 1.46     |       |
| March 31,  2009     |       | 0.4     |       | 1.09     |       |

 
| **The Following Months** | ** ** | **Low** | ** ** | **High** | ** ** |
|--------------------------|------------|---------|------------|----------|------------|
| ** **               | ** ** | **US$** | ** ** | **US$**  | ** ** |
| January 2009        |       | 0.75    |       | 1.09     |       |
| February 2009       |       | 0.41    |       | 0.83     |       |
| March 2009          |       | 0.40    |       | 0.74     |       |
| April 2009          |       | 0.64    |       | 1.10     |       |
| May 2009            |       | 0.83    |       | 1.13     |       |

 

The Ordinary Shares were held by approximately 44 holders of record asof June 1, 2009. Based upon information received from broker-dealers,clearing firms and others, the Company believes that it has in excess of 1,900beneficial holders of its Ordinary Shares.

 

**Item 9C.Markets**

 

See Item 9A. “Listing Details.”

 

**ITEM 10.****                                             ****ADDITIONAL INFORMATION**

 

***Item10A.******                                         ******Share Capital***

 

**AuthorizedCapital**. Theauthorized capital of the Company is US$250,000 comprised of 20,000,000Ordinary Shares and 5,000,000 shares of Preferred Stock. As of December 31,2008, there were 11,820,339 Ordinary Shares and no shares of Preferred Stock,issued and outstanding.  As of December 31,2008approximately 381,692 Ordinary Shares were held by the Company as treasurystock and are non-voting. All of the Company’s shares of capital stock have apar value of US$0.01 per share.

 

Holders of the Company’sOrdinary Shares are entitled to one vote for each whole share on all matters tobe voted upon by shareholders, including the election of directors. Holders ofOrdinary Shares do not have cumulative voting rights in the election ofdirectors. All shares of Ordinary Shares are equal to each other with respectto liquidation and dividend rights. Holders of Ordinary Shares are entitled toreceive dividends if and when declared by the Company’s Board of Directors outof funds legally available under British Virgin Islands law. In the event ofthe liquidation of the Company, all assets available for distribution to theholders of Ordinary Shares are distributable among them according to theirrespective share holdings. All of the outstanding shares of Ordinary Shares ofthe Company are duly authorized, validly issued, fully paid and non-assessable.

 

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Pursuant to the Company’sMemorandum and Articles of Association and pursuant to the laws of the BritishVirgin Islands, the Company’s Memorandum and Articles of Association may beamended by a resolution of the Board of Directors without shareholder approval.This includes amendments to increase or reduce the authorized capital stock ofthe Company or to increase or reduce the par value of its shares. The abilityof the Company to amend its Memorandum and Articles of Association without shareholderapproval could have the effect of delaying, deterring or preventing a change incontrol of the Company without any further action by the shareholders includingbut not limited to, a tender offer to purchase the Common Stock at a premiumover then current market prices.

 

Under United States law,majority and controlling shareholders generally have certain “fiduciary”responsibilities to the minority shareholders. Shareholder action must be takenin good faith and actions by controlling shareholders which are obviouslyunreasonable may be declared null and void. The British Virgin Islands lawprotecting the interests of the minority shareholders is not as protective inall circumstances as the law protecting minority shareholders in United Statesjurisdictions. While British Virgin Islands law does not permit a shareholderof a British Virgin Islands company to sue its directors derivatively, i.e.., in the name of and for the benefit of the Company, and to sue the Companyand its directors for his benefit and the benefit of others similarly situated,the circumstances in which any such action may be brought that may be availablein respect of any such action may result in the rights of shareholders of aBritish Virgin Island company being more limited than those rights ofshareholders in a United States company.

 

The Board of Directors ofthe Company, without further shareholder action, may issue shares of PreferredStock in any number of series and may establish as to each such series thedesignation and number of shares to be issued and the relative rights andpreferences of the shares of each series, including provisions regarding votingpowers, redemption, dividend rights, rights upon liquidation and conversionrights. The issuance of shares of Preferred Stock by the Board of Directorscould adversely effect the rights of holders of Ordinary Shares by, among othermatters, establishing preferential dividends, liquidation rights and votingpower. The Company has not issued any shares of Preferred Stock and has nopresent intention to issue shares of Preferred Stock. The issuance thereofcould discourage or defeat efforts to acquire control of the Company throughacquisition of Ordinary Shares.

 
| ***Item 10B.*** | *** *** | ***Memorandum and Articles of Association*** |
|-----------------|--------------|----------------------------------------------|

 

Set forth below is asummary of the material provisions of our Memorandum and Articles ofAssociation (the “Articles) and the British Virgin Islands’ (“BVI”)International Business Companies Act of 1984 relating to the shares. Thisdescription does not purport to be complete and is qualified in its entirety byreference to BVI statutory law and to the Articles.

 

**ShareRegister and Voting Restrictions.**  The Company maintains a share register at itsregistered office in the BVI. The Company’s registered number is 200960. Theobjects of the Company are to engage in any act or activity that is notprohibited under any law of the BVI. Under the Articles, the Company is notrequired to treat the holder of a registered share in the Company as ashareholder until that person’s name has been entered in the share register.The holders of Ordinary Shares have one vote for each Ordinary Share held ofrecord. The holders of Preferred Shares have such voting powers, full orlimited, or no voting powers and such restrictions as may be stated andexpressed in the resolution providing for the issuance of the Preferred Shares.

 

**Shareholders Meeting.** The directors of the Company may convenemeetings of the shareholders of the Company at such times and in such mannerand places within or outside the BVI as the directors consider necessary ordesirable. Upon the written request of the shareholders holding ten (10%)percent or more of the outstanding voting shares in the Company the directorsmust convene a meeting of shareholders.

 

A shareholder mayparticipate at a meeting of shareholders by telephone or other electronicmeans, as long as all shareholders participating in the meeting are able tohear each other.

 

A meeting of shareholdersis duly constituted if, at the commencement of the meeting, there are presentin person or by proxy not less than fifty (50%) percent of the votes of theshares or class series of shares entitled to vote on resolutions ofshareholders to be considered at the meeting.

 

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If a quorum is not present, the meeting, if convened upon therequisition of shareholders, shall be dissolved; in any other case it shallstand adjourned to the next business day at the same time and place or to suchother time and place as the directors may determine, and if at the adjournedmeeting there are present in person or by proxy not less than one third of thevotes of the shares or each class or series of shares entitled to vote on theresolutions to be considered by the meeting, those present shall constitute aquorum but otherwise the meeting shall be dissolved.

 

Any action that may betaken by the shareholders at a meeting may also be taken by a resolution ofshareholders consented to in writing or by written electronic communication,without the need for any notice, but if not a unanimous writing, a copy of suchresolution shall be sent to all non-consenting shareholders.

 

**NetProfits and Dividends.** Under BVI law, dividends may only be declared and paid out of surplus,such that after payment of dividends the Company must be able to satisfy itsliabilities as they become due in the ordinary course of business and therealizable value of the assets of such company must not be less than the sum ofits liabilities (other than deferred taxes and capital). There are no other BVIrestrictions regarding dividends.

 

**Pre-emptiveRights.** Theholders of Ordinary Shares and Preferred Shares are not entitled to any pre-emptiveor similar rights.

 

**Conflictof Interests.** Noagreement or transaction between the Company and one or more of its directorsor any person in which any director has a financial interest or to whom anydirector is related, including as a director of that other person, is void andavoidable for this reason only, or by reason only that the director is presentat the meeting of directors, or at the meeting of the committee of directorsthat approves the agreement or transaction, or that the vote or consent of thedirector is counted for that purpose, if the material facts of the interest ofeach director in the agreement or transaction and his interest in orrelationship to any other party to the agreement or transaction are disclosedin good faith, or are known by the other directors. A director who has aninterest in any particular business to be considered at a meeting of directorsor shareholders may be counted for purposes of determining whether the meetingis duly constituted.

 

**Repurchaseof Shares.** TheCompany may purchase, redeem or otherwise acquire and hold its own shares, butonly out of surplus or in exchange for newly issued shares of equal value.Subject to provisions to the contrary in:

 

(a)                                       the designations, powers, preferences,rights, qualifications, limitations and restrictions with which the shares wereissued; or

 

(b)                                      the subscription agreement for the issueof the shares,

 

the Company may notpurchase, redeem or otherwise acquire its own shares without the consent ofshareholders whose shares are to be purchased, redeemed or otherwise acquired.

 

Generally, no purchase,redemption or other acquisition of shares shall be made unless the directorsdetermine that immediately after purchase, redemption or other acquisition theCompany will be able to satisfy its liabilities as they become due in theordinary course of its business and the realizable value of the assets of theCompany will not be less than the sum of its total liabilities, other thandeferred taxes, as shown in the books of account, and its capital and, in theabsence of fraud, the decision of the directors as to the realizable value ofthe assets of the Company is conclusive, unless a question of law is involved.

 

**Duration,Liquidation, Merger.** The Company shall continue until wound-up and dissolved by a resolution ofshareholders, or under the terms of any insolvency or liquidation laws in forcein the BVI. Under BVI law the Company may merge with another company, includinga parent company or subsidiary, incorporated in the BVI, or in a jurisdictionoutside of the BVI where the laws of that jurisdiction permit the merger. Amerger must be authorized by the directors of the Company and approved by theshareholders.

 

**Boardof Directors.** Thebusiness and affairs of the Company are managed by the directors who mayexercise all such powers of the Company as are not by BVI law or by the Company’sArticles reserved to the shareholders of the Company.

 

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***Item 10C.      Material Contracts***

 

On April 29, 2007, Far East entered into a subscription agreementwith Blue Sky and Blue Sky’s management shareholders to purchase twenty (20%)percent of the equity capital of Blue Sky (the “Blue Sky Agreement”) for atotal of US$4,700,000 of which US$4,000,000 was paid in August 2007 with afinal payment of US$692,000 to be paid by the end of June 2008 based uponBlue Sky’s net profits for its fiscal year ended December 31, 2007. TheBlue Sky Agreement contains certain provisions requiring Far East’s writtenconsent prior to Blue Sky; taking on new shareholders, pledging or sellingassets, declaring a dividend, amending its constitution, guaranteeing the obligationsof third parties, dismissing management or changing their rates ofcompensation, appointing directors and similar provisions. Far East also hasthe right to appoint a non-executive director to Blue Sky, who will notparticipate in the day to day management of Blue Sky.  In the event BlueSky sells additional shares, Far East has the right to maintain its 20%interest by paying the same price as any proposed purchaser.  Pursuant tothe Blue Sky Agreement, in March 2008, Blue Sky declared a dividend to bepaid in December 2008, to its shareholders.  The Company estimatesBlue Sky’s dividends to Far East will approximate US$80,000. As part of theBlue Sky Agreement, Far East agreed that if it was able and circumstancespermit, it would undertake the obligation of guaranteeing loans of not morethan US$2,900,000 for Blue Sky.

 

On July 18, 2007,Far East entered into a subscription agreement with Jia Huan and Jia Huan’smanagement shareholders to purchase twenty (20%) percent of the equity capitalof Jia Huan for US$2,500,000 (the “Jia Huan Agreement”).  The Jia HuanAgreement contains certain provisions requiring Far East’s written consentprior to Jia Huan; taking on new shareholders, pledging or selling assets,declaring a dividend, amending its constitution, guaranteeing the obligationsof third parties, dismissing management or changing their rates ofcompensation, appointing directors and similar provisions. Far East also hasthe right to appoint a non-executive director who will not participate in the dayto day management of Jia Huan.  In the event Jia Huan sells additionalshares, Far East has the right to maintain its 20% interest by paying the sameprice as any proposed purchaser.  The Jia Huan transaction was completedon January 20, 2008.

 

As part of itsacquisitions of Yixing and Pact, the Company granted the minority shareholdersof both entities the right to require the Company to purchase the remainingsecurities of Yixing and Pact pursuant to a formula that would obligate theCompany to pay the minority shareholders approximately $1,962,000.  There has been no indicationto the Company from the minority shareholders that they desire to sell theirshares.  See Item 4A. “History and Development of the Company” and Item4B. “Business Overview”.

 

***Item 10D.******     ******ExchangeControls***

 

There are no exchangecontrol restrictions on payment of dividends on the Company’s Ordinary Sharesor on the conduct of the Company’s operations either in Hong Kong, where theCompany’s principal executive offices are located, or the British VirginIslands, where the Company is incorporated. There are no British Virgin Islandslaws which impose foreign exchange controls on the Company or that effect thepayment of dividends, interest, or other payments to non-resident holders ofthe Company’s securities. British Virgin Islands laws and the Company’sMemorandum and Articles of Association impose no limitations on the right ofnon-resident or foreign owners to hold the Company’s securities or vote theCompany’s Ordinary Shares. The PRC government has established a unifiedexchange rate system and system of exchange controls to which the Company issubject.

 

***Item 10E.******     ******Taxation***

 

The Company is exempted from taxation in the British Virgin Islands.

 

The Company’ssubsidiaries organized in Hong Kong, Far East, Euro Tech (China) Limited andChinaH2O.com Limited, provide for Hong Kong profits tax at a rate of 16.5% on the basis of their income forfinancial reporting purposes, adjusting for income and expense items which arenot assessable or deductible for profits tax purposes. 

 

Euro Tech Trading(Shanghai) Limited, a subsidiary of the Company, provides for PRC EnterpriseIncome Tax at a rate of 18%, (a rate currently levied by the Pudong local TaxBureau despite the National Tax Bureau Rate of 25%) after offsetting lossesbrought forward, if any, on the basis of its income for financing reportingpurposes, adjusting for income and pense items which are not assessable ordeductible for PRC Enterprise Income Tax purposes.

 

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In accordance with the relevant income tax laws and regulationsapplicable to foreign investment enterprises in the PRC, Shanghai Euro TechLimited (“SET”), a subsidiary of the Company, is exempt from PRC EnterpriseIncome Tax of 15% for two years starting from 2008, after offsetting losses broughtforward, if any, followed by a 50% reduction for the next three yearsthereafter. As of December 31, 2008, SET had an assessable loss broughtforward of US$242,253 as agreed by the local tax authority to offset itsprofits for the coming years. This loss will expire in five years.

 

According to the relevantPRC tax rules and regulations, Shanghai Euro Tech EnvironmentalEngineering Limited is exempt from the PRC Enterprise Income Tax of 18% for thetwo year period ending this year, followed by a 50% reduction for the nextthree years thereafter. Chongqing Euro Tech Rizhi Technology Co., Ltd, Rizhi Euro Tech Instrument (Shaanxi)Co., Ltd and Guangzhou Euro Tech Environmental Equipment Co., Ltdprovide for PRC Enterprise Income Tax at a rate of 25%, after offsetting losses broughtforward, if any, on the basis of its income for financial reporting purposes,adjusting for income and expense items which are not assessable or deductiblefor PRC Enterprise Income Tax purposes.

 

According to the relevantPRC tax rules and regulations, Yixing Pact Environmental Technology Co.,Ltd is registered in Shanghai as Foreign Owned Enterprise that is entitled to atax rate of 25%.  Pact Asia Pacific Limited is situated in the British VirginIslands where there are no taxes imposed on it.  However, part of itsprofits is subject to Hong Kong profits tax at a rate of 16.5% in Fiscal 2008 as to those profitsearned in Hong Kong.

 

VIES of the Group providefor PRC Enterprise Income Tax at a rate of 25%, after offsetting losses broughtforward, if any, on the basis of its income for financial reporting purposes,adjusting for income and expense items which are not assessable or deductiblefor PRC Enterprise Income Tax purposes.

 

As of December 31,2008, certain VIEs had aggregated assessable losses carried forward of US$99,830 as agreed by the local tax authority.

 

The Company’s effectivetax for Fiscal 2008, was a weighted average statutory tax rate of 57.3%. Principal adjustments to thisstatutory tax rate was a valuation allowance of****17.8% for Fiscal 2008. 

 

Accumulated tax losses ofShanghai Euro Tech Limited, another subsidiary incorporated in the PRC,available to offset against future profit were US$242,253, US$225,300 and US$305,975,respectively, during Fiscal2008, Fiscal 2007 and Fiscal 2006.

 

On March 16, 2007,the PRC National People’s Congress passed the China Corporate Income Tax Law (“IncomeTax Law”), which became effective January 1, 2008 and applies a unifiedincome tax rate for foreign invested enterprises and domestic enterprise. TheIncome Tax Law is effective immediately for companies previously subject tohigher taxation rates and provides a five-year transition period from itseffective date for those enterprises which were established before theeffective date of the new tax law and previously entitled to a preferential taxtreatment.

 

On December 26, 2007, the State Council and on February 20,2008 the Ministry of Finance issued implementation guidelines (“Guidelines”)setting out how the transition of tax rates will occur. The Guidelines statethat those enterprises which enjoyed a preferential tax rate of 15% areeligible for a graduated rate increase to 25% over the 5-year period beginningfrom January 1, 2008. The applicable rates under such an agreements forsuch enterprises are 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011,2012 and thereafter, respectively. In addition, foreign investmentmanufacturing enterprises which have not fully utilized any preferential taxtreatments, such as tax holidays or reduced rates of taxation, will be able tocontinue to receive them during the transitional period. The Group has appliedthe new rate in relation to deferred tax balances.

 

Effective January 1, 2007, the Company adopted FIN No. 48, “Accountingfor Uncertainty in Income Taxes.”  In accordance with FIN No. 48, theCompany recognizes tax benefits that satisfy a greater than 50% probabilitythreshold and provides for the estimated impact of interest and penalties forsuch tax benefits.

 

***Item 10H.******     ******Documentson Display***

 

The documents that areexhibits to or incorporated by reference in this annual report can be read atthe U.S. Securities and Exchange Commission’s public reference facilities at100 F Street, N.E., Washington, DC 20549-2001 or on 

 

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the Commission’s website:www.sec.gov.

 

***Item 10I.       Subsidiary Information***

 

The Company will submitthe separate financial statements of Blue Sky, as required under Regulation S-X210.3-09, once they are ready.

 

**ITEM 11.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company’s primaryrisk exposures arise from changes in interest rates and foreign currencyexchanges rates. *Foreign Currency Risks*

 

The Company is exposed to risk from changing foreigncurrency exchange rates. The Company’s sales are denominated either in HKdollar or RMB. The majority of the Company’s expenses and cost of revenue aredenominated in HK dollars, followed by RMB, US dollars, Japanese yen and theEuro. The Company is subject to a variety of risks associated with changesamong the relative value of the US dollar, HK dollar, RMB, Japanese yen and theEuro. The Company does not currently adequately hedge its foreign exchangepositions. Any material increase in the value of the HK dollar, RMB, Japaneseyen and the Euro relative to the US dollar would increase the Company’sexpenses and cost of revenue and therefore would have a material adverse effecton the Company’s business, financial condition and results of operations.

 

*Inflation*

 

The Company cannotaccurately determine the precise effect of inflation on its operations, it doesnot believe inflation has had a material effect on sales or results ofoperations during the past several years.

 

The Company is currentlynot exposed to material future earnings or cash flow exposures from changes ininterest rates on debt obligations as the Company had no bank indebtedness inFiscal 2008. The Company does not currently anticipate entering into interestrate swaps and/or similar instruments.

 

**PART II**

 

**ITEM15.        CONTROLSAND PROCEDURES**

 

(a)          Evaluation of Disclosure Controls and Procedures

 

Our Chief ExecutiveOfficer and Chief Financial Officer has evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d -15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) asof the end of the period covered by this Annual Report on Form 20-F. Based on such evaluation, they have concluded that as of such date, ourdisclosure controls and procedures are effective and designed to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in applicable Securities and Exchange Commission (“SEC”)rules and forms and they effectively ensure that information required tobe disclosed in our reports filed or submitted under the Exchange Act isaccumulated and communicated to our management, including, our Chief ExecutiveOfficer and Principal Financial Officer, allowing for timely decisionsregarding required disclosures.

 
|   | (b) | Management’s Annual  Report on Internal Control over Financial Reporting |
|--------|-----|-------------------------------------------------------------------------------|

 

Our management, under thesupervision of our Chief Executive Officer and Chief Financial Officer, isresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) ofthe Exchange Act.  Our internal control system was designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation and fair presentation of our consolidated financial statements forexternal purposes in accordance with generally accepted accounting principles. Our Chief Executive Officer and Chief Financial Officer assessed theeffectiveness of our internal control over financial reporting as of December 31,2008.  In making this assessment, they used the criteria established inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”).  Based on thisassessment, our Chief Executive Officer and Chief Financial Officer haveconcluded that, as of December 31, 2008, our internal control overfinancial reporting is effective based on those criteria.  Notwithstandingthe foregoing, all internal control systems, no matter how well designed, haveinherent limitations.  Therefore, even those systems determined to beeffective may not 

 

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prevent or detectmisstatements and can provide only reasonable assurance with respect tofinancial statement preparation and presentation.  Also, projections ofany evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

This annual report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting.  Management’sreport was not subject to attestation by the Company’s registered publicaccounting firm pursuant to temporary rules of the SEC that permit theCompany to provide only management’s report in this annual report.

 
|   | (c)  | Changes in Internal  Controls |
|--------|-----------|-------------------------------|

 

There were no changes inour internal controls that occurred during the period covered by our annualreport that has materially affected, or is reasonably likely to materiallyaffect our internal control over financial reporting.

 

***Item 16A.******    ******AuditCommittee Financial Expert***

 

The Committee includesone non-employee director who meets the independence and “financial expert”requirements and two other members who meet the independence requirements ofthe NASDAQ listing standards and the rules and regulations of U.S.Securities and Exchange Commission.  The Committee includes Messrs. Y.K.Liang, Ka Chong Cheang and Li Da Weng.  Mr. Y.K. Liang is the “financialexpert” on that committee.

 

***Item 16B.******     ******CodeOf Ethics***

 

Our Board of Directorshas adopted a code of business conduct and ethics that applies to ourdirectors, officers and employees, including certain provisions thatspecifically apply to our chief executive officer, chief financial officer andany other persons who perform similar functions for us.  The Companyagrees to undertake to provide to any person without charge, a copy of our codeof business conduct and ethics within ten working days after we receive suchperson’s written request.

 

***Item 16C.******     ******PrincipalAccountant Fees And Services***

 

The following table setsforth the aggregate fees by categories specified below in connection withcertain professional services rendered by BDO Limited who were our principalexternal auditors, for 2008 and 2007, respectively.

 
| ** **             | ** ** | **For the Year Ended December, 31** | ** ** |
|------------------------|------------|--------------------------------------------------------------|------------|
| ** **             | ** ** | **2008**                                                     | ** ** | **2007** | ** ** |
| ** **             | ** ** | **US$**                                                      | ** ** | **US$** | ** ** |
|                   |       |                                                         |       |   |   |
| Audit  fees(1)         |       | 154,000                                                      |       | 189,000 |   |
| Audit-related  fees(2) |       | Nil                                                          |       | 25,000 |   |
| Tax  fees(3)           |       | 3,800                                                        |       | 8,100 |   |
| All  other fees        |       | Nil                                                          |       | Nil |   |

 

Our Audit Committee hasadopted a pre-approval policy for the engagement of our independent accountantto perform permitted audit and non-audit services. Under this policy, which isdesigned to assure that such engagements do not impair the independence of ourauditors, the Audit Committee pre-approves annually a range of specific auditand non-audit services in the categories of Audit Service, Audit-RelatedServices, Tax Services and other services that may be performed by ourindependent accountants, and the maximum pre-approved fees that may be paid ascompensation for each pre-approved service in those categories. Any proposedservices exceeding the maximum pre-approved fees require specific approval bythe Audit Committee.

 

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(1)            “Audit fees” means the aggregate feesbilled in each of the fiscal years listed for professional services rendered byour principal auditors for the audit of our annual financial statements.

 

(2)            “Audit-related fees” means the aggregate fees billed ineach of the fiscal years listed for assurance and related services by ourprincipal auditors that are reasonably related to the performance of the auditor review of our financial statements and are not reported under “Audit fees.”Services comprising the fees disclosed under the category of “Audit-relatedfees” involve principally the performance of certain agreed upon procedures forthe years ended December 31, 2006, 2007 and 2008, respectively.

 

(3)            “Tax fees” means the aggregated fees billed in each ofthe years listed for professional services rendered by our principal auditorsfor tax compliance, tax advice and tax planning.

 

***Item 16D.******     ******ExemptionsFrom Listing Standards***

 

The Company is a “ControlledCompany” as defined in NASDAQ’s corporate governance rules as a majorityof our shares are owned by a “control group” consisting of T.C. Leung, PearlVenture Ltd. and Regent Earnings Limited, who have disclosed their “controlgroup” status in their filings with the Commission.  So long as that “controlledcompany” status remains in effect, the Company will be exempt from certain ofNASDAQ corporate governance rules that, including among other things,would require: (a) a majority of our directors be independent; (b) thecompensation of our chief executive officer be determined or recommended byindependent directors; and (c) director nominations be determined orrecommended by independent directors.

 

The Company believes itis in compliance with NASDAQ’s corporate governance rules as in effect andintends to comply with the changes to said rules no later than the datethat they become effective.

 

***Item 16E.******     ******Purchasesof Equity Securities By Issuer and Affiliated Purchasers.***

 

During the followingmonths in 2008, T.C. Leung , our Chief Executive Officer and principalshareholder, either directly or through an entity beneficially owned by him(Regent), purchased shares in the open market from time to time.

 

As of December 31,2008,the Company shares have been purchased by him at prices ranging from $US0.88 to$US1.00 with an average price per share of $US0.94 as more particularly setforth below:

 

| **Period**                                       | ** ** | **(a)  Total Number of  Shares Purchased** | ** ** | **(b)  Average Price   Per Share** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------|------------|
|                                             |       |                                                 |       |                                         |       |
| November 1,  2008 to November 30, 2008 |       | 1,300                                                |       | US$                                          | 0.95       |   |
| December 1,  2008 to December 31, 2008 |       | 1,100                                                |       | US$                                          | 0.91       |   |

 

In November 2008,the Company adopted a program to repurchase up to 300,000 of its issued andoutstanding Ordinary Shares by December 31, 2009. This gives Euro Tech theability to purchase the shares in the open market or through negotiated orblock transactions from time to time based on market and business conditions overthe next 6 months. Under this program, the Company has the ability to purchaseits Ordinary Shares in the open market or through negotiated or blocktransactions from time to time based on market and business conditions untilthe end of 2009.  As of December 31,2008, 41,041 of theCompany’s Ordinary Shares have been purchased by the Company under this programat prices ranging from US$0.93 to US$1.1 with an average price per share of US$1.07 as more particularly described below:

 
| **Period**                                       | ** ** | **(a) Total  Number of   Shares   Purchased** | ** ** | **(b) Average Price  Paid per Share** | ** ** | **(c) Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or   Programs** | ** ** | **(d) Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans or  Programs** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| November 1,  2008 to November 30, 2008 |       | 12,691                                             |       | US$                                        | 1.06       |                                                                                                    | 12,691     |                                                                                            | 287,309    |   |
| December 1,  2008 to December 31, 2008 |       | 28,350                                             |       | US$                                        | 1.08       |                                                                                                    | 28,350     |                                                                                            | 258,959    |   |

 

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**PART III**

 

**ITEM 18.****      ****FINANCIAL STATEMENTS**

 

The following financialstatements are filed as part of this annual report on Form 20-F.

 
| Index to consolidated  financial statements                     |
|-----------------------------------------------------------------|
|                                                            |
| Reports of Independent Registered Public Accounting  Firms      |
|                                                            |
| Consolidated balance sheets                                     |
|                                                            |
| Consolidated statements of income                               |
|                                                            |
| Consolidated statements of cash flow                            |
|                                                            |
| Consolidated statement of changes in shareholders’  equity |
|                                                            |
| Notes to the consolidated financial statements                  |

 

**ITEM 19.****      ****EXHIBITS**

 

Lists of Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                                          |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                     |
| 1.1                  |       | Amended and Restated  Memorandum and Articles of Association (1)                                                         |
|                 |       |                                                                                                                     |
| 1.2                  |       | Amendments to  Exhibit 3.1 adopted by shareholders on August 15, 2000 (3)                                      |
|                 |       |                                                                                                                     |
| 4.5                  |       | 2000 Officers and  Directors Stock Option and Incentive Plan (3)                                                         |
|                 |       |                                                                                                                     |
| 4.6                  |       | 2000 Employees’ Stock  Option and Incentive Plan (3)                                                                |
|                 |       |                                                                                                                     |
| 4.7                  |       | Equity Interest  Transfer Agreement between Tamworth Industrial Ltd. (“Tamworth”) and  Registrant (4)          |
|                 |       |                                                                                                                     |
| 4.8                  |       | Equity Interest  Transfer and Shareholders’ Agreement among Tamworth, Registrant and Pact Asia  Pacific Limited (4) |
|                 |       |                                                                                                                     |
| 4.10                 |       | 2002 Officers and  Directors Stock Option Plan (6)                                                                       |
|                 |       |                                                                                                                     |
| 4.11                 |       | Registrant’s Audit  Committee Charter (7)                                                                           |
|                 |       |                                                                                                                     |
| 4.12                 |       | 2007 Officers and  Directors Option Plan (8)                                                                             |
|                 |       |                                                                                                                     |
| 8.1                  |       | List of Subsidiaries  (9)                                                                                                |
|                 |       |                                                                                                                     |
| 10.1                 |       | Share Sale and Purchase  Agreement between Tamworth Industrial Ltd. And Registrant’s subsidiary (5)                 |
|                 |       |                                                                                                                     |
| 10.2                 |       | Equity Interest  Transfer Agreement between Tamworth Industrial Ltd. And the Registrant’s  subsidiary (5)           |

 

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|   |   |                                                                                                                                                                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3   |   | Share Transfer and  Subscription Agreement among Registrant’s subsidiary, Zhejiang Jia Huan  Limited (“Jia Huan”) and the Management Shareholders of Jia Huan (9) |
|   |   |                                                                                                                                                                             |
| 10.4   |   | Share Subscription  Agreement among Registrant’s subsidiary, Zhejang Tianlan Limited (“Blue Sky”)  and the Management Shareholders of Blue Sky (9)                |
|   |   |                                                                                                                                                                             |
| 12.1   |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 *                                                                      |
|   |   |                                                                                                                                                                             |
| 12.2   |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 *                                                                      |
|   |   |                                                                                                                                                                             |
| 13.1   |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *               |
|   |   |                                                                                                                                                                             |
| 13.2   |   | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *              |

 

----

| *      |   | Filed Herewith                                                                                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                             |
| (1)    |   | Incorporated by  reference, previously filed as an Exhibit to Registration Statement, SEC  File No. 333-16277 and is incorporated by reference herein. |
|   |   |                                                                                                                                                             |
| (2)    |   | Incorporated by  reference, previously filed as an Exhibit to Registrant’s Report on  Form 20-F for its year ended December 31, 1999.        |
|   |   |                                                                                                                                                             |
| (3)    |   | Incorporated by  reference, previously filed as an Exhibit to Registrant’s Report on  Form 20-F for its year ended December 31, 2000.        |
|   |   |                                                                                                                                                             |
| (4)    |   | Incorporated by  reference, previously filed as an Exhibit to Registrant’s Report on  Form 6-K filed on February 11, 2002.                   |
|   |   |                                                                                                                                                             |
| (5)    |   | Incorporated by  reference, previously filed as an Exhibit to Registrant’s Report on  Form 6-K, filed on December 8, 2005.                   |
|   |   |                                                                                                                                                             |
| (6)    |   | Incorporated by  reference, previously filed as an Exhibit to Registrant’s Report on  Form 6-K filed on July 24, 2002.                       |
|   |   |                                                                                                                                                             |
| (7)    |   | Incorporated by  reference, previously filed as an Exhibit to Registrant’s Report on  Form 6-K filed on August 19, 2002.                     |
|   |   |                                                                                                                                                             |
| (8)    |   | Incorporated by  reference, previously filed as an Exhibit to Registrant’s Report on  Form 6-K, filed on August 14, 2007.                    |
|   |   |                                                                                                                                                             |
| (9)    |   | Incorporated by  reference,, previously filed as an Exhibit to Registrant’s Report on Form 20-F,  filed on June 28,2008.,                    |

 

48

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**SIGNATURES**

 

Pursuant to therequirements of Section 12 of the Securities Exchange Act of 1934, theregistrant certifies that it meets all of the requirements for filing on Form 20-Fand has duly caused this annual report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|                       | **EURO  TECH HOLDINGS COMPANY LIMITED**            |
|----------------------------|----------------------------------------------------|
|                       | (Registrant)                                       |
|                       |                                               |
|                       |                                               |
|                       | /s/ T.C. Leung                                     |
|                       | T.C. Leung,                                        |
|                       | Chief Executive Officer  and Chairman of the Board |
|                       |                                               |
|                       |                                               |
| Dated: June 29,  2009 |                                               |

 

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| **EURO TECH HOLDINGS COMPANY LIMITED**                                      |
|-----------------------------------------------------------------------------|
|                                                                        |
| **AUDITED CONSOLIDATED BALANCE SHEETS**                                     |
|                                                                        |
| **AS OF DECEMBER 31, 200****8****AND 200****7****AND**                      |
| ** **                                                                  |
| **CONSOLIDATED STATEMENTS OF INCOME,**                                      |
|                                                                        |
| **CONSOLIDATED CASH FLOWS AND CHANGES IN  SHAREHOLDERS’ EQUITY**       |
| ** **                                                                  |
| **FOR THE YEARS ENDED DECEMBER 31, 200****8****, 200****7****AND 200****6** |
|                                                                        |
| **TOGETHER WITH REPORT OF INDEPENDENT REGISTERED**                          |
|                                                                        |
| **PUBLIC ACCOUNTING FIRM**                                                  |

 

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Table ofContents

 

**Report of Independent Registered Public Accounting Firm**

 

To the Board of Directors and shareholders of

Euro Tech Holdings Company Limited

 

We have audited the accompanying consolidatedbalance sheets of Euro Tech Holdings Company Limited as of December 31,2008 and 2007 and the related consolidated statements of operations, shareholders’equity and cash flows for the years ended December 31, 2008, 2007 and2006. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audit in accordance with standardsof the Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  The audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Euro Tech Holdings Company Limited as of December 31,2008 and 2007 and the results of its consolidated operations and cash flows forthe years ended December 31, 2008, 2007 and 2006, in conformity withgenerally accepted accounting principles in the United States of America.

 

 

/s/ BDOLimited

 

 

Hong Kong, June 26,2009

 

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Tableof Contents

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED BALANCE SHEETS**

**AS OF DECEMBER 31**

 
| ** **                                                                                                                                             | ** ** | **Note**             | ** ** | **200****8**     | ** ** | **200****7**     | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                                             | ** ** | ** **           | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Assets                                                                                                                                                 |       |                 |       |             |       |             |       |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Current assets:                                                                                                                                        |       |                 |       |             |       |             |       |
| Cash and cash equivalents                                                                                                                              |       |                 |       | 7,146            |       | 9,387            |       |
| Restricted  cash                                                                                                                                       |       |                 |       | 388              |       | 332              |       |
| Accounts receivable, net                                                                                                                               |       | 6                    |       | 6,707            |       | 4,968            |       |
| Prepayments and other  current assets                                                                                                                  |       |                 |       | 1,041            |       | 912              |       |
| Inventories, net                                                                                                                                       |       | 7                    |       | 2,600            |       | 2,012            |       |
| Taxation recoverable                                                                                                                                   |       |                 |       | —           |       | 12               |       |
| Total current assets                                                                                                                                   |       |                 |       | 17,882           |       | 17,623           |       |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Property, plant and  equipment, net                                                                                                                    |       | 8 & 21(iii) |       | 1,513            |       | 1,622            |       |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Investments in affiliates                                                                                                                              |       | 9                    |       | 7,679            |       | 5,046            |       |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Goodwill                                                                                                                                               |       | 12                   |       | 1,060            |       | 1,060            |       |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Deferred tax assets                                                                                                                                    |       | 4                    |       | 144              |       | 131              |       |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Total assets                                                                                                                                           |       |                 |       | 28,278           |       | 25,482           |       |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Liabilities and  shareholders’ equity                                                                                                             |       |                 |       |             |       |             |       |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Current liabilities:                                                                                                                                   |       |                 |       |             |       |             |       |
| Accounts payable                                                                                                                                       |       |                 |       | 5,838            |       | 3,112            |       |
| Other payables and accrued  expenses                                                                                                                   |       | 10                   |       | 2,844            |       | 3,892            |       |
| Taxation payable                                                                                                                                       |       |                 |       | 617              |       | 520              |       |
| Total current liabilities                                                                                                                              |       |                 |       | 9,299            |       | 7,524            |       |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Minority  interest                                                                                                                                     |       |                 |       | 1,986            |       | 1,545            |       |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Commitments and  contingencies                                                                                                                         |       | 19                   |       | —           |       | —           |       |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Shareholders’ equity:                                                                                                                             |       |                 |       |             |       |             |       |
| Ordinary share, par value  US$0.01 each, 20,000,000 (2007: 20,000,000)  shares authorized; 12,202,031 (2007: 12,024,901) shares issued and outstanding |       | 11                   |       | 122              |       | 120              |       |
| Additional paid-in capital                                                                                                                             |       |                 |       | 9,495            |       | 9,229            |       |
| Treasury stock, 381,692 (2007: 340,651) shares at cost                                                                                                 |       | 13                   |       | (281             | )          | (237             | )          |
| PRC statutory reserve                                                                                                                                  |       | 14                   |       | 200              |       | 165              |       |
| Accumulated other  comprehensive income                                                                                                                |       |                 |       | 478              |       | 271              |       |
| Retained earnings                                                                                                                                      |       |                 |       | 6,979            |       | 6,865            |       |
| Total shareholders’ equity                                                                                                                        |       |                 |       | 16,993           |       | 16,413           |       |
|                                                                                                                                                   |       |                 |       |             |       |             |       |
| Total liabilities and  shareholders’ equity                                                                                                       |       |                 |       | 28,278           |       | 25,482           |       |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**EURO TECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED STATEMENTS OF INCOME**

**FOR THE YEARS ENDED DECEMBER 31, 200****8,****200****7****AND 200****6**

** **
| ** **                                                                       | ** ** | **Note**         | ** ** | **200****8**     | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | ** **       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                             |       |             |       |             |       |             |       |             |       |
| Revenue                                                                          |       |             |       |             |       |             |       |             |       |
| Trading and manufacturing                                                        |       |             |       | 21,439           |       | 20,010           |       | 22,243           |       |
| Engineering                                                                      |       |             |       | 10,299           |       | 7,220            |       | 4,918            |       |
|                                                                             |       |             |       |             |       |             |       |             |       |
| Total revenue                                                                    |       | 21(i) & (ii) |       | 31,738           |       | 27,230           |       | 27,161           |       |
|                                                                             |       |             |       |             |       |             |       |             |       |
| Cost of revenue                                                                  |       |             |       |             |       |             |       |             |       |
| Trading and manufacturing                                                        |       |             |       | (16,618          | )          | (15,406          | )          | (17,321          | )          |
| Engineering                                                                      |       |             |       | (7,536           | )          | (4,992           | )          | (3,285           | )          |
|                                                                             |       |             |       |             |       |             |       |             |       |
| Total cost of revenue                                                            |       |             |       | (24,154          | )          | (20,398          | )          | (20,606          | )          |
| Gross profit                                                                     |       |             |       | 7,584            |       | 6,832            |       | 6,555            |       |
|                                                                             |       |             |       |             |       |             |       |             |       |
| Selling and administrative  expenses                                             |       |             |       | (7,213           | )          | (6,585           | )          | (5,961           | )          |
| Operating income                                                                 |       |             |       | 371              |       | 247              |       | 594              |       |
| Interest income                                                                  |       |             |       | 45               |       | 256              |       | 95               |       |
| Other income, net                                                                |       | 3                |       | 144              |       | 161              |       | 146              |       |
| Income before income taxes, minority interest and equity in profit of affiliates |       |             |       | 560              |       | 664              |       | 835              |       |
|                                                                             |       |             |       |             |       |             |       |             |       |
| Income taxes                                                                     |       | 4                |       | (321             | )          | (144             | )          | (156             | )          |
|                                                                             |       |             |       |             |       |             |       |             |       |
| Minority interest in profits of subsidiaries                                     |       |             |       | (363             | )          | (345             | )          | (318             | )          |
|                                                                             |       |             |       |             |       |             |       |             |       |
| Equity in profit of  affiliates                                                  |       |             |       | 273              |       | 247              |       | —           |       |
| Net  income for the year                                                         |       |             |       | 149              |       | 422              |       | 361              |       |
|                                                                             |       |             |       |             |       |             |       |             |       |
| Net income per ordinary  share                                                   |       |             |       |             |       |             |       |             |       |
| - Basic                                                                          |       |             |       | US$              | 0.01       |             | US$        | 0.04             |       | US$ | 0.04 |   |
|                                                                             |       |             |       |             |       |             |       |             |       |
| - Diluted                                                                        |       |             |       | US$              | 0.01       |             | US$        | 0.03             |       | US$ | 0.03 |   |
| Weighted average number of  ordinary shares outstanding                          |       |             |       |             |       |             |       |             |       |
| - Basic                                                                          |       | 5                |       | 11,824,153       |       | 11,105,556       |       | 8,047,911        |       |
|                                                                             |       |             |       |             |       |             |       |             |       |
| - Diluted                                                                        |       | 5                |       | 12,212,058       |       | 12,095,335       |       | 10,787,420       |       |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-4

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**EURO TECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 200****8****, 200****7****AND 200****6**

 
| ** **                                                                                   | ** ** | **200****8**         | ** ** | **200****7**         | ** ** | **200****6**         | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                   | ** ** | **US$’000**     | ** ** | **US$’000**     | ** ** | **US$’000**     | ** ** |
| Cash flows from operating  activities:                                                       |       |                 |       |                 |       |                 |       |
| Net income                                                                                   |       | 149                  |       | 422                  |       | 361                  |       |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |                 |       |                 |       |                 |       |
| Depreciation of property,  plant and equipment                                               |       | 218                  |       | 232                  |       | 216                  |       |
| Stock  based compensation expense                                                            |       | 217                  |       | 148                  |       | —               |       |
| Loss  (Gain) on disposal of property, plant and equipment                                    |       | 1                    |       | (19                  | )          | 1                    |       |
| Minority  interest in profits of subsidiaries                                                |       | 363                  |       | 345                  |       | 318                  |       |
| Equity in profit of  affiliates                                                              |       | (273                 | )          | (247                 | )          | —               |       |
| Deferred tax assets                                                                          |       | (10                  | )          | (96                  | )          | —               |       |
| Deferred  tax liabilities                                                                    |       | —               |       | —               |       | (4                   | )          |
| (Increase) decrease in  current assets:                                                      |       |                 |       |                 |       |                 |       |
| Accounts receivable, net                                                                     |       | (1,739               | )          | (54                  | )          | 553                  |       |
| Prepayments and other  current assets                                                        |       | (129                 | )          | (189                 | )          | (80                  | )          |
| Inventories, net                                                                             |       | (588                 | )          | 16                   |       | 704                  |       |
| Taxation recoverable                                                                         |       | 12                   |       | —               |       | 30                   |       |
| Increase (decrease) in  current liabilities:                                                 |       |                 |       |                 |       |                 |       |
| Accounts payable                                                                             |       | 2,726                |       | (1,080               | )          | (435                 | )          |
| Other payables and accrued  expenses                                                         |       | (400                 | )          | 896                  |       | (222                 | )          |
| Taxation payable                                                                             |       | 97                   |       | 75                   |       | 23                   |       |
| Net cash provided by  operating activities                                                   |       | 644                  |       | 449                  |       | 1,465                |       |
| Cash flows from investing  activities:                                                       |       |                 |       |                 |       |                 |       |
| Purchase of property,  plant and equipment                                                   |       | (99                  | )          | (250                 | )          | (106                 | )          |
| Proceeds  on disposal of property, plant and equipment                                       |       | —               |       | 43                   |       | —               |       |
| Dividend  received from affiliates                                                           |       | 294                  |       | —               |       | —               |       |
| Investments  in affiliates                                                                   |       | (3,302               | )          | (4,151               | )          | —               |       |
| Restricted  cash for issuance of bank guarantees                                             |       | (56                  | )          | 83                   |       | (111                 | )          |
| Dividend  paid to minority interest                                                          |       | —               |       | (140                 | )          | (135                 | )          |
| Net cash used in investing  activities                                                       |       | (3,163               | )          | (4,415               | )          | (352                 | )          |
| Cash flows from financing  activities:                                                       |       |                 |       |                 |       |                 |       |
| Issuance  of ordinary shares on exercise of options                                          |       | 51                   |       | 3,720                |       | 2,607                |       |
| Purchase  of treasury stock                                                                  |       | (44                  | )          | —               |       | —               |       |
| Cash  from issuance of registered capital in subsidiary to minority interest                 |       | —               |       | 200                  |       | —               |       |
| Net cash provided by financing activities                                                    |       | 7                    |       | 3,920                |       | 2,607                |       |
| Effect of exchange rate  changes on cash and cash equivalents                                |       | 271                  |       | 273                  |       | 78                   |       |
|                                                                                         |       |                 |       |                 |       |                 |       |
| Net (decrease)/increase in cash and cash equivalents                                         |       | (2,241               | )          | 227                  |       | 3,798                |       |
| Cash and cash equivalents,  beginning of year                                                |       | 9,387                |       | 9,160                |       | 5,362                |       |
| Cash and cash equivalents,  end of year                                                      |       | 7,146                |       | 9,387                |       | 9,160                |       |
|                                                                                         |       |                 |       |                 |       |                 |       |
| ** **                                                                                   | ** ** | **US$****’000** | ** ** | **US$****’000** | ** ** | **US$****’000** | ** ** |
| Supplementary information                                                                    |       |                 |       |                 |       |                 |       |
| Interest received                                                                            |       | 45                   |       | 256                  |       | 95                   |       |
| Interest paid                                                                                |       | —               |       | —               |       | —               |       |
| Income taxes paid                                                                            |       | 233                  |       | 166                  |       | 125                  |       |
| Shares  surrendered for exercise of stock options                                            |       | 73                   |       | 155                  |       | 168                  |       |

 

As at December 31, 2007 there was a final consideration ofUS$648,000 payable in relation to the acquisition of Zhejiang Tianlan Desulfurization and Dust—Removal Co., Ltd. included inother payables and accrued expenses.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**EURO TECH HOLDINGS COMPANY LIMITED**

** **

**CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 200****8****, 200****7****AND 200****6**

 
|                                                                 |       | **Number  of****Ordinary  share** |       | **Ordinary  share** |       | **Additional  paid-in  capital** |       | **Treasury  stock** |       | **Accumulated  other  comprehensive  income  (loss)** |       | **PRC  statutory  reserve** |       | **Retained  earnings** |       | **Total**        |       |
|----------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------|------------|----------------------------------|------------|---------------------|------------|-------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|------------------|------------|
| ** **                                                           | ** ** | ** **                        | ** ** | **US$’000**    | ** ** | **US$’000**                 | ** ** | **US$’000**    | ** ** | **US$’000**                                      | ** ** | **US$’000**            | ** ** | **US$’000**       | ** ** | **US$’000** | ** ** |
|                                                                 |       |                              |       |                |       |                             |       |                |       |                                                  |       |                        |       |                   |       |             |       |
| Balance as of January 1, 2006                                   |       | 7,363,002                         |       | 74                  |       | 2,800                            |       | (237                | )          | (10                                                   | )          | 72                          |       | 6,193                  |       | 8,892            |       |
| Net income                                                           |       | —                            |       | —              |       | —                           |       | —              |       | —                                                |       | —                      |       | 361                    |       | 361              |       |
| Other  comprehensive income: Foreign exchange translation adjustment |       | —                            |       | —              |       | —                           |       | —              |       | 79                                                    |       | —                      |       | —                 |       | 79               |       |
| Total  comprehensive income                                          |       |                              |       |                |       |                             |       |                |       |                                                  |       |                        |       |                   |       | 440              |       |
| Shares  surrendered for exercise of stock options                    |       | (36,700                           | )          | —              |       | (168                             | )          | —              |       | —                                                |       | —                      |       | —                 |       | (168             | )          |
| Exercise  of stock options                                           |       | 2,048,890                         |       | 20                  |       | 2,706                            |       | —              |       | —                                                |       | —                      |       | —                 |       | 2,726            |       |
| Transfer of reserve                                                  |       | —                            |       | —              |       | —                           |       | —              |       | —                                                |       | 16                          |       | (32                    | )          | (16              | )          |
| Stock-based  compensation expense                                    |       | —                            |       | —              |       | 49                               |       | —              |       | —                                                |       | —                      |       | —                 |       | 49               |       |
| Balance  as of December 31, 2006                                |       | 9,375,192                         |       | 94                  |       | 5,387                            |       | (237                | )          | 69                                                    |       | 88                          |       | 6,522                  |       | 11,923           |       |
| Net income                                                           |       | —                            |       | —              |       | —                           |       | —              |       | —                                                |       | —                      |       | 422                    |       | 422              |       |
| Other  comprehensive income: Foreign exchange translation adjustment |       | —                            |       | —              |       | —                           |       | —              |       | 202                                                   |       | —                      |       | —                 |       | 202              |       |
| Total  comprehensive income                                          |       |                              |       |                |       |                             |       |                |       |                                                  |       |                        |       |                   |       | 624              |       |
| Shares  surrendered for exercise of stock options                    |       | (45,537                           | )          | (1                  | )          | (154                             | )          | —              |       | —                                                |       | —                      |       | —                 |       | (155             | )          |
| Exercise  of stock options                                           |       | 2,695,246                         |       | 27                  |       | 3,848                            |       | —              |       | —                                                |       | —                      |       | —                 |       | 3,875            |       |
| Transfer of reserve                                                  |       | —                            |       | —              |       | —                           |       | —              |       | —                                                |       | 77                          |       | (79                    | )          | (2               | )          |
| Stock-based  compensation expense                                    |       | —                            |       | —              |       | 148                              |       | —              |       | —                                                |       | —                      |       | —                 |       | 148              |       |
| Balance  as of December 31, 2007                                |       | 12,024,901                        |       | 120                 |       | 9,229                            |       | (237                | )          | 271                                                   |       | 165                         |       | 6,865                  |       | 16,413           |       |
| Net income                                                           |       | —                            |       | —              |       | —                           |       | —              |       | —                                                |       | —                      |       | 149                    |       | 149              |       |
| Other  comprehensive income: Foreign exchange translation adjustment |       | —                            |       | —              |       | —                           |       | —              |       | 207                                                   |       | —                      |       | —                 |       | 207              |       |
| Total  comprehensive income                                          |       |                              |       |                |       |                             |       |                |       |                                                  |       |                        |       |                   |       | 356              |       |
| Purchase  of treasury stock                                          |       | —                            |       | —              |       | —                           |       | (44                 | )          | —                                                |       | —                      |       | —                 |       | (44              | )          |
| Shares  surrendered for exercise of stock options                    |       | (31,240                           | )          | —              |       | (73                              | )          | —              |       | —                                                |       | —                      |       | —                 |       | (73              | )          |
| Exercise  of stock options                                           |       | 208,370                           |       | 2                   |       | 122                              |       | —              |       | —                                                |       | —                      |       | —                 |       | 124              |       |
| Transfer of reserve                                                  |       | —                            |       | —              |       | —                           |       | —              |       | —                                                |       | 35                          |       | (35                    | )          | —           |       |
| Stock-based  compensation expense                                    |       | —                            |       | —              |       | 217                              |       | —              |       | —                                                |       | —                      |       | —                 |       | 217              |       |
| Balance  as of December 31, 2008                                |       | 12,202,031                        |       | 122                 |       | 9,495                            |       | (281                | )          | 478                                                   |       | 200                         |       | 6,979                  |       | 16,993           |       |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**1****             ****Organizationand principal activities**

 

Euro Tech Holdings CompanyLimited (the “Company”) was incorporated in the British Virgin Islands on September 30,1996.

 

Euro Tech (Far East) Limited(“Far East”) is the principal operating subsidiary of the Company.  It is principally engaged in the marketingand trading of water and waste water related process control, analytical andtesting instruments, disinfection equipment, supplies and related automationsystems in Hong Kong and in the People’s Republic of China (the “PRC”).

 

Details of the Company’s significantsubsidiaries and affiliates are summarized as follows:

 
| **Name**                                                       | ** ** | **Percentage  of equity  ownership** | ** ** | **Place of  incorporation** | ** ** | **Principal activities**                                                                                                                                                       |
|----------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Subsidiaries:                                                  |       |                                 |       |                        |       |                                                                                                                                                                           |
|                                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Euro  Tech (Far East) Limited                                  |       | 100%                                 |       | Hong Kong                   |       | Marketing  and trading of water and waste water related process control, analytical and  testing instruments, disinfection equipment, supplies and related automation  systems |
|                                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Euro  Tech (China) Limited                                     |       | 100%                                 |       | Hong Kong                   |       | Inactive                                                                                                                                                                       |
|                                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| ChinaH2O.com  Limited                                          |       | 100%                                 |       | Hong Kong                   |       | Internet  content provider and provision of marketing services for environmental  industry to the Company and its  subsidiaries                                                |
|                                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Euro  Tech Trading (Shanghai) Limited                          |       | 100%                                 |       | The PRC                     |       | Marketing  and trading of water and waste water related process control, analytical and  testing instruments, disinfection equipment, supplies and related automation  systems |
|                                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Shanghai  Euro Tech Limited                                    |       | 100%                                 |       | The PRC                     |       | Manufacturing  of analytical and testing equipment                                                                                                                             |
|                                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Shanghai  Euro Tech Environmental  Engineering Company Limited |       | 100%                                 |       | The PRC                     |       | Undertaking water and waste-water  treatment engineering projects                                                                                                              |
|                                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Chongqing Euro Tech Rizhi Technology Co., Ltd             |       | 100%                                 |       | The PRC                     |       | Marketing  and trading of water and waste water related process control, analytical and  testing instruments, disinfection equipment, supplies and related automation  systems |
|                                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Rizhi  Euro Tech Instrument (Shaanxi) Co., Ltd            |       | 100%                                 |       | The PRC                     |       | Marketing  and trading of water and waste water related process control, analytical and                                                                                        |

 

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|                                                             |   |   |   |                       |   | testing instruments,  disinfection equipment, supplies and related automation systems                                                                                          |
|------------------------------------------------------------------|--------|--------|--------|----------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                             |   |   |   |                       |   |                                                                                                                                                                           |
| Guangzhou Euro Tech Environmental Equipment Co., Ltd             |   | 100%   |   | The PRC                    |   | Marketing  and trading of water and waste water related process control, analytical and  testing instruments, disinfection equipment, supplies and related automation  systems |
|                                                             |   |   |   |                       |   |                                                                                                                                                                           |
| Yixing  Pact Environmental Technology Co., Ltd              |   | 51%    |   | The PRC                    |   | Design,  manufacturing and operation of water and waste water treatment machinery and  equipment                                                                               |
|                                                             |   |   |   |                       |   |                                                                                                                                                                           |
| Pact  Asia Pacific Limited                                       |   | 51%    |   | The British Virgin Islands |   | Producing  and selling of environment protection equipment, undertaking environment  protection projects and providing relevant technology advice, training and  services      |
|                                                             |   |   |   |                       |   |                                                                                                                                                                           |
| Affiliates:                                                      |   |   |   |                       |   |                                                                                                                                                                           |
|                                                             |   |   |   |                       |   |                                                                                                                                                                           |
| Zhejiang Tianlan Desulfurization and Dust—Removal  Co. Ltd. |   | 20%*   |   | The PRC                    |   | Design, general contract, equipment  manufacturing, installation, testing and operation management of the  treatment of waste gases emitted                                    |
|                                                             |   |   |   |                       |   |                                                                                                                                                                           |
| Zhejaing Jia Huan Electronic Co. Ltd.                            |   | 20%**  |   | The  PRC                   |   | Design and manufacturing automatic control systems and electric voltage  control equipment for electrostatic precipitators (air  purification equipment)                       |

 

----

* In the year2007, the Company acquired 20% equity interest of this company.

 

** In the year2008, the Company acquired 20% equity interest of this company.

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

 

**2****             ****Summaryof significant accounting policies**

 

**(a)****         ****Basis of Consolidation**

 

The consolidated financialstatements include the accounts of Euro Tech Holdings Company Limited and itssubsidiaries (the “Group”).  Thefinancial statements of variable interest entities (“VIEs”), as defined by the Financial Accounting Standards Board (“FASB”) InterpretationNo. 46 (R) (“FIN 46 (R)”), are included in the consolidated financialstatements, if applicable.  In January 2003,the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation ofVariable Interest Entities” and amended it by issuing FIN 46 (R) in December 2003.  FIN 46 (R) addresses consolidation bybusiness enterprises of VIEs that either: (1) do not have sufficientequity investment at risk to permit the entity to finance its activitieswithout additional subordinated financial support, or (2) have equityinvestors that lack an essential characteristic of a controlling financialinterest.

 

The Group identified thatcertain retail shops established in the PRC qualified as variable interestentities as defined in FIN 46 (R).  Theretail shops are principally engaged in the retailing business of water andwaste water related process control, analytical and testing instruments,disinfection equipment, supplies and related automation systems.  The Company is the primary beneficiary ofthese retail shops and, accordingly, consolidated their financial statementseffective December 31, 2004.  TheCompany has a controlling financial interest in these retail shops and issubject to a majority of the risk of loss from the retailing activities, and isentitled to receive a majority of the retail shops’ residual returns.  Total assets and liabilities of theseconsolidated VIEs total US$107,386 and US$66,412, as of December 31, 2008 and US$150,602and US$289,127, as of December 31,2007, respectively.  The cumulative losses onconsolidating these VIEs in the Group’s consolidated statement of income in 2008 were US$41,443 (2007: profits ofUS$17,638 and 2006: losses of US$152,723), including taxes of US$3,126 (2007: US$11,118 and 2006: US$6,814).  The assets of the entities consist mainly ofcash and bank balances, trade and other receivables, inventories and property,plant and equipment.   The creditors ofthese entities do not have recourse to the general credit of the Group.  The Group will provide all the neededfinancing for the VIEs.

 

Investments in businessentities in which the Company does not have control, but has the ability toexercise significant influence over operating and financial policies (generally20-50 percent ownership), are accounted for using the equity method ofaccounting.  All material intercompanybalances and transactions have been eliminated on consolidation.

 

**(b)****         ****Subsidiaries**

 

A subsidiary is a company in which theCompany holds, directly or indirectly, more than 50% of its outstanding votingshare capital and over which it is able to exercise control.

 

**(c)****         ****Revenue Recognition**

 

The Group’s main source ofrevenue is the sale of water and waste water related process control,analytical and testing instruments, disinfection equipment, supplies andrelated automation systems. The Company recognizes revenue when the product isdelivered and the title is transferred. For certain products where installation is necessary, revenue isrecognized upon completion of installation. Revenue earned from customersupport services, which represents a minor percentage of total revenues, isrecognized when such services are provided.

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

 

**2****             ****Summaryof significant accounting policies (Continued)**

 

**(c)****         ****Revenue Recognition (Continued)**

 

Revenues and profits in longterm fixed price contracts or the engineering income are recorded under thepercentage of completion methodin accordance with SOP 81-1, “Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts”.This approachrelies on estimates of total expected direct costs at completion, which arecompared to actual direct costs incurred to date to arrive at an estimate ofrevenue and profit earned to date. Recognized revenue and profit are subject to revisions as the contractprogresses to completion.  Revisions toprofit estimates are reflected in income in the period in which the facts thatgive rise to the revision become known. Forany contract where it is identified that a loss will be incurred, the full losswill be recognized immediately. 

 

**(d)****         ****Research and Development Costs**

 

Research and developmentcosts (“R&D” costs) are expensed as incurred.  The R&D costs amounted to approximatelyUS$89,000, US$47,000 and US$55,000 for theyears ended December 31, 2008, 2007 and 2006 respectivelyand were included in “Selling and Administrative” expenses****inthe Group’s consolidated statement of income.

 

**(e)****         ****Advertising and promotionalexpenses**

 

Advertising and promotionalexpenses (“A&P” expenses) are expensed as incurred.  The A&P expenses amounted to approximatelyUS$40,000, US$78,000 and US$76,000 for theyears December 31, 2008, 2007 and 2006 respectivelyand were included in “Selling and Administrative” expenses****inthe Group’s consolidated statement of income.

 

**(f)****          ****Taxation**

 

The Group accounts forincome and deferred tax under the provision of Statement of FinancialAccounting Standards (“SFAS”) No. 109: “Accounting for Income Taxes”,under which deferred taxes are recognized for all temporary differences betweenthe applicable tax balance sheets and the consolidated balance sheet.  Deferred tax assets and liabilities arerecognized for the estimated future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. SFAS No. 109 also requires the recognition of the future taxbenefits of net operating loss carry forwards. A valuation allowance is established when the deferred tax assets arenot expected to be realized within a reasonable period of time.

 

Effective January 1, 2007, the Company adoptedFIN No. 48, “Accounting for Uncertainty in Income Taxes.” In accordancewith FIN No. 48, the Company recognizes tax benefits that satisfy agreater than 50% probability threshold and provides for the estimated impact ofinterest and penalties for such tax benefits. The Company did not have such uncertain tax positions in 2007 and 2008.

 

Deferred tax assets andliabilities are measured using the enacted tax rates expected to be applicablefor taxable income in the years in which temporary differences are expected tobe recovered or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome for the period that includes the enactment date.

 

Note 4 shows the applicabletax rates for individual subsidiary and variable interest entities, as well asthe major temporary differences so recorded.

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

 

**2****             ****Summaryof significant accounting policies (Continued)**

 

**(g)****         ****Cash and Cash Equivalents**

 

Cash and cash equivalentsinclude cash on hand and demand depositswith banks.

 

**(h)****         ****Receivables and Other Assets**

 

Receivables and other assetsare recorded at their nominal values. Valuation allowances are provided for identified individual risks forthese line items.  If the loss of a certainpart of the receivables is probable, valuation allowances are provided to coverthe expected loss.  Receivables arewritten off against the allowance after all means of collection have beenexhausted and the potential for recovery is considered remote.

 

**(i)****          ****Inventories**

 

Inventories are stated atthe lower of cost, on the first-in, first-out method, or market value.  Costsinclude purchase and related costs incurred in bringing each product to itspresent location and condition.  Market value is calculated based on the estimated normalselling price, less further costs expected to be incurred for disposal.  Provision is made for obsolete, slow movingor defective items, where appropriate.

 

**(j)****          ****Property,Plant and Equipment**

 

Property, plant andequipment are stated at cost less accumulated depreciation. Gains or losses ondisposal are reflected in current operations. Major expenditures for betterments and renewals are capitalized.  All ordinary repair and maintenance costs areexpensed as incurred.  Depreciation ofproperty, plant and equipment is computed using the straight-line method overthe assets’ estimated useful lives as follows:

 
| Office premises                           |   | 47 to 51 years                                                 |
|-------------------------------------------|--------|----------------------------------------------------------------|
| Leasehold improvements                    |   | over terms of the leases or the useful lives whichever is less |
| Furniture, fixtures and  office equipment |   | 3 to 5 years                                                   |
| Motor vehicles                            |   | 4 years                                                        |
| Testing equipment                         |   | 3 years                                                        |

 

**(k)****        ****Impairment**

 

The Group has adopted SFAS No. 144:“Accounting for Impairment or Disposal of Long-Lived Assets” which requiresimpairment losses to be recorded for property, plant and equipment to be heldand used in operations when indicators of impairment are present.  Reviews are regularly performed to determinewhether the carrying value of assets is impaired.  The Group determines the existence of suchimpairment by measuring the expected future cash flows (undiscounted andwithout interest charges) and comparing such amount to the carrying amount ofthe assets.  An impairment loss, if oneexists, is then measured as the amount by which the carrying amount of theasset exceeds the discounted estimated future cash flows. Assets to be disposedof are reported at the lower of the carrying amount or fair value of suchassets less costs to sell.  Assetimpairment charges are recorded to reduce the carrying amount of the long-livedasset that will be sold or disposed of to their estimated fair values. Chargesfor the asset impairment reduce the carrying amount of the long-lived assets totheir estimated salvage value in connection with the decision to dispose ofsuch assets.  There were no impairmentlosses recorded during each of the three years ended December 31, 2008.

 

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**EUROTECH HOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

 

**2****             ****Summaryof significant accounting policies (Continued)**

 

**(l)****          ****OperatingLeases**

 

Leases where substantiallyall the risks and rewards of ownership of the leased assets remain with thelessors are accounted for as operating leases. Rental payments under operating leases are charged to expense on thestraight-line basis over the period of the relevant leases.

 

**(m)****        ****Goodwill**

 

The Group has adopted SFASNo.142: “Goodwill and other intangible assets” which assess the possibleimpairment of goodwill existing at the date of adoption and perform asubsequent impairment test on an annual basis.

 

**(n)****         ****Foreign Currency Translation**

 

The Company maintains itsbooks and records in United States dollars. Its subsidiaries and affiliates maintain their books and records eitherin Hong Kong dollars or Chinese Renminbi (“functional currencies”).  Foreign currency transactions during the yearare translated into the respective functional currencies at the applicablerates of exchange at the dates of the transactions.  Monetary assets and liabilities denominatedin foreign currencies are translated into the respective functional currenciesusing the exchange rates prevailing at the balance sheet dates.  Gains or losses from foreign currencytransactions are recognized in the consolidated statements of income during theyear in which they occur.  Translationadjustments on subsidiaries’ equity are included as cumulative translationadjustments.

 

**(o)****         ****Derivative Instruments andHedging Activities**

 

SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended bySFAS No. 137, “Accounting for Derivative Instruments and HedgingActivities — Deferral of the Effective Date of FASB Statement No. 133 — anamendment of FASB Statement No. 133”, and SFAS No. 138, “Accountingfor Certain Derivative Instruments and Certain Hedging Activities — anamendment of FASB Statement No. 133”, as well as the interpretations ofthe Derivatives Implementation Group (“DIG”), are applied as amended by SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”.  SFAS No. 133 contains accounting andreporting standards for hedging accounting and for derivative financialinstruments, including certain derivative financial instruments embedded inother contracts.

 

SFAS No. 133 requiresthat all derivatives be recognized as either assets or liabilities in theconsolidated balance sheet and measured at fair value.  Depending on the documented designation of aderivative instrument, any change in fair value is recognized either in netincome or shareholders’ equity (as a component of accumulated othercomprehensive income).

 

Fair values of derivativeinstruments are classified as operating assets or liabilities.  Changes in fair value of derivativeinstruments affecting income are classified as other operating income orexpenses.  Please see note 17 for additional information regarding the Company’s use of derivativeinstruments.

 

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**EUROTECH HOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

 

**2****             ****Summaryof significant accounting policies (Continued)**

 

**(p)****          ****ComprehensiveIncome**

 

The Group has adopted SFAS No. 130:  “Reporting Comprehensive Income,” whichrequires the Group to report all changes in equity during a period, except forthose resulting from investment by owners and distribution to owners, in thefinancial statements for the period in which they are recognized.  The Group has presented comprehensive income,which encompasses net income and foreign currency translation adjustments, inthe consolidated statement of changes in shareholders’ equity.

 

**(q)****         ****Ordinary Share**

 

Ordinary share refers to the$0.01 par value capital stock asdesignated in the Company’s Certificate of Incorporation.  Treasury stock is accounted for using thecost method.  When treasury stock isreissued, the value is computed and recorded using a weighted-average basis.

 

**(r)****         ****Net income per****Ordinary****Share**

 

Net income per ordinary share is computed in accordance with SFAS No. 128“Earnings Per Share”, by dividing the net income by the weighted average numberof shares of ordinary share outstanding during the period.  The Company reports both basic earnings pershare, which is based on the weighted average number of ordinary shares outstanding, and diluted earnings per share,which is based on the weighted average number of ordinary sharesoutstanding and all dilutive potential ordinary sharesoutstanding.  Outstanding stock optionsare the only dilutive potential shares of the Company.

 

**(s)****         ****Stock-based Compensation**

 

TheGroup adopted the provisions of Statement 123 (revised 2004) (Statement123(R)), Share-Based Payment, which revises Statement 123, Accounting forStock-Based Compensation using the modified prospectiveapplication transition methodStatement 123(R) requires the Group to recognize expense related to thefair value of our stock-based compensation awards, including employee stockoptions.

 

**(t)****           ****Use ofEstimates**

 

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America (“GAAP”) requires managementto make estimates and assumptions that affect the amounts that are reported inthe consolidated financial statements and accompanying disclosures.  Although these estimates are based onmanagement’s best knowledge of current events and actions that the Company mayundertake in the future, actual results may be different from the estimates.

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

 

**2****             ****Summaryof significant accounting policies (Continued)**

 

**(u)**          **Related Parties**

 

Entitiesare considered to be related to the Group if the parties, directly orindirectly, through one or more intermediaries, control, are controlled by, orare under common control with the Group. Related parties also include principal owners of the Group, itsmanagement, members of the immediate families of principal owners of the Groupand its management and other parties with which the Group may deal if one partycontrols or can significantly influence the management or operating policies ofthe other to an extent that one of the transacting parties might be preventedfrom fully pursuing its own separate interests. A party which can significantly influence the management or operatingpolicies of the transacting parties or if it has an ownership interest in oneof the transacting parties and can significantly influence the other to anextent that one or more of the transacting parties might be prevented fromfully pursuing its own separate interests is also a related party.

 

**(v)**          **Segment Information**

 

The Company’s segmentreporting is prepared in accordance with SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information”.  The management approach required by SFAS No. 131designates that the internal reporting structure that is used by management formaking operating decisions and assessing performance should be used as thesource for presenting the Company’s reportable segments.  The Company categorizes its operations intotwo business segments: Trading and Manufacturing, and Engineering.

 

**(w)**         **Recent Accounting Pronouncements**

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests inConsolidated Financial Statements—an amendment of ARB No. 51” (SFAS No. 160).SFAS No. 160 establishes accounting and reporting standards fornoncontrolling interests in subsidiaries. This statement requires the reportingof all noncontrolling interests as a separate component of stockholders’equity, the reporting of consolidated net income (loss) as the amountattributable to both the parent and the noncontrolling interests and theseparate disclosure of net income (loss) attributable to the parent and to thenoncontrolling interests. In addition, this statement provides accounting andreporting guidance related to changes in noncontrolling ownership interests.Other than the reporting requirements described above which requireretrospective application, the provisions of SFAS No. 160 are to beapplied prospectively in the first annual reporting period beginning on orafter December 15, 2008. The Company is currently evaluating the potentialimpact, if any, of the adoption of FAS No. 160 on the consolidatedfinancial statements.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,”(FAS No. 141 (R)), which replaces FASB Statement No. 141. FAS No. 141(R) establishes principles and requirements for how an acquirer recognizesand measures in its financial statements the identifiable assets acquired, theliabilities assumed, any noncontrolling interest in the acquiree and thegoodwill acquired. The Statement also establishes disclosure requirements whichwill enable users to evaluate the nature and financial effects of the businesscombination. FAS No. 141 (R) is effective as of the beginning of anentity’s fiscal year that begins after December 15, 2008, which will bethe Company’s year beginning January 1, 2009. An entity is precluded fromimplementing Statement 141R early. The Company is 

 

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currently evaluating thepotential impact, if any, of the adoption of FAS No. 141 (R) on theconsolidated financial statements.

 

In March 2008, theFASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities - an amendment of FASB Statement No. 133” (SFAS No. 161).  SFASNo. 161 requires additional disclosures about the objectives of usingderivative instruments, the method by which the derivative instruments andrelated hedged items are accounted for under Statement No. 133 and itsrelated interpretations, and the effect of derivative instruments and relatedhedged items on financial position, financial performance, and cashflows.  SFAS No. 161 also requires disclosure of the fair valuesof derivative instruments and their gains and losses in a tabularformat.  SFAS No. 161 is effective for financial statementsissued for fiscal years and interim periods beginning after November 15,2008.  The Company has no derivative instruments or hedgingactivities and this pronouncement is only disclosure-related; accordingly, SFAS161 has no impact on the Company’s financial position, consolidated results ofoperations or cash flows.

 

In April 2008, theFASB issued Staff Position (FSP) No. FAS 142-3, “Determination of theUseful Life of Intangible Assets (FSP FAS No. 142-3)”.  FSP FAS No.142-3 amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under SFAS No. 142, Goodwill and Other IntangibleAssets.  It is effective for financial statements issued for fiscalyears beginning after December 15, 2008, and interim periods within thosefiscal years and should be applied prospectively to intangible assets acquiredafter the effective date.  Early adoption is not permitted. FSP FASNo. 142-3 also requires expanded disclosure related to the determination ofintangible asset useful lives for intangible assets and should be applied toall intangible assets recognized as of, and subsequent to the effectivedate.  The impact of FSP FAS No. 142-3 will depend on the size andnature of acquisitions on or after January 1, 2009.

 

InMay 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS No. 165).SFAS No. 165 provides general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued. SFAS No. 165 is applicable forinterim or annual periods after June 15, 2009. The application of SFAS No. 165is not expected to have a material effect on the Company’s consolidatedfinancial statements.

 

InJune 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of FinancialAssets - an amendment of FASB Statement No. 140” (SFAS No. 166). SFAS No. 166seeks to improve the relevance, representational faithfulness, andcomparability of the information that a reporting entity provides in itsfinancial statements about a transfer of financial assets; the effects of atransfer on its financial position, financial performance, and cash flows; anda transferor’s continuing involvement, if any, in transferred financial assets.SFAS No. 166 in applicable for annual periods after November 15, 2009 andinterim periods therein and thereafter. The Company is currently evaluating thepotential impact, if any, of the adoption of SFAS No. 166 on the consolidatedfinancial statements.

 

InJune 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.46(R)” (SFAS No. 167). SFAS No. 167 seeks to improve financial reporting byenterprises involved with variable interest entities. SFAS No. 167 isapplicable for annual periods after November 15, 2009 and interim periodstherein and thereafter. The Company is currently evaluating the potentialimpact, if any, of the adoption of SFAS No. 167 on the consolidated financialstatements.

 

The Company does not believethat any other of the recently issued and adopted, but not yet effective,accounting standards would have a material effect on the accompanying financialstatements.

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

 

**3****             ****Otherincome, net**

 
| ** **                                                 | ** ** | **200****8**     | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Gain/(loss) on  disposal of property, plant and  equipment |       | (1               | )          | 19               |       | (1               | )          |
| Exchange gain, net                                         |       | 120              |       | 104              |       | 130              |       |
| Rental income                                              |       | 25               |       | 38               |       | 17               |       |
|                                                       |       | 144              |       | 161              |       | 146              |       |

 

**4****             ****Incometaxes**

 

The Company is exempt fromtaxation in the British Virgin Islands.

 

Euro Tech (Far East) Limited,Euro Tech (China) Limited and ChinaH2O.com Limited provided for Hong Kongprofits tax at a rate of 16.5% in year 2008 (2007 and 2006: 17.5%) on the basis of their income for financialreporting purposes, adjusting for income and expense items which are notassessable or deductible for profits tax purposes.

 

Euro Tech Trading (Shanghai)Limited, a subsidiary of the Company, provides for PRC Enterprise Income Tax ata rate of 18% (2007 and 2006:15%) (a rate currently levied by the Pudong localTax Bureau despite the rate National Tax Bureau of 25%), after offsettinglosses brought forward, if any, on the basis of its income for financialreporting purposes, adjusting for income and expense items which are notassessable or deductible for PRC Enterprise Income Tax purposes.

 

In accordance with therelevant income tax laws and regulations applicable to foreign investmententerprises in the PRC, Shanghai Euro Tech Limited (“SET”), a subsidiary of theCompany, is exempt from the PRC Enterprise Income Tax for two years startingfrom 2008, after offsetting losses brought forward, if any, followed by a 50%reduction for the next three years thereafter. As of December 31, 2008, SET had an assessable loss carriedforward of US$242,253 as agreed by the local tax authority to offset its profitfor the coming year (2007: US$225,300). Such loss will expire in 5years.

 

According to the relevantPRC tax rules and regulations,Shanghai Euro Tech Environmental Engineering Limited is exempt fromthe PRC Enterprise Income Tax of 18% (2007: 15%)for two years starting from 2007, followed by a50% reduction for the next three years thereafter.Chongqing Euro Tech Rizhi Technology Co., Ltd, Rizhi Euro Tech Instrument(Shaanxi) Co., Ltd and Guangzhou Euro Tech EnvironmentalEquipment Co., Ltd provide forPRC Enterprise Income Tax at a rate of 25%, afteroffsetting losses brought forward, if any, on the basis of its income forfinancial reporting purposes, adjusting for income and expense items which arenot assessable or deductible for PRC Enterprise Income Tax purposes.

 

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According to the relevantPRC tax rules and regulations, YixingPact Environmental Technology Co., Ltdis registered in Shanghai as Foreign Owned Enterprise that are entitled toEnterprise Income Tax rate of 25%(2007: 27%).Pact Asia Pacific Limited operates in the BritishVirgin Islands where thereare no taxes imposed on it. However, part of its profit is subject to Hong Kong profits tax at arate of 17.5% in year 2007 as the profit isearned in Hong Kong.

 

VIEs of the Group provide for PRC EnterpriseIncome Tax at a rate of 25% (2007: 33%), after offsetting losses broughtforward, if any, on the basis of its income for financial reporting purposes,adjusting for income and expense items which are not assessable or deductiblefor PRC Enterprise Income Tax purposes.

 

As of December 31,2008, certain VIEs had aggregated assessable losses carried forward ofUS$99,830 as agreed by the local tax authority(2007: US$118,161).

 

On March 16, 2007, the PRC NationalPeople’s Congress passed the China Corporate Income Tax Law (“Income Tax Law”),which became effective January 1, 2008 and applies a unified income taxrate for foreign invested enterprises and domestic enterprise. The Income TaxLaw is effective immediately for companies previously subject to highertaxation rates and provides a five-year transition period from its effectivedate for those enterprises which were established before the effective date ofthe new tax law and previously entitled to a preferential tax treatment.

 

On December 26, 2007, the State Counciland on February 20, 2008 the Ministry of Finance issued implementationguidelines (“Guidelines”) setting out how the transition of tax rates willoccur. The Guidelines state that those enterprises which enjoyed a preferentialtax rate of 15% are eligible for a graduated rate increase to 25% over the5-year period beginning from January 1, 2008. The applicable rates undersuch an agreements for such enterprises are 18%, 20%, 22%, 24% and 25% for2008, 2009, 2010, 2011, 2012 and thereafter, respectively. In addition, foreigninvestment manufacturing enterprises which have not fully utilized anypreferential tax treatments, such as tax holidays or reduced rates of taxation,will be able to continue to receive them during the transitional period. TheGroup has applied the new rate in relation to deferred tax balances.

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

 

**4****             ****Incometaxes (Continued)**

 

Incomebefore income taxes:

 
| ** ** | ** ** | **200****8**     | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|       |       |             |       |             |       |             |       |
| Domestic   |       | —           |       | —           |       | —           |       |
| Foreign    |       | 560              |       | 664              |       | 835              |       |
|       |       | 560              |       | 664              |       | 835              |       |

 

Theprovision for income taxes consists of:

 
| ** **                | ** ** | **200****8**     | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Current tax  expenses:    |       |             |       |             |       |             |       |
| Domestic                  |       | —           |       | —           |       | —           |       |
| Foreign                   |       | 331              |       | 240              |       | 163              |       |
| Total current  provision  |       | 331              |       | 240              |       | 163              |       |
|                      |       |             |       |             |       |             |       |
| Deferred tax  benefit:    |       |             |       |             |       |             |       |
| Domestic                  |       | —           |       | —           |       | —           |       |
| Foreign                   |       | (10              | )          | (96              | )          | (7               | )          |
| Total deferred  provision |       | (10              | )          | (96              | )          | (7               | )          |

 

The reconciliation of theweighted average statutory income tax rate to the effective income tax rate asstated in the consolidated statements of income is as follows:

 
| ** **                                   | ** ** | **200****8** | ** ** | **200****7** | ** ** | **200****6** | ** ** |
|----------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
|                                         |       |         |       |         |       |         |       |
| Weighted average statutory tax rate          |       | 39.8         | %          | 11.3         | %          | 14.3         | %          |
| Change in valuation allowances               |       | 17.8         | %          | 17.1         | %          | 5.5          | %          |
| Over-provision for income tax in prior years |       | —       | %          | —       | %          | (0.5         | )%         |
| Others                                       |       | (0.3         | )%         | (6.8         | )%         | (0.6         | )%         |
| Effective tax rate                           |       | 57.3         | %          | 21.6         | %          | 18.7         | %          |

 

The components of deferredtax assets are as follows:

 
| ** **                                                   | ** ** | **200****8**     | ** ** | **200****7**     | ** ** |
|--------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                         |       |             |       |             |       |
| Deferred  tax assets arising from tax losses                 |       | 147              |       | 137              |       |
| Deferred  tax liabilities arising from temporary differences |       | (3               | )          | (6               | )          |
| Less:  Valuation allowances                                  |       | —           |       | —           |       |
| Net  deferred tax assets                                     |       | 144              |       | 131              |       |

 

F-18

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

 

**5****             ****Net income per ordinary share**

 

The calculation of the basic and diluted net incomeper ordinary share is based on the following data:

 
| ** **                                                                                   | ** ** | **200****8**     | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Number of shares                                                                             |       |             |       |             |       |             |       |
| Weighted  average number of ordinary shares for the purposes of basic net income per share   |       | 11,824,153       |       | 11,105,556       |       | 8,047,911        |       |
| Effect of dilutive potential ordinary shares:Stock options                                   |       | 387,905          |       | 989,779          |       | 2,739,509        |       |
| Weighted  average number of ordinary shares for the purposes of diluted net income per share |       | 12,212,058       |       | 12,095,335       |       | 10,787,420       |       |

 

**6****             ****Accountsreceivable**

** **
| ** **                         | ** ** | **200****8**     | ** ** | **200****7**     | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                         | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                               |       |             |       |             |       |
| Trade receivables                  |       | 6,792            |       | 5,063            |       |
| Less: Allowance for doubtful debts |       | (85              | )          | (95              | )          |
|                               |       | 6,707            |       | 4,968            |       |

 
| ** **                               | ** ** | **200****8**     | ** ** | **200****7**     | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                               | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Allowance for  doubtful debts            |       |             |       |             |       |
| Balance at beginning                     |       | 95               |       | 86               |       |
| Released/(charged) to costs and expenses |       | 8                |       | 28               |       |
| Write off                                |       | (18              | )          | (19              | )          |
| Balance at end                           |       | 85               |       | 95               |       |

 

Asof December 31, 2008, accounts receivables in the form of bills receivablethrough banks amounted to US$50,000 (2007: US$ 26,000).

 

**7****             ****Inventories,net**

** **
| ** **       | ** ** | **200****8**     | ** ** | **200****7**     | ** ** |
|------------------|------------|------------------|------------|------------------|------------|
| ** **       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|             |       |             |       |             |       |
| Raw materials    |       | 162              |       | 76               |       |
| Work in progress |       | 365              |       | 108              |       |
| Finished goods   |       | 2,073            |       | 1,828            |       |
|             |       | 2,600            |       | 2,012            |       |

 

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Managementcontinuously reviews obsolete and slow moving inventories and assesses theinventory valuation to determine if the provision is deemed appropriate. For the year ended December 31, 2008, and 2007, provision forobsolete and slow moving inventories amounted to US$68,758 and US$28,064, respectively, which werecharged to cost of revenue in Consolidated Statements of Income.

 

**8****             ****Property,plant and equipment**

 
| ** **                               | ** ** | **200****8**     | ** ** | **200****7**     | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                               | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                     |       |             |       |             |       |
| Office premises                          |       | 2,257            |       | 2,257            |       |
| Leasehold improvements                   |       | 150              |       | 140              |       |
| Furniture, fixtures and office equipment |       | 857              |       | 776              |       |
| Motor vehicles                           |       | 162              |       | 173              |       |
| Testing equipment                        |       | 77               |       | 77               |       |
|                                     |       | 3,503            |       | 3,423            |       |
|                                     |       |             |       |             |       |
| Less: Accumulated depreciation           |       | (1,990           | )          | (1,801           | )          |
|                                     |       | 1,513            |       | 1,622            |       |

 
| ** **          | ** ** | **200****8**     | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|---------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **          | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Depreciation charge |       | 218              |       | 232              |       | 216              |       |

 

F-20

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

**9****                                        ****Investmentsin affiliates****and acquisition ofsubsidiaries**

 

TheGroup granted the minority shareholder of Yixing Pact EnvironmentalTechnology Co., Ltd and Pact Asia Pacific Limited a three-year put optionrequiring the Group to acquire all remainingsecurities of these two companies at 5.2 timesof their average net income for the three prior fiscal years.

 

During the year ended December 31,2007, the Group acquired 20% equity interests in ZhejiangTianlan Desulfurization and Dust—Removal Co. Ltd, a company incorporated inthe PRC for a total consideration of US$4,648,000.  The Group believes that after this acquisition, ithas a strategic partner to work with in China for the environmentalprotection business.With this affiliate’s technology andtechnical support, it can nowprovide services and environmental solutions not only for water and wastewatertreatment but also for air pollution control for industrial clients in China.Investments in this affiliate areaccounted for using the equity method of accounting.

 

Asummary of the financial information of the affiliate, Zhejiang Tianlan Desulfurizationand Dust—Removal Co. Ltd, is set forth below:

 
| **Balance Sheet:**               | ** ** | **200****8**     | ** ** | **200****7**     | ** ** |
|----------------------------------|------------|------------------|------------|------------------|------------|
|                             |       | **US$’000** |       | **US$’000** |       |
| Current assets                   |       | 16,952           |       | 16,110           |       |
| Non-current assets               |       | 5,504            |       | 2,487            |       |
| Total assets                     |       | 22,456           |       | 18,597           |       |
| Current and total liabilities    |       | (9,831           | )          | (7,328           | )          |
| Total  shareholders’ equity |       | 12,625           |       | 11,269           |       |

 
| **Operating results:** | ** ** | **200****8**     | ** ** | **200****7**     | ** ** |
|------------------------|------------|------------------|------------|------------------|------------|
|                   |       | **US$’000** | ** ** | **US$’000** |       |
| Net sales              |       | 14,688           |       | 10,535           |       |
| Operating  profits     |       | 1,396            |       | 2,281            |       |
| Net profits            |       | 1,215            |       | 1,927            |       |

 

During the year ended December 31, 2008, the Groupacquired 20% equity interests in Zhejiang Jia Huan Electronic Co. Ltd., (“Jia Huan”), a company incorporated in the PRC, for approximately US$2,610,000. Jia Huan has been inthe environmental protection business since 1969 and is based in Jin Hua,Zhejiang. The Group believes that afterthis acquisition, it has a strategicpartner to help it make inroadsinto the rapidly growing air 

 

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pollution control market in China. Investments in this affiliate are accounted for using the equity method of accounting.

 

Asummary of the financial information of the affiliate, Zhejiang Jia HuanElectronic Co. Ltd, is set forth below:

 
| **Balance Sheet:**               | ** ** | **200****8**     | ** ** |
|----------------------------------|------------|------------------|------------|
|                             |       | **US$’000** |       |
| Current assets                   |       | 17,423           |       |
| Non-current assets               |       | 5,197            |       |
| Total assets                     |       | 22,620           |       |
| Current and total liabilities    |       | (11,559          | )          |
| Total  shareholders’ equity |       | 11,061           |       |

 
| **Operating results:** | ** ** | **200****8**     | ** ** |
|------------------------|------------|------------------|------------|
|                   |       | **US$’000** |       |
| Net sales              |       | 13,571           |       |
| Operating  profits     |       | 639              |       |
| Net profits            |       | 152              |       |

 

**10****                                 ****Otherpayables and accrued expenses**

 

Other payables and accruedexpenses mainly represent deposits received from customers and accruals foroperating expenses.

 

**11****                                 ****Ordinary share**

 

Duringthe year ended December 31, 2006,the Company issued 2,048,890 ordinary shares for stock options exercised andcancelled 36,700 shares surrendered for exercise of stock options.

 

Duringthe year ended December 31, 2007,the Company issued 2,695,246 ordinary shares for stock options exercised andcancelled 45,537 shares surrendered for exercise of stock options.

 

Duringthe year ended December 31, 2008,the Company issued 208,370 ordinary shares for stock options exercised andcancelled 31,240 shares surrendered for exercise of stock options.

 

**12****                                 ****Goodwill**

 

TheCompany accounted for the acquisition in accordance with SFAS No. 141 “BusinessCombinations”, which resulted in the recognition of goodwill. Goodwillrepresents the excess of acquisition cost over the estimated fair value of netassets acquired as of October 18, 2005 as described in Note 9.

 

Asof December 31, 2008, the Companycompleted the annual impairment test. (i.e. comparing the carrying amount ofthe net assets, including goodwill, with the fair value of the Company as of December 31, 2008) Based on theresult of the first step of the test, the Company believes that there was noimpairment of goodwill as of December 31, 2008.

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

**1****3****                                 ****Treasurystock**

 

The Company authorized astock buyback program in December 2000 pursuant to which up to 341,250 shares, but not to exceed US$281,250 in value, ofthe Company’s ordinary share could be purchased in the open market from time totime as market and business conditions warrant. The Company repurchased a total of 36,445 shares and 304,206 shares ofordinary share during 2000 and 2001 for considerations of approximatelyUS$16,000 and US$221,000, respectively.

 

The Company authorized astock buyback program in November 2008 pursuant towhich up to 300,000 shares, butnot to exceed US$420,000 in value, of the Company’s ordinary share could be purchased in theopen market from time to time as market and business conditions warrant.  The Company repurchased a total of 41,041 shares of ordinary shareduring 2008 for considerations ofapproximately US$44,000.

 

There was no reissuance oftreasury stock during each of the three years ended December 31, 2008.

 

**1****4****                                 ****PRCstatutory reserve**

 

Under the relevant PRC lawsand regulations, the PRC subsidiaries are required to appropriate certainpercentage of their respective net income to two statutory funds i.e. the statutory reserve fund and the statutorystaff welfare fund.  The PRC subsidiaries also appropriated certainamount of their net income to the expansion funds.

 

(i) Statutory reservefunds

 

Pursuant to applicable PRClaws and regulations, the PRC subsidiaries are required to allocate at least10% of the companies’ net income to thestatutory reserve funds until such funds reaches 50% of the companies’registered capital. The statutory reserve funds can be utilized upon theapproval by the relevant authorities, to offset accumulated losses or toincrease registered capital of the companies, provided that such funds bemaintained at a minimum of 25% of the companies’ registered capital.

 

(ii) Statutory welfarefunds

 

Pursuant to applicable PRClaws and regulations, the PRC subsidiaries are required to allocate certain amount of the companies’ net income to the staffwelfare funds determined by theCompany. The staff welfare funds can only be used to provide staff welfarefacilities and other collective benefits to the companies’ employees. This fundis non-distributable other than upon liquidation of the PRC subsidiaries.

 

(iii) Expansion funds

 

The expansion reserve shall only be used to make up losses,expand the PRC subsidiaries’ production operations, or increase the capital ofthe subsidiaries. The expansion fund can be utilized upon approval by relevantauthorities, to convert into registered capital and issue bonus capital toexisting investors, provided that such funds be maintained at a minimum of 25%of the companies’ registered capital.

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

**1****5****                                 ****Stockoptions**

 

(i)            ManagementOptions Plan

 

A total of 4,586,400 shares of ordinary share have been reserved forissuance under the Company’s management option plan (the “Management Options”).  The Management Options provide for the grantof options to its officers, directors and employees as the Company’s Chairmanof the Board of Directors and Chief Executive Officer may direct.

 

Duringthe year ended December 31, 2006, the Company granted 10,000 shares with the exercise price of US$1.6789 per share to itsofficers, directors and employees, which allowed them to purchase up to 10,000 shares of ordinary share.  The options expired in March 2007.  The Company further cancelled 21,840 options with an exercise price of US$1.6789. Duringthe same year, 1,015,740 options and 757,000 options under the Management Options with theexercise price of US$ 1.221 per share and US$1.6789 per share, respectively,wereexercised.

 

Duringthe year ended December 31, 2007, 90,090 options and 2,018,916 options under the Management Options with theexercise price of US$ 1.221 per share and US$1.6789 per share, respectively,wereexercised. All the remaining unexercised options expired in March 2007.

 

(ii)           2000 StockOption Plan

 

A total of 1,195,740 shares of ordinary share have been reserved forissuance under the Company’s 2000 Stock Option Plan (the “2000 Stock Options”).  The 2000 Stock Options provide for the grantof options to its officers, directors and employees as the Company’s Chairmanof the Board of Directors and Chief Executive Officer may direct. 

 

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During the year ended December 31,2006, 16,380 options with exercise price of US$0.5787 were cancelled. The Company further granted 40,000 options and 5,000 options underthe 2000 Stock Options with an exercise price of US$3.33 and US$2.02 per share, respectively, to its officers, directors and employees, whichallow them to purchase up to 45,000 shares ofordinary share. The options vested within a six-monthperiod and will expire in August 2010. During thesame year, 40,950 options and 214,200 options with exercise price of US$ 0.5787 and US$0.8191 per share, respectively,wereexercised**.**

 

During the year ended December 31,2007, 16,380 optionsand 6,300 options with exercise price of US$0.5787and US$0.6809, respectively, werecancelled.  During the same year, 46,410 optionsand 101,430 options with exercise price of US$ 0.5787 and US$0.8191 per share, respectively,wereexercised**.**

 

During the year ended December 31,2008, 32,000 options with an exerciseprice of US$2.56 per share weregranted to its employees. These options weresubsequently surrendered and cancelled duringthe vesting period. During the same year,24,570 options with exercise priceof US$ 0.5787 per sharewereexercised**.**

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

**1****5****                                 ****Stockoptions (Continued)**

 

(iii)          2002 Employees’Stock Option and Incentive Plan and 2002 Officers’ and Directors’ Stock Optionand Incentive Plan

 

A total of 294,000 shares and 840,000 shares ofordinary share have been reserved for issuance under the Company’s 2002Employees’ Stock Option and Incentive Plan (the “2002 Employee Stock Options”)and 2002 Officers’ and Directors’ Stock Option and Incentive Plan (the “2002D&O Stock Options”), respectively. Both 2002 Employee Stock Options and the 2002 D&O Stock Optionsprovide for the grant of options to its employees as the Company’s Chairman ofthe Board of Directors and Chief Executive Officer may direct.

 

Duringthe year ended December 31, 2006, 8,400 options with the exerciseprice of US$ 0.7618 were cancelled. During the same year,21,000 options with exercise priceof US$ 0.7618 per sharewereexercised.

 

Duringthe year ended December 31, 2007, 8,400 options with the exerciseprice of US$ 0.7618 were cancelled. During the same year,50,400 options and 388,000 options withexercise price of US$ 0.7618and US$0.5857 per share, respectively,wereexercised**.**

 

Duringthe year ended December 31, 2008, 16,800 options and 167,000 options with exercise price of US$ 0.7618 and US$0.5857 per share, respectively,wereexercised**.**

 

(iv)          2007 Officers’ and Directors’ Stock Option and Incentive Plan

 

A total of 880,000 shares of ordinary share have been reserved for issuanceunder the Company’s 2007 Officers’ andDirectors’ Stock Option and Incentive Plan (the “2007 D&O StockOptions”).  The 2007 D&O Stock Options provide for the grant of options to its directors and officers as the Company’s Chairman of the Board of Directorsand Chief Executive Officer may direct. During the year ended December 31, 2007, the Companygranted such options to its officers anddirectors under the 2007 D&O StockOptions, which allow them to purchase up to 133,000,66,500, 66,500,100,000 and133,000 shares of ordinary share at an exercise price of US$2.85, US$4.00, US$4.05, US$3.66 and US$2.66, respectively. The options vested for a period of asix-month period and will expire

 

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beforeend of November 2009. During the same year, nooptions had been exercised.

 

Duringthe year ended December 31, 2008, all the 499,000 options granted in 2007were cancelled. On January 24, 2008, 173,000 options with an exercise price of US$2.56 per share weregranted. These options were subsequentlysurrendered and cancelled on July 4, 2008.

 

The Company estimate thefair value of the options granted under the Black-Scholes pricing model.

 

Changes in outstandingoptions under various plans mentioned above were as follows:

 
| ** **                      | ** ** | **200****8**  | ** ** | **200****7**                              | ** ** | **200****6**  | ** ** |
|---------------------------------|------------|---------------|------------|-------------------------------------------|------------|---------------|------------|
| ** **                      | ** ** | **Number of** | ** ** | **Weighted  average  exercise** | ** ** | **Number of** | ** ** | **Weighted  average  exercise** | ** ** | **Number of** | ** ** | **Weighted  average  exercise** | ** ** |
| ** **                      | ** ** | **options**   | ** ** | ** price**                           | ** ** | **options**   | ** ** | **price** | ** ** | **options** | ** ** | ** price** | ** ** |
|                            |       |          |       | **US$**                                   |       |          |       | **US$** |   |   |   | **US$** |   |
| Outstanding,  beginning of year |       | 1,290,840     |       | 1.74                                      |       | 3,938,296     |       | 1.32 |   | 5,978,806 |   | 1.31 |   |
| Granted                         |       | 205,000       |       | 2.56                                      |       | 499,000       |       | 3.27 |   | 55,000 |   | 2.91 |   |
| Cancelled/Expired               |       | (704,000      | )          | (3.07                                     | )          | (451,210      | )          | (1.58 | ) | (46,620 | ) | (1.13 | ) |
| Exercised                       |       | (208,370      | )          | (0.60                                     | )          | (2,695,246    | )          | (1.44 | ) | (2,048,890 | ) | (1.33 | ) |
| Outstanding,  end of year       |       | 583,470       |       | 0.84                                      |       | 1,290,840     |       | 1.74 |   | 3,938,296 |   | 1.32 |   |
|                            |       |          |       |                                      |       |          |       |   |   |   |   |   |   |
| Exercisable,  end of year       |       | 583,470       |       | 0.84                                      |       | 791,840       |       | 0.78 |   | 3,923,296 |   | 1.32 |   |

 

As of December 31, 2008, the options outstanding and exercisable had exercise prices in therange of US$0.5787 to US$3.33 and a weightedaverage unexpired life of approximately 2.7 years.

 
| **As of  December 31, 2008**            | ** ** | **Shares** | ** ** | **Intrinsic  Value** | ** ** |
|-----------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | **US$’ 000**    | ** ** |
| Total outstanding  in-the-money options |       | 538,470    |       | 119,000              |       |
|                                    |       |       |       |                 |       |
| Total vested in-the-money  options      |       | 538,470    |       | 119,000              |       |

 

The total intrinsic value of share optionsexercised for the twelve months ended December 31, 2008 and 2007 wereapproximately $374,000 and $3,492,000, respectively. At of December 31, 2008,there was no unrecognized stock-based compensation expense related to unvestedstock options.

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

**1****5****                                 ****Stockoptions (Continued)**

 

OnJanuary 1, 2006, the Group adopted the provisions of Statement 123(revised 2004) (Statement 123(R)), Share-Based Payment, which revises Statement123, Accounting for Stock-Based Compensation, and supersedes APB Opinion 25,Accounting for Stock Issued to Employees. Statement 123(R) requires us torecognize expense related to the fair value of our stock-based compensationawards, including employee stock options.

 

The Black-Scholes option-pricing model isused to estimate the fair value of the options granted. This requires the inputof subjective assumptions, including the expected volatility of stock price,expected option term, expected risk-free rate over the expected option term andexpected dividend yield rate over the expected option term.  Because changes in subjective inputassumptions can materially affect the fair value estimate, in directors’opinion, the existing model may not necessarily provide a realizable measure ofthe fair value of the stock options. Expected volatility is based on historicalvolatility in the 180 days prior to the issue of the options. Expected option termand dividend yield rate are based on historical trends. Expected risk-free rateis based on US Treasury securities with similar maturities as the expectedterms of the options at the date of grant.

 

The following table summarizes theassumptions used during the years ended December 31, 2008 and 2007:

 
| **Assumptions**        | ** ** | **200****8** | ** ** | **200****7** | ** ** |
|------------------------|------------|--------------|------------|--------------|------------|
|                   |       |         |       |         |       |
| Expected  volatility   |       | 75.9-86.7%   |       | 75.9-86.7%   |       |
| Expected  dividends    |       | 0%           |       | 0%           |       |
| Expected  term (years) |       | 1.25         |       | 1.25         |       |
| Risk-free  rate        |       | 3.2-4.3%     |       | 3.2-4.3%     |       |

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

**1****6****                                 ****Pensionplan**

 

Prior to December 1,2000, the Group had only one defined contribution pension plan for all its HongKong employees.  Under this plan, allemployees were entitled to pension benefits equal to their own contributionsplus 50% to 100% of individual fund account balances contributed by the Group,depending on their years of service with the Group.  The Group was required to make specificcontributions at approximately 10% of the basic salaries of the employees to anindependent fund management company.

 

With the introduction of theMandatory Provident Fund Scheme, a defined contribution scheme managed by anindependent trustee on December 1, 2000, the Group and its employees whojoined the Group subsequently make monthly contributions to the scheme at 5% ofthe employee’s cash income as defined under the Mandatory Provident Fundlegislation.  Contributions of both theGroup and its employees are subject to a maximum of HK$1,000 per month andthereafter contributions are voluntary and are not subject to any limitation.  The Group and its employees made their firstcontributions in December 2000.

 

As stipulated by the rules andregulations in the PRC, the Group contributes to state-sponsored retirementplans for its employees in Mainland China. The Group contributes approximatelyranging from10% to 22% of the basic salaries of its employees, and has nofurther obligations for the actual payment of pension or post-retirementbenefits beyond the annual contributions. The state-sponsored retirement plans are responsible for the entirepension obligations payable to retired employees.

 

During the years ended December 31,2008, 2007 and 2006, the aggregatecontributions of the Group to the aforementioned pension plans and retirementbenefit schemes were approximately US$291,000, US$245,000 and US$202,000 respectively.

 

**1****7****                                 ****Riskfactor and Derivative Instruments**

 

Financial risk factors

 

The Group’s activitiesexpose it to a variety of financial risks: foreign exchange rate risk andcredit risk.

 

(i)            Credit risk

 

The Group has no significant concentration of credit risk.  The Group has policies in place to ensurethat sales of products are made to customers with an appropriate credithistory.  The Group has policies thatlimit the amount of credit exposure to any customers. Derivative counterpartiesand cash transactions are limited to high credit quality banks.

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

**1****7****                                 ****RiskFactor and Derivative Instruments (Continued)**

 

(ii)          Foreignexchange risk

 

The Group operates in HongKong, the PRC and trades with both local and overseas customers, and is exposedto foreign exchange risk arising from various currency exposures, primarilywith respect to purchases in, Hong Kong dollar, Renminbi andEuro.  Foreign exchange risk arises fromcommitted and unmatched future commercial transactions, such as confirmedimport purchase orders and sales orders, recognized assets and liabilities, andnet investment in the PRC operations. The Group uses derivative financialinstruments such as foreign exchange contracts to hedge certain foreigncurrency exposures.

 

The Group’s prevailing riskmanagement policy is to hedge the net committed transactions (mainly sales andimport purchases) in each major currency.

 

The Company’s policy generally permits the use of derivatives if theyare associated with underlying assets or liabilities, forecasted transactions,or legally binding rights or obligations. There were no such derivates duringthe years ended December 31, 2008 and 2007.

 

**18****                                 ****Relatedparty transactions**

 

Arelated party is an entity that can control or significantly influence themanagement or operating policies of another entity to the extent one of theentities may be prevented from pursuing its own interests.  A related party may also be any party theentity deals with that can exercise that control.  There were no transactions with relatedparties in the years 2008, 2007 and 2006.

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

**19****                                 ****Commitmentsand contingencies**

 

(i)           Operatingleases

 

The Group has various operating leaseagreements for office and industrial premises. Rental expenses for the years ended December 31, 2008, 2007 and 2006 were approximately US$411,000, US$448,000, and US$404,000,respectively.  Future minimum rentalpayments as of December 31, 2008, underagreements classified as operating leases with non-cancellable terms amountedto US$177,000 of which US$154,000 are payable in the year 2009 and US$23,000 are payable each year from 2010 to 2012.

 

(ii)          Bankingfacilities

 

As at December 31, 2008, 2007 and 2006, the Group had various banking facilities available for overdraft,import and export credits and foreign exchange contracts from which the Groupcan access up to approximately US$2,564,000, US$4,167,000 and US$4,167,000respectively, of which approximatelyUS$234,000, US$138,000 and US$726,000 was utilized for issuance of bankguarantees.

 

**20****                                 ****Fairvalue of financial instruments**

 

The carrying values offinancial instruments, which consist of cash and cash equivalents, accountsreceivable and accounts payable, bills receivable, bills payable, otherpayables and balances with related companies approximate their fair values dueto the short-term nature of these instruments.

 

**2****1****                                 ****Segmentinformation**

 

(i)   TheGroup reports under two segments: Trading and manufacturing, and Engineering.

 

Operating incomerepresents total revenues less operating expenses, excluding other expense,interest and income taxes. The identifiable assets by segment are those used ineach segment’s operations. Intersegment amounts are not significant and areeliminated to arrive at consolidated totals.

 
| ** **                 | ** ** | **200****8**     | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Revenue                    |       |             |       |             |       |             |       |
| Trading and  manufacturing |       | 21,439           |       | 20,010           |       | 22,243           |       |
| Engineering                |       | 10,299           |       | 7,220            |       | 4,918            |       |
|                       |       | 31,738           |       | 27,230           |       | 27,161           |       |
| Operating income           |       |             |       |             |       |             |       |
| Trading and  manufacturing |       | (184             | )          | (76              | )          | (237             | )          |
| Engineering                |       | 555              |       | 323              |       | 831              |       |
|                       |       | 371              |       | 247              |       | 594              |       |

 

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| ** **                   | ** ** | **200****8**     | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Depreciation:                |       |             |       |             |       |             |       |
| Trading and  manufacturing   |       | 179              |       | 197              |       | 197              |       |
| Engineering                  |       | 39               |       | 35               |       | 19               |       |
|                         |       | 218              |       | 232              |       | 216              |       |
| Capital Expenditures,  Gross |       |             |       |             |       |             |       |
| Trading and  manufacturing   |       | 56               |       | 147              |       | 63               |       |
| Engineering                  |       | 43               |       | 103              |       | 43               |       |
|                         |       | 99               |       | 250              |       | 106              |       |

 
| ** **                 | ** ** | **200****8**     | ** ** | **200****7**     | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Assets                     |       |             |       |             |       |
| Trading and  manufacturing |       | 12,754           |       | 13,187           |       |
| Engineering                |       | 7,845            |       | 7,249            |       |
| Unallocated                |       | 7,679            |       | 5,046            |       |
|                       |       | 28,278           |       | 25,482           |       |
| Liabilities                |       |             |       |             |       |
| Trading and  manufacturing |       | 6,108            |       | 4,213            |       |
| Engineering                |       | 3,191            |       | 2,663            |       |
| Unallocated                |       | —           |       | 648              |       |
|                       |       | 9,299            |       | 7,524            |       |

 

(ii)                              Geographicalanalysis of revenue by customer location is as follows:

 
| ** ** | ** ** | **200****8**     | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Revenue -  |       |             |       |             |       |             |       |
| The PRC    |       | 25,430           |       | 21,595           |       | 22,457           |       |
| Hong Kong  |       | 5,745            |       | 5,401            |       | 4,324            |       |
| Others     |       | 563              |       | 234              |       | 380              |       |
|       |       | 31,738           |       | 27,230           |       | 27,161           |       |

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

**2****1****                                 ****Segmentinformation (Continued)**

 

(iii)          Long-livedassets (1)

 

Geographical analysis oflong-lived assets is as follows:

 
| ** ** | ** ** | **200****8**     | ** ** | **200****7**     | ** ** |
|------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|       |       |             |       |             |       |
| Hong Kong  |       | 810              |       | 881              |       |
| The PRC    |       | 703              |       | 741              |       |
|       |       | 1,513            |       | 1,622            |       |

 

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(1)                                  Long-livedassets represent property, plant and equipment, net.

 

(iv)         Major suppliers

 

Details of individualsuppliers accounting for more than 5% of the Group’s purchases are as follows:

 
| ** **                        | ** ** | **200****8** | ** ** | **200****7** | ** ** | **200****6** | ** ** |
|-----------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
|                              |       |         |       |         |       |         |       |
| Hioki E.E. Corp.                  |       | 15           | %          | 32           | %          | 36           | %          |
| Thermo Fisher Scientific          |       | 10           | %          | 5            | %          | 2            | %          |
| Calipers Life  Sciences Inc.      |       | 10           | %          | 6            | %          | 4            | %          |
| Hach Company - Lachat Instruments |       | 8            | %          | 5            | %          | 8            | %          |
| Siemens Water  Technologies Group |       | 7            | %          | 10           | %          | 6            | %          |
| Hach Ultra                        |       | 7            | %          | 5            | %          | 4            | %          |
| Hach Company                      |       | 6            | %          | 6            | %          | 9            | %          |

 

Some of the purchaseagreements signed with the Group’s suppliers are memorialized. They are notformal contracts and are arranged through other acknowledgements orcorrespondence which may contain vague description of the terms and conditionsof such arrangements, and therefore may be unenforceable.

 

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