**FORM 20-F**

** **

| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                  | **REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **OR**                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                |
| **ý**                                                                                                                                                                                                                                                                                                                                                                                                                             | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **For the fiscal  year ended December 31, 2002**                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **OR**                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **For the  transition period  from                                to                                ** |

 

**Commission filenumber 000-22113**

 

**EURO TECH HOLDINGS COMPANY LIMITED**

(Exact name of Registrantas specified in its charter)

 

**EURO TECHHOLDINGS COMPANY LIMITED**

(Translationof Registrant’s name into English)

 

**British Virgin Islands**

(Jurisdictionof incorporation or organization)

 

**18/F Gee Chang Hong Centre, 65 Wong ChukHong Road, Hong Kong**

(Addressof principal executive offices)

 

Securities registered or to be registered pursuantto Section 12(b) of the Act.

 

| **Title of each class** |   | **Name of each exchange  on which registered** |
|-------------------------|--------|------------------------------------------------|
|                    |   |                                           |
| **Not Applicable**      |   |                                           |

 

| Securities registered or to be  registered pursuant to Section 12(g) of the Act.            |
|---------------------------------------------------------------------------------------------|
|                                                                                        |
| **Ordinary  Shares, $.01 par value**                                                        |
| (Title  of Class)                                                                           |
|                                                                                        |
| Securities for which there is a  reporting obligation pursuant to Section 15(d) of the Act. |
|                                                                                        |
|                                                                                        |
| (Title  of Class)                                                                           |

 

Indicate the number of issued and outstanding shares of each of theissuer’s classes of capital or common stock as of the close of the periodcovered by the annual report.

 
|   | **3,064,151 Ordinary Shares** |
|--------|-------------------------------|

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be 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 to suchfiling requirements for the past 90 days.

 

Yes   ý             No   o

 

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

 

Item 17   o       Item 18   ý

 

 

----

 

###### **TABLE OF CONTENTS**

 

 
| **INTRODUCTION**           |
|----------------------------|
|                       |
| FORWARD LOOKING STATEMENTS |
|                       |
| **GLOSSARY**               |
|                       |   |
| **PART I**                 |   |
|                       |   |
| ITEM 1.                    | IDENTITY  OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
|                       |   |
| ITEM 2.                    | OFFER  STATISTICS AND EXPECTED TIMETABLE |
|                       |   |
| ITEM 3.                    | KEY  INFORMATION |
|                       |   |
| *Item 3A.*                 | *Selected Financial Data* |
|                       |   |
| *Item 3B.*                 | *Capitalization and Indebtedness* |
|                       |   |
| *Item 3C.*                 | *Reasons for the Offer and Use of Proceeds* |
|                       |   |
| *Item 3D.*                 | *Risk Factors* |
|                       |   |
| ITEM 4.                    | INFORMATION  ON THE COMPANY |
|                       |   |
| *Item 4A.*                 | *History and Development of the Company* |
|                       |   |
| *Item 4B.*                 | *Business Overview* |
|                       |   |
| *Item 4C.*                 | *Organizational Structure* |
|                       |   |
| *Item 4D.*                 | *Property, Plant and Equipment* |
|                       |   |
| ITEM 5.                    | OPERATING  AND FINANCIAL REVIEW AND PROSPECTS |
|                       |   |
| *Item 5A.*                 | *Operating Results* |
|                       |   |
| *Item 5B.*                 | *Liquidity and Capital Resources* |
|                       |   |
| *Item 5C.*                 | *Research and Development, Patents and Licenses* |
|                       |   |
| *Item 5D.*                 | *Trend Information* |
|                       |   |
| *Item 5E.*                 | *Off Balance Sheet Arrangements* |
|                       |   |
| *Item 5F.*                 | *Tabular Disclosure of Contractual Obligations* |
|                       |   |
| ITEM 6.                    | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES |
|                       |   |
| *Item 6A.*                 | *Directors and Senior Management* |
|                       |   |
| *Item 6B.*                 | *Compensation* |
|                       |   |
| *Item  6C.*                | *Board Practices* |
|                       |   |
| *Item 6D.*                 | *Employees* |
|                       |   |
| *Item  6E.*                | *Share Ownership* |
|                       |   |
| ITEM  7.                   | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
|                       |   |
| *Item 7A.*                 | *Major Shareholders* |
|                       |   |
| *Item 7B.*                 | *Related Party  Transactions* |
|                       |   |
| *Item 7C.*                 | *Interest of  Experts and Counsel* |

 

i

----

 
| ITEM 8.        | FINANCIAL INFORMATION                                                        |
|----------------|------------------------------------------------------------------------------|
|           |                                                                         |
| *Item  8A.*    | *Consolidated  Statements and Other Financial Information*                   |
|           |                                                                         |
| *Item 8B.*     | *Significant Changes*                                                        |
|           |                                                                         |
| ITEM 9.        | THE OFFERING AND  LISTING                                                    |
|           |                                                                         |
| *Item 9A.*     | *Listing  Details and 9.C Markets*                                           |
|           |                                                                         |
| *Item 9B.*     | *Plan of Distribution*                                                       |
|           |                                                                         |
| *Item 9D.*     | *Selling Shareholders*                                                       |
|           |                                                                         |
| *Item 9E.*     | *Dilution*                                                                   |
|           |                                                                         |
| *Item 9F.*     | *Expenses Of The Issue*                                                      |
|           |                                                                         |
| ITEM 10.       | ADDITIONAL INFORMATION                                                       |
|           |                                                                         |
| *Item  10A.*   | *Share Capital*                                                              |
|           |                                                                         |
| *Item  10B.*   | *Memorandum  and Articles of Association*                                    |
|           |                                                                         |
| *Item 10C.*    | *Material Contracts*                                                         |
|           |                                                                         |
| *Item 10D.*    | *Exchange Controls*                                                          |
|           |                                                                         |
| *Item 10E.*    | *Taxation*                                                                   |
|           |                                                                         |
| *Item 10F.*    | *Dividends And  Paying Agents*                                               |
|           |                                                                         |
| *Item 10G.*    | *Statement By Experts*                                                       |
|           |                                                                         |
| *Item 10H.*    | *Documents on Display*                                                       |
|           |                                                                         |
| *Item 10I.*    | *Subsidiary Information*                                                     |
|           |                                                                         |
| ITEM  11.      | QUANTITATIVE  AND QUALIFICATION DISCLOSURES ABOUT MARKET RISK                |
|           |                                                                         |
| ITEM  12.      | DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES                      |
|           |                                                                         |
| **PART II**    |                                                                         |
|           |                                                                         |
| ITEM 13.       | DEFAULTS,  DIVIDENDS, ARREARAGES AND DELINQUENCIES                           |
|           |                                                                         |
| ITEM  14.      | MATERIAL  MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
|           |                                                                         |
| ITEM 15.       | CONTROLS AND  PROCEDURES                                                     |
|           |                                                                         |
| ITEM 16.       | [RESERVED]                                                                   |
|           |                                                                         |
| ITEM 16A.      | AUDIT  COMMITTEE FINANCIAL EXPERT                                            |
|           |                                                                         |
| ITEM 16B.      |                                                                         |
|           |                                                                         |
| ITEM 16C.      |                                                                         |
|           |                                                                         |
| **PART III**   |                                                                         |
|           |                                                                         |
| ITEM 17.       | FINANCIAL STATEMENTS                                                         |
|           |                                                                         |
| ITEM 18.       | FINANCIAL STATEMENTS                                                         |
|           |                                                                         |
| ITEM 19.       | EXHIBITS                                                                     |
|           |                                                                         |
| **SIGNATURES** |                                                                         |

# ** **

ii

----

 

# **INTRODUCTION**

 

In this Form 20-F, reference to “us”, “we”, the “Company” and “EuroTech”are to EuroTech Holdings Company Limited and its subsidiaries unless otherwiseexpressly stated or the context otherwise requires.

 

## **Forward Looking Statements**

 

This annual report contains forward looking statements. Additionalwritten or oral forward looking statements may be made by the Company from timeto time in filings with the Securities and Exchange Commission (the“Commission”) or otherwise. Such forward looking statements are within themeaning of that term in Section 21E of the Exchange Act of 1934. Suchstatements may include, but not be limited to, projections of revenues, income,or loss, capital expenditures, plans for future operations, financing needs orplans, and plans relating to products or services of the Company, as well asassumptions relating to the foregoing. The words “believe,” “expect,”“anticipate,” “estimate,” “project,” and similar expressions identify forwardlooking statements, which speak only as of the date the statement was made.Forward looking statements are inherently subject to risks and uncertainties,some of which cannot be predicted or quantified. Future events and actualresults could differ materially from those set forth in, contemplated by, orunderlying the forward looking statements. Statements in this Annual Report,including those contained in the sections entitled Part I, Item 3D. “RiskFactors” and Item 5. “Operating and Financial Review and Prospects” and thenotes to the Company’s Consolidated Financial Statements, describe factors,among others, that could contribute to or cause such differences.

 

iii

----

 

# **GLOSSARY**

 

The following glossary of terms may be helpful in understanding theterminology used in this Annual Report.

 
| Ambient Air:                    |   | Atmospheric air (outdoor as  opposed to indoor 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. |
|                            |   |                                                                                                                                                                                                                                                                                                                      |
| 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.                                                                                                                                                                              |
|                            |   |                                                                                                                                                                                                                                                                                                                      |
| 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.                                                                                                                                                                                                                                     |
|                            |   |                                                                                                                                                                                                                                                                                                                      |
| 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.                                                                                                                                                        |
|                            |   |                                                                                                                                                                                                                                                                                                                      |
| Multi-Channel Digital Recorder: |   | A device that measures and records more than one  input of a digitized signal (signal in the form of pulses).                                                                                                                                                                                                             |
|                            |   |                                                                                                                                                                                                                                                                                                                      |
| Multi-Channel and Analogue      |   |                                                                                                                                                                                                                                                                                                                      |
| Recorder:                       |   | A device that measures and records more than one  input of a signal in multi-voltage or milliampere (e.g. temperature in  degrees Centigrade or degrees Fahrenheit).                                                                                                                                                      |
|                            |   |                                                                                                                                                                                                                                                                                                                      |
| Process Analyzer:               |   | An analyzer that continuously samples, monitors and  measures fluids or gases.                                                                                                                                                                                                                                            |
|                            |   |                                                                                                                                                                                                                                                                                                                      |
| Process Turbidimeter:           |   | An analytical instrument that continually measures  the clarity of water based on light scattering or deflection.                                                                                                                                                                                                         |

 

1

----

 
| Programmable Logic Controller: |   | A device used to automate the monitoring and control  of an industrial plant.                                                                                                                         |
|--------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                           |   |                                                                                                                                                                                                  |
| SCADA:                         |   | Supervisory Control and Data Acquisition. An  industrial device used to monitor and control an industrial plant’s status  and provide facilities to record the progress of a machine or project. |
|                           |   |                                                                                                                                                                                                  |
| Telemetry:                     |   | The science and technology of automatic measurement  and transmission of data by wire, radio or other means from remote sources.                                                                      |
|                           |   |                                                                                                                                                                                                  |
| Total Organic Carbon Analyzer: |   | An analytical instrument that measures organic  contamination in water.                                                                                                                               |

 

2

----

 

# **PARTI**

 

## **ITEM 1**.                             IDENTITY OF DIRECTORS,SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

## **ITEM 2.**                             OFFERSTATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

## **ITEM 3.**                             KEYINFORMATION

### *** ***

## ***Item 3A.****                         Selected Financial Data*

 

**SELECTED FINANCIAL INFORMATION**

(Amounts expressed inthousands, exceptshare and per share data and unless otherwise stated)

 

The selectedconsolidated income statement data for years ended December 31, 2002, 2001and 2000, and the selected consolidated balance sheet data as ofDecember 31, 2002 and 2001 set forth below are derived from auditedconsolidated financial statements of the Company and should be read inconjunction with, 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, 1999 and 1998 and the selected consolidatedbalance sheet data as of December 31, 2000, 1999 and 1998 set forth beloware derived from audited consolidated financial statements of the Company whichare not included herein.

 
|                      |   | **As of December 31,** |   |
|---------------------------|--------|------------------------|--------|
|                      |   | **2002**               |   | **2001** |   | **2000** |   | **1999** |   | **1998****** |   |
|                      |   | **US$**                |   | **US$** |   | **US$** |   | **US$** |   | **US$** |   |
| **Balance Sheet Data:**   |   |                   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents |   | 3,173                  |   | 3,551 |   | 3,963 |   | 3,691 |   | 3,045 |   |
| Working capital(1)        |   | 4,363                  |   | 4,123 |   | 3,686 |   | 3,632 |   | 3,493 |   |
| Total assets              |   | 12,716                 |   | 11,379 |   | 10,092 |   | 9,637 |   | 8,559 |   |
| Short-term debt(2)        |   | 0                      |   | 90 |   | 94 |   | 85 |   | 68 |   |
| Long-term bank loans      |   | 0                      |   | 0 |   | 92 |   | 178 |   | 260 |   |
| Net assets                |   | 6,714                  |   | 6,206 |   | 5,878 |   | 5,533 |   | 5,194 |   |

 

----

(1)                                  Current assets minus current liabilities.

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

 

3

----

 
|                                                  |   | **For the Year Ended December 31,** |       |
|-------------------------------------------------------|--------|-------------------------------------|------------|
|                                                  |   | **2002**                            |       | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                  |   | **US$**                             |       | **US$** |   | **US$** |   | **US$** |   | **US$** |   |
| **Income  Statement Data:**                           |   |                                | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                                  |   |                                |       |   |   |   |   |   |   |   |   |
| Revenue                                               |   | 23,497                              |       | 19,685 |   | 15,010 |   | 13,107 |   | 12,757 |   |
| Cost of revenue                                       |   | (18,735                             | )          | (15,396 | ) | (11,467 | ) | (9,896 | ) | (9,662 | ) |
|                                                  |   |                                |       |   |   |   |   |   |   |   |   |
| Gross profit                                          |   | 4,762                               |       | 4,289 |   | 3,543 |   | 3,211 |   | 3,095 |   |
|                                                  |   |                                |       |   |   |   |   |   |   |   |   |
| Selling andAdministrativeExpenses                     |   | (4,173                              | )          | (3,734 | ) | (3,301 | ) | (2,946 | ) | (2,924 | ) |
| Operating income                                      |   | 589                                 |       | 555 |   | 242 |   | 265 |   | 171 |   |
|                                                  |   |                                |       |   |   |   |   |   |   |   |   |
| Interest Income                                       |   | 18                                  |       | 66 |   | 113 |   | 85 |   | 86 |   |
| Other income, net                                     |   | 9                                   |       | 126 |   | 97 |   | 67 |   | 69 |   |
| Income before taxes                                   |   | 616                                 |       | 747 |   | 452 |   | 417 |   | 326 |   |
|                                                  |   |                                |       |   |   |   |   |   |   |   |   |
| Income taxes                                          |   | (123                                | )          | (163 | ) | (94 | ) | (78 | ) | (71 | ) |
| Share of equity innet  income of affiliates           |   | 7                                   |       | — |   | — |   | — |   | — |   |
| Net income                                            |   | 500                                 |       | 584 |   | 358 |   | 339 |   | 255 |   |
|                                                  |   |                                |       |   |   |   |   |   |   |   |   |
| Net income perOrdinary  Share                         |   |                                |       |   |   |   |   |   |   |   |   |
| Basic                                                 |   | 0.15                                |       | 0.18 |   | 0.11 |   | 0.11 |   | 0.08 |   |
| Diluted                                               |   | 0.15                                |       | 0.18 |   | 0.11 |   | 0.11 |   | 0.08 |   |
| Weighted average Numberof  Ordinary SharesOutstanding |   | 3,226,366                           |       | 3,226,366 |   | 3,226,366 |   | 3,226,366 |   | 3,226,366 |   |

 

 

Currency exchange rates as of the date of this Report are:

 

US$1 = HK $7.8

US$1 = RMB 8.3

 

### ***Item3B.***                         Capitalizationand Indebtedness

 

Not applicable.

 

4

----

 

### ***Item3C.***                         Reasonsfor the Offer and Use of Proceeds

 

Not applicable.

 

### ***Item3D.***                         RiskFactors

 

You should carefully consider all of the information set forth in thisannual report and the following risk factors. The risks below are not the onlyones we face. Additional risks not currently known by us or that we deemimmaterial may also impair our business operations. Our business, financialcondition or results of operations could be materially adversely affected byany of these risks. This annual report also contains forward looking statementsthat involve risks and uncertainties. Our results could materially differ fromthose anticipated in these forward looking statements as a result of certainfactors, including the risks we face as described below and elsewhere. See“Forward Looking Statements.”

 

**Certain Risks Relating to Doing Business in Hong Kong and thePeople’s Republic of China (“PRC”).**

 
| **PRC Sovereignty Over**       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Hong Kong Still Developing** |   | • |   | The Company’s executive and  principal offices are located in Hong Kong, a Special Administrative Region  of China (an “SAR”; Hong Kong is sometimes herein referred to as the “Hong  Kong SAR”).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                           |
|                           |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                           |   | • |   | As provided in the Sino-British Joint Declaration on  the Question of Hong Kong (the ”Joint Declaration”) and the Basic Law of  the Hong Kong SAR of China (the “Basic Law”), the Hong Kong SAR is provided a  high degree of autonomy except in foreign and defense affairs. China’s political system and policies are  not practiced in Hong Kong. Under this principle of “one country, two  systems”, Hong Kong maintains a legal system that is based on common law and  is different from that of China. There is an open question whether Hong  Kong’s future prosperity in its role as a gateway to China after China’s  recent accession to the Word Trade Organization, introducing a market  liberalization in China, will be diminished. The Company does not  believe that the transfer of sovereignty over Hong Kong has had an adverse  impact on its financial and operating environment. |
|                           |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                           |   | • |   | The Company’s results of operations and financial  condition may be influenced by the political situation in Hong Kong and by  the general state of the Hong Kong economy. See “ – Economic Instability;  Currency Exchange Rate.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

5

----

 
|                       |   | • |   | There can be no assurance that  these past or any prospective future changes in political, economic or  commercial conditions in Hong Kong and China will not result in a material  adverse affect upon the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|----------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Economic Instability;**  |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Currency Exchange Rate** |   | • |   | Most economies in the Far East  are suffering from large debts, declining company earnings and economic  growth, and significant currency devaluation. The region has also suffered  from the effects of the resulting capital flight from financial institutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                       |   | • |   | Issuer stock valuations also  dropped sharply from a 1997 high on the main Hong Kong stock index (the Hang  Seng)**.**  On August 7, 1997, the Hang Seng Index was 16,673.27. On June 13, 2003, that  index stood at 9,855.64.****There can be no assurance that these  problems will not continue to abate or worsen or that recovery will continue  in the near future in which event the Company may likely be materially  adversely affected.                                                                                                                                                                                                                                                                                                             |
|                       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Economy May**            |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Be Unstable**            |   | • |   | Unlike many other countries’  economies, the PRC government’s economic philosophy is based upon a “planned”  economy model as opposed to a “free enterprise” or “capitalist” model with  moderate government regulation which is the typical model in most developed,  Western nations. For more than forty years, the PRC economy has been, and  presently continues to be, a socialist economy operating under government  controls promulgated under various one-, five- and ten-year plans  (collectively, “State Plans”) adopted by central Chinese government  authorities and implemented, to a large extent, by provincial and local  authorities which may set production and development targets. |
|                       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                       |   | • |   | Since approximately the early  1980s the Chinese government has implemented certain policies that emphasize  decentralization of decision-making power and responsibility with respect to  matters such as allocation of funds and the regionalization of economic  development, reduce the role of government planning and permit some  utilization of market forces in the development of its economy. Such economic  reform measures or other policies, if continued, may be inconsistent,  ineffectual, or discontinued at any time with or                                                                                                                                                                                                               |

 

6

----

 
|                       |   |   |   | without notice, and the  Company may not be able to benefit from any or all such reforms or policies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|----------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                       |   | • |   | The success of the Company’s  activities in the PRC depends on the Company’s continued ability to overcome  circumstances specifically affecting the industrial sector, including the  relatively poor infrastructure, road transportation and communications  network and an uncertain legal and regulatory environment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Economic Reforms May**   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Not Continue or Impact** |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Positively On The**      |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Company; Changing**      |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Business Environment**   |   | • |   | Over the past several  years, the PRC’s government has pursued economic reform policies including  encouraging private economic activities and decentralization of economic  deregulation. The PRC government may not continue to pursue these policies or  may significantly alter them to our detriment from time to time without  notice. Changes in policies by the PRC government resulting in changes in  laws, regulations, or their interpretation, or the imposition of confiscatory  taxes, restrictions on currency conversion and imports could materially and  adversely affect our business and operating results. The nationalization or  other expropriations of private enterprises by the PRC government could result  in a loss of our investments in actual funds and time and effort, in China. |
|                       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                       |   | • |   | The Company’s results at times  may also be adversely affected by:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                       |   |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | changes in political, economic and social conditions  in the PRC; |
|                       |   |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | by changes in government  policies such as changes in laws and regulations (or their interpretation); |
|                       |   |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | the introduction of additional  measures to control inflation; |
|                       |   |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | changes in the rate or method  of taxation; |
|                       |   |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | imposition of additional  restrictions on currency conversion remittances abroad; |
|                       |   |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | reduction in tariff protection  and other import restrictions; |
|                       |   |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | a return to the more  centrally-planned economy that existed previously. |

 

7

----

** **
| **The Spread of SARS May**    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-------------------------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Have a Negative Impact on** |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **Our Business**              |   | • |   | There has been a recent  outbreak of Severe Acute Respiratory Syndrome (SARS) in Hong Kong, Beijing,  Guangzhou and elsewhere in Southern China. Our executive offices and  warehouse are located in Hong Kong and we have regional sales offices in  Beijing and Guangzhou. This outbreak is being investigated by the World  Health Organization, among other health agencies. To date, we are not aware  of any of our employees having contracted this illness and have no cessation  of operations due to our employees being suspected of SARS infection. We have  instructed our employees to minimize business travel and have distributed  respiratory masks to our employees. Although we believe that the spread of  SARS may have a near term impact on our operations with business travel and  customer purchases being postponed or delayed but not eliminated, we are  continually trying to keep abreast of the situation, but at this time, it is  difficult to precisely quantify the future impact of SARS on our business.  The SARS outbreak could result in quarantines or closures to some of our  facilities if our employees are infected with SARS and ongoing SARS concerns,  particularly its effects on person-to-person contacts and travel, could negatively  impact our customers and our business and operating results. |
|                          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **Uneven Economic**           |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **Growth**                    |   | • |   | The PRC’s economy has  experienced significant growth in recent years, but that growth has been  uneven among various geographic regions and economic sectors. Economic  reforms and growth in the PRC have been more successful in certain provinces  than in others, and the continuation or increase of such disparities could  adversely affect political or social stability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **PRC Inflation**             |   | • |   | The PRC has recently  experienced substantial rates of inflation, although inflation has declined  in the most recent years. The PRC government’s measures to restrain inflation  have had a significant adverse impact on the Company in the past and more  measures in this regard or other actions by the PRC government could  materially and adversely affect the Company, its business and results of  operations. See – “Adverse Impact upon Company of PRC’s Credit Restrictions.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

8

----

 
| **Regional Economic**        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|------------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Problems**                 |   | • |   | Most economies in the Far East  have suffered from large debts, declining company earnings and economic  growth, and significant currency devaluation. The region has also suffered  from the effects of the resulting capital flight on financial institutions.  These problems may materially adversely affect political and economic  conditions in Hong Kong and the PRC. There can be no assurance that such  problems will abate or become worse, or continue for a protracted period, or  that recovery will occur in the near future, if at all, in which event the  Company may likely be materially adversely affected.                                                                                                                                                                                                                                                           |
|                         |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Uncertain Legal System**   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **and Application of Laws**  |   | • |   | The legislative trend in the  PRC over the past decade has been to enhance the protection afforded to  foreign investment and allow for more active control by foreign parties of  foreign invested enterprises. There can 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 or the ability of the Company to  enter into Sino-foreign agreements.                                                                                                                                                                                                                                                                                                                                                    |
|                         |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **PRC Legal System**         |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Business Laws Developing** |   | • |   | The PRC does not yet possess a  comprehensive body of business law or a consolidated body of laws governing  foreign investment enterprises. As a result, the enforcement, interpretation  and implementation of existing laws, regulations or agreements may be  sporadic, inconsistent and subject to considerable discretion. The PRC’s  judiciary has not had sufficient opportunity to gain experience in enforcing  laws that exist, leading to a higher than usual degree of uncertainty as to  the outcome of any litigation. As the legal system develops, entities such as  the Company may be adversely affected by new laws, changes to existing laws  (or interpretations thereof) and preemption of provincial or local laws by  national laws. Even when adequate law exists in the PRC, it may not be  possible to obtain speedy and equitable enforcement of the law. |

 

9

----

 
| **Government Currency**                                |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------------------------------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Controls**                                           |   | • |   | The PRC government imposes  control over its foreign currency reserves in part through direct regulation  of the conversion of its currency, Renminbi (“Rmb”) into foreign exchange and  through restrictions on foreign 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 foreign exchange market rate with reference  to current exchange rates on the world financial markets.                                                                                  |
|                                                   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                   |   | • |   | Although the Rmb to U.S.  dollar exchange rate has generally been stable since January 1, 1994 and  the PRC government has stated its intention to intervene in the future to  support the value of the Rmb, there can be no assurance that exchange rates  will not again become volatile or that the Rmb will not devalue further  against the U.S. dollar or Hong Kong dollar. Exchange rate fluctuations may  adversely affect the Company because of foreign currency denominated  liabilities, and may materially adversely affect the value, translated into  U.S. dollars, of the Company’s net fixed assets situated and to be situated  in the PRC, earnings and dividends. |
|                                                   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Turbulent Relations**                                |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **with the United States**                             |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **of America (“United**                           |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **States”)**                                      |   | • |   | Differences between the  United States and PRC governments on some political issues continue  occasionally to color the relationship. These occasional controversies could  materially and adversely affect our business and operations. Political or  trade friction between the two countries could also materially and adversely  affect the market price of our Ordinary Shares, whether or not they adversely  affect our business.                                                                                                                                                                                                                                                        |
|                                                   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Certain Risks Relating to Company’s Business.** |
|                                                   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **We May  Make Acquisitions**                          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Without  Your Approval**                             |   | • |   | Although we endeavor to evaluate the risks inherent  in any particular acquisition, there can be no assurance that we will  properly or accurately ascertain all such risks. We will have virtually  unrestricted flexibility in identifying and selecting prospective acquisition  candidates and in deciding                                                                                                                                                                                                                                                                                                                                                                                  |

 

10

----

 
|                 |   |   |   | if they should be acquired for cash, equity or debt,  and in what combination of cash, equity and/or debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                 |   |   |   | We will not seek stockholder approval for any  acquisitions unless required by applicable law and regulations. Our  stockholders will not have an opportunity to review financial and other  information on acquisition candidates prior to consummation of any  acquisitions under almost all circumstances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                 |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                 |   |   |   | Investors will be relying upon our management, upon  whose judgment the investor must depend, with only limited information  concerning management’s specific intentions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                 |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                 |   |   |   | There can be no assurance that  the Company will locate any such additional acquisition candidate,  successfully complete such additional acquisition, or any acquisition will  perform as anticipated, will not result in significant unexpected liabilities  or will ever contribute significant revenues or profits to the Company or  that the Company will not lose its entire investment in any acquisition  candidate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                 |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **Past Investments** |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **in Real Estate**   |   | • |   | The Company has from time to  time invested in real estate in Hong Kong. Although the Company has derived  past profits from some of its investments in Hong Kong real estate, there can  be no assurance that the Company will ever derive a profit from any future  investments in Hong Kong realty. As a result of the recent transfer of  sovereignty over Hong Kong from the United Kingdom to China, any investment  in Hong Kong realty will be subject to the risks arising from that transfer,  including but not limited to the possible appropriation of realty by the  Chinese government. In addition, in Mid-1998 the Government of Hong Kong  froze public land sales and dispositions of property through April 1999 in  order to stabilize Hong Kong property values which had substantially declined  from their peak in 1997. See Item 5. “Operating and Financial Review and  Prospects.” |
|                 |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **Dependence**       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **upon Management**  |   | • |   | The Company is dependent  upon the services of its executive officers, in particular Mr. T.C.  Leung, the Chairman of the Company’s Board of Directors and its Chief  Executive Officer. The business of the Company could be adversely effected by  the loss of services of, or a material reduction in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

11

----

** **
|                         |   |   |   | the amount of time devoted to  the Company by its executive officers. Although the Company is the  beneficiary of a “Key Person” life insurance policy in the amount of  US$1,000,000 on the life of Mr. Leung, there can be no assurance that  such coverage will be sufficient to compensate the Company for the loss of  the services of Mr. Leung. See Item 6. “Directors, Senior Management and  Employees.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|------------------------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                         |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Adverse Impact upon**      |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Company of PRC’s**    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Credit Restrictions**      |   | • |   | The Company faces competition  from other distributors of substantially similar products and manufacturers  themselves, both foreign and Chinese. The Company faces its principal  competition from foreign manufacturers and other distributors of their  products situated in Hong Kong and the PRC. Competition may cause purchaser  demands for price reductions and reduced profit margin.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                         |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Competition with Vendors** |   | • |   | As the Company plans to  assemble products of the kind that it presently distributes, the Company may  directly compete with certain of its vendors. Any such direct competition may  adversely affect its relationship with its vendors. See Item 4. “Information  on the Company.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                         |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Dependence on Vendors;**   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Lack of Long**             |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Term Agreements**          |   | • |   | The Company distributes  supplies manufactured by a number of vendors, including Hach Company, Inc.  (“Hach”), Hioki E.E. Corp. (“Hioki”), Eurotherm, Ltd. (“Eurotherm”), Wallace  & Tiernan Pacific Pty. Ltd. (“Wallace”), Lachat Instruments Inc.  (“Lachat”) and ThermoQuest Corporation (“ThermoQuest”), which are the  Company’s largest suppliers. The Company has only a letter from Hioki  appointing the Company as Hioki’s sales representative in the PRC, Hong Kong  and Macao, its agreements with each of Wallace and ThermoQuest are terminable  on ninety days notice by either party. Although alternative sources of supply  exist, there can be no assurance that the termination of the Company’s  relationship with any of the above or other vendors would not have a  short-term adverse effect on the Company’s operations due to the Company’s  dependence on these vendors. |

 

12

----

 
| **Risks Relating to the Company Itself.** |
|-------------------------------------------|
|                                      |   |   |   |   |
| **Control by T.C. Leung Poten-**          |   |   |   |   |
| **tial Conflict of Interests**            |   | • |   | T.C. Leung, the Company’s  Chairman of the Board and Chief Executive Officer, as a practical matter, is  able to nominate and cause the election of all the members of the Company’s  Board of Directors, control the appointment of its officers and the  day-to-day affairs and management of the Company. As a consequence,  Mr. Leung can have the Company managed in a manner that would be in his  own interests and not in the interests of the other shareholders of the  Company. See Item 7. “Major Shareholders and Related Party Transactions” and  Item 6. “Directors, Senior Management and Employees.” |
|                                      |   |   |   |   |
| **Certain Legal Consequences**            |   |   |   |   |
| **of Incorporation**                      |   |   |   |   |
| **in the British Virgin**                 |   |   |   |   |
| **Islands; Rights of Share-**             |   |   |   |   |
| **holders Not as Extensive**              |   |   |   |   |
| **as in U.S. Corporations**               |   | • |   | Principles of British Virgin  Islands (“BVI”) corporate law relating to such matters as the validity of the  Company procedures, the fiduciary duties of management and the rights of the  Company’s shareholders may differ from those that would apply if the Company  were incorporated in a jurisdiction within the United States. |
|                                      |   |   |   |   |
|                                      |   | • |   | The rights of shareholders  under British Virgin Islands law are not as extensive as the rights of  shareholders under legislation or judicial precedent in many United States  jurisdictions. Under United States law, majority and controlling shareholders  generally have certain “fiduciary” responsibilities to the minority  shareholders. United States shareholder action must be taken in good faith  and actions by controlling shareholders in a United States jurisdiction and  executive compensation which are obviously unreasonable may be declared null  and void. |
|                                      |   |   |   |   |
|                                      |   | • |   | The BVI law protecting the  interests of the minority shareholders is not as protective in all circumstances  as the law protecting minority shareholders in United States jurisdictions.  The shareholders of the Company may have more difficulty in protecting their  interests in the face of actions 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 United States jurisdictions. |

 

13

----

 
| **Anti-takeover  Provisions** |   | **•** |   | **The Company has 5,000,000 shares  of “blank check preferred stock” authorized. The “blank check preferred  stock” is intended to strengthen the Company’s ability to resist an  unsolicited takeover bid and may be deemed to have an anti-takeover effect.  The Board of Directors has the right to fix the rights, terms and preferences  at the time of issue of “blank check preferred stock” without further action  by our shareholders.**                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-------------------------------|--------|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                          |   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Uncertainty of**            |   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Enforcing United**          |   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **States Judgments**          |   | •     |   | There is some uncertainty  whether BVI courts would enforce judgments of the courts of the United States  and of other foreign jurisdictions, or enforce actions brought in the BVI  which are based upon the securities laws of the United States. A final  monetary judgment obtained in the United States will be treated as a cause of  action in itself by the BVI courts so that no retrial of the issues would be  necessary, provided that material preconditions are met and the proceedings  pursuant to which judgment was obtained were not contrary to the rules of  natural justice.                                                                                                                                                                                                                                                                                                                                              |
|                          |   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                          |   | •     |   | All of the Company’s directors  and executive officers reside outside of the United States, service of  process upon the Company and such persons may be difficult to effect in the  United States upon all such directors and officers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                          |   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                          |   | •     |   | All of the Company’s assets are and will be located  outside of the United States, in Hong Kong and the PRC, and any judgment  obtained in the United States may not be enforced in those jurisdictions.  Hong Kong courts will not directly enforce against the Company or such persons  judgments obtained in the United States. There is also substantial doubt as  to the enforceability in the PRC of actions to enforce judgments of the  United States’ courts arising out of or based on the ownership of the  securities offered hereby, including judgments arising out of or based on the  civil liability provisions of United States federal or state securities laws  or otherwise. See “– Certain Legal Consequences of Incorporation in the  British Virgin Islands; Rights of Shareholders not as Extensive as in U.S.  Corporations” and “– Uncertainty of Enforcing U.S. Judgments.” |

## ** **

14

----

 
| **Being a Foreign Private**               |   |   |
|-------------------------------------------|--------|--------|
| **Issuer Exempts Us From**                |   |   |
| **Certain Securities and**                |   |   |
| **Exchange Commission (“SEC”)** |   |   |
| **and National Association of**           |   |   |
| **Securities Dealers Automated**          |   |   |
| **Quotation System (“NASDAQ”)** |   |   |
| **Requirements**                          |   | • |   | We are a foreign private  issuer within the meaning of rules promulgated under the Securities Exchange  Act of 1934 (the “Exchange Act”). As such, we are exempt from certain  provisions applicable to United States public companies including: |
|                                      |   |   |   |   |
|                                      |   |   |   | • | the rules under the  Exchange Act requiring the filing with the Commission of quarterly reports on  Form 10-Q, current reports on Form 8-K or annual reports on Form 10-K; |
|                                      |   |   |   |   |
|                                      |   |   |   | • | the sections of the  Exchange Act regulating the solicitation of proxies, consents or  authorizations in respect of a security registered under the Exchange Act; |
|                                      |   |   |   |   |
|                                      |   |   |   | • | the provisions of  Regulation FD aimed at preventing issuers from making selective disclosures  of material information; and |
|                                      |   |   |   |   |
|                                      |   |   |   | • | the sections of the  Exchange Act requiring insiders to file public reports of their stock  ownership and trading activities and establishing insider liability for  profits realized from any “short-swing” trading transaction (i.e., a purchase  and sale, or sale and purchase, of the issuer’s equity securities within less  than six months). |
|                                      |   |   |   |   |
|                                      |   |   |   | In addition, because the  Company is a foreign private issuer, certain of the corporate governance  standards of the NASDAQ that are applied to United States companies listed on  that exchange may not be applied to us. Because of these exemptions,  investors are not afforded the same protections or information generally  available to investors holding shares in public companies organized in the  United States. |

## ** **

15

----

 
| **Our  Securities Must**          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Continue  To Meet Qualitative** |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **And  Quantitative Listing**     |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Maintenance  Criteria**         |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **For  The NASDAQ SmallCap**      |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Market**                        |   | • |   | Our securities are quoted and traded on the NASDAQ  SmallCap Market. There can be no assurance that we will continue to meet both  the qualitative and quantitative criteria for continued quotation and trading  of our securities on the NASDAQ SmallCap Market. That criteria, which  undergoes periodic NASDAQ review, include, among other things, at least:                                                                                                                                                                                                         |
|                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                              |   |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | US$35,000,000 in market capitalization, US$2,500,000  in stockholders’ equity or US$500,000 in net income in an issuer’s last  fiscal year or two of its last three fiscal years; |
|                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                              |   |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | a US$1.00 minimum bid price; |
|                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                              |   |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | two market makers; |
|                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                              |   |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 300 round lot shareholders; and |
|                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                              |   |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 500,000 shares publicly held (excluding officers,  directors and persons owning 10% or more of the Company’s issued and  outstanding shares) with US$1,000,000 in market value. |
|                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                              |   |   |   | If we are unable to meet the continued quotation  criteria of the NASDAQ SmallCap Market and are suspended from trading on  these markets, our securities could possibly be traded in the  over-the-counter market and be quoted in the so-called “pink sheets” or, if  then available, the OTC Bulletin Board. In such an event, an investor would  likely find it more difficult to dispose of, or even obtain accurate quotations  of, our securities. See “- We Will Also Be Required To Meet Anticipated  NASDAQ Corporate Governance Criteria.” |
|                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **We  Will Also Be Required**     |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **To  Meet Anticipated**          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **NASDAQ  Corporate**             |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Governance  Criteria**          |   | • |   | Although the NASDAQ SmallCap Market has always had  certain corporate governance criteria for the listing and continued quotation  of an issuer’s securities, NASDAQ has                                                                                                                                                                                                                                                                                                                                                                                             |

 

16

----

 
|   |   | proposed, and we believe the SEC is likely to  approve, substantially expanded issuer corporate governance criteria for the  issuers of those securities quoted on the NASDAQ SmallCap Market. Although,  in the past, we have been able to satisfy NASDAQ’s SmallCap Market corporate  governance criteria, the new proposed criteria is substantially more  difficult to comply with. The new proposed criteria include, among other  things:                                                                                                                                                                                                                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | an increase in the degree of independence of members  of the board of directors with a majority of board members to be independent,  and these independent directors are to, among other things: (i) hold regular  meetings among themselves only and (ii) approve related party transactions,  all with a strict definition of an independent director; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | an enhancement of independent director responsibility,  with, among other things, the responsibility to approve: (i) director  nominations and (ii) executive officer compensation; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | an empowerment of audit committees of boards of  directors with, among other things: (i) sole authority to hire and fire  auditors and (ii) authority to hire their own experts when appropriate; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | establishment of a code of conduct addressing  conflicts of interest and compliance with laws; and |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | a limit on payments to independent directors and  their family members (other than for services on the board of directors). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | We believe that these proposed corporate governance  requirements, including the expanded powers and responsibilities of  independent directors and a stricter definition of an independent director  will make it more difficult to find independent directors for our Board of  Directors. Increased competition for qualified independent directors,  including those persons with accounting experience and financial statement  acumen to serve on audit committees, can be anticipated. We believe that  compliance with NASDAQ’s proposed corporate governance requirements will be  difficult and will increase our costs and expenses as the costs of finding  and compensating independent directors escalate and the costs |

 

17

----

 
|                         |   |   |   | of administering their new powers and  responsibilities prove to be an added financial burden. If NASDAQ’s corporate  governance rules are adopted and we are unable to attract a sufficient number  of independent directors willing to take on the responsibilities imposed by  such rules on what we believe to be commercially reasonable terms, our  securities may be delisted from NASDAQ.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------------------------------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                         |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **The  Market Price Of Our** |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Securities  Has Declined** |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Substantially  Since Our** |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Initial  Public Offering** |   | • |   | On June 18, 2003, the closing price for our Ordinary  Shares was US$1.44, as reported by the NASDAQ SmallCap Market on that date.  In addition to the diminution of market value, continued market price declines  could result in the delisting of our securities from the NASDAQ SmallCap  Market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                         |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **There  Are Risks In**      |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Purchasing  Low-Priced**   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Securities**               |   | • |   | If our securities were to be suspended or delisted  from the NASDAQ SmallCap Market, they could be subject to rules under the  Securities Exchange Act of 1934 (“Exchange Act”) which impose additional  sales practice requirements on broker-dealers who sell such securities to  persons other than established clients and “accredited investors” (for  example, individuals with a net worth in excess of US$1,000,000 or an annual  income exceeding US$200,000 or US$300,000 together with their spouses). For  transactions covered by such rules, a broker-dealer must make a special  suitability determination of the purchaser and have received the purchaser’s  written consent to the transaction prior to the sale. Consequently, such  rules may affect the ability of broker-dealers to sell our securities and the  ability to sell any of our securities in any secondary market that may  develop for such securities. |
|                         |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                         |   |   |   | The SEC has enacted rules that define a “penny  stock” to be any equity security that has a price (as therein defined) of  less than US$5.00 per share or an exercise price of less than US$5.00 per  share, subject to certain exceptions, including securities listed on the  NASDAQ SmallCap Market or on designated exchanges. For any transaction  involving a penny stock, unless exempt, the rules require the delivery, prior  to any transaction in a penny stock, of a disclosure statement prepared by  the SEC relating to the penny stock                                                                                                                                                                                                                                                                                                                                                                                                     |

 

18

----

 
|                            |   |   |   | market. Disclosure also has to be made about the  risks of investing in penny stocks in both public offerings and in secondary  trading. In the event our securities are no longer listed on the NASDAQ  SmallCap Market or are not otherwise exempt from the provisions of the SEC’s  “penny stock” rules, such rules may also affect the ability of broker-dealers  and investors to sell our securities. |
|---------------------------------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                            |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **There  Is No Assurance Of A** |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **Continued  Public Market**    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **For  Our Securities**         |   | • |   | There can be no assurance that a trading market for  our Ordinary Shares will be sustained.                                                                                                                                                                                                                                                                                                                                |

 

## **ITEM 4.**                             INFORMATIONON THE COMPANY

 

### ***Item4A.***                         Historyand Development of the Company

 

The Company wasorganized under the laws of the British Virgin Islands on September 30,1996 for the purposes of raising capital and for acquiring all the outstandingcapital stock of Euro Tech (Far East) Ltd., a Hong Kong corporation (“Far East”).The Company successfully completed a public offering (“Public Offering”) fromwhich the Company received net proceeds of approximately US$1,817,000, in March1997. Pursuant to and concurrent with the Public Offering, the Company acquiredall the issued and outstanding capital stock of Far East, and thereafter FarEast became a wholly-owned subsidiary and the primary operational tool of theCompany. Far East was established in 1971 and has been in continuous operationsince that time. See Item 5. “Operating and Financial Review and Prospects.”Far East engages in its core business of distributing various equipment,instruments and supplies used in connection with the treatment, analysis andtesting of water and waste water.

 

Prior to its incorporation, the businesses of the Company were engagedin by Far East, which in 1997 was acquired by, and is now a wholly-ownedsubsidiary of the Company. Far East was established in 1971, under the name ofEurotherm (Far East) Ltd., as a subsidiary of a United Kingdom publicly tradedcompany, Eurotherm Ltd., to market and distribute its parent company’sindustrial control equipment in Hong Kong and Southeast Asia, and expanded itsactivities into the PRC in 1973. In the early 1980’s, Far East begandistributing high-tech equipment manufactured in the United States, Europe andJapan within the PRC, in addition to its distribution of its parent’s products.In 1988, the activities of the parent and Far East were separated intoEurotherm International and Far East. In or around 1994, all the capital stockof Far East was purchased by its management, principally T.C. Leung, theCompany’s Chairman of the Board of Directors and Chief Executive Officer. FarEast thereafter changed its name from Eurotherm (Far East) Ltd. to its currentname. See Item 7. “Major Shareholders and Related Party Transactions.”

 

The Company used portions of the net proceeds of the Public Offering to(a) establish an operation for the assembly of the type of products nowdistributed by the Company, including certain water-related testing, monitoringand treatment equipment (approximately US$250,000),

 

19

----

 

(b) to expand its marketing efforts by, amongother things, opening additional regional sales offices in the PRC(approximately US$200,000), (c) purchase equipment (approximately US$189,000),(d) establish a subsidiary to develop and operate a B2B website (approximatelyUS$331,000), (e) repurchase securities from the underwriter of the Company’sPublic Offering (approximately US$105,000), (f) pay expenses incurred inseeking acquisition candidates and hiring an agent in the United States(approximately US$170,000), (g) repurchase its own Ordinary Shares in the openmarket (approximately US$237,000), and (h) acquire a 30% equity interest inPact Asia Pacific Limited and Yixing Pact Environmental Technology CompanyLimited (“Pact”) (approximately US$335,000).

 

### ***Item4B.***                         BusinessOverview

 

The Company is primarily a distributor of a wide range of advancedwater treatment equipment (including chlorination equipment), laboratoryinstruments, analyzers, test kits and related supplies. The Company acts as anexclusive and non-exclusive distributor for well-known manufacturers of suchequipment, primarily to commercial customers and governmental agencies orinstrumentalities in Hong Kong and the PRC. The Company distributes products tomore than 500 regular customers, including the Hong Kong EnvironmentalProtection Department, the Beijing Hydrology station, China Light & PowerCo., Ltd., Hong Kong Electric Co., Ltd., and the Kowloon-Canton RailwayCorporation,****China’s National Environmental Protection Agency, a jointventure between the China Great Wall Industry I/E Corp. and Austria’s AquaEngineering to construct one of Beijing’s water treatment plants, and tosubdistributors located in Hong Kong, the PRC and Macao. These products aremanufactured by a substantial number of major American, European and Japanesecorporations, including Hach, Hioki, Eurotherm, Wallace, Lachat andThermoQuest, which are the Company’s largest suppliers, with purchases fromthem accounting for approximately 19%, 15%, 15%, 7%, 6% and 5%, respectively,of the Company’s sales during its fiscal year ended December 31, 2002 (“Fiscal2002”) and 22%, 11%, 14%, 5%, 4% and 9%, respectively, of the Company’s salesduring the Company’s fiscal year ended December 31, 2001 (“Fiscal 2001”).

 

The Company distributes products through its Hong Kong headquarters,its representative offices located in Beijing, Shanghai, Guangzhou, Chongqing,Xi ́An, Shenyang and Wuhan, and through non-exclusive arrangements withindependent sub-distributors located in Hong Kong, the PRC and Macao.

 

The Company believes that the continuing growth of industrial activityin particular, and overall business activity in general, in the PRC over thelast five years has produced a strong and increasing demand for its products inthe PRC. The Company further believes that in the near future the need anddemand for the products it distributes will grow as a result of increasedregulations governing the environment and industrial pollution output,projected growing demands of the PRC’s population for clean water and ahealthier and safer environment, and the potential for the contamination or depletionof existing clean fresh water sources.

 

The Company believes that by assembling the products it distributes, itmay realize increased gross profit margins and greater revenues and net incomethan if it remained only a

 

20

----

 

distributorof such products. Similarly, the Company believes that by expanding itsregional sales efforts in the PRC, it may realize higher revenues and netincome.

 

On January 31, 2002, the Company acquired a 30% equity interest in Pactfor approximately US$288,000, related expenses (legal and accounting) inconnection with this acquisition approximated US$47,000. Pact is a privatelyowned engineering firm situated in Shanghai that specializes in the design,manufacture and operation of water and waste water treatment plants in severalindustries situated in China. The Company believes that Pact’s business iscomplementary to the Company’s business as the Company continues to focus onsales and marketing of products of others. The Company believes that byaligning itself with an engineering firm, such as Pact, it may be able to gaina competitive advantage by offering customers and potential customers not onlyhardware but solutions to engineering problems as well. Also, the Companyanticipates that by securing an equity stake in Pact, its ability to become asupplier to Pact is enhanced. It took the Company approximately ten months tocomplete the acquisition of an equity stake in Pact. The Company continues toseek to make a similar acquisition of an engineering company specializing inair pollution control or other complementary environmental protection fields.

 

**Products, Services and Customers**

 

Laboratory instruments, analyzers and test kits are used to analyze thechemical content and ascertain the level of impurities or other contaminants inwater. The Company distributes analytical re-agents and chemicals to supporttesting systems of laboratory and portable instruments, process analyzers andportable test kits and assist in the analysis process. The Company offers awide variety of test kits to test water quality. The Company believes thatthese portable test kits are easy to use and preadapted for rugged field use.These test kits are used to monitor drinking water distribution systems.

 

Laboratory and portable instruments generally consist of analyticalinstruments including but not limited to the following: spectrophotometers,colorimeters, turbidimeters, ion-selective electrodes, chemical oxygen demandapparati, digestion apparati, and precision re-agent dispensing devices whichare used to test and monitor impurities and contaminants in water systems. See“Glossary.”

 

The Company also distributes continuous-reading process analyzers,process turbidimeters, pH controllers and analyzer accessories. These productsare generally used to monitor and control drinking water quality to ensure thatwater treatment procedures comply with regulatory standards. See “Glossary.”

 

**ScientificInstruments.** The Companydistributes analytical instruments, environmental monitoring instruments andgeneral purpose laboratory instruments. Analytical instruments include, but arenot limited to, mass spectrometers, flow injector analyzers and atomicspectrometers. Environmental monitoring instruments include both air and waterquality monitoring instruments. Air quality monitoring instruments aregenerally divided into those which monitor ambient (i.e., atmospheric) air, andthose which monitor pollution sources. Additionally, the Company offers generalpurpose laboratory instruments including a variety of water quality monitoringand analysis

 

21

----

 

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 include government agencies,academic and research institutions and major laboratories. The Company alsodistributes products to beverage producers and restaurants, including waterquality test kits to more than twelve bottling plants of a well known UnitedStates softdrink producer, which are located in the PRC; total organic carbonanalyzers to the People’s Liberation Army (the PRC armed forces), water qualitymonitoring instruments to well known United States fast food franchisor’srestaurants located in Hong Kong and the PRC, and to well known United Statesand European beer producers bottling plants located in Wuhan, PRC. Each suchsoda producer, restaurant and beer bottler and the People’s Liberation Army do not account for a significantportion of our sales.

 

Customers for air and water quality monitoring instruments also includegovernment agencies such as the Hong Kong Environmental Protection Department,which uses a Company distributed water quality monitoring system to monitor thewater quality of Hong Kong’s Victoria Harbor, more than ten water treatmentplants located in the PRC (including sites at Beijing, Tianjin, Guangzhou andWuhan), and the Beijing Environmental Monitoring Centre. The Company is alsoone of two distributors supplying continuous water monitoring systems toBeijing’s Hydrology Station.

 

The Company derived approximately 58.7%, 56.1% and 55.2% of itsrevenues from the sale of Scientific Instruments during Fiscal 2002, Fiscal2001 and Fiscal 2000, respectively.

 

**Process Controland Engineering Products.**The Company provides process control systems specifically designed for theindustrial needs of clients including sensors, temperature gauges, pressuregauges, 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 HongKong’s new Chek Lap Kok airport and its environs.

 

The Company derived approximately 18.6%, 17.7% and 21.0% of itsrevenues from the sale of Process Control and Engineering Products duringFiscal 2002, Fiscal 2001 and Fiscal 2000, respectively.

 

**Other Products.** The Company distributes general testing andmeasuring equipment including multi-channel digital and analogue recorders,signal amplifiers and calibration equipment to industries including powerplants, railway and aero-space industries, utilities, educational institutionsand telecommunications companies.

 

The Company derived approximately 11.9%, 11.5% and 13.4% of itsrevenues from the sale of these Other Products during Fiscal 2002, Fiscal 2001and Fiscal 2000, respectively.

 

22

----

 

**SpecialProjects and Technical Support.** In conjunction with the distribution of products such as programmablelogic controllers, telemetry units and SCADA systems and software, the Companyalso provides systems engineering to government agencies, industrial plants andbeverage producers. The Company derived approximately 9.5%, 13.2% and 7.8% ofits revenue from its Special Project Operation during Fiscal 2002, Fiscal 2001and Fiscal 2000, respectively. This revenue was derived primarily from sales ofproducts.

 

The Company’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. The Company derived approximately 1.3%, 1.5% and 2.6% of itsrevenues from Technical Support Operation during Fiscal 2002, Fiscal 2001 andFiscal 2000, respectively.

 

**Customers.** At the end of Fiscal 2002, the Company had morethan 500 regular customers, including sub-distributors, located in Hong Kong,the PRC and Macao. During Fiscal 2002, no single customer accounted for morethan 5% of the Company’s revenues, and the Company does not believe that anysingle customer or sub-distributor is material to its operations.

 

**InfraredPhotometric Oil Analyzer**

 

In May 2000, theCompany signed an agreement with the Shanghai Institute Optics Instrument tojointly develop an Infrared Photometric Oil Analyzer by infrared absorptionmethod. This analyzer is intended to detect concentrations of petroleum, animaland vegetable oils in surface water, underground water, municipal andindustrial wastewater. Potential customers are environmental water monitoringstations, water purification and waste treatment facilities, underground waterand harbor water monitoring stations located in China.

 

Our perceived advantageof the analyzer is that samples under its testing protocols are measured bythree different wavelengths simultaneously thus giving more accurate readingsagainst one fixed wavelength used by most of our potential competitors’products.

 

Although a smallnumber of this product have been sold, there can be no assurance that theanalyzer will become a commercially viable product.

 

**Sources of Supply**

 

The Company has exclusivity agreements covering specific geographicareas with many of its suppliers for certain products. Such agreements do notencompass all products distributed by the Company and all market areas servedby the Company.

 

The Company distributes products manufactured by a number of vendors,including Hach, Hioki, Eurotherm, Wallace, Lachat and ThermoQuest, which arethe Company’s primary suppliers, with purchases from them accounting forapproximately 19%, 15%, 15%, 7%, 6% and 5%, respectively of the Company’srevenue during Fiscal 2002 and 22%, 11%, 14%, 5%, 4% and 9%, respectively, ofthe Company’s revenue during Fiscal 2001. The Company has exclusivity

 

23

----

 

agreementsfor specified geographic areas with many of its suppliers for certain products,including Wallace and ThermoQuest. Those agreements do not encompass allproducts distributed by the Company or all of the market areas serviced by theCompany. The Company’s agreement with ThermoQuest for most products does notinclude the PRC, while the Company’s agreement with Wallace is limited to HongKong. In addition, some of these agreements are memorialized not as formalcontracts but rather through other acknowledgements or correspondence which maycontain a vague, if any, description of the terms and conditions of suchagreement or arrangement, and therefore may be unenforceable. The Company haswritten confirmation from Hach that the Company is Hach’s non-exclusiverepresentative in the PRC, Hong Kong and Macao authorized to supply, installand commission Hach’s products and accessories. The Company has only a letterfrom Hioki appointing the Company as Hioki’s sales representative in the PRC,Hong Kong and Macao. The Company’s agreements with Wallace and ThermoQuest areterminable by either party on thirty days notice prior to their respectiverenewal dates. The Company’s agreement with Hach is terminable on ninety daysnotice by either party. Although alternative sources of supply exist, there canbe no assurance that the termination of the Company’s relationship with any ofthe above or other vendors would not have a short-term adverse effect onoperations.

 

**Expansion**

 

The Company continues to seek: (1) development of manufacturing andengineering operations as part of its core business through (a) the developmentof and assembly of more of the Company’s own environment-related equipment (see“ – Product Assembly Operations”), (b) the expansion of its process engineeringbusiness through its own environmental engineering department and cooperationwith Pact, and (c) potential acquisitions of manufacturing plants andengineering companies for proposed product-assembly operations; and (2) thedevelopment of a strategic retail network to serve China (see “ – Sales andMarketing”).

 

**Regulatory Environment**

 

Concerns about and awareness of pollution problems and environmentalissues have grown at all levels of PRC government as the PRC has experiencedeconomic growth. Environmental protection laws and strict regulations have beenenacted and are buttressed by increased budget allocations for environmentalregulation, monitoring and enforcement. The PRC’s primary environmentalprotection agency is the State Environmental Protection Agency (SEPA), underwhich there are Environment Protection Bureaus in each city and county.According to the Company, under bureau management, there are two environmentmonitoring systems: one system consists of over 2,200 monitoring stations tocollect and analyze the environmental data of each city and county; anothersystem consists of over 2,500 stations to monitor specific industrial districtsor factories which have been identified as major pollution sources due to theirnon-compliance with environmental regulations. SEPA has recently identified100,000 enterprises as new major pollution sources and the number of monitoringstations for industrial firms increased to 230,000 during 2001. The Company hassupplied water and air quality monitoring and analytic instruments to thesemonitoring stations for several years. Despite this anticipated growth inmonitoring stations, there can be no assurance that the agencies will continueto use the Company’s products for these purposes, that other market competitorswill not enter the market with superior products, distribution systems or morecompetitive prices. See “ – Competition.”

 

24

----

 

**Competition**

 

The Company faces competition from other distributors of substantiallysimilar products as well as the manufacturers of such products, and in bothforeign and Chinese markets. The Company faces its principal competition frommanufacturers and other distributors of its core products located in Hong Kongand the PRC. Moreover, the Company has begun to implement plans to assembleproducts of the kind that it presently distributes (see “ – Product AssemblyOperations”). Should an assembly operation be developed to the stage whereproducts are presented to the market, the Company may be in direct competitionwith certain 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 affect the Company’s core business.

 

During Fiscal 2002, Fiscal 2001 and Fiscal 2000, the Company’s grossprofit margins were approximately 20.3%, 21.8% and 23.6%, respectively. TheCompany believes that it competes with the PRC manufacturers on the basis ofquality and technology. The Company believes it offers foreign-manufacturedproducts which are of higher quality and use more advanced technology thanproducts manufactured in the PRC. The Company believes that it competes withforeign manufacturers and other distributors of their products on the basis ofthe Company’s more extensive distribution network and an establishedreputation.

 

**B2BWebsite**

 

B2B website. In orabout March 2000, the Company established Chinah2o.com.Ltd., a Hong Kongcorporation. Through Chinah2o.com Ltd., the Company launched a bilingualBusiness-to-Business (“B2B”) internet platform in August 2000. The website islocated at (http://www.chinah2o.com). The B2B website is directed atenvironmental businesses in China. The purpose of the B2B website is to connectmanufacturers, distributors and suppliers of environmental protection equipmentand related consultants and engineering firms in the West with potentialclients in China (i.e., water, wastewater treatment plants, environmentalprotection bureaus, environmental monitoring stations, and related industries).The website provides environmental news, directories of western suppliers,potential clients in China, advertisement space and businessopportunities.  The business and otheractivities generated by Chinah2o.com, Ltd. have had a synergistic effectwith those of the Company indirectly by feeding market information, sales leadsand tender information to the Company.

 

25

----

 

**Product Assembly Operations**

 

The Company, through its PRC Corporation, Shanghai Euro Tech Limited,plans to assemble certain products which the Company currently distributes,including certain water-related testing, monitoring and treatment equipment.The manufacturing plant moved to a larger facility in 2003 under a two-yearlease expiring in April 2005 and has commenced assembly operations for waterand waste water test instruments. It is contemplated that the Company willimport components, assemble the finished products and then distribute the productsthrough its distribution network. The Company believes that by establishingproduct assembly operations in the PRC and expanding the number of its regionalsales offices in the PRC, it will not only increase revenues by expanding itscustomer base and increasing distribution capabilities, but also net incomesince the Company believes it will enjoy higher overall profit margins byassembling certain products which it now distributes rather than by onlypurchasing the finished product from vendors. The Infrared Photometric OilAnalyzer, together with the two types of specialized reagents have been thebest customer accepted products from this plant. This plant also manufacturesmulti-function reactor, spectrophotometer, reagents for chemical oxygen demandand chlorine and silica measurement.

 

In June 2003, theCompany entered into an agreement with O.I. Corporation (“O.I.”) permitting theCompany to assemble O.I.’s Total Organic Carbon Analyzer (“TOC”) at theCompany’s manufacturing facility. The Company believes that O.I.’s TOC is moreadvanced than the products currently sold by the Company and that by assemblingO.I.’s TOC, it may be able to increase its market share for advanced analyticalequipment at more competitive prices than it is now offering. Also, the Companyanticipates that this agreement will trigger closer cooperation with itsvendors to develop other products. Although the Company had entered intoassembly agreements for products with other vendors, this agreement is adeparture from past practice because, for the first time, the Company isassembling advanced analytical equipment for one of our vendors as opposed to“lower tech” analytical equipment.

 

**Sales and Marketing**

 

The Company distributes products through its principal office locatedin Hong Kong and its representative PRC offices located in Beijing, Shanghai,Guangzhou, Chongqing, Xi ́An, Shenyang and Wuhan. The Company has a marketingand sales force of 54 people who are paid a salary plus commission based onsales. The Company’s offices also coordinate the sales efforts of approximatelyfifty other companies located in the PRC which act as sub-distributors. Thesesub-distributors are engaged on a non-exclusive basis to distribute theproducts of other distributors. Each of the fifty sub-distributors accountedfor less than two percent of the Company’s sales during Fiscal 2002 and Fiscal2001.

 

In April of 2001, a “pilot” shop in Shanghai was established to sellinventoried water and other electronics testing equipment to potentialcustomers. This was followed by a second shop in Beijing in the last quarter of2001 and five more shops thereafter. The Company has found the seven existingshops to be useful as demonstration locations easily accessed by localcustomers who can pay in local currency while “off the shelf” sales are made which move its inventory more easily. Allof the foregoing are perceived by the Company to have had a positive impact onits business reputation while reducing the Company’s dependency onsub-distributors who may not be

 

26

----

 

loyalto the Company and distribute products of its competitors. As foreign entitiesare not generally permitted to own these facilities, these  seven shops are owned by non-officer/director,employees of the Company with funds from the Company through non-fixed termloans of approximately US$372,000 bearing a nominal rate of interest. The shopsdo not have any financing from other sources. There can be no assurances that;these shops will prove to be economically viable, the Company will not sustainlosses in connection with the loans to the shops; the shops will result in anysignificant revenues or profits to the Company. Also, similar shops may beestablished by its competitors and/or third parties. These shops were opened onthe following dates:

 

| Shanghai   |   | April 2001    |
|------------|--------|---------------|
| Beijing    |   | October 2001  |
| Chongqing  |   | March 2002    |
| Guangzhou  |   | June 2002     |
| Xi ́An |   | July 2002     |
| Wuhan      |   | November 2002 |
| Shenyang   |   | December 2002 |

### *** ***

### ***Item4C.***                         OrganizationalStructure

 

The Company presently wholly-owns Euro Tech (Far East) Limited (“FarEast”) which, in turn, wholly owns the following corporations:

 

•                                          Euro Tech Trading (Shanghai) Limited –a People’sRepublic of China corporation

•                                          Euro Tech (China) Limited –a Hong Kong corporation

•                                          Chinah2o.com Limited –a Hong Kong corporation

•                                          Shanghai Euro Tech Limited –a People’s Republicof China corporation

 

The Company’s wholly-owned subsidiary and primary operational arm isFar East, which it acquired in March 1997. Far East has engaged in thedistribution of various industrial control equipment, which continues to be thecore business of the Company, since its inception in 1971.

 

### ***Item4D.***                         Property,Plant and Equipment

 

The Companymaintains an executive office at 18/F Gee Chang Hong Centre, 65 Wong Chuk HangRoad, Hong Kong. The Company occupies approximately 12,800 square feet ofoffice and warehouse storage space under a two (2) year lease from June 2003 toMay 2005 for monthly rental payments of approximately US$7,050. The warehousestorage space is used to hold products for distribution to its customers viacommon carriers.

 

In August 1995, the Company purchased approximately 1,200 square footof space in a building in Hong Kong. The Company financed the purchase and, asof December 31, 2002, had paid in full the mortgage for this property. Thisproperty is now used as Chinah2o.com Ltd.’s office.

 

The Company alsomaintains representative offices within the PRC in the cities of Beijing,Shanghai, Guangzhou, Chongqing, Xi ́An, Wuhan and Shenyang. The Beijing andShanghai sales

 

27

----

 

offices are owned by theCompany. The Beijing and Shanghai sales offices are situated on Company ownedproperty. The remaining sales offices are rented pursuant to short-term leasesaggregating approximately US$2,290 per month.

 

Euro Tech Trading (Shanghai) Ltd.’s office is rented pursuant to alease from May 2003 to June 2004 for monthly rental payments of approximatelyUS$230. Shanghai Euro Tech Ltd.’s premises are rented pursuant to a lease fromMay 2003 to April 2005 for monthly rental payments of approximately US$3,400.

 

The Company’s registered office in the British Virgin Islands islocated at TrustNet Chambers, P.O. Box 3444, Road Town, Tortola, British VirginIslands and its telephone number is (284) 494-5296.

 

## **ITEM 5.**                             OPERATINGAND FINANCIAL REVIEW AND PROSPECTS

 

### ***Item5A.***                         OperatingResults

 

**Background - Political and Economic Conditions in Hong Kongand the People’s Republic of China**

 

The Company’s operations are located almost entirely within, andrevenues are almost entirely generated from Hong Kong and the PRC. Set forth below are the approximate percentageof the Company’s sales made to customers in the PRC and Hong Kong for thefiscal years indicated:

 

| **Fiscal Year** |   | **PRC** |   | **Hong Kong** |   |
|-----------------|--------|---------|--------|---------------|--------|
|            |   |    |   |          |   |
| 2000            |   | 68      | %      | 29            | %      |
| 2001            |   | 72      | %      | 26            | %      |
| 2002            |   | 71      | %      | 29            | %      |

 

Sales to customers situated in Macao and elsewhere in Fiscal 2000through Fiscal 2002 were nominal. This makes the Company particularlysusceptible to changes in the political and economic climate of either HongKong or the PRC.

 

**Hong Kong.** Hong Kong has been one of the prime centers forcommercial activity and economic development recently in Southeast Asia. OnJuly 1, 1997, sovereignty over Hong Kong was transferred from the UnitedKingdom to the PRC. As provided in the Sino-British Joint Declaration and theBasic Law, the Hong Kong SAR is provided a high degree of autonomy except inforeign and defense affairs. The Basic Law provides that the Hong Kong SAR is tohave its own legislature, legal and judicial system and full economic autonomyfor 50 years after the transfer of sovereignty. Based on the current politicalconditions and the Company’s understanding of the Basic Law, the Company doesnot believe that the transfer of sovereignty over Hong Kong has had or willhave an adverse impact on its financial and operating environment. Although theChinese government has pledged to maintain the economic and political autonomyof Hong Kong over its

 

28

----

 

internalaffairs, there is no assurance that such pledge will continue to be honored ifthere are changes in the Chinese political or economic climate. See Item 3D.“Key Information – Risk Factors.”

 

**PRC.** The PRC has been a socialist state since 1949.For more than forty years, the PRC’s economy has been, and presently continuesto be, a socialist economy operating under government controls promulgatedunder various one-, five- and ten-year plans (collectively, “State Plans”)adopted by central Chinese government authorities and implemented, to a largeextent, by provincial and local authorities which may set production anddevelopment targets. However, since approximately the early 1980s, the PRC’snational government has undertaken certain reforms to permit greater provincialand local economic autonomy and private economic activities. Any change inpolitical or economic conditions may substantially adversely affect thesereform initiatives and, in turn, the Company. See Item 3D. “Key Information –Risk Factors.”

 

**Results from Operations**

 

The followingoperating and financial review should be read in conjunction with theConsolidated Financial Statements and notes thereto appearing elsewhere in thisAnnual Report. All financial data referred to in the following discussion hasbeen prepared in accordance with United States Generally Accepted AccountingPrinciples (“GAAP”).

 

The following table presents selected statement of operations dataexpressed in thousand US$ and as a percentage of revenue for the Company’sFiscal 2002, Fiscal 2001, Fiscal 2000, Fiscal 1999 and Fiscal 1998 years.

 
|                                       |   | **Year Ended December 31,** |   |
|--------------------------------------------|--------|-----------------------------|--------|
|                                       |   | **2002**                    |   | **2001** |   | **2000** |   |
| Revenue                                    |   | 23,497                      |   | 100.0 | % | 19,685 |   | 100.0 | % | 15,010 |   | 100.0 | % |
| Cost of revenue                            |   | 18,735                      |   | 79.7 | % | 15,396 |   | 78.2 | % | 11,467 |   | 76.4 | % |
| Gross Profit                               |   | 4,762                       |   | 20.3 | % | 4,289 |   | 21.8 | % | 3,453 |   | 23.6 | % |
| Selling and administrative expenses        |   | 4,173                       |   | 17.8 | % | 3,734 |   | 19.0 | % | 3,301 |   | 22.0 | % |
| Income before income taxes                 |   | 616                         |   | 2.6 | % | 747 |   | 3.8 | % | 452 |   | 3.0 | % |
| Income taxes                               |   | 123                         |   | 0.5 | % | 163 |   | 0.8 | % | 94 |   | 0.6 | % |
| Share of equity in net incomeof affiliates |   | 7                           |   | 0.0 | % | 0 |   | 0.0 | % | 0 |   | 0.0 | % |
| Net income                                 |   | 500                         |   | 2.1 | % | 584 |   | 3.0 | % | 358 |   | 2.4 | % |

 
|                                       |   | **Year Ended December 31,** |   |
|--------------------------------------------|--------|-----------------------------|--------|
|                                       |   | **1999**                    |   | **1998** |   |
| Revenue                                    |   | 13,107                      |   | 100.0 | % | 12,757 |   | 100.0 | % |
| Cost of revenue                            |   | 9,896                       |   | 75.5 | % | 9,662 |   | 75.7 | % |
| Gross Profit                               |   | 3,211                       |   | 24.5 | % | 3,095 |   | 24.3 | % |
| Selling and administrative expenses        |   | 2,946                       |   | 22.5 | % | 2,924 |   | 22.9 | % |
| Income before income taxes                 |   | 417                         |   | 3.2 | % | 326 |   | 2.6 | % |
| Income taxes                               |   | 78                          |   | 0.6 | % | 71 |   | 0.6 | % |
| Share of equity in net incomeof affiliates |   | 0                           |   | 0.0 | % | 0 |   | 0.0 | % |
| Net income                                 |   | 339                         |   | 2.6 | % | 255 |   | 2.0 | % |

 

29

----

 

**Results ofOperations**

 

**Fiscal Year Ended December 31, 2002 Compared to Fiscal YearEnded December 31, 2001**

 

*Revenue; Gross Profit and Cost ofRevenue.* Revenue increased by approximately US$3,812,000 or20.5% to approximately US$23,497,000 in Fiscal 2002 from approximatelyUS$19,685,000 in the Company’s year ended December 31, 2001 (“Fiscal 2001”).The increase was primarily due to the diversification and strengthening of theCompany’s distribution network and increase in PRC import business.

 

Gross profitsincreased by approximately US$473,000 or 11.0% to approximately US$4,762,000for Fiscal 2002 as compared to approximately US$4,289,000 for Fiscal 2001. Thisincrease was attributable to the revenue increase in Fiscal 2002. During Fiscal2002, the Company’s cost of revenue was approximately US$18,735,000, or 79.7%of revenue, in comparison to approximately US$15,396,000, or 78.2% of revenuefor Fiscal 2001. Cost of revenue expressed as a percentage of revenue increasedby 1.5% in Fiscal 2002 as compared with Fiscal 2001. The gross profit marginpercentage decrease and the percentage increase in cost of revenue wereattributed to the fact that the Company had reduced the selling prices of someproducts by approximately 5% to 11% to compete with other companies, includingother non-exclusive distributors of the Company’s principal vendors, and theCompany had an increase in import business of approximately US$2,800,000, whichhave a lower profit margin, during Fiscal 2002.

 

*Selling and Administrative Expenses.*Selling and administrative expenses were approximately US$4,173,000 in Fiscal2002, an increase of approximately US$439,000 or 12.0% from approximatelyUS$3,734,000 in Fiscal 2001. The increase was primarily due to the generalincrease in expenses directly related to the increase in revenues whichincluded a larger sales force, and an increase in expenses for the expansion ofthe manufacturing operations. However, measured as a percentage of revenue,selling and administrative expenses actually declined by 1.2% from 19% inFiscal 2001 to 17.8% in Fiscal 2002.

 

*Interest Income.*Net interest income decreased by approximately US$48,000 or 72.7% toapproximately US$18,000 in Fiscal 2002 from approximately US$66,000 for Fiscal2001. Interest income decreased by approximately US$59,000 or 72.8% toapproximately US$22,000 in Fiscal 2002 from approximately US$81,000 in Fiscal2001. The decrease was primarily due to the general decline in the interestrates for bank deposits during the year. Interest expense decreased byapproximately US$11,000 or 73.3% to approximately US$4,000 in Fiscal 2002 fromapproximately US$15,000 for Fiscal 2001. The decrease was a result of theCompany’s reduced utilization of credit facilities under its bankingarrangements, the general decline in interest rates and the pay down of itsoutstanding debt.

 

*Other Income.*Other income decreased by approximately US$117,000 or 92.9% to approximatelyUS$9,000 in Fiscal 2002 from approximately US$126,000 in Fiscal 2001. Thedecrease in other income was principally due to an exchange loss ofapproximately US$53,000

 

30

----

 

for Fiscal 2002 as aresult of the weakening of US$ compared with the exchange gain of US$80,000 forFiscal 2001.

 

*Provision for Profit Tax.*Provisions for taxes decreased by US$40,000 to approximately US$123,000 inFiscal 2002 from approximately US$163,000 in Fiscal 2001. The decrease wasprimarily due to the utilization of an accumulated tax loss brought forward.The decrease in effective tax rate from 21.8% in Fiscal 2001 to 19.7% in Fiscal2002 was primarily due to the decrease of the valuation allowances.

 

*Net Income.* Incomefrom continuing operations decreased by approximately US$84,000 or 14.4% toapproximately US$500,000 in Fiscal 2002 from approximately US$584,000 in Fiscal2001. The increase in revenue resulted in increases in gross margin andoperating profit. However, the exchange loss and decrease in interest incomeexceeded the increase in operating income resulting in a decrease in net incomefor the year.

 

**Fiscal Year Ended December 31, 2001 Compared to Fiscal YearEnded December 31, 2000**

 

*Revenue; Gross Profit and Cost ofRevenue.* Revenue increased by approximately US$4,675,000 or31.1% to approximately US$19,685,000 in Fiscal 2001 from approximatelyUS$15,010,000 in the Company’s year ended December 31, 2000 (“Fiscal 2000”).The increase was primarily due to the diversification and strengthening of theCompany’s distribution network.

 

Gross profitsincreased by approximately US$746,000 or 21.1% to approximately US$4,289,000for Fiscal 2001 as compared to approximately US$3,543,000 for Fiscal 2000. Thisincrease was attributable to the revenue increase in Fiscal 2001. During Fiscal2001, the Company’s cost of revenue was approximately US$15,396,000, or 78.2%of revenue, in comparison to approximately US$11,467,000, or 76.4% of revenuefor Fiscal 2000. Cost of revenue expressed as a percentage of revenue increasedby 1.8% in Fiscal 2001 as compared with Fiscal 2000. The gross profit margindecrease and the percentage increase in cost of revenue were attributed to thefact that the Company had reduced the selling prices to compete with othercompanies during Fiscal 2001.

 

*Selling and Administrative Expenses.*Selling and administrative expenses were approximately US$3,734,000 in Fiscal2001, an increase of approximately US$433,000 or 13.1% from approximatelyUS$3,301,000 in Fiscal 2000. The increase was primarily due to the generalincrease in expenses related to the increase in revenue. However, measured as apercentage of revenue, selling and administrative expenses actually declined by3% from 22% in Fiscal 2000 to 19% in Fiscal 2001.

 

*Interest Income.*Net interest income decreased by approximately US$47,000 or 41.6% toapproximately US$66,000 in Fiscal 2001 from approximately US$113,000 for Fiscal2000. Interest income decreased by approximately US$57,000 or 41.3% toapproximately US$81,000 in Fiscal 2001 from approximately US$138,000 in Fiscal2000. The decrease was primarily due to the general decrease in the interestrate from bank deposits during the year. Interest expense decreased byapproximately US$10,000 or 40.0% to approximately US$15,000 in Fiscal 2001

 

31

----

 

from approximatelyUS$25,000 for Fiscal 2000. The decrease was a result of the Company’s reducedutilization of credit facilities under its banking arrangements.

 

*Other Income.*Other income increased by approximately US$29,000 or 29.9% to approximatelyUS$126,000 in Fiscal 2001 from approximately US$97,000 in Fiscal 2000. Theincrease in other income was principally due to increase in exchange gains ofapproximately US$24,000 and rental income of approximately US$8,000.

 

*Provision for Profit Tax.*Provisions for taxes increased by US$69,000 to approximately US$163,000 inFiscal 2001 from approximately US$94,000 in Fiscal 2000. The increase was dueprimarily to an increase in operating profit. The increase in effective taxrate from 20.8% in Fiscal 2000 to 21.8% in Fiscal 2001 was due to the netoperating loss of some subsidiaries for which no benefit was realized.

 

*Net Income.* Incomefrom continuing operations increased by approximately US$226,000 or 63.1% toapproximately US$584,000 in Fiscal 2001 from approximately US$358,000 in Fiscal2000. The increase in net income was primarily due to the increase in revenueand the increase in the gross margin.

 

**Fiscal Year EndedDecember 31, 2000 Compared to Fiscal Year Ended December 31, 1999**

 

*Revenue; Gross Profit and Cost ofRevenue.* Revenue increased by approximately US$1,903,000 or14.5% to approximately US$15,010,000 in Fiscal 2000 from approximatelyUS$13,107,000 in the Company’s year ended December 31, 1999 (“Fiscal 1999”).The increase was primarily due to improvement of the economy in the PRC.

 

Gross profitsincreased by approximately US$332,000 or 10.3% to approximately US$3,543,000for Fiscal 2000 as compared to approximately US$3,211,000 for Fiscal 1999. Thisincrease was attributable to the revenue increase in Fiscal 2000. During Fiscal2000, the Company’s cost of revenue was approximately US$11,467,000, or 76.4%of revenue, in comparison to approximately US$9,896,000 or 75.5% of revenue forFiscal 1999. Cost of revenue expressed as a percentage of revenue increased by0.9% in Fiscal 2000 as compared with Fiscal 1999. The gross profit margindecreased and the percentage increase in cost of revenue were attributed to thefact that the Company had less engineering assignments during Fiscal 2000.

 

*Selling and Administrative Expenses.*Selling and administrative expenses were approximately US$3,301,000 in Fiscal2000, an increase of approximately US$355,000 or 12.1% from approximatelyUS$2,946,000 in Fiscal 1999. The increase was primarily due to (i) the generalincrease in expenses related to the increase in revenue, and (ii) additionalexpenses for the two new subsidiary companies, i.e. Shanghai Euro Tech Limitedand Chinah2o.com Limited.

 

*Interest Income.*Net interest income increased by approximately US$28,000 or 32.9% toapproximately US$113,000 in Fiscal 2000 from approximately US$85,000 for Fiscal1999. Interest income increased by approximately US$24,000 or 21.1% toapproximately US$138,000 in Fiscal 2000 from approximately US$114,000 in Fiscal1999. The increase was primarily due

 

32

----

 

to the general increasein the interest rate from bank deposits and increase in bank deposits duringthe year. Interest expense decreased by approximately US$4,000 or 13.8% toapproximately US$25,000 in Fiscal 2000 from approximately US$29,000 for Fiscal1999. The decrease was a result of the Company’s reduced utilization of creditfacilities under its banking arrangements.

 

*Other Income.*Other income increased by approximately US$30,000 or 44.8% to approximatelyUS$97,000 in Fiscal 2000 from approximately US$67,000 in Fiscal 1999. Theincrease in other income was principally due to increase in exchange gains.

 

*Provision for Profit Tax.*Provisions for taxes increased by US$16,000 to approximately US$94,000 inFiscal 2000 from approximately US$78,000 in Fiscal 1999. The increase was dueprimarily to an increase in operating profit. The increase in effective taxrate was due to the net operating loss of some subsidiaries for which nobenefit was realized.

 

*Net Income.*Netincome increased by approximately US$19,000 or 5.6% to approximately US$358,000in Fiscal 2000 from approximately US$339,000 in Fiscal 1999. The increase innet income was primarily due to the increase in revenue and the increase in thegross margin. However, the increase in net income was substantially offset bythe operating loss of some newly set up subsidiaries.

 

### ***Item5B.***                         Liquidityand Capital Resources

 

The Company has primarily used its cash to fund accounts receivable,inventories, and capital expenditures including purchases of property, officefurniture and equipment, computers and calibration equipment. The Company hashistorically met its cash requirements from cash flows from operations,short-term borrowings, under bank lines of credit, and long-term mortgage bankloans. The Company expects, but can make no assurances that its present cashreserves, cash from operations and existing available bank credit facilitieswould be sufficient to fund its future capital expenditure requirements.Working capital at the end of Fiscal 2002 and Fiscal 2001 was approximatelyUS$4,363,000 and US$4,123,000,respectively.

 

The Companygenerated net cash of approximately US$675,000 from operating activities inFiscal 2000, on net income of approximately US$358,000 in Fiscal 2000. From itsnet income in Fiscal 2001 of approximately US$584,000, the Company usedapproximately US$60,000 in net cash in its operating activities. The Companygenerated net cash of approximately US$89,000 from operating activities on netincome of approximately US$530,000 in Fiscal 2002. At the end of Fiscal 2002,Fiscal 2001 and Fiscal 2000, the Company’s accounts receivable wereapproximately US$4,376,000, US$2,717,000 and US$2,497,000, respectively.

 

The Company usedapproximately US$416,000, US$0 and US$313,000 for investing activities inFiscal 2002, Fiscal 2001 and Fiscal 2000, respectively. The Company usedapproximately US$81,000 to purchase facilities and equipment and usedapproximately US$335,000 to acquire a 30% equity interest in Pact in Fiscal2002.

 

33

----

 

The Company usedUS$90,000, US$317,000 and US$93,000 in Fiscal 2002, Fiscal 2001 and Fiscal 2000for financing activities, respectively. The Company had various bankingfacilities available for overdraft, import and export credits and foreignexchange contracts from which the Company can access up to approximatelyUS$4,320,000. While the Company’s bank has made available approximatelyUS$615,000 of such facilities to a supplier of the Company for the Company’sfuture purchase commitments, the Company had not utilized any portion of thisfacility as of December 31, 2002. The aforementioned available creditfacilities were obtained on the conditions that, among other things, theCompany mortgage its properties as security for the credit facilities, not tocreate a charge or lien on its other assets in favor of other parties withoutsuch bank’s consent, and the Company maintaining a certain level of net worth.The Company also had a bank loan from the Hong Kong and Shanghai BankingCorporation to finance the purchase of its properties which was fully repaid byDecember 2002.

 

Cash decreasedfrom approximately US$3,551,000 at the end of Fiscal 2001 to approximatelyUS$3,173,000 at the end of Fiscal 2002. The principal reasons for the decreasein cash were (i) cash used in the acquisition of a 30% equity interest in Pact;and (ii) an increase in accounts receivable. The Company plans to use cash onhand primarily to acquire a manufacturing plant and/or engineering company inHong Kong and/or the PRC and to expand its manufacturing plant andenvironmental engineering business.

 

The Company’s netaccounts receivable increased from approximately US$2,717,000 at December 31,2001 to approximately US$4,376,000 at December 31, 2002. The increase isattributed to (i) an approximate 20% increase in sales (particularly near theend of Fiscal 2002, with an approximate 38.5% increase in sales during December2002 as compared to December 2001); (ii) a decrease of approximately US$267,000in bills receivable; (iii) an increase in credit sales to end users as a resultof the Company’s efforts to reduce its dependency on sub-distributors; and (iv)increased sales of systems which had been made mainly under credit arrangementsduring Fiscal 2002.

 

The Company’sinventory declined from approximately US$2,003,000 at the end of Fiscal 2001 toapproximately US$1,964,000 at the end of Fiscal 2002. The lower inventory levelat the end of Fiscal 2002 was principally due to an increase in inventorydeliveries to customers before the end of Fiscal 2002.

 

The Company’scapital expenditures were approximately US$81,000 in Fiscal 2002. Capitalexpenditures during Fiscal 2002 were incurred primarily in connection with thepurchase of office equipment, furniture and fixtures. A source of funds forthese capital expenditures included net proceeds from the Public Offering. TheCompany continues to seek targets for acquisition, such as facilities forassembly operations or engineering companies. If such acquisitions are indeedmade, the Company may expect to incur significantly larger capitalexpenditures, for which the Company presently intends, but as to which noassurance can be made, to use existing cash reserves, cash from operations andavailable bank credit facilities to fund such capital expenditures.

 

34

----

 

**Inflation**

 

The annual rate of inflation in the PRC has declined significantly inrecent years. In calendar years 2000, 2001 and 2002, the rates of inflation(deflation) were approximately 0.4%, 0.7% and (0.8%), respectively, incomparison to the preceding years, respectively. The Company believes thisdeclining inflation rate has had a positive effect on its results fromoperations. The Company believes, although no assurance can be given, thatcredit restrictions will be gradually lifted, and that as a result Far Eastwill be able to increase prices in the market for its products and thus realizeincreased profit margins.

 

**Share Repurchase Program**

 

In December 2000,the Company approved a program to repurchase up to 162,500 shares of its issuedand outstanding stock by December 31, 2001. 162,215 of the Company’s OrdinaryShares were re-purchased by the Company under this program at a total cost ofapproximately US$237,000 to the Company.

 

**CriticalAccounting Policies**

** **

*Revenue Recognition*

 

Pursuant to revenue recognition criteria set forth in Securities andExchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101: “RevenueRecognition”, the Company recognizes revenue when it is realized or realizableand earned. The Company considers revenue realized or realizable and earnedwhen 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.

 

*Inventory Valuation*

 

The Company writes down its inventory for estimated obsolescence orunmarketable inventory equal to the difference between the cost of inventory andthe estimated market value based upon assumptions about future demand andmarket conditions. If actual future demand or market conditions are lessfavorable than those projected by management, additional write-downs may berequired.

 

*Deferred Taxes*

 

As part of the process of preparing its consolidated financialstatements, the Company is required to estimate its income taxes and tax basesof assets and liabilities in each of the jurisdictions in which it operates.This process involves the Company estimating its current tax exposure togetherwith assessing temporary differences resulting from its differing treatment ofitems for tax and accounting purposes. These differences result in deferred taxassets and liabilities, which are included in the Company’s consolidatedbalance sheet. The Company must then assess the likelihood that its deferredtax assets will be recovered from future taxable income, and, to the extent theCompany believes that recovery is more unlikely than likely, it must establisha valuation

 

35

----

 

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.

 

*New Statements of FinancialAccounting Standards*

 

In June 2001, the Financial Accounting Standard Board (“FASB”)issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” effectivefor fiscal years beginning after June 15, 2002. This statement addresses thediverse accounting practices for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs. Theadoption of this statement will not have a material effect on the Company’sfinancial position or results of operations.

 

In July 2002, theFASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities”. SFAS146 requires the recognition of a liability for costs associated with an exitplan or disposal activity when incurred and nullifies Emerging Issues TaskForce (EITF) Issue 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)”, which allowed recognition at the date ofan entity’s commitment to an exit plan. The provisions of this statement areeffective for exit or disposal activities that are initiated by the Companyafter December 31, 2002. The adoption of this statement is not anticipated tohave a material effect on the Company’s financial position or results ofoperations.

 

In December 2002, the FASB issued SFAS No.148, “Accounting forStock-Based Compensation - Transition and Disclosure” which amends SFAS No.123.This statement provides alternative methods of transition for a voluntarychange to the fair value-based method of accounting for stock-based employeecompensation and amends the disclosure requirements of SFAS No.123. Thetransition guidance and annual disclosure provisions are effective for fiscalyears ending after December 15, 2003. The interim disclosure provisions areeffective for financial reports containing financial statements for interimperiods beginning after December 15, 2002. The adoption of this statement willnot have a material effect on the Company’s financial position or results ofoperations.

 

In May 2003, the FASB issued SFAS No.150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity”.This statement establishes standards for how an issuer classifies and measuresin its statement of financial position certain financial instruments withcharacteristics of both liabilities and equity. In accordance with thestandard, financial instruments that embody obligations for the issuer arerequired to be classified as liabilities. This Statement shall be effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise shall be effective at the beginning of the first interim periodbeginning after June 15, 2003. The Company is currently assessing the impact ofthis statement.

 

In November2002, the FASB issued Interpretation No.45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, including Indirect Guarantees ofIndebtedness of Others”. This interpretation requires a guarantor to recognize,at the inception of the guarantee, a liability for the fair value of theobligation undertaken in issuing the guarantee. It also enhances guarantor’sdisclosure requirements to be made in its interim and annual financial statementsabout its obligations under certain guarantees it has issued. The initialrecognition and initial measurement provisions of this interpretation areapplicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002. The disclosure requirements are effective for financialstatements of interim or annual periods ending after December 15, 2002.  The Company does not believe that  this interpretation will have amaterial  effect, if any, on theCompany’s financial position or results of operations.

 

In November2002, the Emerging Issues Task Force issued EITF Issue No. 00-21 “Accountingfor Revenue Arrangements with Multiple Deliverables”, (“EITF 00-21”) effectivefor arrangements entered into after June 15, 2003. EITF 00-21 defines units ofaccounting for arrangements with multiple deliverables resulting in revenuebeing allocated over the units of accounting for revenue recognition purposes.The adoption of this consensus is not anticipated to have a material effect onthe Company’s financial position or results of operations.

 

In January 2003, the FASBissued FASB Interpretation No. (“FIN”) 46 “Consolidation of Variable InterestEntities-an Interpretation of ARB No. 51”. FIN 46 requires that certain variable interest entities, or VIE’s, beconsolidated by their primary beneficiary if the primary beneficiary is subjectto a majority of the risk of loss from the VIE activities, or entitled toreceive a majority of the VIE’s residual returns, or both.  An entity is subject to FIN 46 and isconsidered to be a VIE if it has (1) equity that is insufficient to permit theentity to finance its activities without additional subordinated financialsupport from other parties, or (2) equity investors that cannot makesignificant decisions about the entity’s operations, or that do not absorb theexpected losses or receive the expected returns of the entity.  FIN 46 is effective immediately for all newVIE’s created or acquired after January 31, 2003.  For VIE’s created or acquired prior to February 1, 2003, theprovisions of FIN 46 must be applied for the first interim or annual periodbeginning after June 15, 2003.  Based onthe Company’s analysis of this interpretation it is possible that the retailshops established in the PRC may be subject to the provisions of FIN 46.  The Company’s

 

36

----

 

maximum exposure to loss as a result of its involvement with theseshops is equal to the advances to these entities as of December 31, 2002 ofapproximately US$292,000.

 

### ***Item5C.***                         Researchand Development, Patents and Licenses

 

During Fiscal2002, Fiscal 2001 and Fiscal 2000, the Company expensed approximatelyUS$10,000, US$20,000 and US$40,000, respectively, on the development of anInfrared Photometric Oil Analyzer pursuant to its agreement with the ShanghaiInstitute Optics Instrument. See Item 4B. “Business Overview.” It isanticipated that an additional US$150,000 in research and development costswill be expended on similar projects and potential research and developmentprojects for the development of on line water testing equipment during Fiscal2003.

 

### ***Item5D.***                         TrendInformation

 

The Company believes that the expenses incurred in product developmentmay result in increases in revenue but such increases are unlikely to allow fora recovery of the expenses for approximately the next two years.

 

### ***Item5E.***                         OffBalance Sheet Arrangements

 

Not applicable.

 

### ***Item5F.***                         TabularDisclosure of Contractual Obligations

 
| **Contractual  Obligations**        |   | **Total** |   | **Less than  1 Year** |   | **1-3 Years** |   | **4-5 Years** |   | **After  5 Years** |   |
|-------------------------------------|--------|-----------|--------|-----------------------|--------|---------------|--------|---------------|--------|--------------------|--------|
|                                |   |      |   |                  |   |          |   |          |   |               |   |
| Operating Leases                    |   | US$85,000 |   | US$85,000             |   | —        |   | —        |   | —             |   |
|                                |   |      |   |                  |   |          |   |          |   |               |   |
| Total  Contractual Cash Obligations |   | US$85,000 |   | US$85,000             |   | —        |   | —        |   | —             |   |

## ** **

## **ITEM 6.**                             DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES

 

### ***Item6A.***                         Directorsand Senior Management

 

Informationconcerning the Directors and Executive Officers of the Company are as follows:

 
| **Name**   |   | **Age** |   | **Position**                                                    |
|------------|--------|---------|--------|-----------------------------------------------------------------|
|       |   |    |   |                                                            |
| T.C. Leung |   | 59      |   | Chairman of the Board of Directors  and Chief Executive Officer |
|       |   |    |   |                                                            |
| Jerry Wong |   | 44      |   | Director and Chief Financial Officer                            |
|       |   |    |   |                                                            |
| Nancy Wong |   | 54      |   | Director                                                        |

 

37

----

 
| **Name**     |   | **Age** |   | **Position** |
|--------------|--------|---------|--------|--------------|
|         |   |    |   |         |
| C.P. Kwan    |   | 44      |   | Director     |
|         |   |    |   |         |
| Alex Sham    |   | 39      |   | Director     |
|         |   |    |   |         |
| Y.K. Liang   |   | 73      |   | Director     |
|         |   |    |   |         |
| Ho Choi Chiu |   | 71      |   | Director     |
|         |   |    |   |         |
| Wang Xu Hong |   | 36      |   | Director     |

 

Set forth below is a brief background of the executive officers anddirectors based upon the information supplied by them to the Company:

 

**T.C. Leung** has been Chief Executive Officer and Chairman ofthe Board of Directors of both the Company and Far East since their inception.Before establishing Far East, Mr. Leung was an engineer for EnglishElectric in England, from 1965 to 1968, and Lockheed Aircraft in Hong Kong,from 1968 to 1970. Mr. Leung also served as managing director of Eurotherm(Far East) Ltd. between 1971 and 1992. Since 1988, Mr. Leung has alsoserved as managing director of Eurotherm Hong Kong. Mr. Leung received aMasters degree in Business Administration from the University of East Asia, Macaoin 1986 and is a Chartered Engineer, a title bestowed upon a member of theCouncil of Engineering Institutions in the United Kingdom.

 

**Jerry Wong** has served as Director and Chief FinancialOfficer of Far East since 1994 and has been with Far East since 1987. Mr. Wonghas been the Chief Financial Officer and a Director of the Company since itsinception. From 1985 until 1987, Mr. Wong worked for MUA Agencies Ltd., asubsidiary of a Hong Kong publicly listed company engaged in the insurancebusiness, as deputy manager of its secretarial, legal and accountingdepartment. From 1981 until 1985, Mr. Wong served as a senior accountantin Price Waterhouse-Hong Kong. He is a Fellow of the Association of CharteredCertified Accountants in the United Kingdom and a Certified Public Accountantin Hong Kong.

 

**Nancy Wong** has been a Director of the Company since itsinception and a Director of Far East, and its Personnel Manager, since 1994.Ms. Wong has been with Far East since 1971. Ms. Wong is also FarEast’s Chief Representative in China. During the last several years,Ms. Wong has played a pivotal role in Far East’s business expansion inChina. Ms. Wong received a Bachelor of Science degree in BusinessAdministration from the University of East Asia, Macao in 1989.

 

38

----

 

**C.P. Kwan** joined Far East in 1984 and has served as aDirector and Manager of its Process Equipment Department since 1991.Mr. Kwan has been a Director of the Company since its inception. Beforejoining Far East, he was employed by Haven Automation (H.K.) Ltd., a companyinvolved in the water treatment and process control business between 1981 and1984.

 

**Alex Sham** has been a Director of the Company since itsinception. Mr. Sham joined Far East in 1988 and has been its Sales Managersince 1993 and became a Director of Far East in 1996. Mr. Sham received aBachelor of Science in Applied Chemistry from Hong Kong Baptist University in1990. Prior to joining Far East, Mr. Sham was employed by theEnvironmental Protection Department of the Hong Kong Government from 1986 until1988.

 

**Y.K. Liang** has been a director of the Company sinceFebruary 1998. Mr. Liang is a director of Wong Liang Consultants Ltd.(“Consultants”) and a member of the certified public accounting firm of Y.K.Liang & Co. (“LCO”). Mr. Liang has been associated with both Consultantsand LCO for more than the past five years. Consultants is a general businessconsulting firm.

 

**Ho Choi Chiu** has been a director of the Company since October2000. Mr. Ho is a certified public accountant, is a senior partner in theaccounting firm of C.C. Ho & Company, a firm that he has been associatedwith for more than the past five years.

 

**Wang Xu Hong** has been a director of the Company since August2002. Mr. Wang is the East China sales manager of Euro Tech (Far East) Limited,a wholly-owned subsidiary of the Company, since mid 1994. From mid 1997 untiljoining Euro Tech, he was employed as a Research Associate and Lecturer at theAnalysis and Research Center of Shanghai’s Tongji University. Wang Xu Hongreceived Bachelor’s and Master’s degrees in Science from Fudan University in1984 and 1988, respectively.

 

Directors of the Company serve until the next annual meeting ofshareholders of the Company and until their successors are elected and dulyqualified. Officers of the Company are elected annually by the Board ofDirectors and serve at the discretion of the Board of Directors.

 

None of the Company’s directors, officers or beneficial owners of tenpercent or more of its Common Stock are required to file any reports pursuantto Section 16(a) of the Securities Exchange Act of 1934, as amended (the “1934Act”).

 

The Company had three meetings of its Board of Directors during Fiscal2002.

 

The Company has not had any directors resign or decline to stand forre-election at any time during or since December 31, 1998. However, at theCompany’s 2000 annual meeting, the Company’s shareholders did not re-elect onedirector.

 

There are no material legal proceedings involving any director, officeror affiliate of the Company, owner of record or beneficially of more than fivepercent of the Company’s Common Stock or any associate of any of the foregoing.

 

39

----

 

### ***Item6B.***                         Compensation

 

The following table sets forth certain summary information with respectto the compensation paid by the Company and Far East for services rendered inall capacities to the Company and Far East during Fiscal 2002, Fiscal 2001 andFiscal 2000 to the Chairman of the Board and Chief Executive Officer.

 

**Summary Compensation Table**

 
| **Name and Principal Position**           |   | **Year** |   | **Salary (US$)** |   | **Bonus (US$)** |   |
|-------------------------------------------|--------|----------|--------|------------------|--------|-----------------|--------|
|                                      |   |     |   |             |   |            |   |
| T.C. Leung, Chairman of the Board of |   | 2002     |   | 100,000          |   | 45,000          |   |
| Directors and Chief Executive Officer     |   | 2001     |   | 100,000          |   | 61,000          |   |
|                                      |   | 2000     |   | 100,000          |   | 44,000          |   |

 

**Compensation of Directors.**Directors of the Company do not receivecompensation for their services as directors; however, the Board of Directorsmay authorize the payment of compensation to directors for their attendance atregular and annual meetings of the Board and for attendance at meetings ofcommittees of the Board as is customary for similar companies. Directors willbe reimbursed for their reasonable out-of-pocket expenses incurred inconnection with their duties to the Company.

 

**Pension Plan.****Prior to December 1, 2000, the Company hadonly one defined contribution pension plan for all its Hong Kong employees.Under this plan, all employees were entitled to pension benefits equal to theirown contributions plus 50% to 100% of individual fund account balancescontributed by the Company, depending on their years of service with theCompany. The Company was required to make specific contributions atapproximately 10% of the basic salaries of the employees to an independent fundmanagement company.

 

With the introduction of the Mandatory Provident Fund Scheme, a definedcontribution scheme managed by an independent trustee on December 1, 2000, eachof the Company and its employees who joined the Company subsequently makesmonthly contributions to the scheme at 5% of the employee’s cash income asdefined under the Mandatory Provident Fund legislation. Contributions of boththe Company and its employees are subject to a maximum of HK$1,000 per monthand thereafter contributions are voluntary and are not subject to anylimitation. The Company and its employees made their first contributions inDecember 2000.

 

As stipulated by the rules and regulations in the PRC, the Companycontributes to state-sponsored retirement plans for its employees in MainlandChina.  The Company contributesapproximately 7% (2000 and 2001 - 7%) of the basic salaries of its employees,and has no further obligations for the actual payment of pension or post-retirementbenefits beyond the annual contributions. The state-sponsored retirement plansare responsible for the entire pension obligations payable to retiredemployees.

 

40

----

 

During the years ended December 31, 2002, 2001 and 2000, the aggregatecontributions of the Company to the aforementioned pension plans and retirementbenefit schemes were approximately US$131,000, US$135,000 and US$97,000,respectively.

 

**T.C. Leung.****T.C. Leung’s services to the Company and Far Eastwere provided pursuant to a personal services agreement between the Company,Far East and Shereman Enterprises Ltd. (“Shereman”), a management company (the“Employment Agreement”). The Employment Agreement terminated in March 2002,however, Mr. Leung continues to serve in those capacities while the Companynegotiates this matter. Since July 2002, Mr. Leung has been paid directly,instead of the Company making payments to Shereman. Mr. Leung serves asthe Chairman of the Board of Directors and Chief Executive Officer of Far East andthe Company.

 

**Management Option Plan.****TheCompany has authorized the issuance of Options to purchase up to an aggregateof 2,184,000 Ordinary Shares (the “Management Options”) to its officers,directors and employees as the Company’s Chairman of the Board and ChiefExecutive Officer may direct. The Management Options became exercisable onMarch 14, 1998 and will expire on March 14, 2007.

 

The exercise priceand the number of Ordinary Shares purchasable upon exercise of any ManagementOptions are subject to adjustment upon the occurrence of certain events,including stock dividends, reclassification, reorganizations, consolidations,mergers, and certain issuances and redemptions of Ordinary Shares andsecurities convertible into or exchangeable for Ordinary Shares excludingcertain issuances of shares. No adjustments in the exercise price will berequired to be made with respect to the Management Options until cumulativeadjustments amount to US$.05.

 

In the event ofany capital reorganization, certain reclassifications of the Ordinary Shares,any consolidation or merger involving the Company (other than (i) aconsolidation or merger which does not result in any reclassification or changein the outstanding Ordinary Shares, or (ii) sale of the properties and assetsof the Company, as, or substantially as, an entirety to any other corporation),Management Options will thereupon become exercisable only for the number ofshares of stock or other securities, assets, or cash to which a holder of thenumber of Ordinary Shares of the Company purchasable (at the time of suchreorganization, reclassification, consolidation, merger, or sale) upon exerciseof such Management Options would have been entitled upon such reorganization,reclassification, consolidation, merger, or sale.

 

The table belowshows, as to each of the executive officers and directors of the Company and asto all executive officers and directors of the Company as a group, thefollowing information with respect to Management Options: (i) the aggregateamounts of Ordinary Shares subject to Management Options; and (ii) the pershare exercise price for the Management Options granted to these individuals.

 

Each of thefollowing persons also received options under the Company’s 2000 and 2002Officers and Directors Plans.

 

41

----

 
| **Name of Executive  Officers and Directors**                |   | **Shares  Subject  To Management Options** |   | **Per Share  Exercise Price** |   |
|--------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------|--------|
|                                                         |   |                                       |   | **(US$)**                     |   |
|                                                         |   |                                       |   |                          |   |
| T.C. Leung                                                   |   | 1,170,000                                  |   | 3.5256                        |   |
|                                                         |   | 546,000                                    |   | 2.5641                        |   |
|                                                         |   |                                       |   |                          |   |
| Alex Sham                                                    |   | 59,735                                     |   | 3.5256                        |   |
|                                                         |   | 31,200                                     |   | 2.5641                        |   |
|                                                         |   |                                       |   |                          |   |
| Jerry Wong                                                   |   | 51,935                                     |   | 3.5256                        |   |
|                                                         |   | 23,400                                     |   | 2.5641                        |   |
|                                                         |   |                                       |   |                          |   |
| Nancy Wong                                                   |   | 44,200                                     |   | 3.5256                        |   |
|                                                         |   | 11,700                                     |   | 2.5641                        |   |
|                                                         |   |                                       |   |                          |   |
| C.P. Kwan                                                    |   | 35,100                                     |   | 3.5256                        |   |
|                                                         |   | 11,700                                     |   | 2.5641                        |   |
|                                                         |   |                                       |   |                          |   |
| Wang Xu Hong                                                 |   | 10,140                                     |   | 3.5256                        |   |
|                                                         |   |                                       |   |                          |   |
| All Executive Officers and Directors as a group  (8 persons) |   | 1,995,110                                  |   | 2.5641 -3.5256                | (1)    |

 

----

(1)   Price range.

 

Other officersand/or employees of the Company have been or will be granted management optionsto purchase an aggregate of 163,410 Management Options, all of which will beexercisable at US$3.5256 per share.

 

As of May 31,2003, no Management Options have been exercised. At May 31, 2003, none of theoptions were “in the money,” although by their terms they are exercisable.

 

**Company Option 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 toacquire Ordinary Shares to key employees of the Company and its subsidiaries.All four plans are collectively referred to as the “Plans”.

 

392,800 and779,600 shares are authorized for issuance under the Employees Plan and theOfficers Plans, respectively.

 

42

----

 

The Board ofDirectors or a committee (the “Committee”) appointed by the Board of Directorsadministers the Plans. The Board of Directors or the Committee has theauthority to interpret the Plans, prescribe, amend and rescind rules andregulations relating to them, determine the terms and provisions of optionsgranted under the Plans (which need not be identical), and make otherdeterminations as it deems necessary and advisable for the administration ofthe 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 bythe Committee or the Chief Executive Officer to grant an award under the Plansis subject to ratification by the Board of Directors of the Company. The Boardis also to ratify any decision that affects the terms or conditions of optionsawarded to elected officers or directors of the Company or its subsidiaries.

 

In the event thatthe Ordinary Shares of the Company are subdivided or consolidated as a resultof a reorganization, stock split, payment of a stock dividend, reverse stocksplit or other change in the Company’s capitalization, the Committee or theBoard of Directors has the authority to make appropriate adjustments in theOrdinary Shares available for issuance under the Plans, the number of sharessubject to options that may have been or may be awarded to any participant inany 12 month period, the price, number of Ordinary Shares or kind of securitiessubject to outstanding options, or the terms of such options in order toprevent dilution or enlargement of rights under the options. In addition, theBoard may also change the kind of securities available for grant under thePlans to reflect any such corporate changes.

 

The Committee orthe Chief Executive Officer has the discretion to determine which employeesconstitute key employees to whom options will be awarded under the EmployeesPlan.

 

The Committee orChief Executive Officer, as the case may be, determines the number of OrdinaryShares subject to options to be granted.

 

The purchase priceper share of the Ordinary Shares to be paid upon the exercise of the optionmust be at least 100% of the fair market value of an Ordinary Shares on thedate on which the option was granted. Under the Plans, if the Ordinary Sharesare principally traded on a national securities exchange or the Nasdaq StockMarket’s National Market or Small Cap Market at the time of grant, the Companyis required to use, as fair market value, the average of the closing prices ofthe Ordinary Shares for the ten consecutive trading days immediately before thedate of grant. If the Ordinary Shares are traded on a national securitiesexchange or the Nasdaq Stock Market’s National Market or Small Cap Market, butno closing prices are reported for such ten-day period, or if the OrdinaryShares are principally traded in the over-the-counter market, the Company isrequired to use, as fair market value, the average of the mean between the bidand asked prices reported for the Company’s Ordinary Shares at the close oftrading during such ten-day period before the date of grant. If the OrdinaryShares are traded neither on a national securities exchange, the Nasdaq StockMarket’s National Market, Small Cap Market nor in the over-the-counter marketor if bid and asked prices are otherwise not available, the fair market

 

43

----

 

value of the OrdinaryShares on the date of grant will be determined in good faith by the Committeeor the Board of Directors, as the case may be.

 

The Board ofDirectors or the Committee, as the case may be, or, to the extent that suchauthority has been delegated to the Chief Executive Officer, the ChiefExecutive Officer determines, at the time of grant, when each option grantedunder the Plans will become exercisable. Notwithstanding the foregoing, alloptions held by a key employee of the Company or its subsidiaries becomeimmediately exercisable, whether or not exercisable at the time, upon the deathor 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 forshares purchased upon exercise of an option may be made by any of the followingmethods, subject to certain requirements: (1) in cash, paid by either theoptionholder or a broker to whom the optionee has tendered the option; (2) inOrdinary Shares valued at the fair market value of such shares on the date ofexercise, provided that such shares were held by the optionholder for not lessthan six months 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 combination of thepreceding methods.

 

**Transfer Of Options.** Under the Plans, an option may not be sold,assigned or otherwise transferred except to:

 

•                                          thespouse or lineal descendant of a plan participant;

 

•                                          thetrustee of a trust for the primary benefit of a plan participant’s spouse orlineal descendant;

 

•                                          apartnership of which a plan participant and lineal descendants are the onlypartners; or

 

•                                          acharitable organization.

 

These assignmentsare only permitted if the assigning optionee does not receive any compensationin connection with the assignment and the assignment is expressly approved bythe Board or Committee, as the case may be.

 

The Companyindemnifies the members of any Committee and its delegates and the ChiefExecutive Officer against (1) reasonable expenses incurred in connection withthe defense of any action, suit or proceeding to which they may be a party byreason of any action taken or failure to act in connection with the Plans, and(2) all amounts paid by them in settlement of or satisfaction of a judgmententered in any such action, suit or proceeding, except in cases where such aperson is adjudged liable for gross negligence or gross misconduct in theperformance of his or her duties.

 

44

----

 

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

 

During Fiscal 2000and in January 2002, the Company granted options to certain of its officers anddirectors pursuant to the 2000 Officers and Directors Plan and, in November2002, options were granted to certain of its officers and directors pursuant tothe 2002 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 subject to such options.

 
| **Names of Executive  Officers and Directors**   |   | **Shares  Subject  To the Officers  Plans Options** |   | **Per Share  Exercise Price** |   |
|--------------------------------------------------|--------|-----------------------------------------------------|--------|-------------------------------|--------|
|                                             |   |                                                |   | **(US$)**                     |   |
| T.C. Leung                                       |   | 270,000                                             | (1)    | 1.23                          |   |
|                                             |   | 143,000                                             | (2)    | 1.2154                        |   |
|                                             |   | 98,000                                              | (2)    | 1.72                          |   |
|                                             |   |                                                |   |                          |   |
| Alex Sham                                        |   | 40,000                                              | (1)    | 1.23                          |   |
|                                             |   | 15,600                                              | (2)    | 1.2154                        |   |
|                                             |   | 45,000                                              | (2)    | 1.72                          |   |
|                                             |   |                                                |   |                          |   |
| Jerry Wong                                       |   | 30,000                                              | (1)    | 1.23                          |   |
|                                             |   | 13,000                                              | (2)    | 1.2154                        |   |
|                                             |   | 25,000                                              | (2)    | 1.72                          |   |
|                                             |   |                                                |   |                          |   |
| Nancy Wong                                       |   | 20,000                                              | (1)    | 1.23                          |   |
|                                             |   | 10,400                                              | (2)    | 1.2154                        |   |
|                                             |   | 11,000                                              | (2)    | 1.72                          |   |
|                                             |   |                                                |   |                          |   |
| C.P. Kwan                                        |   | 20,000                                              | (1)    | 1.23                          |   |
|                                             |   | 7,800                                               | (2)    | 1.2154                        |   |
|                                             |   | 10,800                                              | (2)    | 1.72                          |   |
|                                             |   |                                                |   |                          |   |
| Wang Xu Hong                                     |   | 20,000                                              | (1)    | 1.23                          |   |
|                                             |   | 5,200                                               | (3)    | 1.2154                        |   |
|                                             |   | 15,000                                              | (3)    | 1.72                          |   |
|                                             |   |                                                |   |                          |   |
| All executive  officers and Directors as a group |   | 799,800                                             |   | 1.2154 – 1.72            | (4)    |
|                                             |   |                                                |   |                          |   |

 

----

 

(1)                    Granted pursuant to the 2002Officers and Directors Plan.

(2)                    Granted pursuant to the 2000Officers and Directors Plan.

(3)                    Granted pursuant to the 2000Employees Plan.

(4)                    Price range.

 

45

----

 

The foregoingoptions will expire in August 2010.

 

Pursuant to its2000 Employees Plan, the Company has also granted options to 32 of itsnon-officer/director employees to purchase an aggregate of 189,800 of itsOrdinary Shares exercisable at a price of US$1.2154 per share for a ten yearterm expiring in February 2011.

 

Pursuant to its2002 Employees Plan, the Company has also granted options to 32 of itsnon-officer/director employees to purchase an aggregate of 140,000 of itsOrdinary Shares exercisable at a price of US$1.60 per share for a ten year termexpiring in April 2012.

 

At December 31,2002, no options had been exercised.

 

The Company hasset forth in this Report all required disclosure of additional compensation toits executive officers and directors including personal benefits and securitiesor properties paid or distributed which was not offered on the same terms toall full time employees during Fiscal 2002.

 

### ***Item6C.***                 BoardPractices

 

The term of eachof the Company’s eight directors expires at the election and qualification oftheir successors at the next annual meeting of the Company’s shareholders,anticipated to be held in August of this year. All of the Company’s eightdirectors were elected at the Company’s last annual meeting of shareholders inAugust 2002.

 

The Board has a standing Audit Committee to assist the Board in carryingout its duties. The Audit Committee has a written charter approved by theBoard. The chair of the Audit Committee determines the meeting agenda of theAudit Committee. The Audit Committee members receive materials in advance ofCommittee meetings allowing them to prepare for the meeting.

 

During Fiscal 2002, the Audit Committee met three (3) times beingattended by all members.

 

The Audit Committee assists the Board in monitoring the Company’sfinancial accounting, controls, planning and reporting. Among its duties, theAudit Committee:

 

•                                          reviews the adequacy of the Company’s internalcontrols;

 

•                                          reviews the independence, fee arrangements,audit scope, and performance of the Company’s independent auditors, andrecommends the appointment or replacement of independent auditors to the Boardof Directors;

 

•                                          reviews and approves all non-audit work, ifany, to be performed by the auditors;

 

46

----

 

•                                          reviews the scope of our internal auditing andthe adequacy of the organizational structure and qualifications of the internalauditing staff;

 

•                                          reviews, before release, the quarterly resultsand interim financial data; and

 

•                                          reviews, before release, the audited financialstatements and operating and financial review and prospects contained in theCompany’s Annual Report on Form 20-F, and recommends that the Board ofDirectors submit these items to the shareholders’ meeting for approval.

 

The Audit Committee is currently composed of T.C. Leung Y.K. Liang andHo Choi Chiu. The Board has determined that the membership of the AuditCommittee meets the independence requirements of the NASDAQ listing standardsand the applicable rules and regulations of the SEC.

 

### ***Item6D.***                 Employees

 

The Company hasapproximately 110 full-time employees. At December 31, 2002, 2001 and 2000,staffing levels were approximately as follows:

 
|                      |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|
| Marketing and sales       |   | 54       |   | 44       |   | 37       |   |
| Administrative            |   | 36       |   | 30       |   | 24       |   |
| Technical                 |   | 20       |   | 18       |   | 18       |   |
| Total full time employees |   | 110      |   | 92       |   | 79       |   |

 

The Company’smanagement consists of its officers and directors.

 

The Company is notsubject to any collective bargaining agreement and believes that itsrelationship with its employees are good.

 

### ***Item6E.***                 ShareOwnership

 

With respect tothe share ownership of the directors and senior management of the Company,reference is made to Item 7. “Major Shareholders and Related PartyTransactions.”

 

### ***ITEM 7.***                     MAJOR SHAREHOLDERS AND RELATED PARTYTRANSACTIONS

 

### ***Item7A.***                 MajorShareholders

 

The followingtable sets forth, as of June 11, 2003, certain information concerningbeneficial ownership of the Company’s Ordinary Shares 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:

 

47

----

 
|                                                                           |   | **Amount and  Nature of  Beneficial  Ownership(3)** |   | **Approximate  Percentage  Of Ordinary  Shares Owned** |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|--------------------------------------------------------|--------|
| T.C. Leung (1)(2)                                                              |   | 3,912,237                                           |   | 73.9                                                   | %      |
|                                                                           |   |                                                |   |                                                   |   |
| Pearl Venture Ltd.(1)(2)                                                       |   | 1,468,370                                           |   | 47.9                                                   | %      |
|                                                                           |   |                                                |   |                                                   |   |
| Alex Sham(3)                                                                   |   | 213,375                                             |   | 6.6                                                    | %      |
|                                                                           |   |                                                |   |                                                   |   |
| Jerry Wong(3)                                                                  |   | 154,255                                             |   | 4.8                                                    | %      |
|                                                                           |   |                                                |   |                                                   |   |
| Nancy Wong(3)                                                                  |   | 119,140                                             |   | 3.8                                                    | %      |
|                                                                           |   |                                                |   |                                                   |   |
| C.P. Kwan(3)                                                                   |   | 183,909                                             |   | 5.8                                                    | %      |
|                                                                           |   |                                                |   |                                                   |   |
| Y.K. Liang(3)                                                                  |   | 0                                                   |   | —                                                 |   |
|                                                                           |   |                                                |   |                                                   |   |
| Wang Xu Hong(3)                                                                |   | 50,340                                              |   | 1.6                                                    | %      |
|                                                                           |   |                                                |   |                                                   |   |
| Ho Choi Chiu(3)                                                                |   | 0                                                   |   | —                                                 |   |
|                                                                           |   |                                                |   |                                                   |   |
| Yeung Kai Tai(4)                                                               |   | 196,563                                             |   | 6.4                                                    | %      |
|                                                                           |   |                                                |   |                                                   |   |
| All Executive Officers And Directors of the Company as a group (8  persons)(3) |   | 4,633,256                                           |   | 79.1                                                   | %      |

 

### ***Item 7B.***                 Related Party Transactions

 

----

(1)               The address for Mr.Leung is c/o Euro Tech (Far East) Ltd., 18/F Gee Chang Hong Centre, 65 WongChuk Hang Road, Hong Kong. The address for Pearl is Columbus Centre Building,Wichhams Cay, Road Town, Tortola, British Virgin Islands.

(2)               Includesshares of the Company’s Common Stock owned of record by Pearl, which is a trustestablished for the benefit of Mr. Leung. Also includes those Company OrdinaryShares owned of record by Regent, of which Pearl is the majority shareholder.

(3)               Gives effectto the exercise of Management Options and 2000 Officers and Directors Plan,2000 Employees Plan and 2002 Officers and Directors Plan Options owned ofrecord by such persons and which have vested or will vest within six (6) monthsof the date of this Report. See Item 6B. “Compensation.”

(4)               The address forYeung Kai Tai is 37-37A Jordan Road, 4th Floor, Doubleset CommercialCentre, Kowloon, Hong Kong.

 

48

----

 

All outstandingbalances with related parties are unsecured, non-interest bearing and arerepayable in 2003. The related companies with which the Company has engaged inmaterial transactions are Eurotherm and Armtison Limited (“Armtison”). DuringFiscal 2002, 2001 and 2000, the Company made sales to Eurotherm ofapproximately US$33,000, US$30,000 and US$26,000, respectively. During Fiscal2002, 2001 and 2000, the Company made purchases from Armtison of approximatelyUS$33,000, US$68,000 and US$72,000, respectively and from Eurotherm of approximatelyUS$2,800,000, US$2,114,000 and US$845,000, respectively. Additionally, duringFiscal 2002, 2001 and 2000, the Company paid approximately US$45,000, US$46,000and US$46,000, respectively to Armtison for office space rentals, andapproximately US$27,000, US$27,000 and US$29,000 in management fees toEurotherm to assist in the management of some of the Company’s PRC officeswhile the Company earned approximately US$34,000 per year from Eurotherm foroffice space rentals. The payments to Armtison and Eurotherm were based onactual office space usage and the time cost of personnel used, respectively. Atthe end of Fiscal 2002, the Company was obligated to Eurotherm forapproximately US$662,000 for normal trade indebtedness. This indebtedness isrepayable on normal trading terms, is unsecured and does not bear interest.T.C. Leung, the Company’s Chairman of the Board and Chief Executive Officer isalso a director of Eurotherm. During Fiscal 2003 and for the foreseeablefuture, the Company has continued and expects to continue to:

 

•                                          make sales to Eurotherm;

•                                          make purchases from Armtison and Eurotherm;

•                                          lease facilities from Armtison;

•                                          pay management fees to Eurotherm; and

•                                          lease facilities to Eurotherm.

 

As of December 31,2002 and 2001, approximately US$283,000 and US$120,000, respectively of othercurrent assets represent advances to certain PRC employees of the Company. Theadvances are provided to those PRC employees in order for them to finance theoperations of certain retail shops established in PRC by the employees to sellthe Company’s products. The advances are unsecured, bear interest at a nominalrate and have no fixed repayment terms. During Fiscal 2002 and Fiscal 2001,allowance for doubtful debt in respect of such advances of US$89,000 and nilwere made. The Company does not account for the related sales to these retailships until the inventories are sold to third parties.

 

### ***Item 7C.***                 Interest of Experts and Counsel

 

Not applicable.

 

### ***ITEM 8.***                     FINANCIAL INFORMATION

 

### ***Item 8A.***                 Consolidated Statements and Other FinancialInformation

 

Item 8A.1                                             SeeItem 18.

 

Item 8A.2                                             SeeItem 18.

 

49

----

 

Item 8A.3                                             SeeReport of Independent Accountant page F-1.

 

Item 8A.4                                             Wehave complied with this requirement.

 

Item 8A.5                                             Notapplicable.

 

Item 8A.6                                             Notapplicable.

 

Item 8A.7                                             LegalProceedings.

 

The Company is nota party to any material legal proceedings.

 

Item 8A.8                                             DividendPolicy.

 

The Company hasnot paid cash dividends to date. The payment of cash dividends, if any, in thefuture is within the discretion of the Board of Directors. The payment of cashdividends, if any, in the future will depend upon the Company’s earnings,capital requirements and financial conditions and other relevant factors. TheCompany’s Board of Directors does not presently intend to declare any cashdividends in the foreseeable future, but instead intends to retain allearnings, if any, for use in the Company and Far East’s business operations.

 

### ***Item 8B.***                  SignificantChanges

 

There has not beenany significant change since the date of the annual financial statementsincluded in this Report.

 

### ***ITEM 9.***                     THE OFFERING AND LISTING

 

### ***Item 9A.***                 Listing Details and 9.C Markets

 

The Company hasone class of securities presently registered: Ordinary Shares. These securitiesare presently traded on the NASDAQ SmallCap Market under the trading symbols“CLWT”, and have so traded since the Company’s Public Offering in March 1997.

 

The followingquotations have not been adjusted for a 20% stock dividend issued in September1999 and the 30% stock dividend issued in August 2001.

 

The high and lowbid price quotations for the Ordinary Shares in the periods indicated are asfollows:

 
| **Years End December 31,** |   | **High** |       | **Low**  |       |
|----------------------------|--------|----------|------------|----------|------------|
|                       |   | **US$**  | ** ** | **US$**  | ** ** |
| 1998                       |   | 6.75     |       | 2.5      |       |
| 1999                       |   | 3.625    |       | 0.25     |       |
| 2000                       |   | 15.00    |       | 0.031250 |       |
| 2001                       |   | 2.790    |       | 0.781    |       |
| 2002                       |   | 1.910    |       | 0.800    |       |

 

50

----

 
| **Quarters Ended** |   | **High** |   | **Low** | ** ** |
|--------------------|--------|----------|--------|---------|------------|
|               |   | **US$**  |   | **US$** |       |
| March 31, 2001     |   | 2.00     |   | 0.78125 |       |
| June 30, 2001      |   | 2.450    |   | 1.688   |       |
| September 30, 2001 |   | 2.790    |   | 1.00    |       |
| December 31, 2001  |   | 2.320    |   | 1.130   |       |
| March 31, 2002     |   | 1.800    |   | 1.050   |       |
| June 30, 2002      |   | 1.650    |   | 1.010   |       |
| September 30, 2002 |   | 1.910    |   | 1.140   |       |
| December 31, 2002  |   | 1.470    |   | 0.800   |       |
| March 31, 2003     |   | 2.030    |   | 0.880   |       |

 
| **Period**                          |   |   | ** ** |   | ** ** |
|-------------------------------------|--------|--------|------------|--------|------------|
| From April 1, 2003 to June 15, 2003 |   | 1.750  |       | 1.010  |       |

 
| **The Following Months** |   | **High** | ** ** | **Low** | ** ** |
|--------------------------|--------|----------|------------|---------|------------|
|                     |   | **US$**  | ** ** | **US$** | ** ** |
| December 2002            |   | 1.470    |       | 0.800   |       |
| January 2003             |   | 2.030    |       | 0.900   |       |
| February 2003            |   | 1.330    |       | 1.050   |       |
| March 2003               |   | 1.760    |       | 0.880   |       |
| April 2003               |   | 1.480    |       | 1.050   |       |
| May 2003                 |   | 1.750    |       | 1.010   |       |

 

The OrdinaryShares were held by approximately 48 holders of record as of June 11, 2003.Based upon information received from broker-dealers, clearing firms and others,the Company believes that it has approximately at least 400 beneficialshareholders of its Ordinary Shares.

 

### ***Item 9B.***                 Plan of Distribution

 

Not Applicable.

 

### ***Item 9D.***                 Selling Shareholders

 

Not Applicable.

 

### ***Item9E.***                 Dilution

 

Not Applicable.

 

51

----

 

 

### ***Item 9F***                 Expenses Of The Issue

 

Not Applicable.

 

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

 

### ***Item10A.***          ShareCapital

 

**Authorized Capital**.The authorized capital of the Company is US$250,000 comprised of 20,000,000Ordinary Shares and 5,000,000 shares of Preferred Stock. As ofDecember 31, 2002 there were 3,064,151 Ordinary Shares and no shares ofPreferred Stock, issued and outstanding. All of the Company’s shares of capitalstock have a par value of US$.01 per share.

 

Holders of theCompany’s Ordinary Shares are entitled to one vote for each whole share on allmatters to be voted upon by shareholders, including the election of directors.Holders of Ordinary Shares do not have cumulative voting rights in the electionof directors. 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. Holders of Ordinary Shares have no preemptive rightsto purchase any additional, unissued shares of Ordinary Shares. All of theoutstanding shares of Ordinary Shares of the Company are duly authorized,validly issued, fully paid and non-assessable.

 

Pursuant to theCompany’s Memorandum and Articles of Association and pursuant to the laws ofthe British Virgin Islands, the Company’s Memorandum and Articles ofAssociation may be amended by a resolution of the Board of Directors withoutshareholder approval. This includes amendments to increase or reduce theauthorized capital stock of the Company or to increase or reduce the par valueof its shares. The ability of the Company to amend its Memorandum and Articlesof Association without shareholder approval could have the effect of delaying,deterring or preventing a change in control of the Company without any furtheraction by the shareholders including but not limited to, a tender offer topurchase the Common Stock at a premium over then current market prices.

 

Under UnitedStates law, majority and controlling shareholders generally have certain“fiduciary” responsibilities to the minority shareholders. Shareholder actionmust be taken in good faith and actions by controlling shareholders which areobviously unreasonable may be declared null and void. The British VirginIslands law protecting the interests of the minority shareholders is not asprotective in all circumstances as the law protecting minority shareholders inUnited States jurisdictions. While British Virgin Islands law does not permit ashareholder of a British Virgin Islands company to sue its directorsderivatively, i.e., in the name of and for the benefit of the Company,and to sue the Company and its directors for his benefit and the benefit ofothers similarly situated, the circumstances in which any such action may bebrought that may be available in respect of any such action may result in therights of shareholders of a British 

 

52

----

 

Virgin Island companybeing more limited than those rights of shareholders in a United Statescompany.

 

The Board ofDirectors of the Company, without further shareholder action, may issue sharesof Preferred Stock in any number of series and may establish as to each suchseries the designation and number of shares to be issued and the relativerights and preferences of the shares of each series, including provisionsregarding voting powers, redemption, dividend rights, rights upon liquidationand conversion rights. The issuance of shares of Preferred Stock by the Boardof Directors could adversely affect the rights of holders of Ordinary Sharesby, among other matters, establishing preferential dividends, liquidationrights and voting power. The Company has not issued any shares of PreferredStock and has no present intention to issue shares of Preferred Stock. Theissuance thereof could discourage or defeat efforts to acquire control of theCompany through acquisition of Ordinary Shares.

 

**Warrants**. TheCompany had Warrants, to purchase an aggregate of 2,527,200 Ordinary Shares,issued in its initial public offering (the “Warrants”). All Warrants expired inMarch 2003 unexercised.

 

### ***Item 10B.***          Memorandum and Articles of Association

 

Set forth below isa summary 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.

 

**Share Register and Voting Restrictions.**  The Company maintains a share register atits registered office in the BVI. The Company’s registered number is 200960.The objects of the Company are to engage in any act or activity that is notprohibited under any law of the BVI. See Regulation 4(1) of the Articles. Underthe Articles, the Company is not required to treat the holder of a registeredshare in the Company as a shareholder until that person’s name has been enteredin the share register. The holders of Ordinary Shares have one vote for eachOrdinary Share held of record. The holders of Preferred Shares have such votingpowers, full or limited, or no voting powers and such restrictions as may bestated and expressed in the resolution providing for the issuance of thePreferred Shares.

 

**Shareholders Meeting.**The directors of the Company may convene meetings of the shareholders of theCompany at such times and in such manner and places within or outside the BVIas the directors consider necessary or desirable. Upon the written request ofthe shareholders holding ten (10%) percent or more of the outstanding votingshares in the Company the directors must convene a meeting of shareholders. Thedirectors must give not less than seven days notice of meetings of shareholdersto those persons whose names on the date of the notice is given appear asshareholders in the share register of the Company and are entitled to vote atthe meeting. The directors may fix the date notice is given of a meeting ofshareholders as the record date for determining those shares that are entitledto vote at the meeting.

 

53

----

 

The inadvertentfailure of the directors to give notice of a meeting to a shareholder, or thefact that a shareholder has not received notice, does not invalidate themeeting. A shareholder may be represented at a meeting of shareholders by aproxy who may speak and vote on behalf of the shareholder.

 

A shareholder mayparticipate at a meeting of shareholders by telephone or other electronic means,as long as all shareholders participating in the meeting are able to hear eachother.

 

A meeting ofshareholders is duly constituted if, at the commencement of the meeting, thereare present in person or by proxy not less than fifty (50%) percent of thevotes of the shares or class series of shares entitled to vote on resolutionsof shareholders to be considered at the meeting.

 

If a quorum is notpresent, the meeting, if convened upon the requisition of shareholders, shallbe dissolved; in any other case it shall stand adjourned to the next businessday at the same time and place or to such other time and place as the directorsmay determine, and if at the adjourned meeting there are present in person orby proxy not less than one third of the votes of the shares or each class orseries of shares entitled to vote on the resolutions to be considered by themeeting, those present shall constitute a quorum but otherwise the meetingshall be dissolved.

 

At every meetingof shareholders, the chairman of the board of directors shall preside aschairman of the meeting.

 

The chairman may,with the consent of the meeting, adjourn any meeting from time to time, andfrom place to place, but no business shall be transacted at any adjournedmeeting other than the business left unfinished at the meeting from which theadjournment took place.

 

At any meeting ofthe shareholders the chairman shall be responsible for deciding in such manneras he shall consider appropriate whether any resolution has been carried or notant the result of his decision shall be announced to the meeting and recordedin the minutes thereof.

 

Any action thatmay be taken by the shareholders at a meeting may also be taken by a resolutionof shareholders 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.

 

**Net Profits and Dividends.**Under BVI law, dividends may only be declared and paid by an InternationalBusiness Company (which the Company is classified as under BVI law) out ofsurplus, such that after payment of dividends such company must be able tosatisfy its liabilities as they become due in the ordinary course of businessand the realizable value of the assets of such company must not be less thanthe sum of its liabilities (other than deferred taxes and capital). There areno other BVI restrictions regarding dividends.

 

**Pre-emptive Rights.**The holders of Ordinary Shares and Preferred Shares are not entitled to anypre-emptive or similar rights.

 

54

----

 

**Borrowing Power.**The directors may exercise all the powers of the Company to borrow money and tomortgage or charge its undertakings and property or any part thereof, to issuedebentures, debenture stock and other securities whenever money is borrowed oras security for any debt, liability or obligation of the Company or of anythird party.

 

**Conflict of Interests.**No agreement or transaction between the Company and one or more of itsdirectors or any person in which any director has a financial interest or towhom any director is related, including as a director of that other person, isvoid and voidable for this reason only, or by reason only that the director ispresent at the meeting of directors, or at the meeting of the committee ofdirectors that approves the agreement or transaction, or that the vote orconsent of the director is counted for that purpose, if the material facts ofthe interest of each director in the agreement or transaction and his interestin or relationship to any other party to the agreement or transaction aredisclosed in good faith, or are known by the other directors. A director whohas an interest in any particular business to be considered at a meeting ofdirectors or shareholders may be counted for purposes of determining whetherthe meeting is duly constituted.

 

**Repurchase of Shares.**The Company may purchase, redeem or otherwise acquire and hold its own shares,but only out of surplus or in exchange for newly issued shares of equal value.Subject to provisions to the contrary in:

 

(a)                                  thedesignations, powers, preferences, rights, qualifications, limitations andrestrictions with which the shares were issued; or

 

(b)                                 thesubscription agreement for the issue of 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, nopurchase, redemption or other acquisition of shares shall be made unless thedirectors determine that immediately after purchase, redemption or otheracquisition the Company will be able to satisfy its liabilities as they becomedue in the ordinary course of its business and the realizable value of theassets of the Company will not be less than the sum of its total liabilities,other than deferred taxes, as shown in the books of account, and its capitaland, in the absence of fraud, the decision of the directors as to therealizable value of the assets of the Company is conclusive, unless a questionof law is involved.

 

**Notices.**  Any notice, information or written statementto be given by the Company to shareholders may be served, in the case ofshareholders holding registered shares in any way by which it can reasonably beexpected to reach each shareholder or by mail addressed to each shareholder atthe address shown in the share register and in the case of shareholdersholdings shares issued to bearer, in the manner provided in the Memorandum ofAssociation.

 

**Purpose, Duration, Liquidation,Merger.**  The Companyis empowered under BVI law and its Memorandum of Association to engage in anyact or activity that is not prohibited under any law in the BVI. The Companyshall continue until wound-up and dissolved by a resolution of 

 

55

----

 

shareholders, or underthe terms of any insolvency or liquidation laws in force in the BVI. Under BVIlaw the Company may merge with another company, including a parent company orsubsidiary, incorporated in the BVI, or in a jurisdiction outside of the BVIwhere the laws of that jurisdiction permit the merger. A merger must beauthorized by the directors of the Company and approved by the shareholders.

 

**Disclosure of Principal Shareholders.**Under the laws of the BVI the identity of the shareholders of the Company isconfidential and is not disclosed in any public document.

 

**Board of Directors.**The business 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 theCompany’s Articles required to be exercised by the shareholders of the Company.

### *** ***

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

 

Pursuant to theCompany’s distribution agreement with Hach, the Company is Hach’s non-exclusiverepresentative in the PRC, Hong Kong and Macao and is authorized to supply,install and commission Hach’s products and accessories. The Company’s agreementwith Hach is terminable on ninety days notice by either party.

 

T.C. Leung’sservices to the Company and Far East are provided pursuant to the EmploymentAgreement between the Company, Far East and Shereman Enterprises Ltd., amanagement company. The Employment Agreement, dated March 14, 1997, terminatedin March 2002. See Item 6B. Compensation.

 

Pursuant to anequity interest transfer agreement between the Company and Tamworth IndustrialLtd. (“Tamworth”) and an equity interest and transfer agreement among theCompany, Tamworth and Pact Asia Pacific Limited, on January 31, 2002, theCompany acquired a 30% equity interest in Pact for approximately US$288,000,Pact, a privately owned engineering firm situated in Shanghai that specializesin the design, manufacture an operation of water and waste water treatment plantsin several industries situated in China.

 

There are no othermaterial contracts other than those entered into in the ordinary course ofbusiness.

 

### ***Item10D.***          ExchangeControls

### *** ***

There are noexchange control restrictions on payment of dividends on the Company’s OrdinaryShares or on the conduct of the Company’s operations either in Hong Kong, wherethe Company’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 affect 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 

 

56

----

 

government hasestablished a unified exchange rate system and system of exchange controls towhich the Company is subject.

 

### ***Item10E.***          Taxation

 

The Company isexempt from taxation in the British Virgin Islands.

 

The Company’ssubsidiaries organized in Hong Kong, Far East, Euro Tech (China) Limited,Limited and ChinaH20.com Limited, pay the Hong Kong profits tax at a rate of16% on their income for financial reporting purposes, after adjustments forincome and expense items which are not assessable or deductible for profits taxpurposes. Hong Kong levies no capital gains or dividends tax.

 

Euro Tech Trading(Shanghai) Limited, a subsidiary of the Company, provides for PRC EnterpriseIncome Tax at a rate of 15%, after offsetting losses brought forward, if any,on the basis of its income for financing reporting purposes, adjusting forincome and expense items which are not assessable or deductible for PRCEnterprise Income Tax purposes.

 

In accordance withthe relevant income tax laws and regulations applicable to foreign investmententerprises in the PRC, Shanghai Euro Tech Limited, a subsidiary of theCompany, is exempt from PRC enterprise income tax of 15% for two years startingfrom their first profit-making year, after offsetting losses brought forward,if any, followed by a 50% reduction for the next three years thereafter.

 

The Company’seffective tax rates for Fiscal 2002, Fiscal 2001 and Fiscal 2000 were 19.7%,21.8% and 20.8%, respectively. A statutory tax rate of 16% was in effect duringeach of these three fiscal years. Principal adjustments to this statutory taxrate were valuation allowances of 2.1%, 4.9% and 5.5% during Fiscal 2002,Fiscal 2001 and Fiscal 2000, respectively.

 

Income taxesrepresent current Hong Kong profits tax applied at 16% for subsidiariesincorporated in Hong Kong for the years ended December 31, 2002, 2001 and 2000,and PRC Enterprise Income Tax applied at 15% for Euro Tech Trading (Shanghai)Limited, a subsidiary incorporated in the PRC, for the year ended December 31,2002 after deduction of all accumulated tax loss brought forward from previousyears. Accumulated tax losses of Shanghai Euro Tech Limited, another subsidiaryincorporated in the PRC, available to offset again future profit wereUS$173,926 and US$83,294, respectively as of December 31, 2002 and 2001.

 

### ***Item 10F.***          Dividends And Paying Agents

 

Not applicable.

### *** ***

### ***Item 10G.***          Statement By Experts

 

Not applicable.

 

57

----

 

### ***Item 10H.***         Documents on Display

 

The documents thatare exhibits to or incorporated by reference in this annual report can be readat the U.S. Securities and Exchange Commission’s public reference facilities atRoom 1024, 450 Fifth Street, N.W., Washington, DC 20549 or on the Commission’swebsite: www.sec.gov.

 

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

 

Not applicable.

 

### ***ITEM 11.***              QUANTITATIVE AND QUALIFICATION DISCLOSURES ABOUT MARKETRISK

 

The Company’sprimary risk exposures arise from changes in interest rates and foreigncurrency exchanges rates.

 

*Foreign Currency Risks*

 

The Company isexposed to risk from changing foreign currency exchange rates. The Company’ssales are denominated either in HK dollar or Chinese Renminbi (“RMB”). Themajority of the Company’s expenses and cost of revenue are denominated in HKdollars, followed by RMB, U.S dollars, Japanese yen and the Euro. The Companyis subject to a variety of risks associated with changes among the relativevalue of the U.S. dollar, HK dollar, RMB, Japanese yen and the Euro. The Company does not currently hedge itsforeign exchange positions. Any material increase in the value of the HKdollar, RMB, Japanese yen and the Euro relative to the U.S. dollar wouldincrease the Company’s expenses and cost of revenue and therefore would have amaterial adverse effect on the Company’s business, financial condition and resultsof operations.

 

*Inflation*

 

Although theCompany cannot accurately determine the precise effect of inflation on itsoperations, it does not believe inflation has had a material effect on sales orresults of operations.

 

The Company iscurrently not exposed to material future earnings or cash flow exposures fromchanges in interest rates on debt obligations since the only debt of theCompany’s bank indebtedness was repaid in full in Fiscal 2002. The Company doesnot currently anticipate entering into interest rate swaps and/or similarinstruments.

## ** **

### ***ITEM 12.***              DESCRIPTION OF SECURITIESOTHER THAN EQUITY SECURITIES

 

Not applicable.

# ** **

58

----

 

# **PART II**

 

### ***ITEM 13.***              DEFAULTS, DIVIDENDS,ARREARAGES AND DELINQUENCIES

 

None.

 

### ***ITEM 14.***              MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

For a Discussionof the Use of Proceeds from the Company’s Public Offering, See Item 4A. Historyand Development of the Company.

 

### ***ITEM 15.***              CONTROLS AND PROCEDURES

 

(a)                                  Evaluation of Disclosure Controls andProcedures

 

Our Chief Executive Officer and Chief Financial Officer have evaluatedthe effectiveness of our disclosure controls and procedures, as such term isdefined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of1934, as amended (the “Exchange Act”), as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”). Based on suchevaluation, such officers have concluded that, as of the Evaluation Date, our disclosurecontrols and procedures are effective in relating to us, including ourconsolidated subsidiaries, that is required to be included in our reports filedor submitted under the Exchange Act.

 

(b)                                 Changes in Internal Controls

 

Since the Evaluation Date, there have not been any significant changesin our internal controls or in other factors that could significantly affectsuch controls.

 

### ***ITEM 16.***              [RESERVED]

### *** ***

### ***ITEM 16A.***     AUDIT COMMITTEE FINANCIALEXPERT

 

The Committeeconsists of two non-employee directors who meet the independence and financialexpert requirements of the NASDAQ listing standards and the rules andregulations of U.S. Securities and Exchange Commission.

## ** **

## **59**

## ****

##  

## **ITEM16B.**

 

Not applicable.

 

## **ITEM16C.**

 

Not applicable.

 

60

----

 

**PART III**

 

### ***ITEM 17.***              FINANCIAL STATEMENTS

 

Not applicable.

 

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

 

The followingfinancial statements are filed as part of this annual report on Form 20-F.

 
| Index to consolidated  financial statements                     |
|-----------------------------------------------------------------|
|                                                            |
| Report of Independent  Auditors                                 |
|                                                            |
| Consolidated  income statements                                 |
|                                                            |
| Consolidated balance sheets                                     |
|                                                            |
| Consolidated cash  flow statements                              |
|                                                            |
| Consolidated  statement of changes in shareholders’ equity |
|                                                            |
| Notes to  the consolidated financial statements                 |

 

61

----

 

### ***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)                                                |
|            |   |                                                                                                                    |
| 4.1             |   | Employment Agreement  among Registrant, EuroTech (Far East) Limited, Ltd. etc. (for the services of  T.C. Leung)(1)     |
|            |   |                                                                                                                    |
| 4.2             |   | Management Stock Option  Plan(1)                                                                                        |
|            |   |                                                                                                                    |
| 4.3             |   | Agreement with Shanghai  Institute of Optics Instruments(2)                                                             |
|            |   |                                                                                                                    |
| 4.4             |   | Agreement with Hach  Company, Inc.(2)                                                                                   |
|            |   |                                                                                                                    |
| 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) |
|            |   |                                                                                                                    |
| 4.9             |   | Letters to the  Securities and Exchange Commission pursuant to Temporary Note 3T 60 Article 3  of Regulation S-X(5)     |
|            |   |                                                                                                                    |
| 4.10            |   | 2002 Officers and  Directors Stock Option Plan(6)                                                                       |
|            |   |                                                                                                                    |
| 4.11            |   | Registrant’s Audit  Committee Charter(7)                                                                           |
|            |   |                                                                                                                    |
| 8.1             |   | List of Subsidiaries(3)                                                                                                 |

 

----

(1)                                  Incorporatedby reference, previously filed as an Exhibit to Registration Statement, SECFile No. 333-16277 and is incorporated by reference herein.

(2)                                  Incorporatedby reference, previously filed as an Exhibit to Registrant’s Report on Form20-F for its year ended December 31, 1999.

(3)                                  Incorporatedby reference, previously filed as an Exhibit to Registrant’s Report on Form20-F for its year ended December 31, 2000.

(4)                                  Incorporatedby reference, previously filed as an Exhibit to Registrant’s Report on Form 6-Kfiled on February 11, 2002.

(5)                                  Incorporatedby reference, previously filed as an Exhibit to Registrant’s Report on Form20-F for its year ended December 31, 2001.

(6)                                  Incorporatedby reference, previously filed as an Exhibit to Registrant’s Report on Form 6-Kfiled on July 24, 2002.

(7)                                  Incorporatedby reference, previously filed as an Exhibit to Registrant’s Report on Form 6-Kfiled on August 19, 2002.

 

62

----

 

**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 Form20-F and 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 27, 2003 |
|                      |        |                                                    |                |  |  |  |

 

63

----

 

**EUROTECH HOLDINGS COMPANY LIMITED AND SUBSIDIARIES**

 

**AUDITEDCONSOLIDATED BALANCE SHEETS**

 

**AS OFDECEMBER 31, 2002 AND 2001 AND**

 

**CONSOLIDATEDSTATEMENTS OF INCOME AND COMPREHENSIVE**

 

**INCOME,CASH FLOWS AND CHANGES IN SHAREHOLDERS’ EQUITY**

 

**FOR THEYEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

 

**TOGETHERWITH INDEPENDENT AUDITORS’ REPORTS**

 

----

 

**REPORT OF INDEPENDENT AUDITORS**

**TO THE SHAREHOLDERS AND DIRECTORS OFEURO TECH HOLDINGS**

**COMPANY LIMITED**

 

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, consolidated cash flowsand changes in shareholders’ equity present fairly, in all materialrespects, the financial position of Euro Tech Holdings Company Limited and itssubsidiaries****as of December 31,2002 and the results of their****operationsand their cash flows for theyear then ended ** **in conformity withaccounting principles generally accepted in the United States of America.  These financial statements are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements based on our audit.  We conducted our audit of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion. The consolidated financial statements of EuroTech Holdings Company Limited and subsidiaries as of December 31, 2001, and forthe two years ended December 31, 2001 and 2000, were audited by otherindependent public accountants who have ceased operations. Those independentpublic accountants expressed an unqualified opinion on those financialstatements in their report dated May 24, 2002.

 

 
| **/s/PricewaterhouseCoopers** |   |
|-------------------------------|--------|
|                          |
|                          |
| Hong Kong,                    |
| June 26, 2003                 |

 

----

 

**THEFOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY**

**ARTHURANDERSEN & CO AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN & CO**

 

**REPORTOF INDEPENDENT PUBLIC ACCOUNTANTS**

 

**TOTHE SHAREHOLDERS AND DIRECTORS OF EURO TECH HOLDINGS COMPANY LIMITED**

 

We have audited the accompanying consolidatedbalance sheets of Euro Tech Holdings Company Limited (the “Company”),incorporated in the British Virgin islands, and subsidiaries (the “Group”) asof December 31, 2000 and 2001, and the related consolidated statements ofincome and comprehensive income, cash flows and changes in shareholders’ equityfor the years ended December 31, 1999, 2000 and 2001.  These financial statements are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance withgenerally accepted auditing standards in the United States of America.  Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of the Group as of December 31, 2000 and 2001,and the results of its operations and cash flows for the years ended December31, 1999, 2000 and 2001 in conformity with generally accepted accountingprinciples in the United States of America.

 

 
| **Arthur  Andersen & Co** |
|-------------------------------|
| Certified Public Accountants  |
|                          |
|                          |
| Hong Kong,                    |
| May 24, 2002                  |

 

2

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED BALANCE SHEETS**

**AS OF DECEMBER 31, 2002 AND 2001**

 
|                                                                                                                                              |   | **Notes**  |   | **2002**                                   |       | **2001**         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|--------------------------------------------|------------|------------------|--------|
|                                                                                                                                              |   |       |   | **US$’000**                           |       | **US$’000** |   |
|                                                                                                                                              |   |       |   | **(except  for share and per share data)** | ** ** |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Assets                                                                                                                                            |   |       |   |                                       |       |             |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Current assets:                                                                                                                                   |   |       |   |                                       |       |             |   |
| Cash and cash  equivalents                                                                                                                        |   |       |   | $                                          | 3,173      |             | $      | 3,551 |   |
| Accounts  receivable, net                                                                                                                         |   | 5          |   | 4,376                                      |       | 2,717            |   |
| Bills receivable                                                                                                                                  |   |       |   | 402                                        |       | 669              |   |
| Prepayments and  other current assets                                                                                                             |   | 16         |   | 444                                        |       | 330              |   |
| Inventories                                                                                                                                       |   | 6          |   | 1,964                                      |       | 2,003            |   |
| Amount due from  a related company                                                                                                                |   | 16         |   | 2                                          |       | —           |   |
| Value-added tax  recoverable                                                                                                                      |   |       |   | 4                                          |       | 26               |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Total current  assets                                                                                                                             |   |       |   | 10,365                                     |       | 9,296            |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Property, plant  and equipment, net                                                                                                               |   | 7 & 18 |   | 1,965                                      |       | 2,083            |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Investments in  affiliates                                                                                                                        |   | 8          |   | 343                                        |       | —           |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Deferred tax  assets                                                                                                                              |   | 4          |   | 43                                         |       | —           |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Total assets                                                                                                                                      |   |       |   | $                                          | 12,716     |             | $      | 11,379 |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Liabilities and  shareholders’ equity                                                                                                        |   |       |   |                                       |       |             |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Current  liabilities:                                                                                                                             |   |       |   |                                       |       |             |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Accounts payable                                                                                                                                  |   |       |   | $                                          | 4,530      |             | $      | 3,358 |   |
| Bills payable                                                                                                                                     |   |       |   | 147                                        |       | 137              |   |
| Due to related  companies                                                                                                                         |   | 16         |   | 666                                        |       | 340              |   |
| Other payables  and accrued expenses                                                                                                              |   | 10         |   | 624                                        |       | 1,150            |   |
| Taxation payable                                                                                                                                  |   |       |   | 35                                         |       | 98               |   |
| Long-term bank  loan, current portion                                                                                                             |   | 9          |   | —                                     |       | 90               |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Total current  liabilities                                                                                                                        |   |       |   | 6,002                                      |       | 5,173            |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Commitments and  contingencies                                                                                                                    |   | 17         |   | —                                     |       | —           |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Shareholders’  equity:                                                                                                                       |   |       |   |                                       |       |             |   |
| Common stock,  par value $0.01 each, 20,000,000 (2001 : 20,000,000) shares authorized;  3,226,366 (2001: 3,226,366) shares issued and outstanding |   | 11         |   | 32                                         |       | 32               |   |
| Preferred stock,  par value $0.01 each, 5,000,000 (2001: 5,000,000) shares authorized; nil  (2001: nil) shares issued and outstanding             |   |       |   | —                                     |       | —           |   |
| Additional  paid-in capital                                                                                                                       |   |       |   | 2,049                                      |       | 2,043            |   |
| Warrants                                                                                                                                          |   | 12         |   | 166                                        |       | 172              |   |
| Treasury stock, 162,215  (2001: 162,215) shares at cost                                                                                           |   | 13         |   | (237                                       | )          | (237             | )      |
| Accumulated  other comprehensive loss                                                                                                             |   |       |   | (24                                        | )          | (32              | )      |
| Retained  earnings                                                                                                                                |   |       |   | 4,728                                      |       | 4,228            |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Total  shareholders’ equity                                                                                                                  |   |       |   | 6,714                                      |       | 6,206            |   |
|                                                                                                                                              |   |       |   |                                       |       |             |   |
| Total  liabilities and shareholders’ equity                                                                                                  |   |       |   | $                                          | 12,716     |             | $      | 11,379 |   |

 

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

 

3

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME**

**FOR THE YEARS ENDED DECEMBER 31,2002, 2001 AND 2000**

 
|                                                                                                                                                                                                                                                                 |   | **Notes**   |   | **2002**                                   |   | **2001**         |   | **2000**         |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|--------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                                                                                                                                                                 |   |        |   | **US$’000**                           |   | **US$’000** |   | **US$’000** |   |
|                                                                                                                                                                                                                                                                 |   |        |   | **(except  for share and per share data)** |   |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| Revenue                                                                                                                                                                                                                                                              |   | 16 & 18 |   | $                                          | 23,497 |             | $      | 19,685           |   | $ | 15,010 |   |
| Cost of revenue                                                                                                                                                                                                                                                      |   |        |   | (18,735                                    | )      | (15,396          | )      | (11,467          | )      |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| Gross profit                                                                                                                                                                                                                                                         |   |        |   | 4,762                                      |   | 4,289            |   | 3,543            |   |
| Selling and  administrative expenses                                                                                                                                                                                                                                 |   | 16          |   | (4,173                                     | )      | (3,734           | )      | (3,301           | )      |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| Operating income                                                                                                                                                                                                                                                     |   |        |   | 589                                        |   | 555              |   | 242              |   |
| Interest income                                                                                                                                                                                                                                                      |   | 16          |   | 18                                         |   | 66               |   | 113              |   |
| Other income,  net                                                                                                                                                                                                                                                   |   | 3 & 16  |   | 9                                          |   | 126              |   | 97               |   |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| Income before income taxes                                                                                                                                                                                                                                           |   |        |   | 616                                        |   | 747              |   | 452              |   |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| Income taxes                                                                                                                                                                                                                                                         |   | 4           |   | (123                                       | )      | (163             | )      | (94              | )      |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| Share of equity in profit of affiliates                                                                                                                                                                                                                              |   |        |   | 7                                          |   | —           |   | —           |   |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| Net income                                                                                                                                                                                                                                                           |   |        |   | 500                                        |   | 584              |   | 358              |   |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| Foreign currency translation adjustment                                                                                                                                                                                                                              |   |        |   | 8                                          |   | (35              | )      | 3                |   |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| Comprehensive income                                                                                                                                                                                                                                                 |   |        |   | $                                          | 508    |             | $      | 549              |   | $ | 361 |   |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| Net income per  common share                                                                                                                                                                                                                                         |   |        |   |                                       |   |             |   |             |   |
| •                                          Basic   |   |        |   | $                                          | 0.15   |             | $      | 0.18             |   | $ | 0.11 |   |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| •                                          Diluted |   |        |   | $                                          | 0.15   |             | $      | 0.18             |   | $ | 0.11 |   |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| Weighted average  number of common shares outstanding                                                                                                                                                                                                                |   |        |   |                                       |   |             |   |             |   |
| •                                          Basic   |   |        |   | 3,226,366                                  |   | 3,226,366        |   | 3,226,366        |   |
|                                                                                                                                                                                                                                                                 |   |        |   |                                       |   |             |   |             |   |
| •                                          Diluted |   |        |   | 3,226,366                                  |   | 3,226,366        |   | 3,226,366        |   |

 

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

 

4

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 2002,2001 AND 2000**

** **
|                                                                                         |   | **2002**         |   | **2001**         |   | **2000**         |   |
|----------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                         |   | **US$’000** |   | **US$’000** |   | **US$’000** |   |
| Cash flows from operating activities:                                                        |   |             |   |             |   |             |   |
| Net income                                                                                   |   | $                | 500    |             | $      | 584              |   | $ | 358 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |   |             |   |             |   |             |   |
| Depreciation of property, plant and equipment                                                |   | 163              |   | 201              |   | 109              |   |
| Gain on disposal of property, plant and equipment                                            |   | (3               | )      | —           |   | (1               | )      |
| (Increase) decrease in assets:                                                               |   |             |   |             |   |             |   |
| Accounts receivable, net                                                                     |   | (1,659           | )      | (220             | )      | 329              |   |
| Bills receivable                                                                             |   | 267              |   | (475             | )      | (25              | )      |
| Prepayments and other current assets                                                         |   | (114             | )      | (121             | )      | 94               |   |
| Inventories                                                                                  |   | 39               |   | (1,058           | )      | (376             | )      |
| Value-added tax recoverable                                                                  |   | 22               |   | (26              | )      | —           |   |
| Amount due from a related company                                                            |   | (2               | )      | —           |   | —           |   |
| Deferred tax assets                                                                          |   | (43              | )      | —           |   | —           |   |
| Increase (decrease) in liabilities:                                                          |   |             |   |             |   |             |   |
| Accounts payable                                                                             |   | 1,172            |   | 1,371            |   | (577             | )      |
| Bills payable                                                                                |   | 10               |   | (720             | )      | 423              |   |
| Due to related companies                                                                     |   | 326              |   | 85               |   | 20               |   |
| Other payables and accrued expenses                                                          |   | (526             | )      | 269              |   | 311              |   |
| Taxation payable                                                                             |   | (63              | )      | 50               |   | 10               |   |
|                                                                                         |   |             |   |             |   |             |   |
| Net cash provided by (used in) operating activities                                          |   | 89               |   | (60              | )      | 675              |   |
|                                                                                         |   |             |   |             |   |             |   |
| Cash flows from investing activities:                                                        |   |             |   |             |   |             |   |
| Purchase of property, plant and equipment                                                    |   | (81              | )      | —           |   | (313             | )      |
| Investments in affiliates                                                                    |   | (335             | )      | —           |   | —           |   |
|                                                                                         |   |             |   |             |   |             |   |
| Net cash used in investing activities                                                        |   | (416             | )      | —           |   | (313             | )      |
|                                                                                         |   |             |   |             |   |             |   |
| Cash flows from financing activities:                                                        |   |             |   |             |   |             |   |
| Repayment of long-term bank loan                                                             |   | (90              | )      | (96              | )      | (77              | )      |
| Purchase of treasury stock                                                                   |   | —           |   | (221             | )      | (16              | )      |
|                                                                                         |   |             |   |             |   |             |   |
| Net cash used in financing activities                                                        |   | (90              | )      | (317             | )      | (93              | )      |
|                                                                                         |   |             |   |             |   |             |   |
| Effect of exchange rate changes on cash and cash equivalents                                 |   | 39               |   | (32              | )      | 3                |   |
|                                                                                         |   |             |   |             |   |             |   |
| Net (decrease) increase in cash and cash equivalents                                         |   | (417             | )      | 380              |   | 269              |   |
| Cash and cash equivalents, beginning of year                                                 |   | 3,551            |   | 3,963            |   | 3,691            |   |
|                                                                                         |   |             |   |             |   |             |   |
| Cash and cash equivalents, end of year                                                       |   | $                | 3,173  |             | $      | 3,551            |   | $ | 3,963 |   |
|                                                                                         |   |             |   |             |   |             |   |
| Supplementary information                                                                    |   |             |   |             |   |             |   |
| Interest received                                                                            |   | $                | 22     |             | $      | 81               |   | $ | 138 |   |
| Interest paid                                                                                |   | $                | 4      |             | $      | 15               |   | $ | 25 |   |
| Income taxes paid                                                                            |   | $                | 229    |             | $      | 113              |   | $ | 84 |   |

 

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

 

5

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY**

**FOR THE YEARS ENDED DECEMBER 31,2002, 2001 AND 2000**

 
|                                            |   | **Common  stock** |   | **Additional  paid-in  capital** |   | **Warrants**     |   | **Treasury  stock** |   | **Accumulated  other  comprehensive  income (loss)** |   | **Retained  earnings** |   | **Total**        |   |
|-------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|------------------|--------|---------------------|--------|------------------------------------------------------|--------|------------------------|--------|------------------|--------|
|                                            |   | **US$’000**  |   | **US$’000**                 |   | **US$’000** |   | **US$’000**    |   | **US$’000**                                     |   | **US$’000**       |   | **US$’000** |   |
|                                            |   |              |   |                             |   |             |   |                |   |                                                 |   |                   |   |             |   |
| Balance as of  January 1, 2000                  |   | $                 | 25     |                             | $      | 2,050            |   | $                   | 172    |                                                 | $      | —                 |   | $                | — |   | $ | 3,286 |   | $ | 5,533 |   |
|                                            |   |              |   |                             |   |             |   |                |   |                                                 |   |                   |   |             |   |
| Net income                                      |   | —            |   | —                           |   | —           |   | —              |   | —                                               |   | 358                    |   | 358              |   |
| Purchase of  treasury stock                     |   | —            |   | —                           |   | —           |   | (16                 | )      | —                                               |   | —                 |   | (16              | )      |
| Foreign exchange  translation adjustment        |   | —            |   | —                           |   | —           |   | —              |   | 3                                                    |   | —                 |   | 3                |   |
|                                            |   |              |   |                             |   |             |   |                |   |                                                 |   |                   |   |             |   |
| Balance as of  December 31, 2000                |   | 25                |   | 2,050                            |   | 172              |   | (16                 | )      | 3                                                    |   | 3,644                  |   | 5,878            |   |
|                                            |   |              |   |                             |   |             |   |                |   |                                                 |   |                   |   |             |   |
| Net income                                      |   | —            |   | —                           |   | —           |   | —              |   | —                                               |   | 584                    |   | 584              |   |
| Purchase of  treasury stock                     |   | —            |   | —                           |   | —           |   | (221                | )      | —                                               |   | —                 |   | (221             | )      |
| Stock split  effected in the form of a dividend |   | 7                 |   | (7                               | )      | —           |   | —              |   | —                                               |   | —                 |   | —           |   |
| Foreign exchange  translation adjustment        |   | —            |   | —                           |   | —           |   | —              |   | (35                                                  | )      | —                 |   | (35              | )      |
|                                            |   |              |   |                             |   |             |   |                |   |                                                 |   |                   |   |             |   |
| Balance as of  December 31, 2001                |   | 32                |   | 2,043                            |   | 172              |   | (237                | )      | (32                                                  | )      | 4,228                  |   | 6,206            |   |
|                                            |   |              |   |                             |   |             |   |                |   |                                                 |   |                   |   |             |   |
| Net income                                      |   | —            |   | —                           |   | —           |   | —              |   | —                                               |   | 500                    |   | 500              |   |
| Foreign exchange  translation adjustment        |   | —            |   | —                           |   | —           |   | —              |   | 8                                                    |   | —                 |   | 8                |   |
| Expiration of  warrants                         |   | —            |   | 6                                |   | (6               | )      | —              |   | —                                               |   | —                 |   | —           |   |
|                                            |   |              |   |                             |   |             |   |                |   |                                                 |   |                   |   |             |   |
| Balance as of  December 31, 2002                |   | $                 | 32     |                             | $      | 2,049            |   | $                   | 166    |                                                 | $      | (237                   | )      | $                | (24    | ) | $ | 4,728 |   | $ | 6,714 |   |

 

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

 

6

----

 

**EUROTECH HOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

**1**                                         **Organization and principal activities**

 

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

 

Euro Tech (Far East) Limited (“Far East”) is theprincipal operating subsidiary of the holding 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 holding company’s subsidiaries andaffiliates 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 group companies                                                                  |
|                                          |   |                                  |   |                         |   |                                                                                                                                                                          |
| 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                                                                                                                            |
|                                          |   |                                  |   |                         |   |                                                                                                                                                                          |
| Affiliates:                                   |   |                                  |   |                         |   |                                                                                                                                                                          |
|                                          |   |                                  |   |                         |   |                                                                                                                                                                          |
| Yixing Pact Environmental Technology Co., Ltd |   | 30%                                   |   | The PRC                      |   | Design, manufacturing and operation of water and waste water treatment  machinery and equipment                                                                               |
|                                          |   |                                  |   |                         |   |                                                                                                                                                                          |
| Pact Asia Pacific Limited                     |   | 30%                                   |   | The British Virgin Islands   |   | Producing and selling environment protection equipment, undertaking  environment protection projects and providing relevant technology advice,  training and services         |

 

7

----

 

**2**                                         **Summary of significant accounting policies**

 

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

 

The consolidated accountsinclude the accounts of the holding company and its subsidiaries (the“Company”).  Investments in 20% to 50%owned affiliates of which the Company can exercise significant influence overoperating and financial policies are accounted for using the equity method ofaccounting.  All material intra-groupbalances and transactions have been eliminated on consolidation.

 

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

 

A subsidiary is a company inwhich the Company holds, directly or indirectly, more than 50% of itsoutstanding voting share capital and over which it is able to exercise control.

 

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

 

The Company’s main source of revenue is the sale ofwater and waste water related process control, analytical and testinginstruments, disinfection equipment, supplies and related automation systems.The Company recognizes revenue when the product is delivered and the title istransferred.  For certain products whereinstallation is necessary, revenue is recognized upon completion ofinstallation. For revenue earned from customer support services, whichrepresents a minor percentage of total revenues, revenue is recognized fromsuch services when provided.

 

**(d)**                                  **Taxation**

 

The Company accounts forincome tax under the provision of Statement of Financial Accounting Standards(“SFAS”) No. 109: “Accounting for Income Taxes”, which requires recognition ofdeferred tax assets and liabilities for the expected future tax consequences ofevents that have been included in the accounts or tax returns.

 

Deferred income taxes areprovided using the liability method. Under the liability method, deferred income taxes are recognized for thetax effects of temporary differences between the tax andaccounts bases of assets and liabilities and for credit and losscarryforwards.  To the extent that adeferred tax asset will more likely than not go unrealised, a valuationallowance is recognised.

 

**(e)**                                  **Cash and Cash Equivalents**

 

Cash and cash equivalentsinclude cash on hand and demand deposits with banks.

 

**(f)**                                    **Inventories**

 

Inventories are stated atthe lower of cost, on the first-in, first-out method, or net realizablevalue.  Costs include purchase andrelated costs incurred in bringing each product to its present location andcondition.  Net realizable value iscalculated based on the estimated normal selling price, less further costsexpected to be incurred to disposal. Provision is made for obsolete, slow moving or defective items, whereappropriate.

 

8

----

 

**(g)**                                 **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 costsare expensed as incurred.  Depreciationof property, plant and equipment is computed using the straight-line methodover the assets’ estimated useful lives as follows: office premises - 47 to 51years, leasehold improvements - over terms of the leases, furniture, fixturesand office equipment - 3 to 5 years, motor vehicles - 4 years, and testingequipment - 3 years.

 

The Company accounts for long-lived assets inaccordance with SFAS No. 144, which requires impairment losses to be recordedon long-lived assets used in operations when indicators of impairment arepresent.  Reviews are regularlyperformed to determine whether the carrying value of assets is impaired.

 

The Company adopted SFAS No.144: “Accounting for Impairment or Disposal of Long-Lived Assets” on January 1,2002 which requires impairment losses to be recorded for property, plant and equipment to be held and used inoperations when indicators of impairment are present.  Reviews are regularlyperformed to determine whether the carrying value of assets is impaired.  The Company determines the existence of suchimpairment by measuring the expected future cash flows (undiscounted and withoutinterest charges) and comparing such amount to the carrying amount of theassets.  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 disposed of are reported at thelower of the carrying amount or fair value of such assets less costs tosell.  There were no impairment lossesrecorded in 2002, 2001 or 2000.

 

**(h)**                                 **Operating Leases**

 

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 expenses on thestraight-line basis over the period of the relevant leases.

 

**(i)**                                    **Goodwill**

 

The Company adopted SFASNo.142: “Goodwill and other intangible assets” on January 1, 2002 whichrequires the Company to cease amortizing goodwill, assess the possibleimpairment of goodwill existing at the date of adoption and perform asubsequent impairment test on an annual basis.

 

9

----

 

**(j)**                                    **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 theyear are translated into the respective functional currencies at the applicablerates of exchange at the dates of the transactions.  Monetary assets and liabilities denominated in foreign currenciesare translated into the respective functional currencies using the exchangerates prevailing at the balance sheet dates. Gain or losses from foreign currency transactions are recognized in thestatements of income and comprehensive income during the year in which theyoccur.  Translation adjustments onsubsidiaries’ equity are included as cumulative translation adjustments.

 

**(k)**                                **Comprehensive Income**

 

The Company has adopted SFASNo. 130:  “Reporting ComprehensiveIncome,” which requires the Company to report all changes in equity during aperiod, except for those resulting from investment by owners and distributionto owners, in the accounts for the period in which they are recognized.  The Company has presented comprehensiveincome, which encompasses net income and foreign currency translationadjustments, in the statements of income and comprehensive income.

 

**(l)**                                    **Net income per Common Share**

 

Net income per commonshare  is computed in accordance withSFAS No. 128 “Earnings Per Share”, by dividing the net income by the weightedaverage number of shares of common stock outstanding during the period.  There is no difference between basic anddiluted earnings per share  as the exerciseprices of the redeemable warrants and stock options outstanding were higherthan the average market prices of the common stock for the years ended December31, 2002, 2001 and 2000 andtherefore the effect of including such items in the calculation of earnings pershare would have been anti-dilutive.

 

**(m)**                              **Stock-based Compensation**

 

The Company accounts foremployee stock options in accordance with Accounting Principles Board (“APB”)Opinion No. 25: “Accounting for Stock Issued to Employees” and relatedinterpretations. Compensation expense related to employee stock options is recordedonly if the fair value of the underlying stock exceeds its exercise price onthe date of grant.  The Companydiscloses pro forma earnings per share information in accordance with SFAS No.123.  See Note 14.

 

**(n)**                                 **Use of Estimates**

 

The preparation of accountsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect certain reported amounts and disclosures.  Accordingly, actual results could differ from those estimates.

 

10

----

 

**(o)**                                  **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. The carrying value of the short-term portion of the long-term bank loanapproximates its fair value based upon rates available to the Company forborrowings with similar terms and maturities.

 

**(p)**                                  **RelatedParties**

 

Entities are considered tobe related to the Company if the parties, directly or indirectly, through oneor more intermediaries, control, are controlled by, or are under common controlwith the Company. Related parties also include principal owners of the Company,its management, members of the immediate families of principal owners of theCompany  and its management and otherparties with which the company may deal if one party controls or cansignificantly influence the management or operating policies of the other to anextent that one of the transacting parties might be prevented from fullypursuing its own separate interests. A party which can significantly influencethe management or operating policies of the transacting parties or if it has anownership interest in one of the transacting parties and can significantlyinfluence the other to an extent that one or more of the transacting partiesmight be prevented from fully pursuing its own separate interests is also arelated party

 

**(q)**                                  **NewStatements of Financial Accounting Standards**

 

In June 2001,the Financial Accounting Standard Board (“FASB”) issued SFAS No. 143,“Accounting for Asset Retirement Obligations,” effective for fiscal yearsbeginning after June 15, 2002. This statement addresses the diverse accountingpractices for obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs. The adoption of thisstatement will not have a material effect on the Company’s financial positionor results of operations.

 

In July 2002, the FASB issued SFAS No. 146,“Accounting for Exit or Disposal Activities”. SFAS 146 requires the recognitionof a liability for costs associated with an exit plan or disposal activity whenincurred and nullifies Emerging Issues Task Force (EITF) Issue 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)”, whichallowed recognition at the date of an entity’s commitment to an exit plan. Theprovisions of this statement are effective for exit or disposal activities thatare initiated by the Company after December 31, 2002. The adoption of thisstatement is not anticipated to have a material effect on the Company’sfinancial position or results of operations.

 

11

----

 

In December2002, the FASB issued SFAS No.148, “Accounting for Stock-Based Compensation -Transition and Disclosure” which amends SFAS No.123. This statement providesalternative methods of transition for a voluntary change to the fairvalue-based method of accounting for stock-based employee compensation andamends the disclosure requirements of SFAS No.123. The transition guidance andannual disclosure provisions are effective for fiscal years ending afterDecember 15, 2003. The interim disclosure provisions are effective forfinancial reports containing financial statements for interim periods beginningafter December 15, 2002. The adoption of this statement will not have amaterial effect on the Company’s financial position or results of operations.

 

**(q)**                                  **NewStatements of Financial Accounting Standards (continued)**

 

In May 2003, the FASB issuedSFAS No.150, “Accounting for Certain Financial Instruments with Characteristicsof both Liabilities and Equity”. This statement establishes standards for howan issuer classifies and measures in its statement of financial position certainfinancial instruments with characteristics of both liabilities and equity. Inaccordance with the standard, financial instruments that embody obligations forthe issuer are required to be classified as liabilities. This Statement shallbe effective for financial instruments entered into or modified after May 31,2003, and otherwise shall be effective at the beginning of the first interimperiod beginning after June 15, 2003. The Company is currently assessing theimpact of this statement.

 

In November 2002,the FASB issued Interpretation No.45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, including Indirect Guarantees of Indebtedness ofOthers”. This interpretation requires a guarantor to recognize, at theinception of the guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. It also enhances guarantor’s disclosurerequirements to be made in its interim and annual financial statements aboutits obligations under certain guarantees it has issued. The initial recognitionand initial measurement provisions of this interpretation are applicable on aprospective basis to guarantees issued or modified after December 31, 2002. Thedisclosure requirements are effective for financial statements of interim orannual periods ending after December 15, 2002. The Company does not believe that this interpretation will have a material  effect, if any, on the Company’s financial position or results ofoperations.

 

In November2002, the Emerging Issues Task Force issued EITF Issue No. 00-21 “Accountingfor Revenue Arrangements with Multiple Deliverables”, (“EITF 00-21”) effectivefor arrangements entered into after June 15, 2003. EITF 00-21 defines units ofaccounting for arrangements with multiple deliverables resulting in revenuebeing allocated over the units of accounting for revenue recognition purposes.The adoption of this consensus is not anticipated to have a material effect onthe Company’s financial position or results of operations.

 

12

----

 

In January 2003, the FASBissued FASB Interpretation No. (“FIN”) 46 “Consolidation of Variable InterestEntities-an Interpretation of ARB No. 51”. FIN 46 requires that certain variable interest entities, or VIE’s, beconsolidated by their primary beneficiary if the primary beneficiary is subjectto a majority of the risk of loss from the VIE activities, or entitled toreceive a majority of the VIE’s residual returns, or both.  An entity is subject to FIN 46 and is consideredto be a VIE if it has (1) equity that is insufficient to permit the entity tofinance its activities without additional subordinated financial support fromother parties, or (2) equity investors that cannot make significant decisionsabout the entity’s operations, or that do not absorb the expected losses orreceive the expected returns of the entity. FIN 46 is effective immediately for all new VIE’s created or acquiredafter January 31, 2003.  For VIE’screated or acquired prior to February 1, 2003, the provisions of FIN 46 must beapplied for the first interim or annual period beginning after June 15,2003.  Based on the Company’s analysisof this interpretation it is possible that the retail shops established in thePRC may be subject to the provisions of FIN 46.  The Company’s maximum exposure to loss as a result of itsinvolvement with these shops is equal to the advances to these entities as ofDecember 31, 2002 of approximately US$292,000.

 

**3**                                         **Other income, net**

 
|                                               |   |   |   | **2002**         |   | **2001**         |   | **2000**         |   |
|----------------------------------------------------|--------|--------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                               |   |   |   | **US$’000** |   | **US$’000** |   | **US$’000** |   |
|                                               |   |   |   |             |   |             |   |             |   |
| Gain on disposal of  property, plant and equipment |   |   |   | 3                |   | —           |   | 1                |   |
| Exchange (loss)/gain, net                          |   |   |   | (53              | )      | 80               |   | 56               |   |
| Rental income                                      |   |   |   | 59               |   | 46               |   | 34               |   |
| Others                                             |   |   |   | —           |   | —           |   | 6                |   |
|                                               |   |   |   | 9                |   | 126              |   | 97               |   |

 

**4**                                         **Income taxes**

 

The Company is exempt from taxation in the BritishVirgin Islands.

 

Euro Tech (Far East) Limited, Euro Tech (China)Limited and ChinaH2O.com Limited provide for Hong Kong profits tax at a rate of16% on the basis of their income for financial reporting purposes, adjustingfor income and expense items which are not assessable or deductible for profitstax purposes.

 

13

----

 

Euro Tech Trading (Shanghai) Limited, a subsidiary ofthe Company, provides for PRC Enterprise Income Tax at a rate of 15%, afteroffsetting losses brought forward, if any, on the basis of its income forfinancial  reporting purposes, adjustingfor income and expense items which are not assessable or deductible for PRCEnterprise Income tax purposes.

 

In accordance with the relevant income tax laws andregulations applicable to foreign investment enterprises in the PRC, ShanghaiEuro Tech Limited, a subsidiary of the Company, is exempted from the PRCenterprise income tax of 15% for two years starting from their firstprofit-making year, after offsetting losses brought forward, if any, followedby a 50% reduction for the next three years thereafter.

 

The reconciliation of the weighted average statutoryincome tax rate to the effective income tax rate as stated in the consolidatedstatements of income are as follows:

 
|                                |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                |   |     |   |     |   |     |   |
| Weighted average statutory tax rate |   | 15.7     | %      | 16.0     | %      | 16.0     | %      |
| Change in valuation allowances      |   | 2.1      | %      | 4.9      | %      | 5.5      | %      |
| Others                              |   | 1.9      | %      | 0.9      | %      | (0.7     | )%     |
|                                |   |     |   |     |   |     |   |
| Effective tax rate                  |   | 19.7     | %      | 21.8     | %      | 20.8     | %      |

 

Income taxes represent current Hong Kong profits taxapplied at 16% for subsidiaries incorporated in Hong Kong for the years endedDecember 31, 2002, 2001 and 2000, and PRC Enterprise Income Tax applied at 15%for Euro Tech Trading (Shanghai) Limited, a subsidiary incorporated in the PRC,for the year ended December 31, 2002 after deduction of all accumulated taxloss brought forward from previous years. Accumulated tax losses of Shanghai Euro Tech Limited, another subsidiaryincorporated in the PRC, available to offset again future profit wereUS$173,926 and US$83,294, respectively as of December 31, 2002 and 2001.

 

The components of deferred tax assets are as follows:

 
|                                         |   | **2002**         |   | **2001**         |       |
|----------------------------------------------|--------|------------------|--------|------------------|------------|
|                                         |   | **US$’000** |   | **US$’000** | ** ** |
|                                         |   |             |   |             |       |
| Deferred  tax assets arising from tax losses |   | 69               |   | 53               |       |
| Less:  Valuation allowances                  |   | (26              | )      | (53              | )          |
|                                         |   |             |   |             |       |
| Net  deferred tax assets                     |   | 43               |   | —           |       |

 

14

----

 

**5**                                         **Accounts receivable**

** **
|                               |   | **2002**         |   | **2001**         |   |
|------------------------------------|--------|------------------|--------|------------------|--------|
|                               |   | **US$’000** |   | **US$’000** |   |
|                               |   |             |   |             |   |
| Trade receivables                  |   | 4,392            |   | 2,756            |   |
| Less: Allowance for doubtful debts |   | (16              | )      | (39              | )      |
|                               |   |             |   |             |   |
|                               |   | 4,376            |   | 2,717            |   |

 

**6**                                         **Inventories**

** **
|           |   | **2002**         |   | **2001**         |   |
|----------------|--------|------------------|--------|------------------|--------|
|           |   | **US$’000** |   | **US$’000** |   |
|           |   |             |   |             |   |
| Raw materials  |   | 44               |   | 18               |   |
| Finished goods |   | 1,920            |   | 1,985            |   |
|           |   |             |   |             |   |
|           |   | 1,964            |   | 2,003            |   |

 

Management continuouslyreviews obsolete and slow moving inventories and assesses the inventoryvaluation to determine if the provision is deemed appropriate. At December 31,2002, 2001 and 2000, provision for obsolete and slow moving inventoriesamounted to US$25,445, US$38,883 and Nil, respectively.

 

15

----

 

**7**                                         **Property, plant and equipment**

 
|                                     |   | **2002**         |   | **2001**         |   |
|------------------------------------------|--------|------------------|--------|------------------|--------|
|                                     |   | **US$’000** |   | **US$’000** |   |
|                                     |   |             |   |             |   |
| Office premises                          |   | 2,271            |   | 2,271            |   |
| Leasehold improvements                   |   | 49               |   | 46               |   |
| Furniture, fixtures and office equipment |   | 428              |   | 388              |   |
| Motor vehicles                           |   | 126              |   | 126              |   |
| Testing equipment                        |   | 54               |   | 52               |   |
|                                     |   |             |   |             |   |
|                                     |   | 2,928            |   | 2,883            |   |
|                                     |   |             |   |             |   |
| Less: Accumulated depreciation           |   | (963             | )      | (800             | )      |
|                                     |   |             |   |             |   |
|                                     |   | 1,965            |   | 2,083            |   |

 

As of December 31, 2002 and 2001, office premises withtotal net book values of US$979,600 and US$1,033,000, respectively, werepledged to secure certain banking facilities of the Company (see Note 9).

 

**8**                                         **Investments in affiliates**

 

During the year ended December 31, 2002, the Companyacquired 30% equity interests in Yixing Pact Environmental Technology Co., Ltd,a company incorporated in the PRC, and Pact Asia Pacific Limited, a companyincorporate in British Virgin Island, from an independent third party for atotal consideration of US$335,000.  TheCompany believes that the business of these two investments is complementary tothe Company’s business as the Company continues to focus on sales and marketingof other products. The Company believes that by aligning itself with anengineering firm, such as these affiliates, it may be able to gain acompetitive advantage by offering customers and potential customers not onlyhardware but solutions to engineering problems as well. Details of theseaffiliates are disclosed in Note 1. Investments in these affiliates are accounted for using the equitymethod of accounting.

 

The excess of purchase price over the underlying fairvalue of equity in net assets of the investees is considered goodwill andamounted to US$215,000. The Company has not recognized any separatelyidentifiable intangible assets under the criteria prescribed in SFAS No. 141“Business Combinations” pursuant to the acquisition. This equity methodgoodwill is not amortized, and the investment is tested annually forimpairment. As of December 31, 2002, the Company does not believe theinvestments were impaired.

 

16

----

 

**9**                                         **Long-term bank loan**

 

A long-term bank loan was secured by certain of theCompany’s office premises, bore interest at the best lending rate offered bythe Company’s bank plus 1.75% per annum and was wholly repaid during the yearended December 31, 2002.

 

**10**                                  **Other payables and accrued expenses**

 

Other payables and accrued expenses mainly representdeposits received from customers and accruals for operating expenses.

 

**11**                                  **Common stock**

 

In August 2001, the Company effected a three-for-tenstock split in the form of a dividend, creating approximately 745,000 newshares of common stock of US$0.01 each.

 

The effect of the above three-for-ten stock splits hasbeen reflected retroactively in the accounts and net income per common share computations.

 

**12**                                  **Warrants**

 

A total of 2,620,800 warrants were issued in 1997,which comprised 1,076,400 public warrants, 1,450,800 private warrants and93,600 underwriting warrants issued under the Company’s warrants plan.

 

Each public and private warrant entitles the holderthereof to acquire one share of the Company’s common stock at the exerciseprice of US$3.52 during the period from March 14, 1998 to March 14, 2003.  Each underwriter warrant entitles the holderthereof to acquire one share of the Company’s common stock at the exerciseprice of US$5.29 during the period from March 14 1998 to March 14, 2002. If theclosing bid price of the Company’s common stocks is above US$5.4487 for twentyconsecutive days, the Company has the right to redeem the warrants at the priceof US$0.10 each. For the years ended December 31, 2002, 2001 and 2000, nowarrants were exercised or redeemed and the remaining warrants expired unexercisedon March 14, 2003.

 

**13**                                  **Treasury stock**

 

The Company authorized a stock buyback program inDecember 2000 pursuant to which up to 162,500 shares, but not to exceedUS$281,250 in value, of the Company’s common stock could be purchased in theopen market from time to time as market and business conditions warrant.  During the years ended December 31, 2002,2001 and 2000, the Company repurchased a total of Nil, 144,860 and 17,355shares of common stock for considerationsof approximately Nil, US$221,000 and US$16,000, respectively.  There was no reissuance of treasury stockduring the years ended December 31, 2002, 2001 and 2000.

 

17

----

 

**14**                                  **Stock options**

 

(i)                                     ManagementOptions Plan

 

A total of 2,184,000 sharesof common stock have been reserved for issuance under the Company’s managementoption plan (the “Management Options”). The Management Options provides for thegrant of options to its officers, directors and employees as the Company’sChairman of the Board of Directors and Chief Executive Officer may direct. In1997, the Company granted its officers, directors and employees options underthe Management Options, which allow them to purchase up to 2,073,240 shares ofcommon stock. The exercise price of the options granted was  US$2.56 per share for 624,000 of suchoptions and US$3.53 per share for the remaining 1,449,240. During the yearended December 31, 2000, 17,160 options with the exercise price of US$3.53 werecancelled.  During the same year, theCompany  further granted 115,570 optionsunder the Management Options with the exercise price of US$3.53 per share toits officers, directors and employees, which allowed them to purchase up to115,570 shares of common stock. The options vested for a period of one year andwill expire in March 2007. During the year ended December 31, 2002, 13,130options with the exercise price of US$3.53 were cancelled.

 

(ii)                                  2000 Stock Option Plan

 

A total of 569,400 shares ofcommon stock have been reserved for issuance under the Company’s 2000 StockOption Plan (the “2000 Stock Options”). The 2000 Stock Options provides for thegrant of options to its officers, directors and employees as the Company’sChairman of the Board of Directors and Chief Executive Officer may direct.During the year ended December 31, 2000, the Company granted such options toits officers, directors and employees under the 2000 Stock Options, which allowthem to purchase up to 353,600 shares of common stock. The exercise price ofall options granted is US$1.22 per share. During the year ended December 31,2002, 20,800 options with the exercise price of US$1.22 were cancelled.  The Company further granted 227,500 options and 9,100 options under the 2000 StockOptions with an exercise price of US$1.72 and US$1.43 per share, respectively,to its officers, directors and employees, which allow them to purchase up to236,600 shares of common stock.  Theoptions vested within a six-month to one-year period and will expire in August2010.

 

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

 

A total of 140,000 sharesand 400,000 shares of common stock have been reserved for issuance under theCompany’s 2002 Employees’ Stock Option and Incentive Plan (the “2002 EmployeeStock Options”) and 2002 Officers’ and Directors’ Stock Option and IncentivePlan (the “2002 D&O Stock Options”), respectively. The 2002 Employee StockOptions provide for the grant of options to its employees as the Company’s Chairmanof the Board of Directors and Chief Executive Officer may direct. The 2002D&O Stock Options provides for the grant of options to its officers anddirectors as the Company’s Chairman of Board of Directors and Chief ExecutiveOfficer may direct. During the year ended December 31, 2002, the Companygranted such options to its employees and officers and directors under the 2002Employee Stock Options and 2002 D&O Stock 

 

18

----

 

Options, which allow them topurchase up to 140,000 and 400,000 shares of common stock at an exercise priceof US$1.6 and US$1.23, respectively. The options vested for a period of asix-month period and will expire in April 2012 and November 2012, respectively.  During the years ended December 31, 2002,2001 and 2000, no options had been exercised.

 

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

 
|                            |                         | **2002**                     |   | **2001**                                               |   | **2000**  |   |
|---------------------------------|------------------------------|------------------------------|--------|--------------------------------------------------------|--------|-----------|--------|
|                            |                         |                         |   | **Weighted  average   exercise  price** |   |      |   | **Weighted  average   exercise  price** |   |   |   | **Weighted  average   exercise  price** |   |
| **Number  of  options**    | **Number  of  options** | **Number  of  options** |
|                            |                         |                         |   | **US$**                                                |   |      |   | **US$** |   |   |   | **US$** |   |
|                            |                         |                         |   |                                                   |   |      |   |   |   |   |   |   |   |
| Outstanding,  beginning of year |                         | 2,525,250                    |   | 2.97                                                   |   | 2,525,250 |   | 2.97 |   | 2,073,240 |   | 3.24 |   |
| Granted                         |                         | 776,600                      |   | 1.44                                                   |   | —    |   | — |   | 469,170 |   | 1.79 |   |
| Cancelled                       |                         | (33,930                      | )      | (2.11                                                  | )      | —    |   | — |   | (17,160 | ) | (3.53 | ) |
|                            |                         |                         |   |                                                   |   |      |   |   |   |   |   |   |   |
| Outstanding, end  of year       |                         | 3,267,920                    |   | 2.61                                                   |   | 2,525,250 |   | 2.97 |   | 2,525,250 |   | 2.97 |   |
|                            |                         |                         |   |                                                   |   |      |   |   |   |   |   |   |   |
| Exercisable, end  of year       |                         | 2,858,520                    |   | 2.81                                                   |   | 2,525,250 |   | 2.97 |   | 2,171,650 |   | 3.25 |   |

 

As of December 31, 2002, the options outstanding andexercisable had exercise prices in the range of US$1.22 to US$3.53 and aweighted average unexpired life of approximately 5.7 years.

 

The Company accounts for stock-based compensationusing the intrinsic value method prescribed by APB Opinion No. 25, under whichno compensation cost is recognized as all stock options granted under theManagement Options, the 2000 Stock Options, the 2002 Employee Stock Option andthe 2002 D&O Stock Options have exercise prices at or above the fair marketvalue of the underlying stock at the date of grant.

 

Pro forma information regarding net income andearnings per share is required by SFAS No. 123, and has been determined as ifthe Company had accounted for its employee stock options under the fair valuemethod of SFAS No. 123.  The weightedaverage fair values of stock options at date of grant of $3.27 and $1.43 peroption for the years ended December 31, 2002 and 2000, respectively, wereestimated using the Black-Scholes option pricing model with the followingassumptions.  There were no optionsgranted during the year ended December 31, 2001.

 
|                            |   | **2002**  |   | **2001** |   | **2000** |   |
|---------------------------------|--------|-----------|--------|----------|--------|----------|--------|
|                            |   |      |   |     |   |     |   |
| Risk-free interest rate         |   | 4.3       | %      | —   |   | 6.1      | %      |
| Expected dividend yield         |   | 0         | %      | —   |   | 0        | %      |
| Expected option life            |   | 5.7 years |   | —   |   | 7 years  |   |
| Expected stock price volatility |   | 177       | %      | —   |   | 127      | %      |

 

19

----

 

The Black-Scholesoption-pricing model requires the input of subjective assumptions, includingthe expected volatility of stock price. Because changes in subjective input assumptions can materially affectthe fair value estimate, in directors’ opinion, the existing model may notnecessarily provide a realisable measure of the fair value of the stockoptions.

 

Had compensation expense for the Company’s stock-basedcompensation plan been recognized based on the fair value of the options on thegrant date in accordance with SFAS No. 123, the Company’s pro forma net incomeand earnings per common share would have been as follows:

 
|                                                                                 |   | **2002**         |   | **2001**         |   | **2000**         |   |
|--------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                 |   | **US$’000** |   | **US$’000** |   | **US$’000** |   |
|                                                                                 |   |             |   |             |   |             |   |
| Net income as reported                                                               |   | 500              |   | 584              |   | 358              |   |
| Less: Stock compensation expense determined under  the fair value method, net of tax |   | (779             | )      | (259             | )      | (256             | )      |
|                                                                                 |   |             |   |             |   |             |   |
| Pro forma net (loss)/income                                                          |   | (279             | )      | 325              |   | 102              |   |
|                                                                                 |   |             |   |             |   |             |   |
| (Loss)/income per share:                                                             |   |             |   |             |   |             |   |
|                                                                                 |   |             |   |             |   |             |   |
| Basic and diluted, as reported                                                       |   | US$0.15          |   | US$0.18          |   | US$0.11          |   |
|                                                                                 |   |             |   |             |   |             |   |
| Basic and diluted, pro forma                                                         |   | US$(0.07         | )      | US$0.09          |   | US$0.03          |   |

 

20

----

 

**15**                                  **Pension plan**

 

Prior to December 1, 2000,the Company 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 theCompany, depending on their years of service 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 of theMandatory Provident Fund Scheme, a defined contribution scheme managed by anindependent trustee on December 1, 2000, the Company and its employees whojoined the Company subsequently make monthly contributions to the scheme at 5%of the employee’s cash income as defined under the Mandatory Provident Fundlegislation.  Contributions of both theCompany and its employees are subject to a maximum of HK$1,000 per month andthereafter contributions are voluntary and are not subject to anylimitation.  The Company and itsemployees made their first contributions in December 2000.

 

As stipulated by the rulesand regulations in the PRC, the Company contributes to state-sponsoredretirement plans for its employees in Mainland China.  The Company contributes approximately 7% (2000 and 2001 - 7%) ofthe basic salaries of its employees, and has no further obligations for theactual payment of pension or post-retirement benefits beyond the annualcontributions.  The state-sponsoredretirement plans are responsible for the entire pension obligations payable toretired employees.

 

During the years endedDecember 31, 2002, 2001 and 2000, the aggregate contributions of the Company tothe aforementioned pension plans and retirement benefit schemes wereapproximately US$131,000, US$135,000 and US$97,000, respectively.

 

21

----

 

**16**                                  **Related party transactions**

 

(i)                                     Thetransactions with related parties are summarized as follows:

 
|                                                                                                                                                                                                                                                                                              |   | **2002**         |   | **2001**         |   | **2000**         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                                                                                                                                                                                              |   | **US$’000** |   | **US$’000** |   | **US$’000** |   |
|                                                                                                                                                                                                                                                                                              |   |             |   |             |   |             |   |
| Sale of goods to Eurotherm Limited                                                                                                                                                                                                                                                                |   | 33               |   | 30               |   | 26               |   |
|                                                                                                                                                                                                                                                                                              |   |             |   |             |   |             |   |
| Purchase of goods from                                                                                                                                                                                                                                                                            |   |             |   |             |   |             |   |
| •                                          Armtison Limited                     |   | 33               |   | 68               |   | 72               |   |
| •                                          Actions Instruments (China)  Limited |   | 9                |   | 7                |   | 8                |   |
| •                                          Eurotherm Limited                    |   | 2,800            |   | 2,114            |   | 845              |   |
|                                                                                                                                                                                                                                                                                              |   |             |   |             |   |             |   |
| Interest income on trade receivables earned from  Armtison Limited                                                                                                                                                                                                                                |   | 5                |   | 10               |   | 10               |   |
|                                                                                                                                                                                                                                                                                              |   |             |   |             |   |             |   |
| Interest income from advances to employees                                                                                                                                                                                                                                                        |   | —           |   | 1                |   | —           |   |
|                                                                                                                                                                                                                                                                                              |   |             |   |             |   |             |   |
| Rental income for office premises earned from  Eurotherm Limited                                                                                                                                                                                                                                  |   | 34               |   | 34               |   | 34               |   |
|                                                                                                                                                                                                                                                                                              |   |             |   |             |   |             |   |
| Rental expenses for office premises charged by  Armtison Limited                                                                                                                                                                                                                                  |   | 45               |   | 46               |   | 46               |   |
|                                                                                                                                                                                                                                                                                              |   |             |   |             |   |             |   |
| Management fees charged by Eurotherm Limited                                                                                                                                                                                                                                                      |   | 27               |   | 27               |   | 29               |   |
|                                                                                                                                                                                                                                                                                              |   |             |   |             |   |             |   |
| Management fees received from Pact Asia Pacific Ltd                                                                                                                                                                                                                                               |   | 2                |   | —           |   | —           |   |

 

(ii)                                  Detailsof the amount due from/to related companies are as follows:

 

Details of amount due from a related company:

 
|                     |   | **2002**         |   | **2001**         |   |
|--------------------------|--------|------------------|--------|------------------|--------|
|                     |   | **US$’000** |   | **US$’000** |   |
|                     |   |             |   |             |   |
| Regent  Earnings Limited |   | 2                |   | —           |   |

 

22

----

 

Details of amounts due to related companies:

 
|                                 |   | **2002**         |   | **2001**         |   |
|--------------------------------------|--------|------------------|--------|------------------|--------|
|                                 |   | **US$’000** |   | **US$’000** |   |
|                                 |   |             |   |             |   |
| Armtison  Limited                    |   | 2                |   | 7                |   |
| Actions  Instruments (China) Limited |   | 2                |   | 2                |   |
| Eurotherm  Limited                   |   | 662              |   | 331              |   |
|                                 |   |             |   |             |   |
|                                 |   | 666              |   | 340              |   |

 

The amounts due from/to related companies are trade innature, unsecured, non-interest bearing and are repayable in 2003.

 

(iii)                               ArmtisonLimited, Actions Instruments (China) Limited and Regent Earnings Limited arebeneficially owned by Mr. T. C. Leung, Chief Executive Officer and Chairman ofthe Board of Directors.  Mr. T. C. Leungis also a director of Eurotherm Limited.

 

As of December 31, 2002 and 2001, prepayments andother current assets of approximately US$283,000 and US$120,000, respectivelyincluded advances to certain PRC employees of the Company .  The advances are provided to those PRCemployees in order for them to finance the operations of certain retail shopsestablished in the PRC by the employees to market the Company’s products.  The advances are unsecured, bear interest ata nominal rate and have no fixed repayment terms. During the years endedDecember 31, 2002 and 2001, a provision was made in respect of the recoverabilityof such advances of US$89,000 and Nil were made by the Company. The Companydoes not account for the related sales to these retail shops until theinventories are sold to third parties.

 

**17**                                  **Commitments and Contingencies**

 

(i)                                     OperatingLeases

 

The Company has various operating lease agreements foroffice and industrial premises.  Rentalexpenses for the years ended December 31, 2002, 2001 and 2000 wereapproximately US$210,000, US$201,000 and US$191,000,respectively.  Future minimum rentalpayments as of December 31, 2002 and 2001, under agreements classified asoperating leases with non-cancellable terms amounted to US$85,000 which arepayable in the year 2003.

 

23

----

 

**EUROTECH HOLDINGS COMPANY LIMITED**

 

**NOTES TOTHE CONSOLIDATED ACCOUNTS**

 

(ii)                                  BankingFacilities

 

The Company has various banking facilities availablefor overdraft, import and export credits and foreign exchange contracts fromwhich the Company can access up to approximately US$4,320,000.  While the bank has made availableapproximately US$615,000 of such facilities to a supplier of the Company forthe Company’s future purchase commitments, the Company had not utilized anyportion of this facility as of December 31, 2002.

 

**18**                                  **Segment information**

 

(i)                                     Revenue

 

Geographical analysis of revenue by customer location is as follows:

 
|      |   | **2002**         |   | **2001**         |   | **2000**         |   |
|-----------|--------|------------------|--------|------------------|--------|------------------|--------|
|      |   | **US$’000** |   | **US$’000** |   | **US$’000** |   |
| Revenue - |   |             |   |             |   |             |   |
| Hong Kong |   | 6,787            |   | 5,119            |   | 4,503            |   |
| The PRC   |   | 16,635           |   | 14,173           |   | 10,207           |   |
| Others    |   | 75               |   | 393              |   | 300              |   |
|      |   |             |   |             |   |             |   |
|      |   | 23,497           |   | 19,685           |   | 15,010           |   |

 

 

(ii)                                  Long-livedassets *

 

Geographical analysis of long-lived assets is asfollows:

 
|      |   | **2002**         |   | **2001**         |   |
|-----------|--------|------------------|--------|------------------|--------|
|      |   | **US$’000** |   | **US$’000** |   |
|      |   |             |   |             |   |
| Hong Kong |   | 1,155            |   | 1,230            |   |
| The PRC   |   | 810              |   | 853              |   |
|      |   |             |   |             |   |
|      |   | 1,965            |   | 2,083            |   |

 

----

*                                         Long-lived assets represent property, plant andequipment, net.

 

24

----

 

(iii)                               Majorsuppliers

 

Details of individual suppliers accounting for morethan 5% of the Company’s purchases are as follows:

 
|                                    |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                    |   |     |   |     |   |     |   |
| Wallace & Tiernan Pacific Pty. Ltd. |   | 7        | %      | 5        | %      | 7        | %      |
| Hach Company Inc.                       |   | 19       | %      | 22       | %      | 23       | %      |
| Hioki E.E. Corp.                        |   | 15       | %      | 11       | %      | 12       | %      |
| ThermoQuest Corporation                 |   | 5        | %      | 9        | %      | 7        | %      |
| Eurotherm Ltd.                          |   | 15       | %      | 14       | %      | 8        | %      |
| Lachat Instruments Inc.                 |   | 6        | %      | 4        | %      | 3        | %      |

 

Some of the purchase agreements signed with the Company’ssuppliers are memorialized. They are not formal contracts and are arrangedthrough other acknowledgements or correspondence which may contain a vaguedescription of the terms and conditions of such arrangements, and therefore maybe unenforceable.

 

25

----

 

**CERTIFICATION**

 

I, **Jerry Wong**,certify that:

 

1.                                       Ihave reviewed this annual report on Form 20-F of Euro Tech Holdings CompanyLimited;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)                                  presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls;

 

----

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 

Date: June 27, 2003

 

 
|   | /s/  Jerry Wong         |
|--------|-------------------------|
|   | **Jerry Wong**          |
|   | Chief Financial Officer |

 

----

 

**CERTIFICATION**

 

I, **T.C. Leung**,certify that:

 

1.                                       Ihave reviewed this annual report on Form 20-F of Euro Tech Holdings CompanyLimited;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)                                  presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls;

 

----

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 

Date: June 27, 2003

 

 
|   | /s/  T.C. Leung         |
|--------|-------------------------|
|   | **T.C. Leung**          |
|   | Chief Executive Officer |

 

----