**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, 2003**                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                     |
| **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 file number   000-22113**                                                                                                                                                                                                                                                                                                                                                                                               |

 

**EURO TECH HOLDINGSCOMPANY LIMITED**

(Exact name ofRegistrant as specified in its charter)

 

**EURO TECHHOLDINGS COMPANY LIMITED**

(Translation ofRegistrant’s name into English)

 

**British Virgin Islands**

(Jurisdiction ofincorporation or organization)

 

**18/FGee Chang Hong Centre, 65 Wong Chuk Hong Road, Hong Kong**

(Address ofprincipal executive offices)

 

Securities registered orto be registered pursuant to Section 12(b) of the Act.

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

 

Securities registered orto be registered pursuant to Section 12(g) of the Act.

 

**OrdinaryShares, $.01 par value**

(Title of Class)

 

Securities for whichthere is a reporting obligation pursuant to Section 15(d) of the Act.

 

 

(Title of Class)

 

Indicate the number ofissued and outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.

 
|   | **4,289,782  Ordinary Shares** |
|--------|--------------------------------|

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 
| Yes **ý** | No o |
|----------------|------|

 

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

 
| Item 17 o | Item 18 **ý** |
|-----------|--------------------|

 

 

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**TABLEOF 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

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| 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 9C.*     | *Selling Shareholders*                                                       |   |
|           |                                                                         |   |
| *Item 9D.*     | *Dilution*                                                                   |   |
|           |                                                                         |   |
| *Item 9E.*     | *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                      |   |
|           |                                                                         |   |
| 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.*   | *Code  Of Ethics*                                                            |   |
|           |                                                                         |   |
| *Item  16C.*   | *Principal  Accountant Fees And Services*                                    |   |
|           |                                                                         |   |
| *Item 16D.*    | *Exemptions  From Listing Standards*                                         |   |
|           |                                                                         |   |
| **PART III**   |                                                                         |
|           |                                                                         |
| ITEM 17.       | FINANCIAL STATEMENTS                                                         |   |
|           |                                                                         |   |
| ITEM 18.       | FINANCIAL STATEMENTS                                                         |   |
|           |                                                                         |   |
| ITEM 19.       | EXHIBITS                                                                     |   |
|           |                                                                         |   |
| **SIGNATURES** |                                                                         |
|                |                                                                              |        |  |

 

ii

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**INTRODUCTION**

 

In this Form 20-F,reference to “us”, “we”, the “Company” and “Euro Tech” are to Euro TechHoldings Company Limited and its subsidiaries unless otherwise expressly statedor the context otherwise requires.

 

**Forward Looking Statements**

 

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

 

iii

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**GLOSSARY**

 

The following glossary ofterms may be helpful in understanding the terminology used in this AnnualReport.

 
| 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.                                                                                                                                                                              |
|                             |   |                                                                                                                                                                                                                                                                                                                      |
| Human Machine Interface          |   |                                                                                                                                                                                                                                                                                                                      |
| Software:                        |   | A type of software to  interface (or coordinate) the interaction between machine or equipment and a  human being.                                                                                                                                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                                      |
| 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.                                                                                                                                                                                                                                            |

 

1

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| Process Turbidimeter:           |   | An analytical  instrument that continually measures the clarity of water based on light  scattering or deflection.                                                                                     |
|---------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                            |   |                                                                                                                                                                                                   |
| 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. |
|                            |   |                                                                                                                                                                                                   |
| Sequential Event  Recorder:     |   | High-speed  instrumentation that can record a sequence of events in chronological order  in millisecond resolution.                                                                                    |
|                            |   |                                                                                                                                                                                                   |
| 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

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**PART I**

 

**ITEM 1.****                                  IDENTITYOF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**

 

Not applicable.

 

**ITEM2.****                                  OFFERSTATISTICS AND EXPECTED TIMETABLE**

 

Not applicable.

 

**ITEM 3.****                                  KEYINFORMATION**

 

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

 

**SELECTED FINANCIAL INFORMATION**

(Amounts expressedin thousands, except

share and pershare data and unless otherwise stated)

 

The selected consolidated income statement data foryears ended December 31, 2003, 2002 and 2001, and the selectedconsolidated balance sheet data as of December 31, 2003 and 2002 set forthbelow are derived from audited consolidated financial statements of the Companyincluded herein should be read in conjunction with, and are qualified in theirentirety by reference to such financial statements, including the notes theretoand Item 5. “Operating and Financial Review and Prospects.” The selectedconsolidated income statement data for the years ended December 31, 2000and 1999 and the selected consolidated balance sheet data as ofDecember 31, 2001, 2000 and 1999 set forth below are derived from auditedconsolidated financial statements of the Company which are not included herein.

 
|                       |   | **As of  December 31,** |   |
|----------------------------|--------|------------------------------|--------|
|                       |   | **2003**                     |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                       |   | **US$**                      |   | **US$** |   | **US$** |   | **US$** |   | **US$** |   |
| **Balance Sheet Data:**    |   |                         |   |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents |   | 2,752                        |   | 3,173 |   | 3,551 |   | 3,963 |   | 3,691 |   |
| Working  capital(1)        |   | 4,914                        |   | 4,363 |   | 4,123 |   | 3,686 |   | 3,632 |   |
| Total  assets              |   | 13,308                       |   | 12,716 |   | 11,379 |   | 10,092 |   | 9,637 |   |
| Short-term  debt(2)        |   | 0                            |   | 0 |   | 90 |   | 94 |   | 85 |   |
| Long-term  bank loans      |   | 0                            |   | 0 |   | 0 |   | 92 |   | 178 |   |
| Net  assets                |   | 7,243                        |   | 6,714 |   | 6,206 |   | 5,878 |   | 5,533 |   |

 

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(1)                                  Currentassets minus current liabilities.

(2)                                  Short-termdebt includes short-term borrowings and current portion of long-term bankloans.

 

3

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|                                                    |   | **For the  Year Ended December 31,** |   |
|---------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                    |   | **2003**                                  |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                    |   | **US$**                                   |   | **US$** |   | **US$** |   | **US$** |   | **US$** |   |
| **Income Statement Data:**                              |   |                                      |   |   |   |   |   |   |   |   |   |
|                                                    |   |                                      |   |   |   |   |   |   |   |   |   |
| Revenue                                                 |   | 27,442                                    |   | 23,497 |   | 19,685 |   | 15,010 |   | 13,107 |   |
| Cost  of revenue                                        |   | (22,805                                   | )      | (18,735 | ) | (15,396 | ) | (11,467 | ) | (9,896 | ) |
|                                                    |   |                                      |   |   |   |   |   |   |   |   |   |
| Gross  profit                                           |   | 4,637                                     |   | 4,762 |   | 4,289 |   | 3,543 |   | 3,211 |   |
|                                                    |   |                                      |   |   |   |   |   |   |   |   |   |
| Selling  and Administrative Expenses                    |   | (4,108                                    | )      | (4,173 | ) | (3,734 | ) | (3,301 | ) | (2,946 | ) |
| Operating  income                                       |   | 529                                       |   | 589 |   | 555 |   | 242 |   | 265 |   |
|                                                    |   |                                      |   |   |   |   |   |   |   |   |   |
| Interest  Income                                        |   | 13                                        |   | 18 |   | 66 |   | 113 |   | 85 |   |
| Other  income, net                                      |   | 6                                         |   | 9 |   | 126 |   | 97 |   | 67 |   |
| Income  before taxes                                    |   | 548                                       |   | 616 |   | 747 |   | 452 |   | 417 |   |
|                                                    |   |                                      |   |   |   |   |   |   |   |   |   |
| Income  taxes                                           |   | (108                                      | )      | (123 | ) | (163 | ) | (94 | ) | (78 | ) |
| Share  of equity in net income of affiliates            |   | 91                                        |   | 7 |   | — |   | — |   | — |   |
| Net  income                                             |   | 531                                       |   | 500 |   | 584 |   | 358 |   | 339 |   |
|                                                    |   |                                      |   |   |   |   |   |   |   |   |   |
| Net  income per Ordinary Share                          |   |                                      |   |   |   |   |   |   |   |   |   |
| Basic                                                   |   | 0.12                                      |   | 0.11 |   | 0.13 |   | 0.08 |   | 0.08 |   |
| Diluted                                                 |   | 0.12                                      |   | 0.11 |   | 0.13 |   | 0.08 |   | 0.08 |   |
| Weighted  average Number of Ordinary Shares Outstanding |   | 4,516,883                                 |   | 4,516,883 |   | 4,516,883 |   | 4,516,883 |   | 4,516,883 |   |

 

The Company maintains itsbooks and records in United States dollars ("US$").  Its subsidiaries and affiliates maintaintheir books and records either in Hong Kong dollars or Chinese Renminbi("RMB").

 

The Hong Kong dollar isfreely convertible into other currencies (including the U.S. dollar).  Since 1983, the Hong Kong dollar haseffectively been officially linked to the U.S. dollar at the rate ofapproximately HK$7.80 = US$1.00. However, the market exchange rate of the Hong Kong dollar against theU.S. dollar continues to be influenced by the forces of supply and demand inthe foreign exchange market.  Exchangerates between the Hong Kong dollar and other currencies are influenced by therate between the U.S. dollar and the Hong Kong dollar.

 

Since 1994, theconversion of Renminbi into foreign currencies, including U.S. dollars, hasbeen based on rates set by the People's Bank of China, which are set dailybased on the previous day's interbank foreign exchange market rates.  Since 1994, the official exchange rate forthe conversion of Renminbi to U.S. dollars has generally been stable andmaintained at the rate of approximately RMB8.30 = US$1.00.  The value of the Renminbi fluctuates and issubject to changes in PRC political and economic conditions.

 

***Item 3B.******                              Capitalizationand Indebtedness***

 

Not applicable.

 

***Item 3C.******                              Reasonsfor the Offer and Use of Proceeds***

 

Not applicable.

 

4

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***Item 3D.******                              RiskFactors***

 

You should carefullyconsider all of the information set forth in this annual report and thefollowing risk factors. The risks below are not the only ones we face.Additional risks not currently known by us or that we deem immaterial may alsoimpair our business operations. Our business, financial condition or results ofoperations could be materially adversely affected by any of these risks. Thisannual report also contains forward looking statements that involve risks anduncertainties. Our results could materially differ from those anticipated inthese forward looking statements as a result of certain factors, including therisks we face as described below and elsewhere. See “Forward LookingStatements.”

 

**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 (or “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 will  be diminished after China’s recent entry to the Word Trade Organization, and  introducing market liberalization in China. 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

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|                       |   | • | 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 effect 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 2, 2004, that index stood at 12,201.75.****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

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|                       |   |   | 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

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| **We are subject to international** |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-------------------------------------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **economic and political risks,**   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **such as the spread of SARS,**     |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **over which we have little**       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **or no control.**                  |   | • | Doing business outside the United States subjects us to various  risks, including changing economic and political conditions, exchange  controls, currency fluctuations, armed conflicts and unexpected changes in  United States and foreign laws relating to tariffs, trade restrictions,  transportation regulations, foreign investments and taxation. We have no  control over most of these risks and other unforeseeable risks and may be  unable to anticipate changes in international economic and political  conditions and, therefore, unable to alter our business practice in time to  avoid the adverse effect of any of these changes.                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                |   | • | For example: in  March of 2003, the World Health Organization received reports of “Severe  Acute Respiratory Syndrome” (“SARS”) in various parts of the world that,  adversely affected trade into and from 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. To date, we are not aware of any of our employees having  contracted this illness and there have been no resulting cessation of  operations. We have minimized business travel and have distributed  respiratory masks to our employees. Although we believe that the spread of  SARS has had a near term negative impact on our operations with business  travel and customer purchases being postponed or delayed but not eliminated,  we are continuously trying to keep abreast of the situation, but at this  time, it is difficult to precisely quantify the future impact, in any, of  SARS on our business. |
|                                |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

8

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

 

9

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

 

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**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 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.                                                                                                                                                                                                                                                                                                                                      |
|                         |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **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 affected by  the loss of services of, or a material reduction in 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.” |

 

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| **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 Eurotherm, Ltd.  (“Eurotherm”), Hioki E.E. Corp. (“Hioki”), Hach Company, Inc. (“Hach”), 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 Macau. Purchases from Eurotherm accounted for approximately 31% of our  sales during Fiscal 2003.  This was an  increase from Fiscal 2002, when purchases from Eurotherm accounted for  approximately 15% of our sales.  This  increase in purchases from Eurotherm was the result of several factors,  including but not limited to, (a) some of Eurotherm’s products are readily  saleable “over-the-counter” in our retail shops; and (b) other Eurotherm  products are in demand by the PRC’s energy supply industry, with the demand  for power in the PRC outstripping supply. 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. |

 

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**Risks Relating to the Company Itself.**

 
| **Control by T.C. Leung; Potential** |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------------------------------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **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 Shareholders**           |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **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.                                                                                                                                                              |

 

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| **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

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| **Being a Foreign Private**                      |   |   |                                                                                                                                                                                                                                                         |
|--------------------------------------------------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Issuer Exempts Us From**                       |   |   |                                                                                                                                                                                                                                                         |
| **Certain Securities and**                       |   |   |                                                                                                                                                                                                                                                         |
| **Exchange Commission (“Commission”)** |   |   |                                                                                                                                                                                                                                                         |
| **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 or current reports on Form 8-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; |
|                                             |   |   |                                                                                                                                                                                                                                                         |   |
|                                             |   |   | •                                                                                                                                                                                                                                                       | 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); |
|                                             |   |   |                                                                                                                                                                                                                                                         |
|                                             |   |   | 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.                                                           |

 

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| **Being a “Controlled**     |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|----------------------------------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Company” Exempts Us**     |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **From Certain NASDAQ**          |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Corporate Governance**         |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Criteria**                     |   | • | As a result of T.C. Leung,  the Company’s Chairman of the Board and Chief Executive Officer owning in  excess of the voting power of our Ordinary Shares, we are a “controlled  company” as that term is defined in NASDAQ’s rules and regulations. As a  “controlled company”, we are not required to comply with certain NASDAQ  corporate governance criteria, including, among other things, the  requirements that independent directors have the authority to approve  director nominations, executive officer compensation. |
|                             |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **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. |

 

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|                        |   |   | 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 Are Also Required To** |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **Meet 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  adopted, and the Commission has approved, 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  criteria are more difficult to comply with. The new criteria include, among  other things: |
|                        |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                        |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | an increase in the  degree of independence of members of the board of directors with independent  directors to, among other things: hold regular meetings among themselves  only; |
|                        |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|                        |   |   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | establishment of a code  of conduct addressing 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  corporate governance requirements 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, is expected. We believe that  compliance with NASDAQ’s corporate governance requirements may be difficult and  may increase our costs and expenses as the costs of finding and compensating    |

 

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|                        |   |   | independent directors  escalate and the costs of administering their new powers and responsibilities  prove to be an added financial burden. If we are unable to attract and keep 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 Been**     |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Fluctuating Widely**      |   | • | During the past five  years, the market price of our Ordinary Shares has been subject to wide  fluctuations. Additionally, the Company knows of no reason for these wide  fluctuations. See Item 9A - “Markets”.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                        |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **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 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                                                                                                                                                                                                                 |

 

18

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|                           |   |   | 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**

 

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

 

The Company was organizedunder the laws of the British Virgin Islands on September 30, 1996 for thepurposes of raising capital and for acquiring all the outstanding capital stockof Euro Tech (Far East) Ltd., a Hong Kong corporation (“Far East”). The Companysuccessfully completed a public offering (“Public Offering”) from which theCompany received net proceeds of approximately US$1,817,000, inMarch 1997. Pursuant to and concurrent with the Public Offering, theCompany acquired all the issued and outstanding capital stock of Far East, andthereafter Far East became a wholly-owned subsidiary and the primaryoperational tool of the Company. Far East was established in 1971 and has beenin continuous operation since that time. See Item 5. “Operating and FinancialReview and Prospects.” Far East engages in its core business of distributingvarious equipment, instruments and supplies used in connection with thetreatment, analysis and testing of water and waste water.

 

Historically, thebusinesses of the Company were engaged in by Far East, which in 1997 wasacquired by, and is now a wholly-owned subsidiary of the Company. Far East wasestablished in 1971, under the name of Eurotherm (Far East) Ltd., as asubsidiary of a United Kingdom publicly traded company, Eurotherm Ltd., tomarket and distribute its parent company’s industrial control equipment in HongKong and Southeast Asia, and expanded its activities into the PRC in 1973. Inthe early 1980’s, Far East began distributing high-tech equipment manufacturedin the United States, Europe and Japan within the PRC, in addition to itsdistribution of its parent’s products. In 1988, the activities of the parentand Far East were separated into Eurotherm International and Far East. In oraround 1994, all the capital stock of Far East was purchased by its management,principally T.C. Leung, the Company’s Chairman of the Board of Directorsand Chief Executive Officer. Far East thereafter changed its name fromEurotherm (Far East) Ltd. to its current name. See Item 7. “Major Shareholdersand Related Party Transactions.”

 

The Company used portionsof the net proceeds of the Public Offering to (a) establish an operation forthe assembly of the type of products now distributed by the Company, includingcertain water-related testing, monitoring and treatment equipment, (b) toexpand its marketing efforts by, among other things, opening additionalregional sales offices in the PRC, (c) purchase equipment, (d) establish asubsidiary to develop and operate a B2B website, (e) repurchase securities fromthe underwriter of the Company’s Public Offering, (f) pay expenses incurred in

 

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seeking acquisitioncandidates and hiring an agent in the United States, (g) repurchase its ownOrdinary Shares in the open market, and (h) acquire a 30% equity interest inPact Asia Pacific Limited and Yixing Pact Environmental Technology CompanyLimited (collectively “Pact”).

 

***Item 4B.******                              BusinessOverview***

 

The Company is primarilya distributor of a wide range of advanced water treatment equipment (includingchlorination equipment), laboratory instruments, analyzers, test kits andrelated supplies and power generation equipment (including recorders and powerquality analyzers). The Company acts as an exclusive and non-exclusivedistributor for well-known manufacturers of such equipment, primarily tocommercial customers and governmental agencies or instrumentalities in HongKong and the PRC. During its fiscal year ended December 31, 2003 (“Fiscal2003”) the Company distributed products to in excess of 1,000 customers,including the Hong Kong Environmental Protection Department, the BeijingHydrology station, China Light & Power Co., Ltd., Hong Kong Electric Co.,Ltd., and the Kowloon-Canton Railway Corporation,****China’s NationalEnvironmental Protection Agency, a joint venture between the China Great WallIndustry I/E Corp. and Austria’s Aqua Engineering to construct one of Beijing’swater treatment plants, and to subdistributors located in Hong Kong, the PRCand Macau. These products are manufactured by a substantial number of majorAmerican, European and Japanese corporations, including Eurotherm, Hioki andHach, which are the Company’s largest suppliers, with purchases from themaccounting for approximately 31%, 12% and 8%, respectively, of the Company’ssales during Fiscal 2003 and approximately 15%, 15% and 19%, respectively, ofthe Company’s sales during its fiscal year ended December 31, 2002(“Fiscal 2002”).

 

The Company distributesproducts through its Hong Kong headquarters, its representative offices locatedin Beijing, Shanghai, Guangzhou, Chongqing, Xi ́An, Shenyang, Wuhan and Fuzhou,and through non-exclusive arrangements with independent sub-distributorslocated in Hong Kong, the PRC and Macau.

 

The Company believes thatthe continuing growth of industrial activity in particular, and overallbusiness activity in general, in the PRC over the last five years has produceda strong and increasing demand for its products in the PRC. The Company furtherbelieves that in the near future the need and demand for the products itdistributes will grow as a result of increased regulations governing theenvironment and industrial pollution output, projected growing demands of thePRC’s population for clean water and a healthier and safer environment, the potentialfor the contamination or depletion of existing clean fresh water sources andthe burgeoning demand for power in the PRC.

 

The Company believes thatby assembling the products it distributes, it may realize increased grossprofit margins and greater revenues and net income than if it remained only adistributor of such products with sales of the Company first product offering,an Infrared Photometric Oil Analyzer, commencing in 2003. Similarly, theCompany believes that by expanding its regional sales efforts in the PRC, itmay realize higher revenues and net income.

 

Also, during Fiscal 2003,our Special Products and Engineering Department took on more engineeringprojects in the waste water treatment and power generation industries.

 

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**Expansion Plans for the Near Term**

 

Trading

 

Our expansion plans forthe near term, include, but are not limited to the following:

 

•                  Theavailability of “on-line” ordering for our products is expected forAugust 2004.

 

•                  Thecontinued use of our retail shops to sell “low-tech” products such as thosemanufactured by Hioki and our own products as we believe that, since ourretails shops are operating with what we consider to be low overheads.

 

•                  Webelieve that the continued “low-tech” product sales through our retail shopscoupled with our planned “on-line” product sales capability will allow us tooffer products at lower prices than our competitors.

 

Having “low-tech”products offered through our retail shops and the availability of “on-line”product offering are anticipated to allow our sales force to focus on“high-tech” and other products requiring personal or telephone contact directlywith customers and potential customers.

 

Manufacturing

 

Sales of the InfraredPhotometric Oil Analyzer commenced in 2003. During 2004, we began selling turbidity instruments and spectrometersthat we developed and manufactured ourselves and began assembling and sellingthe Total Organic Analyzer of O.I. Corporation. See “- Product AssemblyOperations”. We intend to assemble and/or manufacture additional products inthe future and seek opportunities with our suppliers to assemble theirproducts, secure manufacturing and/or assembly facilities and seek anothermanufacturer of analytical instruments to acquire.

 

Engineering

 

To allow the Company tobid on larger water, wastewater and power generation projects, we intend toseek the acquisition of an engineering company and/or a system integrator (acompany that provides hardware, software and solutions in the field ofengineering) or enter into a joint venture with a third party to work inconnection with our process control and engineering department.

 

On January 31, 2002,the Company acquired a 30% equity interest in Pact for approximately US$288,000,with related expenses (legal and accounting) in connection with thisacquisition approximated US$47,000. Pact is a privately owned engineering firmsituated in Shanghai that specializes in the design, manufacture and operationof water and waste water treatment plants in several industries situated inChina. The Company believes that Pact’s business is complementary to theCompany’s business as the Company continues to focus on sales and marketing ofproducts of others. The Company believes that by aligning itself with anengineering

 

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firm, such as Pact, itmay be able to gain a competitive advantage by offering customers and potentialcustomers not only hardware but solutions to engineering problems as well.Also, the Company anticipates that by securing an equity stake in Pact, itsability to become a supplier to Pact is enhanced. The Company continues to seekto make a similar acquisition of an engineering company specializing in airpollution control or other complementary environmental protection fields or inthe power generation field.

 

**Products, Services and Customers**

 

Laboratory instruments,analyzers and test kits are used to analyze the chemical content and ascertainthe level of impurities or other contaminants in water. The Company distributesanalytical re-agents and chemicals to support testing systems of laboratory andportable instruments, process analyzers and portable test kits and assist inthe analysis process. The Company offers a wide variety of test kits to testwater quality. The Company believes that these portable test kits are easy touse and preadapted for rugged field use. These test kits are used to monitordrinking water distribution systems.

 

Laboratory and portableinstruments generally consist of analytical instruments including but notlimited to the following: spectrophotometers, colorimeters, turbidimeters,ion-selective electrodes, chemical oxygen demand apparati, digestion apparati,and precision re-agent dispensing devices which are used to test and monitorimpurities and contaminants in water systems. See “Glossary.”

 

The Company alsodistributes continuous-reading process analyzers, process turbidimeters, pHcontrollers and analyzer accessories. These products are generally used tomonitor and control drinking water quality to ensure that water treatmentprocedures comply with regulatory standards. See “Glossary.”

 

**Scientific Instruments.**The Company distributes analytical instruments, environmental monitoring instrumentsand general purpose laboratory instruments. Analytical instruments include, butare not limited to, chromatographs, mass spectrometers, flow injector analyzersand atomic spectrometers. Environmental monitoring instruments include both airand water quality monitoring instruments. Air quality monitoring instrumentsare generally divided into those which monitor ambient (i.e., atmospheric) air,and those which monitor pollution sources. Additionally, the Company offersgeneral purpose laboratory instruments including a variety of water qualitymonitoring and analysis equipment, such as continuous reading processanalyzers, process turbidimeters, pH controllers, and test kits for monitoringchemical content in water (i.e., chlorine, fluorides, etc.). See “Glossary.”

 

Customers for theanalytical instruments include government agencies, academic and researchinstitutions and major laboratories. The Company also distributes products tobeverage producers and restaurants, including water quality test kits to morethan twelve bottling plants of a well known United States softdrink producer,which are located in the PRC; total organic carbon analyzers to the People’sLiberation Army (the PRC armed forces), water quality monitoring instruments towell known United States fast food franchisor’s restaurants located in HongKong and the PRC, and to well known United States and European beer producersbottling plants located

 

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in Wuhan, PRC. Each suchsoda producer, restaurant and beer bottler and the People’s Liberation Army donot account for a significant portion of our sales.

 

Customers for air andwater quality monitoring instruments also include government agencies such asthe Hong Kong Environmental Protection Department, which uses a Companydistributed water quality monitoring system to monitor the water quality ofHong Kong’s Victoria Harbor, more than ten water treatment plants located inthe PRC (including sites at Beijing, Tianjin, Guangzhou and Wuhan), and theBeijing Environmental Monitoring Centre. The Company is also one of twodistributors supplying continuous water monitoring systems to Beijing’sHydrology Station.

 

The Company derivedapproximately 41.3%, 58.7% and 56.1% of its revenues from the sale ofScientific Instruments during Fiscal 2003, Fiscal 2002 and Fiscal 2001,respectively.

 

**Process Control and EngineeringProducts.** The Company provides process control systemsspecifically designed for the industrial needs of clients including sensors,temperature gauges, pressure gauges, flow meters, valves, temperature andpressure transmitters and control devices, temperature and pressurecalibrators, moisture, power, energy and harmonic analyzers. Chlorinationdisinfection systems are also distributed by Far East in conjunction with watertreatment, sewage discharge and swimming pool water treatment. Customers forthe foregoing distributed products include government water supply agencies,water treatment facilities, power and electric companies, petrochemical plantsand instrument manufacturers. For example, the Company distributes chlorinationdisinfection systems to Hong Kong’s new Chek Lap Kok airport and its environs.

 

The Company derivedapproximately 21.6%, 18.6% and 17.7% of its revenues from the sale of ProcessControl and Engineering Products during Fiscal 2003, Fiscal 2002 and Fiscal2001, respectively.

 

**Special Projects and EngineeringDepartment.** In conjunction with the distribution of productssuch as programmable logic controllers, telemetry units and SCADA systems andsoftware, the Company also provides systems engineering to government agencies,wastewater treatment and power generation plants and beverage producers. TheCompany derived approximately 20.7%, 9.5% and 13.2% of its revenue from itsSpecial Project Operation during Fiscal 2003, Fiscal 2002 and Fiscal 2001,respectively. This revenue was derived primarily from sales of products andsupply systems.

 

Our special projects andengineering department is believed by the Company to be the main contractor andsystem integrator of a large number of industrial and municipal wastewater,water treatment and power generation plants in the PRC. Specific servicesprovided by this group include automated control system design, the operationand management of various wastewater, water and power generation projects. Wealso work with PACT which we believe to be the first wholly foreign ownedengineering company in the PRC specializing in the design, manufacture andoperation of industrial water and wastewater treatment plants, waterpurification/treatment stations and membrane separation equipment. We endeavorto introduce, develop, and promote new and advanced technologies, products, andappropriate technical developments from abroad.

 

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We have also beencooperating with established technology companies and engage in systems andspecial projects in Programmable Logic Control, Telemetry unit, SCADA systems,Human Machine Interface Software and Sequential Event Recording.

 

**Other Products.** TheCompany distributes general testing and measuring equipment includingmulti-channel digital and analogue recorders, signal amplifiers and calibrationequipment and power quality analyzers to industries including power plants,railway and aero-space industries, utilities, educational institutions andtelecommunications companies. In 2003, the Company began marketing an infraredimaging camera to transportation systems. Although not suitable for diagnostic purposes,it allows transportation systems to monitor passengers for high-bodytemperatures even during “peak” or rush hour periods.

 

The Company derivedapproximately 14.8%, 11.9% and 11.5% of its revenues from the sale of theseOther Products during Fiscal 2003, Fiscal 2002 and Fiscal 2001, respectively.

 

**Technical Support.**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 1.6%, 1.3% and 1.5% of itsrevenues from Technical Support Operation during Fiscal 2003, Fiscal 2002 andFiscal 2001, respectively.

 

**Customers.** DuringFiscal 2003, the Company distributed products to in excess of 1,000 customers,including sub-distributors, located in Hong Kong, the PRC and Macau. DuringFiscal 2003, the Nanjing Keyuan Control Engineering Co. Ltd. accounted forapproximately 11% of the Company’s revenues. No other single customer accountedfor more than 5% of the Company’s revenues during Fiscal 2003. The Company doesnot believe that any single customer or sub-distributor is material to itsoperations.

 

**Product Assembly Operations**

 

The Company, through its PRCCorporation, Shanghai Euro Tech Limited established in 1999 in the Pudong JinQiao Export Processing Zone of Shanghai, engages in the development,production, sales and servicing of environmental equipment, including thedevelopment of modern laboratory analyzers, on-line measuring equipment andother analyzers for chemicals. Our products are “tailor-made” for thediversified needs of equipment users. Main products include InfraredPhotometric Oil Analyzer (IPOA), COD analyzers, Total Organic Carbon Analyzer,turbidity meters, total suspended solid analyzers, dissolved oxygen analyzers,various types of spectrophotometers as well as a full spectrum of matchingchemical reagents. In 2004, a new turbidity meter, is to be offered. Thisfacility produces the Infrared Photometric Oil Analyzer, together with the twotypes of specialized reagents have been the best customer accepted productsfrom this plant.  Sale of the InfraredPhotometric Oil Analyzer commenced in 2003. This plant also manufacturesmulti-function reactors, spectrophotometers, reagents for chemical oxygendemand and chlorine and silica measurement. , used in water-related testing,monitoring and treatment. The manufacturing plant moved to a larger facility in2003 under a two-year lease expiring in April 2005. It is contemplatedthat the Company will import components, assemble the finished products andthen distribute the products through its distribution network. The Company

 

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believes that byestablishing product assembly operations in the PRC and expanding the number ofits regional sales offices in the PRC, it will not only increase revenues byexpanding its customer base and increasing distribution capabilities, but alsoits net income since the Company believes it will enjoy higher overall profitmargins by assembling certain products which it now distributes rather than byonly purchasing the finished product from vendors.

 

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.

 

**InfraredPhotometric Oil Analyzer**

 

In May 2000, the Companysigned an agreement with the Shanghai Institute Optics Instrument to jointlydevelop an Infrared Photometric Oil Analyzer by infrared absorption method.This analyzer is intended to detect concentrations of petroleum, animal andvegetable oils in surface water, underground water, municipal and industrialwastewater. Potential customers are environmental water monitoring stations,water purification and waste treatment facilities, underground water and harborwater 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.

 

**Sources of Supply**

 

The Company distributesproducts manufactured by a number of vendors, including Eurotherm, Hioki andHach, which are the Company’s primary suppliers, see “- Business Overview”. TheCompany has exclusivity agreements for specified geographic areas with many ofits suppliers for certain products. Those agreements do not encompass allproducts distributed by the Company or all of the market areas serviced by theCompany. 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 Macau authorized to supply, installand commission Hach’s products and accessories.

 

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The Company has only aletter from Hioki appointing the Company as Hioki’s sales representative in thePRC, Hong Kong and Macau. The Company’s agreement with Hach is terminable onninety days notice by either party. Although alternative sources of supplyexist, there can be no assurance that the termination of the Company’srelationship with any of the above or other vendors would not have a short-termadverse effect on operations.

 

**Expansion**

 

The Company continues toseek: (1) development of manufacturing and engineering operations as part ofits core business through (a) the development and assembly of more of theCompany’s own environment-related equipment (see “ – Product AssemblyOperations”), (b) the expansion of its process engineering business through itsown special projects and engineering department and cooperation with Pact, (c)potential acquisitions of manufacturing plants to expand our product-assembly operationsand (d) potential acquisitions of engineering companies to enhance our abilityto bid for and take on larger engineering projects; and (2) the development ofa strategic retail network to serve China (see “ – Sales and Marketing”).

 

**Regulatory Environment**

 

Concerns about andawareness of pollution problems and environmental issues have grown at alllevels of PRC government as the PRC experienced economic growth. Environmentalprotection laws and strict regulations have been enacted and are buttressed byincreased budget allocations for environmental regulation, monitoring andenforcement. The PRC’s primary environmental protection agency is the StateEnvironmental Protection Agency (SEPA), under which there are EnvironmentProtection Bureaus in each city and county. According to oral informationreceived by management from SEPA, under bureau management, there are twoenvironment monitoring systems: one system consists of over 2,200 monitoringstations to collect and analyze the environmental data of each city and county;another system consists of over 2,500 stations to monitor specific industrialdistricts or factories which have been identified as major pollution sourcesdue to their non-compliance with environmental regulations. The Company has suppliedwater and air quality monitoring and analytic instruments to these monitoringstations for several years. Despite this anticipated growth in monitoringstations, there can be no assurance that the agencies will continue to use theCompany’s products for these purposes, or that other market competitors willnot enter the market with superior products, distribution systems or morecompetitive prices. See “ – Competition.”

 

**Competition**

 

The Company facescompetition from other distributors of substantially similar products as wellas the manufacturers of such products, and in both foreign and Chinese markets.The Company faces its principal competition from manufacturers and otherdistributors of its core products located in Hong Kong and the PRC. Moreover,the Company has implemented plans to assemble products of the kind that itpresently distributes (see “ – Product Assembly Operations”). Assemblyoperations have developed to the stage where products are about to be presentedto the market and the Company is in direct competition with certain of itsvendors. There can be no assurance that the existence of this directcompetition will not impair the Company’s ability or such competitor’s

 

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willingness to continueproviding other products for continued distribution by the Company, and thatsuch a development would not materially adversely affect the Company’s corebusiness.

 

During Fiscal 2003,Fiscal 2002 and Fiscal 2001, the Company’s gross profit margins wereapproximately 16.9%, 20.3% and 21.8%, respectively. The Company believes thatit competes with the PRC manufacturers on the basis of quality and technology.The Company believes it offers foreign-manufactured products which are ofhigher quality and use more advanced technology than products manufactured inthe PRC. The Company believes that it competes with foreign manufacturers andother distributors of their products on the basis of the Company’s moreextensive distribution network and an established reputation.

 

**B2B Website**

 

In Fiscal 2000, theCompany established Chinah2o.com Ltd., a Hong Kong corporation. ThroughChinah2o.com Ltd., the Company launched a bilingual Business-to-Business(“B2B”) internet platform in August 2000. The website is located at(http://www.chinah2o.com). The B2B website is directed at environmentalbusinesses 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.

 

**Sales and Marketing**

 

The Company distributesproducts through its principal office located in Hong Kong and itsrepresentative PRC offices located in Beijing, Shanghai, Guangzhou, Chongqing,Xi ́An, Shenyang and Wuhan. The Company has a marketing and sales force of 62people who are paid a salary plus commission based on sales. The Company’soffices also coordinate the sales efforts of approximately fifty othercompanies 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 2003 and Fiscal2002.

 

Following the opening ofour first retail shop in Shanghai in 2001, Euro Tech retail outlets are nowfound in a number of major cities in the PRC, specifically Beijing, Guangzhou,Chongqing, Xi ́An, Shenyang, Wuhan and Fuzhou. Our staff at these shops assistscustomers in selecting the equipment, auxiliary parts and products to suitcustomer specifications. Equipment that needs to be repaired or provided withroutine maintenance can be returned to us via these shops, as our retail shops,except for the Beijing shop, are also maintenance centres. The Company hasfound the eight existing shops to be useful as demonstration locations easilyaccessed by local customers who can pay in local currency while “off the shelf”sales are made which move its inventory more readily. All of the foregoing areperceived by the Company to have had a

 

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positive impact on itsbusiness reputation while reducing the Company’s dependency on sub-distributorswho may not be loyal to the Company and distribute products of its competitors.As foreign entities are not generally permitted to own these facilities, theseshops are owned by non-officer/director, employees of the Company with fundsfrom the Company through non-fixed term loans of approximately US$388,000bearing a nominal rate of interest. The shops do not have financing from othersources. There can be no assurances that; these shops will continue to beeconomically viable, or that the Company will not sustain losses in connectionwith the loans to the shops; or that the shops will generate any significantrevenues or profits for the Company. Also, similar shops may be established byits competitors and/or third parties. These shops were opened on the followingdates:

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

 

***Item 4C.******                              OrganizationalStructure***

 

The Company presentlywholly-owns Far East, which, in turn, wholly owns the following corporations:

 

•                  EuroTech Trading (Shanghai) Limited – a People’s Republic of China corporation

•                  EuroTech (China) Limited – a Hong Kong corporation

•                  Chinah2o.comLimited – a Hong Kong corporation

•                  ShanghaiEuro Tech Limited – a People’s Republic of China corporation

 

The Company’swholly-owned subsidiary and primary operational arm is Far East, which itacquired in March 1997. Far East has engaged in the distribution ofvarious industrial control equipment, which continues to be the core businessof the Company, since its inception in 1971.

 

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

 

The Company maintains anexecutive office at 18/F Gee Chang Hong Centre, 65 Wong Chuk Hang Road, HongKong. The Company occupies approximately 12,800 square feet of office andwarehouse storage space under a two (2) year lease from June 2003 to May2005 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, theCompany purchased approximately 1,200 square feet of space in a building inHong Kong. The Company financed the purchase and, as of December 31, 2002,had paid in full the mortgage for this property. This property is now used asChinah2o.com Ltd.’s office.

 

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The Company alsomaintains representative offices within the PRC in the cities of Beijing,Shanghai, Guangzhou, Chongqing, Xi ́An, Wuhan, Shenyang and Fuzhou. The Beijingand Shanghai sales offices are owned by the Company. The Beijing and Shanghaisales offices are situated on Company owned property. The remaining salesoffices are rented pursuant to short-term leases aggregating approximatelyUS$2,870 per month**.**

 

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

 

The Company’s registeredoffice in the British Virgin Islands is located at TrustNet Chambers, P.O. Box3444, Road Town, Tortola, British Virgin Islands and its telephone number is(284) 494-5296.

 

**ITEM5.****                                  OPERATINGAND FINANCIAL REVIEW AND PROSPECTS**

 

**Overview**

 

The Company is primarilya distributor of a wide range of advanced water treatment equipment (includingchlorination equipment), laboratory instruments, analyzers, test kits andrelated supplies and power generation equipment (including recorders and powerquality analyzers).

 

The Company’s operationsare located almost entirely within, and revenues are almost entirely generatedfrom Hong Kong and the PRC.  The Companyderived approximately 26% and approximately 74% of its revenue from Hong Kongand the PRC, respectively in Fiscal 2003. Net income increased approximately US$31,000, or 6%, in Fiscal 2003 toUS$531,000, compared to US$500,000 in Fiscal 2002, primarily due to diversificationinto engineering and manufacturing and strengthening of the Company’sdistribution and retail network and contributions from its engineeringaffiliates, Pact.

 

The Company continued toexpand its trading business by expanding its regional sales efforts in the PRCand using the retail shops and online ordering in the PRC to sell the Company’sproducts.  The Company manufactures andsells its own developed products such as Infrared Photometric Oil Analyzer,turbidity instruments and spectrophotometers and assembles and sells the TotalOrganic Analyzer of O.I. Corporation. The Company intends to assemble and/or manufacture additional productsin the future and seek opportunities with its suppliers to assemble theirproducts, secure manufacturing and/or assembly facilities and seek anothermanufacturer of analytical instruments to acquire.

 

The Company continued toaccept more engineering projects in water and wastewater industries and also inpower generation industries.  TheCompany intends to seek the acquisition of an engineering company and/or asystem integrator or enter into a joint venture with a third party to work inconnection with its process control and engineering department.

 

***Item 5A.******                              OperatingResults***

 

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

 

The Company’s operationsare located almost entirely within, and revenues are almost entirely generatedfrom Hong Kong and the PRC. Setforth below are the approximate percentage of the Company’s sales made tocustomers in the PRC and Hong Kong for the fiscal years indicated:

 
| **Fiscal Year** |   | **PRC** |   | **Hong Kong** |   |
|-----------------|--------|---------|--------|---------------|--------|
| 2001            |   |    | 72     | %             | 26     | % |
| 2002            |   |    | 71     | %             | 29     | % |
| 2003            |   |    | 74     | %             | 26     | % |

 

Sales to customerssituated in Macau and elsewhere in Fiscal 2001 through Fiscal 2003 werenominal. This makes the Company particularly susceptible to changes in thepolitical and economic climate of either Hong Kong or the PRC.

 

**Hong Kong.** HongKong has been one of the prime centers for commercial activity and economicdevelopment recently in Southeast Asia. On July 1, 1997, sovereignty overHong Kong was transferred from the United Kingdom to the PRC. As provided inthe Sino-British Joint Declaration and the Basic Law, the Hong Kong SAR isprovided a high degree of autonomy except in foreign and defense affairs. TheBasic Law provides that the Hong Kong SAR is to have its own legislature, legaland judicial system and full economic autonomy for 50 years after the transferof sovereignty. Based on the current political conditions and the Company’sunderstanding of the Basic Law, the Company does not believe that the transferof sovereignty over Hong Kong has had

 

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or will have an adverseimpact on its financial and operating environment. Although the Chinesegovernment has pledged to maintain the economic and political autonomy of HongKong over its internal affairs, there is no assurance that such pledge willcontinue to be honored if there are changes in the Chinese political oreconomic climate. See Item 3D. “Key Information – Risk Factors.”

 

**PRC.** The PRC hasbeen a socialist state since 1949. For more than forty years, the PRC’s economyhas been, and presently continues to be, a socialist economy operating undergovernment controls promulgated under various one-, five- and ten-year plans(collectively, “State Plans”) adopted by central Chinese government authoritiesand implemented, to a large extent, by provincial and local authorities whichmay set production and development targets. However, since approximately theearly 1980s, the PRC’s national government has undertaken certain reforms topermit greater provincial and local economic autonomy and private economicactivities. Any change in political or economic conditions may substantiallyadversely affect these reform initiatives and, in turn, the Company. See Item3D. “Key Information – Risk Factors.”

 

**Results from Operations**

 

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

 

The following tablepresents selected statement of operations data expressed in thousands of US$and as a percentage of revenue for the Company’s Fiscal 2003, Fiscal 2002,Fiscal 2001, Fiscal 2000 and Fiscal 1999 years.

 
|                                         |   | **Year Ended  December 31,** |   |
|----------------------------------------------|--------|-----------------------------------|--------|
|                                         |   | **2003**                          |   | **2002** |   | **2001** |   |
| Revenue                                      |   | 27,442                            |   | 100 | % | 23,497 |   | 100.0 | % | 19,685 |   | 100.0 | % |
| Cost  of revenue                             |   | 22,805                            |   | 83.1 | % | 18,735 |   | 79.7 | % | 15,396 |   | 78.2 | % |
| Gross  Profit                                |   | 4,637                             |   | 16.9 | % | 4,762 |   | 20.3 | % | 4,289 |   | 21.8 | % |
| Selling  and administrative expenses         |   | 4,108                             |   | 15.0 | % | 4,173 |   | 17.8 | % | 3,734 |   | 19.0 | % |
| Income  before income taxes                  |   | 548                               |   | 2.0 | % | 616 |   | 2.6 | % | 747 |   | 3.8 | % |
| Income  taxes                                |   | 108                               |   | .4 | % | 123 |   | 0.5 | % | 163 |   | 0.8 | % |
| Share  of equity in net income of affiliates |   | 91                                |   | .3 | % | 7 |   | 0.0 | % | 0 |   | 0.0 | % |
| Net  income                                  |   | 531                               |   | 1.9 | % | 500 |   | 2.1 | % | 584 |   | 3.0 | % |

 

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|                                         |   | **Year Ended  December 31,** |   |
|----------------------------------------------|--------|-----------------------------------|--------|
|                                         |   | **2000**                          |   | **1999** |   |
| Revenue                                      |   | 15,010                            |   | 100.0 | % | 13,107 |   | 100.0 | % |
| Cost  of revenue                             |   | 11,467                            |   | 76.4 | % | 9,896 |   | 75.5 | % |
| Gross  Profit                                |   | 3,453                             |   | 23.6 | % | 3,211 |   | 24.5 | % |
| Selling  and administrative expenses         |   | 3,301                             |   | 22.0 | % | 2,946 |   | 22.5 | % |
| Income  before income taxes                  |   | 452                               |   | 3.0 | % | 417 |   | 3.2 | % |
| Income  taxes                                |   | 94                                |   | 0.6 | % | 78 |   | 0.6 | % |
| Share  of equity in net income of affiliates |   | 0                                 |   | 0.0 | % | 0 |   | 0.0 | % |
| Net  income                                  |   | 358                               |   | 2.4 | % | 339 |   | 2.6 | % |

 

**Resultsof Operations**

 

**Fiscal Year Ended December 31, 2003 Compared to FiscalYear Ended December 31, 2002**

 

*Revenue; Gross Profit and Cost ofRevenue.* Revenue increased by approximately US$3,945,000 or16.8% to approximately US$27,442,000 in Fiscal 2003 from approximatelyUS$23,497,000 in Fiscal 2002. The increase was primarily due to thediversification into engineering and manufacturing and strengthening of theCompany’s distribution and retail network and increase in PRC import business.

 

Gross profits decreasedby approximately US$125,000 or 2.6% to approximately US$4,637,000 for Fiscal2003 as compared to approximately US$4,762,000 for Fiscal 2002. During Fiscal2003, the Company’s cost of revenue was approximately US$22,805,000, or 83.1%of revenue, in comparison to approximately US$18,735,000, or 79.7% of revenuefor Fiscal 2002. Cost of revenue expressed as a percentage of revenue increasedby 3.4% in Fiscal 2003 as compared with Fiscal 2002. The gross profit marginpercentage decrease attributed to the fact that the Company had reduced theselling prices of some products to respond to increased competition and soldmore low tech products through its retail shops, and the Company had anincrease in import business and sales of non-exclusive distributed products ofapproximately US$2,500,000, which with a lower profit margin, during Fiscal2003. The weakening of US$ against other foreign currencies also had an adverseimpact on the gross margin percentage as the Company's sales were mainlydenominated in US$, HK$ and RMB while some of the Company's cost of revenuewere denominated in Japanese Yen, the Euro and Sterling Pound.

 

*Selling and Administrative Expenses.*Selling and administrative expenses were approximately US$4,108,000 in Fiscal2003, a decrease of approximately US$65,000 or 1.6%

 

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from approximatelyUS$4,173,000 in Fiscal 2002. The decrease was primarily due to the decrease inprovisions for the recoverability of advances to finance the operations of PRCretail shops.

 

*Equityin Profit of affiliates.* Equity in profit of affiliates increasedby approximately US$84,000 or 1200% to approximately US$91,000 in Fiscal 2003from approximately US$7,000 in Fiscal 2002. The increase in equity in profit of affiliates was principally due toincrease in net profits of Pact from approximately US$25,000 in Fiscal 2002 toapproximately US$304,000 in Fiscal 2003.

 

*Interest Income.*Net interest income decreased by approximately US$5,000 or 27.8% toapproximately US$13,000 in Fiscal 2003 from approximately US$18,000 for Fiscal2002. Interest income decreased by approximately US$9,000 or 40.9% toapproximately US$13,000 in Fiscal 2003 from approximately US$22,000 in Fiscal2002. The decrease was primarily due to the general decline in the interestrates for bank deposits during the year. Interest expense decreased byapproximately US$4,000 or 100% to approximately US$0 in Fiscal 2003 fromapproximately US$4,000 for Fiscal 2002. The decrease was because the Companyhas utilized the credit facilities under its banking arrangements during Fiscal2002 but not during Fiscal 2003.

 

*Other Income.*Other income decreased by approximately US$3,000 or 33.3% to approximatelyUS$6,000 in Fiscal 2003 from approximately US$9,000 in Fiscal 2002. Thedecrease in other income was principally due to decrease in rental income ofUS$19,000 which was offset by a decrease in exchange loss of approximatelyUS$18,000.

 

*Income Taxes.*Taxes decreased by US$15,000 to approximately US$108,000 in Fiscal 2003 fromapproximately US$123,000 in Fiscal 2002. This decrease was primarily the resultof reduced taxable profits, the utilization of tax losses brought forward and adecrease of valuation allowances.

* *

*Net Income.* Incomefrom continuing operations increased by approximately US$31,000 or 6% toapproximately US$531,000 in Fiscal 2003 from approximately US$500,000 in Fiscal2002. Although revenues increased, sales price reductions of some non-exclusiveproducts and an increase in sales of low margin products resulted in a decreasein our gross profit. However, the Company managed to minimize selling expensesand offset the lowered sale prices of non-exclusive products and sales of lowermargin production by its share of the profits of (approximately US$91,000) fromPact****andachieved an increase in net income for Fiscal 2003.

 

**Fiscal Year Ended December 31, 2002 Compared to FiscalYear Ended 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 Fiscal 2001. The increase was primarily due to thediversification and strengthening of the Company’s distribution network andincrease in PRC import business.

 

Gross profits increasedby approximately US$473,000 or 11.0% to approximately US$4,762,000 for Fiscal2002 as compared to approximately US$4,289,000 for Fiscal 2001. This increasewas attributable to the revenue increase in Fiscal 2002. During Fiscal 2002,the Company’s cost of revenue was approximately US$18,735,000, or 79.7% ofrevenue, in comparison to approximately US$15,396,000, or 78.2% of revenue forFiscal 2001. Cost of revenue expressed as a percentage of revenue increased by1.5% in Fiscal 2002 as compared with Fiscal 2001. The gross profit marginpercentage decrease was attributed to the fact that the Company had reduced theselling prices of some products by approximately 5% to 11% to compete withother companies, including other non-exclusive distributors of the Company’sprincipal vendors, and the Company had an increase in import business ofapproximately US$2,800,000, which have a lower profit margin, during Fiscal2002.

 

*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 general

 

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increase in expensesdirectly related to the increase in revenues which included a larger salesforce, and an increase in expenses for the expansion of the manufacturingoperations. However, measured as a percentage of revenue, selling andadministrative expenses actually declined by 1.2% from 19% in Fiscal 2001 to17.8% 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$53,000 for Fiscal 2002 as a result of the weakening of US$compared with the exchange gain of US$80,000 for Fiscal 2001.

 

*Income Taxes.*Taxes decreased by US$40,000 to approximately US$123,000 in Fiscal 2002 fromapproximately US$163,000 in Fiscal 2001. The decrease was primarily due to theutilization of an accumulated tax loss brought forward. The decrease ineffective tax rate from 21.8% in Fiscal 2001 to 19.7% in Fiscal 2002 wasprimarily 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.

 

 

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

 

The Company has primarilyused its funds to finance accounts receivable, inventories, and capitalexpenditures including purchases of property, office furniture and equipment,computers and calibration equipment. The Company has historically met its cashrequirements from cash flows from operations, short-term borrowings, bank linesof credit, and long-term mortgage bank loans. The Company expects, but can makeno assurances that its present cash reserves, cash from operations and existingavailable bank credit facilities would be sufficient to fund its future capitalexpenditure requirements. Working capital at the end of Fiscal 2003 and Fiscal2002 was approximately US$4,914,000 and US$4,363,000, respectively.

 

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The Company generated netcash of approximately US$89,000 from operating activities on net income ofapproximately US$500,000 in Fiscal 2002. However, during Fiscal 2003, theCompany used approximately $347,000 in its operating activities from its netincome, using approximately $666,000 to fund bills receivable and fund anincrease in inventories, resulting from the increase in revenues and the needto meet a greater level of sales, respectively, than in Fiscal 2002. At the endof Fiscal 2003 and Fiscal 2002, the Company’s accounts receivable wereapproximately US$4,283,000 and US$4,376,000, respectively.

 

The Company usedapproximately US$73,000 and US$416,000 for investing activities in Fiscal 2003and Fiscal 2002, respectively. The Company used approximately US$74,000 to purchasefacilities and equipment.

 

The Company used, US$0,approximately US$90,000 and US$317,000 in Fiscal 2003, Fiscal 2002 and Fiscal2001 for 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$4,321,000. The aforementioned available credit facilities were obtained onthe conditions that, among other things, the Company mortgage its properties assecurity for the credit facilities, not create a charge or lien on its otherassets in favor of third parties without such bank’s consent, and the Companymaintaining a certain level of net worth.

 

Cash decreased fromapproximately US$3,173,000 at the end of Fiscal 2002 to approximatelyUS$2,752,000 at the end of Fiscal 2003. The principal reasons for the decreasein cash were the increases in bills receivables of approximately US$666,000 anda decrease of accounts payable of approximately US$1,352,000. The Company plansto use cash on hand primarily to acquire a manufacturing plant and/orenvironmental engineering company in the PRC and to expand its manufacturingplant and environmental engineering business.

 

The Company’s netaccounts receivable decreased from approximately US$4,376,000 atDecember 31, 2002 to approximately US$4,283,000 at December 31, 2003.The decrease is attributed to increases of bills receivables, in the form of aletter of credit, of approximately US$666,000.

 

The Company’s inventoryincreased from approximately US$1,964,000 at the end of Fiscal 2002 toapproximately US$2,246,000 at the end of Fiscal 2003. The higher inventorylevel at the end of Fiscal 2003 was principally due to the need to maintainincreased inventory levels in the retails shops to meet their increased levelof sales.

 

The Company’s capitalexpenditures were approximately US$74,000 in Fiscal 2003. Capital expendituresduring Fiscal 2003 were incurred primarily in connection with the purchase ofoffice equipment, furniture and fixtures. The Company continues to seek targetsfor acquisition, such as facilities for assembly operations or engineeringcompanies. If such acquisitions are indeed made, the Company may expect toincur significantly larger capital expenditures, for which the Companypresently intends, but as to which no assurance can be

 

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made, to use existingcash reserves, cash from operations and available bank credit facilities tofund such capital expenditures.

 

*Forwardlooking - anticipated future resources and uses of cash.*

 

The Company hashistorically funded its working capital and capital expenditure needs fromoperations and available bank credit facilities, and expects to continuefunding its 2004 working capital requirements from operations and availablebank credit facilities.  The Company mayuse its funds to acquire other businesses, form strategic alliances with thirdparties, invest in product research and development, or expand its salesoffices and retail shops or, with third parties, seek to acquire new productsor businesses or form strategic alliances. 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 cash requirements.

 

**Inflation**

 

The annual rate ofinflation in the PRC has declined significantly in recent years. In calendaryears 2001, 2002 and 2003, the rates of inflation (deflation) were approximately0.7%, (0.8%) and 1.2%, respectively, in comparison to the preceding years,respectively. The Company believes this declining inflation rate has had apositive effect on its results from operations. The Company believes, althoughno assurance can be given, that credit restrictions will be gradually lifted,and that as a result Far East will be able to increase prices in the market forits products and thus realize increased profit margins.

 

**CriticalAccounting Policies**

 

*RevenueRecognition*

 

Pursuant to the revenuerecognition criteria set forth in Securities and Exchange Commission’s StaffAccounting Bulletin (“SAB”) No. 104: “Revenue Recognition”, the Companyrecognizes revenue when it is realized or realizable and earned. The Companyconsiders revenue realized or realizable and earned when it has persuasiveevidence of an arrangement, the product has been delivered, the sales price isfixed or determinable and collectibility is reasonably assured. For certainproducts where installation is necessary, revenue is recognized upon completionof installation.

 

*InventoryValuation*

 

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

 

*DeferredTaxes*

 

As part of the process ofpreparing its consolidated financial statements, the Company is required toestimate its income taxes and tax bases of assets and liabilities in each ofthe jurisdictions in which it operates. This process involves the Companyestimating its current tax exposure together with assessing temporarydifferences resulting from its differing treatment of items for tax andaccounting purposes. These differences result in deferred tax assets andliabilities, which are included in the Company’s consolidated balance sheet.The Company must then assess the likelihood that its deferred tax assets willbe recovered from future taxable income, and, to the extent the Companybelieves that recovery is more unlikely than likely, it must establish avaluation allowance. To the extent the Company establishes a valuationallowance or increases this allowance in a period, it must include an expensewithin the tax provision in the statement of operations.

 

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*New Statements of Financial AccountingStandards*

 

InMay 2003, the FASB issued SFAS No.150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity”. Thisstatement establishes standards for how an issuer classifies and measures inits 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 does not believe that thisinterpretation will have a material effect, if any, on the Company’s financialposition or results of operations.

 

InNovember 2002, the Emerging Issues Task Force issued EITF Issue No. 00-21“Accounting for Revenue Arrangements with Multiple Deliverables”, (“EITF00-21”) effective for arrangements entered into after June 15, 2003. EITF00-21 defines units of accounting for arrangements with multiple deliverablesresulting in revenue being allocated over the units of accounting for revenuerecognition purposes. The Company believes that the adoption of EITF 00-21 willnot have a material effect on the Company’s financial position or results ofoperations.

 

In January 2003, theFASB issued FASB Interpretation No. (“FIN”) 46 (Revised) “Consolidation ofVariable Interest Entities-an Interpretation of ARB No. 51” which was furtherrevised in December 2003. FIN 46 requires that certain variable interestentities (VIE) be consolidated by their primary beneficiary if the primarybeneficiary is subject to a majority of the risk of loss from the VIEactivities, or entitled to receive a majority of the VIEs’ residual returns, orboth. An entity is subject to FIN 46 and is considered to be a VIE if it has(1) equity that is insufficient to permit the entity to finance its activitieswithout additional subordinated financial support from other parties, or (2)equity investors that cannot make significant decisions about the entity’soperations, or that do not absorb the expected losses or receive the expectedreturns of the entity. FIN 46-R is effective immediately for all new VIE’screated or acquired after January 31, 2003. For VIE’s created or acquiredprior to February 1, 2003, the provisions of FIN 46 must be applied forthe first interim or annual period beginning after June 15, 2003.According to the requirements of FIN46 and FIN46-R, the Company has evaluatedits relationship with the seven retail ships established in the PRC. TheCompany is concluded to be the primary beneficiary of these retail shops.  The Company is currently assessing theimpact of this interpretation on its financial position and results ofoperations.  As of December 31, 2003,the Company’s maximum exposure to loss as a result of its involvement withthese shops is equal to the advances to these entities, net with allowances, ofapproximately US$261,000.

 

***Item 5C.******                              Researchand Development, Patents and Licenses***

 

During Fiscal 2003,Fiscal 2002 and Fiscal 2001, the Company expensed approximately US$12,000,US$10,000 and US$20,000, respectively, on the development of an InfraredPhotometric Oil Analyzer pursuant to its agreement with the Shanghai InstituteOptics Instrument. See Item 4B. “Business Overview.” It is anticipated that anadditional US$50,000 in research and development costs will be expended onsimilar projects and potential research and development projects for thedevelopment of on line water testing equipment during Fiscal 2004.

 

37

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***Item 5D.******                              TrendInformation***

 

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

 

***Item 5E.******                              OffBalance Sheet Arrangements***

 

Not applicable.

 

***Item 5F.******                              TabularDisclosure of Contractual Obligations***

 
| **Contractual  Obligations**        |   | **Total** |    | **Less than  1 Year** |   | **1-3 Years** |   | **4-5 Years** |   | **After  5 Years** |   |
|-------------------------------------|--------|-----------|---------|-----------------------|--------|---------------|--------|---------------|--------|--------------------|--------|
|                                |   |      |    |                  |   |          |   |          |   |               |   |
| Operating  Leases                   |   | US$       | 145,000 |                  | US$    | 108,000       |   | US$           | 37,000 |               | — |   | — |   |
|                                |   |      |    |                  |   |          |   |          |   |               |   |
| Total  Contractual Cash Obligations |   | US$       | 145,000 |                  | US$    | 108,000       |   | US$           | 37,000 |               | — |   | — |   |

 

**ITEM6.****                                  DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES**

 

***Item 6A.******                              Directorsand Senior Management***

 

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

 
| **Name**     |   | **Age** |   | **Position**                                                    |
|--------------|--------|---------|--------|-----------------------------------------------------------------|
|         |   |    |   |                                                            |
| T.C. Leung   |   | 60      |   | Chairman of the Board  of Directors and Chief Executive Officer |
|         |   |    |   |                                                            |
| Jerry Wong   |   | 45      |   | Director and Chief  Financial Officer                           |
|         |   |    |   |                                                            |
| Nancy Wong   |   | 55      |   | Director                                                        |
|         |   |    |   |                                                            |
| C.P. Kwan    |   | 45      |   | Director                                                        |
|         |   |    |   |                                                            |
| Alex Sham    |   | 40      |   | Director                                                        |
|         |   |    |   |                                                            |
| Y.K. Liang   |   | 74      |   | Director                                                        |
|         |   |    |   |                                                            |
| Ho Choi Chiu |   | 72      |   | Director                                                        |
|         |   |    |   |                                                            |
| Wang Xu Hong |   | 37      |   | Director                                                        |

 

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

 

**T.C. Leung** has beenChief Executive Officer and Chairman of the Board of Directors of both theCompany and Far East since their inception. Before establishing Far East,Mr. Leung was an engineer for English Electric in England, from 1965 to1968, and Lockheed Aircraft in Hong Kong, from 1968 to 1970. Mr. Leungalso served as managing director of Eurotherm (Far East) Ltd. between 1971 and1992. Since 1988, Mr. Leung has also served as managing director ofEurotherm Hong Kong. Mr. Leung received a Masters degree in BusinessAdministration from the University of East Asia, Macau in 1986 and is aChartered Engineer, a title bestowed upon a member of the Council ofEngineering Institutions in the United Kingdom.

 

**Jerry Wong** hasserved as Director and Chief Financial Officer of Far East since 1994 and hasbeen with Far East since 1987. Mr. Wong has been the Chief FinancialOfficer and a Director of the Company since its inception. From 1985 until1987, Mr. Wong worked for MUA Agencies Ltd., a subsidiary of a Hong Kongpublicly listed company engaged in the insurance business, as deputy manager ofits secretarial, legal and accounting department. From 1981 until 1985,Mr. Wong served as a senior accountant in Price Waterhouse-Hong Kong. Heis a Fellow of the Association of Chartered Certified Accountants in the UnitedKingdom and a Certified Public Accountant in Hong Kong.

 

**Nancy Wong** has beena Director of the Company since its inception and a Director of Far East, andits Personnel Manager, since 1994. Ms. Wong has been with Far East since1971. Ms. Wong is also Far East’s Chief Representative in China. Duringthe last several years, Ms. Wong has played a pivotal role in Far East’sbusiness expansion in China. Ms. Wong received a Bachelor of Sciencedegree in Business Administration from the University of East Asia, Macau in1989.

 

**C.P. Kwan** joinedFar East in 1984 and has served as a Director and Manager of its ProcessEquipment Department since 1991. Mr. Kwan has been a Director of theCompany since its inception. Before joining Far East, he was employed by HavenAutomation (H.K.) Ltd., a company involved in the water treatment and processcontrol business between 1981 and 1984.

 

**Alex Sham** has beena Director of the Company since its inception. Mr. Sham joined Far East in1988 and has been its Sales Manager since 1993 and became a Director of FarEast in 1996. Mr. Sham received a Bachelor of Science in Applied Chemistryfrom Hong Kong Baptist University in 1990. Prior to joining Far East, Mr. Shamwas employed by the Environmental Protection Department of the Hong KongGovernment from 1986 until 1988.

 

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

 

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**Ho Choi Chiu** hasbeen a director of the Company since October 2000. Mr. Ho is a certifiedpublic accountant, and senior partner in the accounting firm of C.C. Ho &Company, a firm that he has been associated with for more than the past five years.

 

**Wang Xu Hong** hasbeen a director of the Company since August 2002. Mr. Wang is the EastChina sales manager of Euro Tech (Far East) Limited, a wholly-owned subsidiaryof the Company, since mid 1994. From mid 1997 until joining Euro Tech, he wasemployed as a Research Associate and Lecturer at the Analysis and ResearchCenter of Shanghai’s Tongji University. Wang Xu Hong received Bachelor’s andMaster’s degrees in Science from Fudan University in 1984 and 1988,respectively.

 

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

 

None of the Company’sdirectors, officers or beneficial owners of ten percent or more of its CommonStock are required to file any reports pursuant to Section 16(a) of theSecurities Exchange Act of 1934, as amended (the “1934 Act”).

 

The Company had two meetingsof its Board of Directors during Fiscal 2003.

 

The Company has not hadany directors resign or decline to stand for re-election at any time during orsince December 31, 1998. However, at the Company’s 2000 annual meeting,the Company’s shareholders did not re-elect one director.

 

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

 

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

 

The following table setsforth certain summary information with respect to the compensation paid by theCompany and Far East for services rendered in all capacities to the Company andFar East during Fiscal 2003, Fiscal 2002 and Fiscal 2001 to the Chairman of theBoard and Chief Executive Officer.

 

**Summary Compensation Table**

 
| **Name and Principal Position**            |   | **Year** |   | **Salary  (US$)** |   | **Bonus  (US$)** |
|--------------------------------------------|--------|----------|--------|-------------------|--------|------------------|
|                                       |   |     |   |              |   |             |
| T.C. Leung,  Chairman of the Board of |   | 2003     |   | 100,000           |   | 18,449           |
| Directors  and Chief Executive Officer     |   | 2002     |   | 100,000           |   | 45,000           |
|                                       |   | 2001     |   | 100,000           |   | 61,000           |

 

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

 

**Pension Plan.****Prior to December 1, 2000, the Companyhad only 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.

 

Withthe introduction of the Mandatory Provident Fund Scheme, a defined contributionscheme managed by an independent trustee on December 1, 2000, each of theCompany and its employees who joined the Company subsequently makes monthlycontributions to the scheme at 5% of the employee’s cash income as definedunder the Mandatory Provident Fund legislation. 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 any limitation.The Company and its employees made their first contributions inDecember 2000.

 

Asstipulated by the rules and regulations in the PRC, the Company contributes tostate-sponsored retirement plans for its employees in Mainland China. TheCompany contributes approximately 7% of the basic salaries of its employees,and has no further obligations for the actual payment of pension orpost-retirement benefits beyond the annual contributions. The state-sponsoredretirement plans are responsible for the entire pension obligations payable toretired employees.

 

Duringthe years ended December 31, 2003, 2002 and 2001, the aggregate contributionsof the Company to the aforementioned pension plans and retirement benefitschemes were approximately US$137,000, US$131,000 and US$135,000, respectively.

 

**Management Option Plan.****TheCompany has authorized the issuance of Options to purchase up to an aggregateof 3,057,600 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 price andthe 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.

 

41

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In the event of anycapital reorganization, certain reclassifications of the Ordinary Shares, anyconsolidation or merger involving the Company (other than (i) a consolidationor merger which does not result in any reclassification or change in theoutstanding Ordinary Shares, or (ii) sale of the properties and assets of theCompany, 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 below shows, asto each of the executive officers and directors of the Company and as to allexecutive officers and directors of the Company as a group, the followinginformation with respect to Management Options: (i) the aggregate amounts ofOrdinary Shares subject to Management Options; and (ii) the per share exerciseprice for the Management Options granted to these individuals.

 

Each of the followingpersons also received options under the Company’s 2000 and 2002 Officers andDirectors Plans.

 
| **Name of Executive  Officers and Directors**                |   | **Shares  Subject  To Management Options** |   | **Per Share  Exercise Price** |   |
|--------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------|--------|
|                                                         |   |                                       |   | **(US$)**                     |   |
|                                                         |   |                                       |   |                          |   |
| T.C.  Leung                                                  |   | 1,638,000                                  |   | 2.5183                        |   |
|                                                         |   | 764,400                                    |   | 1.8315                        |   |
|                                                         |   |                                       |   |                          |   |
| Alex  Sham                                                   |   | 83,629                                     |   | 2.5183                        |   |
|                                                         |   | 43,680                                     |   | 1.8315                        |   |
|                                                         |   |                                       |   |                          |   |
| Jerry  Wong                                                  |   | 72,709                                     |   | 2.5183                        |   |
|                                                         |   | 32,760                                     |   | 1.8315                        |   |
|                                                         |   |                                       |   |                          |   |
| Nancy  Wong                                                  |   | 61,880                                     |   | 2.5183                        |   |
|                                                         |   | 16,380                                     |   | 1.8315                        |   |
|                                                         |   |                                       |   |                          |   |
| C.P.  Kwan                                                   |   | 49,140                                     |   | 2.5183                        |   |
|                                                         |   | 16,380                                     |   | 1.8315                        |   |
|                                                         |   |                                       |   |                          |   |
| Wang  Xu Hong                                                |   | 14,196                                     |   | 2.5183                        |   |
|                                                         |   |                                       |   |                          |   |
| All  Executive Officers and Directors as a group (8 persons) |   | 2,793,154                                  |   | 1.8315 – 2.5183          | (1)    |

 

----

(1)          Pricerange.

 

42

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Other officers and/oremployees of the Company have been or will be granted management options topurchase an aggregate of 228,774 Management Options, all of which will be exercisableat US$2.5183 per share.

 

As of December 31,2003, no Management Options had been exercised. At that date, 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”.

 

461,720 and 1,091,440shares are authorized for issuance under the Employees Plan and the OfficersPlans, respectively.

 

The Board of Directors ora committee (the “Committee”) appointed by the Board of Directors administersthe Plans. The Board of Directors or the Committee has the authority tointerpret the Plans, prescribe, amend and rescind rules and regulationsrelating to them, determine the terms and provisions of options granted underthe Plans (which need not be identical), and make other determinations as itdeems necessary and advisable for the administration of the Plans. The Board ofDirectors or the Committee also has the authority to delegate decisions withrespect to Options granted to key employees under the Employees Plan who arenot elected officers or directors of the Company or its subsidiaries and todelegate decisions with respect to key employees to the Chief ExecutiveOfficer.

 

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

 

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

 

43

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

 

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

 

The purchase price pershare of the Ordinary Shares to be paid upon the exercise of the option must beat least 100% of the fair market value of an Ordinary Shares on the date onwhich the option was granted. Under the Plans, if the Ordinary Shares areprincipally traded on a national securities exchange or the Nasdaq 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 valueof the Ordinary Shares on the date of grant will be determined in good faith bythe Committee or the Board of Directors, as the case may be.

 

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

 

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

 

Payment of Exercise Pricefor Options. Under the Plans, payment for shares purchasedupon exercise of an option may be made by any of the following methods, subjectto certain requirements: (1) in cash, paid by either the optionholder or abroker to whom the optionee has tendered the option; (2) in Ordinary Sharesvalued at the fair market value of such shares on the date of exercise,provided that such shares were held by the optionholder for not less than sixmonths prior to the date of exercise of the option; (3) by any other medium ofpayment 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 optionmay not be sold, assigned or otherwise transferred except to:

 

44

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

 

The Company indemnifiesthe members of any Committee and its delegates and the Chief Executive Officeragainst (1) reasonable expenses incurred in connection with the defense of anyaction, suit or proceeding to which they may be a party by reason of any actiontaken or failure to act in connection with the Plans, and (2) all amounts paidby them in settlement of or satisfaction of a judgment entered in any suchaction, suit or proceeding, except in cases where such a person is adjudgedliable for gross negligence or gross misconduct in the performance of his orher duties.

 

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

 

During Fiscal 2000 and inJanuary 2002, the Company granted options to certain of its officers anddirectors pursuant to the 2000 Officers and Directors Plan and, inNovember 2002, options were granted to certain of its officers anddirectors pursuant to the 2002 Officers and Directors Plan. 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, theaggregate amounts of Ordinary 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                                    |   | 378,000                                             | (1)        | 0.8786                        |       |
|                                           |   | 200,200                                             | (2)        | 0.8681                        |       |
|                                           |   | 137,200                                             | (2)        | 1.2286                        |       |
|                                           |   |                                                |       |                          |       |
| Alex  Sham                                     |   | 56,000                                              | (1)        | 0.8786                        |       |
|                                           |   | 21,840                                              | (2)        | 0.8681                        |       |
|                                           |   | 63,000                                              | (2)        | 1.2286                        |       |

 

45

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| **Names of Executive  Officers and Directors**   |   | **Shares Subject  To the Officers  Plans Options** |       | **Per Share  Exercise Price** |       |
|--------------------------------------------------|--------|----------------------------------------------------|------------|-------------------------------|------------|
|                                             |   |                                               | ** ** | **(US$)**                     | ** ** |
|                                             |   |                                               |       |                          |       |
| Jerry  Wong                                      |   | 42,000                                             | (1)        | 0.8786                        |       |
|                                             |   | 18,200                                             | (2)        | 0.8681                        |       |
|                                             |   | 35,000                                             | (2)        | 1.2286                        |       |
|                                             |   |                                               |       |                          |       |
| Nancy  Wong                                      |   | 28,000                                             | (1)        | 0.8786                        |       |
|                                             |   | 14,560                                             | (2)        | 0.8681                        |       |
|                                             |   | 15,400                                             | (2)        | 1.2286                        |       |
|                                             |   |                                               |       |                          |       |
| C.P.  Kwan                                       |   | 28,000                                             | (1)        | 0.8786                        |       |
|                                             |   | 10,920                                             | (2)        | 0.8681                        |       |
|                                             |   | 15,120                                             | (2)        | 1.2286                        |       |
|                                             |   |                                               |       |                          |       |
| Wang  Xu Hong                                    |   | 28,000                                             | (1)        | 0.8786                        |       |
|                                             |   | 7,280                                              | (3)        | 0.8681                        |       |
|                                             |   | 21,000                                             | (3)        | 1.2286                        |       |
|                                             |   |                                               |       |                          |       |
| All  executive officers and Directors as a group |   | 1,119,720                                          |       | 0.8681 – 1.2286          | (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.

 

The foregoing optionswill expire in August 2010.

 

Pursuant to its 2000Employees Plan, the Company has also granted options to 32 of itsnon-officer/director employees to purchase an aggregate of 265,720 of itsOrdinary Shares exercisable at a price of US$0.8681 per share for a ten yearterm expiring in February 2011.

 

Pursuant to its 2002Employees 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$1.1427 per share for a ten yearterm expiring in April 2012.

 

At December 31,2003, no options had been exercised.

 

The Company has set forthin this Report all required disclosure of additional compensation to itsexecutive officers and directors including personal benefits and securities orproperties paid or distributed which was not offered on the same terms to allfull time employees during Fiscal 2003.

 

46

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Changesin outstanding options under various plans mentioned above were as follows:

 
|                           |   | **As of  December 31,** |   |
|--------------------------------|--------|------------------------------|--------|
|                           |   | **2003**                     |   | **2002** |   | **2001** |   |
|                           |   | **Number of  options**       |   | **Weighted  average  exercise  price** |   | **Number of  options** |   | **Weighted  average  exercise  price** |   | **Number of  options** |   | **Weighted  average  exercise  price** |   |
|                           |   |                         |   | **US$** |   |   |   | **US$** |   |   |   | **US$** |   |
|                           |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding, beginning of year |   | 4,575,088                    |   | 1.87 |   | 3,535,350 |   | 2.12 |   | 3,535,350 |   | 2.12 |   |
| Granted                        |   | —                       |   | — |   | 1,087,240 |   | 1.03 |   | — |   | — |   |
| Cancelled                      |   | —                       |   | — |   | (47,502 | ) | (1.51 | ) | — |   | — |   |
|                           |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding, end of year       |   | 4,575,088                    |   | 1.87 |   | 4,575,088 |   | 1.87 |   | 3,535,350 |   | 2.12 |   |
|                           |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Exercisable, end of year       |   | 4,575,088                    |   | 1.87 |   | 4,001,928 |   | 2.01 |   | 3,535,350 |   | 2.12 |   |

 

Asof December 31, 2003, the options outstanding and exercisable had exerciseprices in the range of US$0.8681 to US$2.5183 and a weighted average unexpiredlife of approximately 4.7 years.

 

TheCompany accounts for stock-based compensation using the intrinsic value methodprescribed by APB Opinion No. 25, under which no compensation cost isrecognized as all stock options granted under the Management Options, the 2000Stock Options, the 2002 Employee Stock Option and the 2002 D&O StockOptions have exercise prices at or above the fair market value of theunderlying stock at the date of grant.

 

Proforma information regarding net income and earnings per share is required bySFAS No. 123, and has been determined as if the Company had accounted for itsemployee stock options under the fair value method of SFAS No. 123.  The weighted average fair values of stockoptions at date of grant of $2.34 per option for the year endedDecember 31,  2002, were estimatedusing the Black-Scholes option pricing model with the following assumptions.There were no options granted during the year ended December 31, 2003.

 
|                            |   | **2003** |   | **2002**  |   | **2001** |   |
|---------------------------------|--------|----------|--------|-----------|--------|----------|--------|
| Risk-free interest rate         |   | —   |   | 4.3       | %      | —   |   |
| Expected dividend yield         |   | —   |   | 0         | %      | —   |   |
| Expected option life            |   | —   |   | 5.7 years |   | —   |   |
| Expected stock price volatility |   | —   |   | 177       | %      | —   |   |

 

47

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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 realizable measure of the fair value of the stockoptions.

 

Hadcompensation expense for the Company’s stock-based compensation plan beenrecognized based on the fair value of the options on the grant date in accordancewith SFAS No. 123, the Company’s pro forma net income and earnings per commonshare would have been as follows:

 
|                                                                                 |   | **As of  December 31,**                                           |   |
|--------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|--------|
|                                                                                 |   | **2003**                                                               |   | **2002** |   | **2001** |   |
|                                                                                 |   | **US$**                                                                |   | **US$** |   | **US$** |   |
|                                                                                 |   | **(amounts  expressed in thousands, except share and per share data)** |   |
|                                                                                 |   |                                                                   |   |   |   |   |   |
| Net income as  reported                                                              |   | 531                                                                    |   | 500 |   | 584 |   |
| Less: Stock  compensation expense determined under the fair value method, net of tax |   | (332                                                                   | )      | (779 | ) | (259 | ) |
|                                                                                 |   |                                                                   |   |   |   |   |   |
| Pro forma net  income/(loss)                                                         |   | 199                                                                    |   | (279 | ) | 325 |   |
|                                                                                 |   |                                                                   |   |   |   |   |   |
| Income/(loss) per  share:                                                            |   |                                                                   |   |   |   |   |   |
|                                                                                 |   |                                                                   |   |   |   |   |   |
| Basic and diluted,  as reported                                                      |   | US$                                                                    | 0.12   |   | US$ | 0.11 |   | US$ | 0.13 |   |
|                                                                                 |   |                                                                   |   |   |   |   |   |
| Basic and diluted,  pro forma                                                        |   | US$                                                                    | 0.04   |   | US$ | (0.06 | ) | US$ | 0.07 |   |

 

***Item 6C.******                              BoardPractices***

 

The term of each of theCompany’s eight directors expires at the election and qualification of theirsuccessors at the next annual meeting of the Company’s shareholders,anticipated to be held in August of this year. All of the Company’s eightdirectors were elected at the Company’s last annual meeting of shareholders inAugust 2003.

 

TheBoard has a standing Audit Committee to assist the Board in carrying out itsduties. The Audit Committee has a written charter approved by the Board. Thechair of the Audit Committee determines the meeting agenda of the Audit Committee.The Audit Committee members receive materials in advance of Committee meetingsallowing them to prepare for the meeting.

 

DuringFiscal 2003, the Audit Committee met five (5) times being attended by allmembers.

 

48

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TheAudit Committee assists the Board in monitoring the Company’s financialaccounting, controls, planning and reporting. Among its duties, the AuditCommittee:

 

Ÿ                                          reviews the Company’s auditing, accounting andfinancial reporting process;

 

Ÿ                                          reviews the adequacy of the Company’s internalcontrols;

 

Ÿ                                          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;

 

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

 

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

 

Ÿ                                          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;

 

Ÿ                                          provide an open avenue of communication amongthe Company’s independent auditors, financial and senior management, theinternal audit function and the Board of Directors;

 

Ÿ                                          review and update the Company’s Code ofBusiness Conduct and Ethics and ensure that there is a system to enforce sameand that this Code complies with all applicable rules and regulations;

 

Ÿ                                          ensure that the Company’s management andauditors assess current financial reporting issues and practices; and

 

Ÿ                                          review and pre-approve both audit andnon-audit services to be provided by the Company’s auditors.

 

TheAudit Committee is currently composed of T.C. Leung, Y.K. Liang and Ho ChoiChiu. The Board has determined that the membership of the Audit Committee meetsthe independence requirements of the NASDAQ listing standards and theapplicable rules and regulations of the SEC.

 

49

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

 

The Company hasapproximately 125 full-time employees. At December 31, 2003, 2002 and 2001,staffing levels were approximately as follows:

 
|                       |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Marketing  and sales       |   | 62       |   | 54       |   | 44       |   |
| Administrative             |   | 40       |   | 36       |   | 30       |   |
| Technical                  |   | 23       |   | 20       |   | 18       |   |
| Total  full time employees |   | 125      |   | 110      |   | 92       |   |

 

The Company’s managementconsists of its officers and directors.

 

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

 

***Item 6E.******                              ShareOwnership***

 

With respect to the shareownership of the directors and senior management of the Company, reference ismade to Item 7. “Major Shareholders and Related Party Transactions.”

 

**ITEM7.****                                  MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

 

***Item 7A.******                              MajorShareholders***

 

The following table setsforth, as of June 1, 2004, certain information concerning beneficialownership of the Company’s Ordinary Shares with respect to (i) each personknown to the Company to own 5% or more of the outstanding Ordinary Shares, (ii)each director and executive officer of the Company, and (iii) all officers anddirectors of the Company as a group:

 
|                      |   | **Amount and  Nature of  Beneficial  Ownership****(3)** |   | **Approximate  Percentage  Of Ordinary  Shares Owned** |   |
|---------------------------|--------|---------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                      |   |                                                    |   |                                                   |   |
| T.C.  Leung(1)(2)         |   | 5,466,162                                               |   | 73.8                                                   | %      |
|                      |   |                                                    |   |                                                   |   |
| Pearl  Venture Ltd.(1)(2) |   | 2,055,716                                               |   | 47.9                                                   | %      |
|                      |   |                                                    |   |                                                   |   |
| Alex  Sham(3)             |   | 298,725                                                 |   | 6.6                                                    | %      |

 

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(1)                                  Theaddress for Mr. Leung is c/o Euro Tech (Far East) Ltd., 18/F Gee Chang HongCentre, 65 Wong Chuk Hang Road, Hong Kong. The address for Pearl is ColumbusCentre 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.

 

50

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|                                                                           |   | **Amount and  Nature of  Beneficial  Ownership****(3)** |   | **Approximate  Percentage  Of Ordinary  Shares Owned** |   |
|--------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                           |   |                                                    |   |                                                   |   |
| Jerry  Wong(3)                                                                 |   | 203,869                                                 |   | 4.5                                                    | %      |
|                                                                           |   |                                                    |   |                                                   |   |
| Nancy  Wong(3)                                                                 |   | 166,796                                                 |   | 3.8                                                    | %      |
|                                                                           |   |                                                    |   |                                                   |   |
| C.P.  Kwan(3)                                                                  |   | 257,472                                                 |   | 5.8                                                    | %      |
|                                                                           |   |                                                    |   |                                                   |   |
| Y.K.  Liang(3)                                                                 |   | 0                                                       |   | —                                                 |   |
|                                                                           |   |                                                    |   |                                                   |   |
| Wang  Xu Hong(3)                                                               |   | 70,476                                                  |   | 1.6                                                    | %      |
|                                                                           |   |                                                    |   |                                                   |   |
| Ho  Choi Chiu(3)                                                               |   | 0                                                       |   | —                                                 |   |
|                                                                           |   |                                                    |   |                                                   |   |
| Yeung  Kai Tai(4)                                                              |   | 228,186                                                 |   | 5.3                                                    | %      |
|                                                                           |   |                                                    |   |                                                   |   |
| All  Executive Officers And Directors of the Company as a group (8 persons)(3) |   | 6,463,500                                               |   | 78.8                                                   | %      |

 

***Item 7B.******                              RelatedParty Transactions***

 

All outstanding balanceswith related parties are unsecured, non-interest bearing and are repayable in2004. The related companies with which the Company has engaged in materialtransactions are Eurotherm and Armtison Limited (“Armtison”). During Fiscal2003, 2002 and 2001, the Company made sales to Eurotherm of approximatelyUS$43,000, US$33,000 and US$30,000, respectively. During Fiscal 2003, 2002 and2001, the Company made purchases from Armtison of approximately US$4,000,US$33,000, US$68,000, respectively and from Eurotherm of approximatelyUS$7,219,000, US$2,800,000 and US$2,114,000 respectively. Additionally, duringFiscal 2003, 2002 and 2001, the Company paid approximately US$33,000,US$45,000, and US$46,000, respectively to Armtison for office space rentals,and approximately US$29,000, US$27,000 and US$27,000 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

 

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(3)                                  Giveseffect to the exercise of Management Options and 2000 Officers and DirectorsPlan, 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)                                  Theaddress for Yeung Kai Tai is 37-37A Jordan Road, 4th Floor, DoublesetCommercial Centre, Kowloon, Hong Kong. The number of shares for Yeung Kai Tai is based upon his filings withthe SEC without further inquiry by the Company.

 

51

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office space usage andthe time cost of personnel used, respectively. At the end of Fiscal 2003, theCompany was obligated to Eurotherm for approximately US$1,330,000 for normaltrade indebtedness. This indebtedness is repayable on normal trading terms, isunsecured and does not bear interest. T.C. Leung, the Company’s Chairman of theBoard and Chief Executive Officer is also a director of Eurotherm. DuringFiscal 2004 and for the foreseeable future, the Company has continued andexpects 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 31,2003 and 2002, approximately US$261,000 and US$283,000, 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 2003 and Fiscal 2002,allowance for doubtful debt in respect of such advances of US$45,000 andUS$89,000, respectively, were made. The Company does not account for therelated sales to these retail ships until the inventories are sold to thirdparties.

 

***Item 7C.******                              Interestof Experts and Counsel***

 

Not applicable.

 

**ITEM 8.****                                  FINANCIALINFORMATION**

 

***Item 8A.******                              ConsolidatedStatements and Other Financial Information***

 

Item 8A.1                                             SeeItem 18.

 

Item 8A.2                                             SeeItem 18.

 

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 not aparty to any material legal proceedings.

 

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Item 8A.8                                             DividendPolicy.

 

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

 

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

 

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

 

**ITEM 9.****                                  THEOFFERING AND LISTING**

 

***Item 9A.******                              ListingDetails and 9.C Markets***

 

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

 

The high and low pricesfor the Ordinary Shares in the periods indicated are, as supplied by NASDAQ, asfollows:

 
| **Years Ended December 31,** |   | **Low** |   | **High** |   |
|-----------------------------------|--------|---------|--------|----------|--------|
|                              |   | **US$** |   | **US$**  |   |
| 1999                              |   |    | 0.2003 |     | 1.9231 |   |
| 2000                              |   |    | 0.3777 |     | 8.3791 |   |
| 2001                              |   |    | 0.4293 |     | 1.6857 |   |
| 2002                              |   |    | 0.5786 |     | 1.3707 |   |
| 2003                              |   |    | 0.6500 |     | 3.7143 |   |

 
| **Quarters Ended**       |   | **Low** |   | **High** |   |
|--------------------------|--------|---------|--------|----------|--------|
|                     |   | **US$** |   | **US$**  |   |
| March 31,  2002     |   | 0.7500  |   | 1.3214   |   |
| June 30,  2002      |   | 0.7357  |   | 1.2143   |   |
| September 30,  2002 |   | 0.8571  |   | 1.3707   |   |
| December 31,  2002  |   | 0.5786  |   | 1.0714   |   |
| March 31,  2003     |   | 0.6500  |   | 1.5714   |   |
| June 30,  2003      |   | 0.7571  |   | 1.2714   |   |
| September 30,  2003 |   | 0.7857  |   | 3.7143   |   |
| December 31,  2003  |   | 1.4000  |   | 2.1000   |   |
| March 31,  2003     |   | 1.4000  |   | 10.9900  |   |

 

53

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| **Period**                                     |   | **Low** |   | **High** |   |
|------------------------------------------------|--------|---------|--------|----------|--------|
|                                           |   | **US$** |   | **US$**  |   |
| From  April 1, 2004 to June 10, 2004 |   | 3.2500  |   | 8.1000   |   |

 
| **The Following Months** |   | **Low** |   | **High** |   |
|--------------------------|--------|---------|--------|----------|--------|
|                     |   | **US$** |   | **US$**  |   |
| January 2004        |   | 1.7800  |   | 2.3800   |   |
| February 2004       |   | 1.4000  |   | 2.2000   |   |
| March 2004          |   | 1.7000  |   | 10.9900  |   |
| April 2004          |   | 3.8500  |   | 8.1000   |   |
| May  2004                |   | 3.2500  |   | 4.5400   |   |

 

The Ordinary Shares wereheld by approximately 42 holders of record as of June 23, 2004. Based uponinformation received from broker-dealers, clearing firms and others, theCompany believes that it has approximately at least 400 beneficial shareholdersof its Ordinary Shares.

 

***Item 9B.******                              Planof Distribution***

 

Not Applicable.

 

***Item 9C.******                              SellingShareholders***

 

Not Applicable.

 

***Item 9D.******                              Dilution***

 

Not Applicable.

 

***Item 9E.******                              ExpensesOf The Issue***

 

Not Applicable.

 

54

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**ITEM 10.****                           ADDITIONALINFORMATION**

 

***Item 10A.******                       ShareCapital***

 

**Authorized Capital**.The authorized capital of the Company is US$250,000 comprised of 20,000,000Ordinary Shares and 5,000,000 shares of Preferred Stock. As of May 31,2004, there were 4,289,782 Ordinary Shares and no shares of Preferred Stock,issued and outstanding. All of the Company’s shares of capital stock have a parvalue of US$.01 per share.

 

Holders of the Company’sOrdinary Shares are entitled to one vote for each whole share on all matters tobe voted upon by shareholders, including the election of directors. Holders ofOrdinary Shares do not have cumulative voting rights in the election ofdirectors. All shares of Ordinary Shares are equal to each other with respectto liquidation and dividend rights. Holders of Ordinary Shares are entitled toreceive dividends if and when declared by the Company’s Board of Directors outof funds legally available under British Virgin Islands law. In the event ofthe liquidation of the Company, all assets available for distribution to theholders of Ordinary Shares are distributable among them according to theirrespective share holdings. 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 the Company’sMemorandum and Articles of Association and pursuant to the laws of the BritishVirgin Islands, the Company’s Memorandum and Articles of Association may beamended by a resolution of the Board of Directors without shareholder approval.This includes amendments to increase or reduce the authorized capital stock ofthe Company or to increase or reduce the par value of its shares. The abilityof the Company to amend its Memorandum and Articles of Association withoutshareholder approval could have the effect of delaying, deterring or preventinga change in control of the Company without any further action by theshareholders including but not limited to, a tender offer to purchase theCommon Stock at a premium over then current market prices.

 

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

 

55

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

 

***Item 10B.******                       Memorandumand Articles of Association***

 

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

 

**Share Register and VotingRestrictions.**  TheCompany maintains a share register at its registered office in the BVI. TheCompany’s registered number is 200960. The objects of the Company are to engagein any act or activity that is not prohibited under any law of the BVI. SeeRegulation 4(1) of the Articles. Under the Articles, the Company is notrequired to treat the holder of a registered share in the Company as ashareholder until that person’s name has been entered in the share register.The holders of Ordinary Shares have one vote for each Ordinary Share held ofrecord. The holders of Preferred Shares have such voting powers, full orlimited, or no voting powers and such restrictions as may be stated andexpressed in the resolution providing for the issuance of the Preferred Shares.

 

**Shareholders Meeting.**The directors of the Company may 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.

 

The inadvertent failureof the directors to give notice of a meeting to a shareholder, or the fact thata shareholder has not received notice, does not invalidate the meeting. Ashareholder may be represented at a meeting of shareholders by a proxy who mayspeak and vote on behalf of the shareholder.

 

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

 

56

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

 

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 meeting ofshareholders, the chairman of the board of directors shall preside as chairmanof the meeting.

 

The chairman may, withthe consent of the meeting, adjourn any meeting from time to time, and fromplace to place, but no business shall be transacted at any adjourned meetingother than the business left unfinished at the meeting from which theadjournment took place.

 

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

 

**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.

 

**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 any thirdparty.

 

57

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

 

**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 at theaddress shown in the share register and in the case of shareholders holdingsshares 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 shareholders, orunder the terms of any insolvency or liquidation laws in force in the BVI.Under BVI law the Company may merge with another company, including a parentcompany or subsidiary, incorporated in the BVI, or in a jurisdiction outside ofthe BVI where the laws of that jurisdiction permit the merger. A merger must beauthorized by the directors of the Company and approved by the shareholders.

 

58

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**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 reserved to the shareholders of the Company.

 

***Item 10C.******                       MaterialContracts***

 

During Fiscal 2003, theCompany’s contract with O.I. Corporation (“O.I.”) permitting the Company toassemble O.I.’s Total Organic Analyzer remained in effect. See Item 4B.“Business Overview – Product Assembly Operations.”

 

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

 

There are no exchangecontrol restrictions on payment of dividends on the Company’s Ordinary Sharesor on the conduct of the Company’s operations either in Hong Kong, where theCompany’s principal executive offices are located, or the British VirginIslands, where the Company is incorporated. There are no British Virgin Islandslaws which impose foreign exchange controls on the Company or that 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 government has established a unifiedexchange rate system and system of exchange controls to which the Company issubject.

 

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

 

The Company is exemptfrom taxation in the British Virgin Islands.

 

The Company’s subsidiariesorganized in Hong Kong, Far East, Euro Tech (China) Limited, and ChinaH2o.comLimited, pay the Hong Kong profits tax at a rate of 17.5% on their income forfinancial reporting purposes, after adjustments for income and expense itemswhich are not assessable or deductible for profits tax purposes. Hong Konglevies 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 with therelevant income tax laws and regulations applicable to foreign investmententerprises in the PRC, Shanghai Euro Tech Limited (“SET”), a subsidiary of theCompany, is exempt from 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. As ofDecember 31, 2003, SET is still exempted from the PRC enterprise income tax asit had an assessable loss of US$28,531 for the current year.

 

59

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The Company’s effectivetax rates for Fiscal 2003, Fiscal 2002 and Fiscal 2001 were 19.7%, 19.7% and21.8%, respectively.  Weighted averagestatutory tax rates of 20.1%, 15.7% and 16% were in effect for Fiscal 2003,Fiscal 2002 and Fiscal 2001, respectively. Principal adjustments to thisstatutory tax rate were valuation allowances of (0.8%), 2.1% and 4.9% duringFiscal 2003, Fiscal 2002 and Fiscal 2001, respectively.

 

Income taxes representcurrent Hong Kong profits tax applied at 16% for subsidiaries incorporated inHong Kong for the years ended December 31, 2002 and 2001. During 2003,Hong Kong enacted a change in the profits tax rate to 17.5% for 2003 and 2004.PRC Enterprise Income Tax applied at 15% for Euro Tech Trading (Shanghai)Limited, a subsidiary incorporated in the PRC, for the year endedDecember 31, 2003. Accumulated tax losses of Shanghai Euro Tech Limited,another subsidiary incorporated in the PRC, available to offset against futureprofit were US$145,395 and US$173,926, respectively as of December 31,2003 and 2002.

 

***Item 10F.******                       DividendsAnd Paying Agents***

 

Not applicable.

 

***Item 10G.******                       StatementBy Experts***

 

Not applicable.

 

***Item 10H.******                      Documents onDisplay***

 

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

 

***Item 10I.******                           SubsidiaryInformation***

 

Not applicable.

 

**ITEM11.****                           QUANTITATIVEAND QUALIFICATION DISCLOSURES ABOUT MARKET RISK**

 

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

 

*Foreign Currency Risks*

 

The Company is exposed torisk from changing foreign currency exchange rates. The Company’s sales aredenominated either in HK dollar or RMB. The majority of the Company’s expensesand cost of revenue are denominated in HK dollars, followed by RMB, U.Sdollars, Japanese yen and the Euro. The Company is subject to a variety ofrisks associated with changes among the relative value of the U.S. dollar, HKdollar,  RMB,

 

60

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Japanese yen and theEuro. The Company does not currently hedge its foreign exchange positions. Anymaterial increase in the value of the HK dollar, RMB, Japanese yen and the Eurorelative to the U.S. dollar would increase the Company’s expenses and cost ofrevenue and therefore would have a material adverse effect on the Company’sbusiness, financial condition and results of operations.

 

*Inflation*

 

Although the Companycannot accurately determine the precise effect of inflation on its operations,it does not believe inflation has had a material effect on sales or results ofoperations.

 

The Company is currentlynot exposed to material future earnings or cash flow exposures from changes ininterest rates on debt obligations as the Company had no bank indebtedness inFiscal 2003. The Company does not currently anticipate entering into interestrate swaps and/or similar instruments.

 

**ITEM12.****                           DESCRIPTIONOF SECURITIES OTHER THAN EQUITY SECURITIES**

 

Not applicable

 

61

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**PART II**

 

**ITEM13.****                           DEFAULTS,DIVIDENDS, ARREARAGES AND DELINQUENCIES**

 

None.

 

**ITEM14.****                           MATERIALMODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS**

 

Not Applicable.

 

**ITEM 15.****                           CONTROLSAND PROCEDURES**

 

(a)                                  Evaluation of Disclosure Controls andProcedures

 

OurChief Executive Officer and Chief Financial Officer have evaluated theeffectiveness of our disclosure controls and procedures, as such term isdefined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act, as of a datewithin 90 days prior to the filing date of this quarterly report (the “EvaluationDate”). Based on such evaluation, such officers have concluded that, as of theEvaluation Date, our disclosure controls and procedures are effective inrelating to us, including our consolidated subsidiaries, that is required to beincluded in our reports filed or submitted under the Exchange Act.

 

(b)                                 Changes in Internal Controls

 

No significant changes inour internal controls or in other factors that could significantly affect thesecontrols subsequent to the date of the evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses, weremade as a result of the evaluation.

 

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

 

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

 

The Committee includestwo non-employee directors who meet the independence and financial expertrequirements of the NASDAQ listing standards and the rules and regulations ofU.S. Securities and Exchange Commission.

 

***Item 16B.******                       Code OfEthics***

 

Our board of directorshas adopted a code of business conduct and ethics that applies to ourdirectors, officers and employees, including certain provisions thatspecifically apply to our chief executive officer, chief financial officer andany other persons who perform similar functions for us.  The Company agrees to undertake to provideto any person without charge, a

 

62

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copy of our code ofbusiness conduct and ethics within ten working days after we receive suchperson’s written request.

 

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

 

The following table setsforth the aggregate fees by categories specified below in connection withcertain professional services rendered by PricewaterhouseCoopers our principalexternal auditors. For the periods indicated.

 
|                   |   | **For the  Year Ended December, 31** |   |
|------------------------|--------|--------------------------------------|--------|
|                   |   | **2002**                             |   | **2003** |   |
| Audit  fees(4)         |   | US$                                  | 66,300 |   | US$ | 63,500 |   |
|                   |   |                                 |   |   |   |
| Audit-related  fees(5) |   | US$                                  | — |   | US$ | — |   |
|                   |   |                                 |   |   |   |
| Tax  fees(6)           |   | US$                                  | 3,800  |   | US$ | 3,800 |   |
|                   |   |                                 |   |   |   |
| All  other fees        |   | US$                                  | — |   | US$ | — |   |

 

Our AuditCommittee has adopted a pre-approval policy for the engagement of ourindependent accountant to perform permitted audit and non-audit services.  Under this policy, which is designed toassure that such engagements do not impair the independence of our auditors,the Audit Committee pre-approves annually a range of specific audit andnon-audit services in the categories of Audit Service, Audit-Related Services,Tax Services and other services that may be performed by our independentaccountants, and the maximum pre-approved fees that may be paid as compensationfor each pre-approved service in those categories.  Any proposed services exceeding the maximum pre-approved feesrequire specific approval by the Audit Committee.

 

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

 

In November of 2003,NASDAQ adopted amendments to its corporate governance rules.  For foreign private issuers, such as theCompany, full compliance with those rules is not required until July 31,2005 and disclosures are required to be made in the Company’s annual reports,to be filed for its fiscal year ending December 31, 2005 and forsubsequent years.

 

The Company is a“controlled Company” as defined in NASDAQ’s corporate governance rules as amajority of our shares are owned by a “control group” consisting of T.C. Leung,Pearl Venture Ltd. and Regent Earnings Limited, who have disclosed their“control group” status in their filings with the Commission.  So long as that “controlled company” statusremains in effect, the Company will be exempt from certain of NASDAQ corporategovernance rules that, including among other things, would require; (a) amajority of our directors be independent;

 

----

**Table ofContents**

(4)                                  “Auditfees” means the aggregate fees billed in each of the fiscal years listed forprofessional services rendered by our principal auditors for the audit of ourannual financial statements.

 

(5)                                  “Audit-relatedfees” means the aggregate fees billed in each of the fiscal years listed forassurance and related services by our principal auditors that are reasonablyrelated to the performance of the audit or review of our financial statementsand are not reported under “Audit fees.” Services comprising the fees disclosedunder the category of “Audit-related fees” involve principally the performanceof certain agreed upon procedures for the years ended December 31, 2002and 2003.

 

(6)                                  “Taxfees” means the aggregated fees billed in each of the years listed forprofessional services rendered by our principal auditors for tax compliance,tax advice and tax planning.

 

63

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(b) the compensation ofour chief executive officer be determined or recommended by independentdirectors; and (c) director nominations be determined or recommended byindependent directors.

 

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

 

64

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**PART III**

 

**ITEM 17.****                           FINANCIALSTATEMENTS**

 

Not applicable.

 

**ITEM 18.****                           FINANCIALSTATEMENTS**

 

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

 
| Index to consolidated  financial statements                     |         |
|-----------------------------------------------------------------|--------------|
|                                                            |         |
| Report  of Independent Auditors                                 | F-1 to F-2   |
|                                                            |         |
| Consolidated balance sheet                                      | F-3          |
|                                                            |         |
| Consolidated  income statements                                 | F-4          |
|                                                            |         |
| Consolidated  cash flow statements                              | F-5          |
|                                                            |         |
| Consolidated  statement of changes in shareholders’ equity | F-6          |
|                                                            |         |
| Notes  to the consolidated financial statements                 | F-7 to  F-20 |

 

**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) |
|            |   |                                                                           |
| 4.2             |   | 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)                      |

 

65

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| 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)                                                                                                                                             |
|   |   |                                                                                                                                                                  |
| 12.1   |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (8)                                                         |
|   |   |                                                                                                                                                                  |
| 12.2   |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (8)                                                         |
|   |   |                                                                                                                                                                  |
| 13.1   |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (8)  |
|   |   |                                                                                                                                                                  |
| 13.2   |   | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (8) |

 

----

(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.

(8)                                  Filedherewith.

 

66

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**EUROTECH HOLDINGS COMPANY LIMITED AND SUBSIDIARIES**

 

**AUDITEDCONSOLIDATED BALANCE SHEETS**

 

**AS OFDECEMBER 31, 2003 AND 2002 AND**

 

**CONSOLIDATEDSTATEMENTS OF INCOME AND COMPREHENSIVE INCOME,**

 

**CASHFLOWS AND CHANGES IN SHAREHOLDERS’ EQUITY**

 

**FOR THEYEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

 

**TOGETHERWITH INDEPENDENT AUDITORS’ REPORTS**

 

----

 

**REPORT OF INDEPENDENT AUDITORS**

**TO THE SHAREHOLDERS AND DIRECTORS OF EURO TECH HOLDINGSCOMPANY LIMITED**

 

In our opinion, theaccompanying consolidatedbalance sheets and the related consolidatedstatements of income and comprehensive income, of cash flows and of changes inshareholders’ equity present fairly, in all material respects, thefinancial position of Euro Tech Holdings Company Limited and its subsidiaries****asof December 31, 2003 and2002, and the results of their****operationsand their cash flows for each ofthe two years in the period ended December 31, 2003, 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 audits.  We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  These standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion. Theconsolidated financial statements of Euro Tech Holdings Company Limited andsubsidiaries for the year ended December 2001, 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** |   |
|--------------------------------|--------|

 

HongKong,

June 25,2004

 

F-1

----

 

**THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUEDBY**

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

 

**REPORTOF INDEPENDENT PUBLIC ACCOUNTANTS**

 

**TO THE SHAREHOLDERS AND DIRECTORS OF EURO TECH HOLDINGSCOMPANY LIMITED**

 

Wehave audited the accompanying consolidated balance sheets of EuroTechHoldings Company Limited (the “Company”), incorporated in the British VirginIslands, and subsidiaries (the “Group”) as of December 31, 2000* and2001*, and the related consolidated statements of income and comprehensiveincome, cash flows and changes in shareholders’ equity for the years endedDecember 31, 1999*, 2000* and 2001. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our auditsin accordance with generally accepted auditing standards in the United Statesof America.  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In opinion, theconsolidated financial statements referred to above present fairly, in allmaterial aspects, the consolidated financial position of the Group as ofDecember 31, 2000* and 2001*, and the results of its operations and cashflows for the years ended December 31, 1999*, 2000* and 2001 in conformitywith generally accepted accounting principles in the United States of America.

 

 

**ARTHURANDERSEN & CO**

Certified PublicAccountants

 

Hong Kong,

May 24, 2002

 

 

----

*                 The Company’sconsolidated balance sheets as of December 31, 2000 and 2001, consolidatedstatements of operations and comprehensive income, shareholders’ equity andcash flows for the years ended December 31, 1999 and 2000 are not includedin this report as they are not required.

 

F-2

----

 

**EUROTECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED BALANCE SHEETS**

**AS OFDECEMBER 31, 2003 AND 2002**

 
|                                                                                                                                             |   | **Note**   |   | **2003**                                    |   | **2002**         |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|---------------------------------------------|--------|------------------|--------|
|                                                                                                                                             |   |       |   | **US$’000**                            |   | **US$’000** |   |
|                                                                                                                                             |   |       |   |                                        |   |             |   |
|                                                                                                                                             |   |       |   | **(except  for shares and per share data)** |   |
| Assets                                                                                                                                           |   |       |   |                                        |   |             |   |
|                                                                                                                                             |   |       |   |                                        |   |             |   |
| Current  assets:                                                                                                                                 |   |       |   |                                        |   |             |   |
| Cash  and cash equivalents                                                                                                                       |   |       |   | 2,752                                       |   | 3,173            |   |
| Accounts  receivable, net                                                                                                                        |   | 5          |   | 4,283                                       |   | 4,376            |   |
| Bills  receivable                                                                                                                                |   |       |   | 1,068                                       |   | 402              |   |
| Prepayments  and other current assets                                                                                                            |   | 15         |   | 615                                         |   | 448              |   |
| Inventories,  net                                                                                                                                |   | 6          |   | 2,246                                       |   | 1,964            |   |
| Taxation  recoverable                                                                                                                            |   |       |   | 15                                          |   | —           |   |
| Amount  due from a related company                                                                                                               |   | 15         |   | —                                      |   | 2                |   |
| Total  current assets                                                                                                                            |   |       |   | 10,979                                      |   | 10,365           |   |
|                                                                                                                                             |   |       |   |                                        |   |             |   |
| Property,  plant and equipment, net                                                                                                              |   | 7 & 17 |   | 1,849                                       |   | 1,965            |   |
|                                                                                                                                             |   |       |   |                                        |   |             |   |
| Investments  in affiliates                                                                                                                       |   | 8          |   | 434                                         |   | 343              |   |
|                                                                                                                                             |   |       |   |                                        |   |             |   |
| Deferred  tax assets                                                                                                                             |   | 4          |   | 46                                          |   | 43               |   |
|                                                                                                                                             |   |       |   |                                        |   |             |   |
| Total  assets                                                                                                                                    |   |       |   | 13,308                                      |   | 12,716           |   |
|                                                                                                                                             |   |       |   |                                        |   |             |   |
| Liabilities  and shareholders’ equity                                                                                                       |   |       |   |                                        |   |             |   |
|                                                                                                                                             |   |       |   |                                        |   |             |   |
| Current  liabilities:                                                                                                                            |   |       |   |                                        |   |             |   |
| Accounts  payable                                                                                                                                |   |       |   | 3,178                                       |   | 4,530            |   |
| Bills  payable                                                                                                                                   |   |       |   | 356                                         |   | 147              |   |
| Due  to related companies                                                                                                                        |   | 15         |   | 1,330                                       |   | 666              |   |
| Other  payables and accrued expenses                                                                                                             |   | 9          |   | 1,173                                       |   | 624              |   |
| Taxation  payable                                                                                                                                |   |       |   | 28                                          |   | 35               |   |
| Total  current liabilities                                                                                                                       |   |       |   | 6,065                                       |   | 6,002            |   |
|                                                                                                                                             |   |       |   |                                        |   |             |   |
| Commitments  and contingencies                                                                                                                   |   | 16         |   | —                                      |   | —           |   |
|                                                                                                                                             |   |       |   |                                        |   |             |   |
| Shareholders’  equity:                                                                                                                      |   |       |   |                                        |   |             |   |
| Common  stock, par value $0.01 each, 20,000,000 (2002: 20,000,000) shares authorized;  4,516,883 (2002: 4,516,883) shares issued and outstanding |   | 10         |   | 45                                          |   | 32               |   |
| Additional  paid-in capital                                                                                                                      |   |       |   | 2,202                                       |   | 2,049            |   |
| Warrants                                                                                                                                         |   | 11         |   | —                                      |   | 166              |   |
| Treasury  stock, 227,101 (2002: 227,101) shares at cost                                                                                          |   | 12         |   | (237                                        | )      | (237             | )      |
| Accumulated  other comprehensive loss                                                                                                            |   |       |   | (26                                         | )      | (24              | )      |
| Retained  earnings                                                                                                                               |   |       |   | 5,259                                       |   | 4,728            |   |
| Total  shareholders’ equity                                                                                                                 |   |       |   | 7,243                                       |   | 6,714            |   |
|                                                                                                                                             |   |       |   |                                        |   |             |   |
| Total  liabilities and shareholders’ equity                                                                                                 |   |       |   | 13,308                                      |   | 12,716           |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-3

----

 

**EUROTECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME**

**FOR THEYEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

 
|                                                  |   | **Note** |   | **2003**                                    |   | **2002**         |   | **2001**         |   |
|-------------------------------------------------------|--------|----------|--------|---------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                  |   |     |   | **US$’000**                            |   | **US$’000** |   | **US$’000** |   |
|                                                  |   |     |   |                                        |   |             |   |             |   |
|                                                  |   |     |   | **(except  for shares and per share data)** |   |
|                                                  |   |     |   |                                        |   |             |   |             |   |
| Revenue                                               |   | 17       |   | 27,442                                      |   | 23,497           |   | 19,685           |   |
| Cost  of revenue                                      |   |     |   | (22,805                                     | )      | (18,735          | )      | (15,396          | )      |
| Gross  profit                                         |   |     |   | 4,637                                       |   | 4,762            |   | 4,289            |   |
| Selling  and administrative expenses                  |   |     |   | (4,108                                      | )      | (4,173           | )      | (3,734           | )      |
| Operating  income                                     |   |     |   | 529                                         |   | 589              |   | 555              |   |
| Interest  income                                      |   |     |   | 13                                          |   | 18               |   | 66               |   |
| Other  income, net                                    |   | 3        |   | 6                                           |   | 9                |   | 126              |   |
| Income  before income taxes                           |   |     |   | 548                                         |   | 616              |   | 747              |   |
|                                                  |   |     |   |                                        |   |             |   |             |   |
| Income  taxes                                         |   | 4        |   | (108                                        | )      | (123             | )      | (163             | )      |
|                                                  |   |     |   |                                        |   |             |   |             |   |
| Equity  in profit of affiliates, net of taxes         |   |     |   | 91                                          |   | 7                |   | —           |   |
| Net  income                                           |   |     |   | 531                                         |   | 500              |   | 584              |   |
| Foreign  currency translation adjustment              |   |     |   | (2                                          | )      | 8                |   | (35              | )      |
| Comprehensive  income                                 |   |     |   | 529                                         |   | 508              |   | 549              |   |
|                                                  |   |     |   |                                        |   |             |   |             |   |
| Net  income per common share                          |   |     |   |                                        |   |             |   |             |   |
| • Basic                                          |   |     |   | US$                                         | 0.12   |             | US$    | 0.11             |   | US$ | 0.13 |   |
|                                                  |   |     |   |                                        |   |             |   |             |   |
| • Diluted                                        |   |     |   | US$                                         | 0.12   |             | US$    | 0.11             |   | US$ | 0.13 |   |
| Weighted  average number of common shares outstanding |   |     |   |                                        |   |             |   |             |   |
| • Basic                                          |   |     |   | 4,516,883                                   |   | 4,516,883        |   | 4,516,883        |   |
|                                                  |   |     |   |                                        |   |             |   |             |   |
| • Diluted                                        |   |     |   | 4,516,883                                   |   | 4,516,883        |   | 4,516,883        |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-4

----

 

**EUROTECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

 
|                                                                                         |   | **2003**         |   | **2002**         |   | **2001**         |   |
|----------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                         |   | **US$’000** |   | **US$’000** |   | **US$’000** |   |
| Cash flows from operating activities:                                                        |   |             |   |             |   |             |   |
| Net income                                                                                   |   | 531              |   | 500              |   | 584              |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |   |             |   |             |   |             |   |
| Depreciation of property, plant and equipment                                                |   | 190              |   | 163              |   | 201              |   |
| Gain on disposal of property, plant and equipment                                            |   | (1               | )      | (3               | )      | —           |   |
| Equity  in profit of affiliates, net of taxes                                                |   | (91              | )      | (7               | )      | —           |   |
| (Increase) decrease in assets:                                                               |   |             |   |             |   |             |   |
| Accounts receivable, net                                                                     |   | 93               |   | (1,659           | )      | (220             | )      |
| Bills receivable                                                                             |   | (666             | )      | 267              |   | (475             | )      |
| Prepayments and other current assets                                                         |   | (153             | )      | (92              | )      | (147             | )      |
| Inventories, net                                                                             |   | (282             | )      | 39               |   | (1,058           | )      |
| Taxation recoverable                                                                         |   | (15              | )      | —           |   | —           |   |
| Amount due from a related company                                                            |   | 2                |   | (2               | )      | —           |   |
| Deferred tax assets                                                                          |   | (3               | )      | (43              | )      | —           |   |
| Increase (decrease) in liabilities:                                                          |   |             |   |             |   |             |   |
| Accounts payable                                                                             |   | (1,352           | )      | 1,172            |   | 1,371            |   |
| Bills payable                                                                                |   | 209              |   | 10               |   | (720             | )      |
| Due to related companies                                                                     |   | 664              |   | 326              |   | 85               |   |
| Other payables and accrued expenses                                                          |   | 534              |   | (526             | )      | 269              |   |
| Taxation payable                                                                             |   | (7               | )      | (63              | )      | 50               |   |
| Net cash (used in)/provided by operating  activities                                         |   | (347             | )      | 82               |   | (60              | )      |
| Cash flows from investing activities:                                                        |   |             |   |             |   |             |   |
| Sales proceeds on disposal of property, plant and  equipment                                 |   | 1                |   | —           |   | —           |   |
| Purchase of property, plant and equipment                                                    |   | (74              | )      | (81              | )      | —           |   |
| Investments in affiliates                                                                    |   | —           |   | (335             | )      | —           |   |
| Net cash used in investing activities                                                        |   | (73              | )      | (416             | )      | —           |   |
| Cash flows from financing activities:                                                        |   |             |   |             |   |             |   |
| Repayment of long-term bank loan                                                             |   | —           |   | (90              | )      | (96              | )      |
| Purchase of treasury stock                                                                   |   | —           |   | —           |   | (221             | )      |
| Net cash used in financing activities                                                        |   | —           |   | (90              | )      | (317             | )      |
| Effect of exchange rate changes on cash and cash  equivalents                                |   | (1               | )      | 46               |   | (35              | )      |
| Net decrease in cash and cash equivalents                                                    |   | (421             | )      | (378             | )      | (412             | )      |
| Cash and cash equivalents, beginning of year                                                 |   | 3,173            |   | 3,551            |   | 3,963            |   |
| Cash and cash equivalents, end of year                                                       |   | 2,752            |   | 3,173            |   | 3,551            |   |
| Supplementary information                                                                    |   |             |   |             |   |             |   |
| Interest received                                                                            |   | US$              | 13     |             | US$    | 22               |   | US$ | 81 |   |
| Interest paid                                                                                |   | US$              | — |             | US$    | 4                |   | US$ | 15 |   |
| Income taxes paid                                                                            |   | US$              | 134    |             | US$    | 229              |   | US$ | 113 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-5

----

 

**EUROTECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY**

**FOR THEYEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

 
|                                           |   | **Number of  common  stock** |   | **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 January1, 2000                   |   | 4,516,883                    |   | 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           |   | 4,516,883                    |   | 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           |   | 4,516,883                    |   | 32                |   | 2,049                            |   | 166              |   | (237                | )      | (24                                                   | )      | 4,728                  |   | 6,714            |   |
|                                           |   |                         |   |              |   |                             |   |             |   |                |   |                                                  |   |                   |   |             |   |
| Net income                                     |   | —                       |   | —            |   | —                           |   | —           |   | —              |   | —                                                |   | 531                    |   | 531              |   |
| Stock split effected in the form of a dividend |   | —                       |   | 13                |   | (13                              | )      | —           |   | —              |   | —                                                |   | —                 |   | —           |   |
| Foreign exchange translation adjustment        |   | —                       |   | —            |   | —                           |   | —           |   | —              |   | (2                                                    | )      |                   |   | (2               | )      |
| Expiration of warrants                         |   | —                       |   | —            |   | 166                              |   | (166             | )      | —              |   | —                                                |   | —                 |   | —           |   |
| Balance as of December 31, 2003           |   | 4,516,883                    |   | 45                |   | 2,202                            |   | —           |   | (237                | )      | (26                                                   | )      | 5,259                  |   | 7,243            |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-6

----

 

**EUROTECH HOLDINGS COMPANY LIMITED**

 

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

Euro Tech HoldingsCompany Limited (the Company”) was incorporated in the British Virgin Islandson September 30, 1996.

 

Euro Tech (Far East)Limited (“Far East”) is the principal operating subsidiary of the holdingcompany.  It is principally engaged inthe marketing and trading of water and waste water related process control,analytical and testing instruments, disinfection equipment, supplies andrelated automation systems in Hong Kong and in the People’s Republic of China(the “PRC”).

 

Details of the holdingcompany’s subsidiaries and affiliates are summarized as follows:

 
| **Name**                                      |   | **Percentage  of equity  ownership** |   | **Place  of  incorporation** |   | **Principal activities**                                                                                                                                                      |
|-----------------------------------------------|--------|--------------------------------------|--------|------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          |   |                                 |   |                         |   |                                                                                                                                                                          |
| Subsidiaries:                                 |   |                                 |   |                         |   |                                                                                                                                                                          |
|                                          |   |                                 |   |                         |   |                                                                                                                                                                          |
| Euro Tech (Far East) Limited                  |   | 100                                  | %      | Hong Kong                    |   | Marketing and trading of water and waste water  related process control, analytical and testing instruments, disinfection  equipment, supplies and related automation systems |
|                                          |   |                                 |   |                         |   |                                                                                                                                                                          |
| Euro Tech (China) Limited                     |   | 100                                  | %      | Hong Kong                    |   | Inactive                                                                                                                                                                      |
|                                          |   |                                 |   |                         |   |                                                                                                                                                                          |
| ChinaH2O.com Limited                          |   | 100                                  | %      | Hong Kong                    |   | Internet content provider and provision of  marketing services for environmental industry to 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 of environment protection  equipment, undertaking environment protection projects and providing relevant  technology advice, training and services      |

 

F-7

----

 

**2****                                         Summary ofsignificant accounting policies**

 

**(a)****                             Basisof Consolidation**

 

Theconsolidated accounts include the accounts of the Company and its subsidiaries(the “Group”).  Investments in 20% to50% owned affiliates of which the Company can exercise significant influenceover operating and financial policies are accounted for using the equity methodof accounting.  All material intra-groupbalances and transactions have been eliminated on consolidation.

 

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

 

Asubsidiary is a company in which the Company holds, directly or indirectly,more than 50% of its outstanding voting share capital and over which it is ableto exercise control.

 

**(c)****                             RevenueRecognition**

 

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

 

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

 

TheGroup accounts for income tax under the provision of Statement of FinancialAccounting Standards (“SFAS”) No. 109: “Accounting for Income Taxes”, whichrequires recognition of deferred tax assets and liabilities for the expectedfuture tax consequences of events that have been included in the accounts ortax returns.

 

Deferredincome taxes are provided using the liability method.  Under the liability method, deferred income taxes are recognizedfor the tax effects of temporarydifferences between the tax and accounting bases of assets and liabilities andfor credit and loss carryforwards.  Tothe extent that a deferred tax asset will more likely than not go unrealised, avaluation allowance is recognised.

 

**(e)****                             Cashand Cash Equivalents**

 

Cashand cash equivalents include cash on hand and demand deposits with banks.

 

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

 

Inventoriesare stated at the lower of cost, on the first-in, first-out method, or netrealizable value.  Costs includepurchase and related costs incurred in bringing each product to its presentlocation and condition.  Net realizablevalue is calculated based on the estimated normal selling price, less furthercosts expected to be incurred for disposal. Provision is made for obsolete, slow moving or defective items, whereappropriate.

 

F-8

----

 

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

 

Property,plant and equipment are stated at cost less accumulated depreciation. Gains orlosses on disposal are reflected in current operations.  Major expenditures for betterments andrenewals are capitalized.  All ordinaryrepair and maintenance costs are expensed as incurred.  Depreciation of property, plant andequipment is computed using the straight-line method over the assets’ estimateduseful lives as follows: office premises - 47 to 51 years, leaseholdimprovements - over terms of the leases, furniture, fixtures and officeequipment - 3 to 5 years, motor vehicles - 4 years, and testing equipment - 3years.

 

The Group accounts forlong-lived assets in accordance with SFAS No. 144, which requires impairmentlosses to be recorded on long-lived assets used in operations when indicatorsof impairment are present.  Reviews areregularly performed to determine whether the carrying value of assets isimpaired.

 

TheGroup adopted SFAS No. 144: “Accounting for Impairment or Disposal ofLong-Lived Assets” on January 1, 2002 which requires impairmentlosses to be recorded for property,plant and equipment to be held and used in operations when indicators ofimpairment are present.  Reviews are regularly performed todetermine whether the carrying value of assets is impaired.  The Group determines the existence of suchimpairment by measuring the expected future cash flows (undiscounted andwithout interest charges) and comparing such amount to the carrying amount ofthe assets.  An impairment loss, if oneexists, is then measured as the amount by which the carrying amount of theasset exceeds the discounted estimated future cash flows. Assets to be disposed of are reported at thelower of the carrying amount or fair value of such assets less costs tosell.  There were no impairment lossesrecorded during each of the three years ended December 31, 2003.

 

**(h)****                            OperatingLeases**

 

Leaseswhere substantially all the risks and rewards of ownership of the leased assetsremain with the lessors are accounted for as operating leases.  Rental payments under operating leases arecharged to expenses on the straight-line basis over the period of the relevantleases.

 

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

 

TheGroup adopted SFAS No.142: “Goodwill and other intangible assets” onJanuary 1, 2002 which requires the Group to cease amortizing goodwill,assess the possible impairment of goodwill existing at the date of adoption andperform a subsequent impairment test on an annual basis.

 

**(j)****                               ForeignCurrency Translation**

 

TheGroup maintains its books and records in United States dollars.  Its subsidiaries and affiliates maintaintheir books and records either in Hong Kong dollars or Chinese Renminbi(“functional currencies”).  Foreigncurrency transactions during the year are translated into the respectivefunctional currencies at the applicable rates of exchange at the dates of thetransactions.  Monetary assets andliabilities denominated in foreign currencies are translated into therespective functional currencies using the exchange rates prevailing at thebalance sheet dates.  Gains or lossesfrom foreign currency transactions are recognized in the statements of incomeand comprehensive income during the year in which they occur.  Translation adjustments on subsidiaries’equity are included as cumulative translation adjustments.

 

F-9

----

 

**(k)****                           ComprehensiveIncome**

 

TheGroup has adopted SFAS No. 130: “Reporting Comprehensive Income,” which requires the Group to report allchanges in equity during a period, except for those resulting from investmentby owners and distribution to owners, in the accounts for the period in whichthey are recognized.  The Group haspresented comprehensive income, which encompasses net income and foreigncurrency translation adjustments, in the statements of income and comprehensiveincome.

 

**(l)****                               Netincome per Common Share**

 

Netincome per common share is computed in accordance with SFAS No. 128 “EarningsPer Share”, by dividing the net income by the weighted average number of sharesof common stock outstanding during the period. There is no difference between basic and diluted earnings per share asthe exercise prices of the redeemable warrants and stock options outstandingwere higher than the average market prices of the common stock for the yearsended December 31, 2003, 2002 and 2001 and therefore the effect ofincluding such items in the calculation of earnings per share would have beenanti-dilutive.

 

**(m)****                         Stock-basedCompensation**

 

Inaccordance with the provisions of SFAS No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure”, the Group has selected thedisclosure only provisions related to employee stock options and sharepurchases and follows the provisions of Accounting Principles Board Opinion No.25: “Accounting for Stock Issued to Employees” (“APB 25”) and relatedinterpretations in accounting for stock options and shares issued toemployees.  Under APB 25, compensationexpense, if any, is recognized as the excess of the estimated fair value of theordinary shares over the exercise price on the measurement date, which istypically the date of grant, and is expensed ratably over the service period,which is typically the vesting period. The Group discloses the effect onnet income and earnings per share as if the Group had applied the fair valuerecognition provision in accordance with SFAS No. 123 in Note 13.

 

**(n)****                            Use ofEstimates**

 

Thepreparation of accounts in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect certain reported amounts and disclosures.  Accordingly, actual results could differfrom those estimates.

 

**(o)****                             FinancialInstruments**

 

Thecarrying values of financial instruments, which consist of cash and cashequivalents, accounts receivable and accounts payable, bills receivable, billspayable, other payables and balances with related companies approximate theirfair values due to the short-term nature of these instruments.

 

F-10

----

 

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

 

Entities are consideredto be related to the Group if the parties, directly or indirectly, through oneor more intermediaries, control, are controlled by, or are under common controlwith the Group.  Related parties alsoinclude principal owners of the Group, its management, members of the immediatefamilies of principal owners of the Group and its management and other partieswith which the Group may deal if one party controls or can significantlyinfluence the management or operating policies of the other to an extent thatone of the transacting parties might be prevented from fully pursuing its ownseparate interests.  A party which cansignificantly influence the management or operating policies of the transactingparties or if it has an ownership interest in one of the transacting partiesand can significantly influence the other to an extent that one or more of thetransacting parties might be prevented from fully pursuing its own separateinterests is also a related party

 

**(q)**                             **RecentAccounting Pronouncements**

 

InMay 2003, the FASB issued SFAS No.150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity”.  This statement establishes standards for howan issuer classifies and measures in its statement of financial positioncertain financial instruments with characteristics of both liabilities andequity.  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 Group does not believe that thisinterpretation will have a material effect, if any, on the Group’s financialposition or results of operations.

 

In November 2002,the Emerging Issues Task Force issued EITF Issue No. 00-21 “Accounting forRevenue Arrangements with Multiple Deliverables”, (“EITF 00-21”) effective forarrangements entered into after June 15, 2003.  EITF 00-21 defines units of accounting for arrangements withmultiple deliverables resulting in revenue being allocated over the units ofaccounting for revenue recognition purposes. The Group believes that the adoption of EITF 00-21 will not have amaterial effect on the Group’s financial position or results of operations.

 

In January 2003, theFASB issued FIN 46 “Consolidation of Variable Interest Entities-anInterpretation of ARB No.51 which was further revised inDecember 2003.  FIN 46 requiresthat certain variable interest entities (“VIE”) be consolidated by theirprimary beneficiary if the primary beneficiary is subject to a majority of therisk of loss from the VIE activities, or entitled to receive a majority of theVIE’s residual returns, or both.  Anentity is subject to FIN 46 and is considered to be a VIE if it has (1) equitythat is insufficient to permit the entity to finance its activities withoutadditional subordinated financial support from other parties, or (2) equityinvestors that cannot make significant decisions about the entity’s operations,or that do not absorb the expected losses or receive the expected returns ofthe entity.  FIN 46-R is effectiveimmediately for all new VIE’s created or acquired after January 31,2003.  For VIE’s created or acquiredprior to February 1, 2003, the provisions of this interpretation must beapplied for the first interim or annual period beginning after June 15,2003.  According to the requirements ofFIN46 and FIN46-R, the Group has evaluated its relationship with the sevenretail shops established in the PRC. The Company is concluded to be the primary beneficiary of these retailshops.  The Group is currently assessingthe impact of this interpretation on its financial position and results ofoperations.  As of December 31, 2003,the Group’s maximum exposure to loss as a result of its involvement with theseshops is equal to the advances to these entities, net with allowances, ofapproximately US$261,000.

 

F-11

----

 

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

 
|                                               |   | **2003**         |   | **2002**         |   | **2001**         |   |
|----------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                               |   | **US$’000** |   | **US$’000** |   | **US$’000** |   |
|                                               |   |             |   |             |   |             |   |
| Gain on disposal of property, plant and  equipment |   | 1                |   | 3                |   | —           |   |
| Exchange (loss)/gain, net                          |   | (35              | )      | (53              | )      | 80               |   |
| Rental income                                      |   | 40               |   | 59               |   | 46               |   |
|                                               |   | 6                |   | 9                |   | 126              |   |

 

**4****              Income taxes**

 

The Company is exemptfrom taxation in the British Virgin Islands.

 

Euro Tech (Far East)Limited, Euro Tech (China) Limited and ChinaH2O.com Limited provide for HongKong profits tax at a rate of 17.5% on the basis of their income for financialreporting purposes, adjusting for income and expense items which are notassessable or deductible for profits tax purposes.

 

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

 

In accordance with therelevant income tax laws and regulations applicable to foreign investmententerprises in the PRC, Shanghai Euro Tech Limited, (“SET”), a subsidiary ofthe Company, is exempted from the PRC enterprise income tax of 15% for twoyears starting from its first profit-making year, after offsetting lossesbrought forward, if any, followed by a 50% reduction for the next three yearsthereafter.  As of December 31, 2003,SET is still exempted from the PRC enterprise income tax as it had anassessable loss of US$28,531 for the current year.

 

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

 
|                                        |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                        |   |     |   |     |   |     |   |
| Weighted average statutory tax rate         |   | 20.1     | %      | 15.7     | %      | 16.0     | %      |
| Change in valuation allowances              |   | (0.8     | )%     | 2.1      | %      | 4.9      | %      |
| Overprovision for income tax in prior years |   | (1.7     | )%     | —   |   | —   |   |
| Others                                      |   | 2.1      | %      | 1.9      | %      | 0.9      | %      |
| Effective tax rate                          |   | 19.7     | %      | 19.7     | %      | 21.8     | %      |

 

Income taxes representcurrent Hong Kong profits tax applied at 16% for subsidiaries incorporated inHong Kong for the years ended December 31, 2002 and 2001, Hong Kong profits tax has been provided atthe rate of 17.5% on the estimated assessable profit for the year of 2003.  In 2003, the government enacted a change inthe profits tax rate from 16% to 17.5% for the fiscal year 2003/2004.  PRC Enterprise Income Tax applied at15% for Euro Tech Trading (Shanghai) Limited, a subsidiary incorporated in thePRC, for the year ended December 31, 2003 Accumulated tax losses of ShanghaiEuro Tech Limited, another subsidiary incorporated in the PRC, available tooffset against future profit were US$145,395 and US$173,926, respectively as ofDecember 31, 2003 and 2002.

 

F-12

----

 

The components ofdeferred tax assets are as follows:

 
|                                                        |   | **2003**         |    | **2002**         |   |
|-------------------------------------------------------------|--------|------------------|---------|------------------|--------|
|                                                        |   | **US$’000** |    | **US$’000** |   |
|                                                        |   |             |    |             |   |
| Deferred  tax assets arising from tax losses                |   | 71               |    | 81               |   |
| Deferred  tax liabilities arising from temporary difference |   | (3               | )  | (12              | )      |
| Less:  Valuation allowances                                 |   | (22              | )       | (26              | )      |
| Net  deferred tax assets                                    |   | 46               |    | 43               |   |

 

**5****              Accounts receivable**

** **
|                               |   | **2003**         |   | **2002**         |   |
|------------------------------------|--------|------------------|--------|------------------|--------|
|                               |   | **US$’000** |   | **US$’000** |   |
|                               |   |             |   |             |   |
| Trade receivables                  |   | 4,302            |   | 4,392            |   |
| Less: Allowance for doubtful debts |   | (19              | )      | (16              | )      |
|                               |   | 4,283            |   | 4,376            |   |

 

**6****              Inventories, net**

** **
|           |   | **2003**         |   | **2002**         |   |
|----------------|--------|------------------|--------|------------------|--------|
|           |   | **US$’000** |   | **US$’000** |   |
|           |   |             |   |             |   |
| Raw materials  |   | 28               |   | 44               |   |
| Finished goods |   | 2,218            |   | 1,920            |   |
|           |   | 2,246            |   | 1,964            |   |

 

Management continuously reviews obsolete and slow moving inventories andassesses the inventory valuation to determine if the provision is deemedappropriate. At December 31, 2003, 2002 and 2001, provision for obsoleteand slow moving inventories amounted to US$10,171, US$25,445 and US$38,883,respectively.

 

F-13

----

 

**EUROTECH HOLDINGS COMPANY LIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

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

 
|                                     |   | **2003**         |   | **2002**         |   |
|------------------------------------------|--------|------------------|--------|------------------|--------|
|                                     |   | **US$’000** |   | **US$’000** |   |
|                                     |   |             |   |             |   |
| Office premises                          |   | 2,271            |   | 2,271            |   |
| Leasehold improvements                   |   | 63               |   | 49               |   |
| Furniture, fixtures and office equipment |   | 488              |   | 428              |   |
| Motor vehicles                           |   | 126              |   | 126              |   |
| Testing equipment                        |   | 54               |   | 54               |   |
|                                     |   | 3,002            |   | 2,928            |   |
|                                     |   |             |   |             |   |
| Less: Accumulated depreciation           |   | (1,153           | )      | (963             | )      |
|                                     |   | 1,849            |   | 1,965            |   |

 

As of December 31,2002, office premises with a total net book value of US$979,600, were pledgedto secure certain banking facilities of the Group.  As of December 31, 2003, legal charges over office premiseshad been released

 

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

 

During the year endedDecember 31, 2002, the Group acquired 30% equity interests in Yixing PactEnvironmental Technology Co., Ltd, a company incorporated in the PRC, and PactAsia Pacific Limited, a company incorporate in British Virgin Island, from anindependent third party for a total consideration of US$335,000.  The Group believed that the business ofthese two investments was complementary to the Group’s business as the Groupcontinued to focus on sales and marketing of other products. The Group believedthat by aligning itself with an engineering firm, such as these affiliates, itwas able to gain a competitive advantage by offering customers and potentialcustomers not only hardware but solutions to engineering problems as well.Details of these affiliates are disclosed in Note 1.  Investments in these affiliates are accounted for using theequity method of accounting.

 

The excess of purchaseprice over the underlying fair value of equity in net assets of the investeesis considered goodwill and amounted to US$215,000. The Group did not recognizeany separately identifiable intangible assets under the criteria prescribed inSFAS No. 141 “Business Combinations” pursuant to the acquisition.  This equity method goodwill is notamortized, and the investment is tested annually for impairment. As ofDecember 31, 2003 and 2002, the Group does not believe the investmentswere impaired.

 

A summary of combined financial information of theaffiliates is set forth below:

 
|                             |   | **2003**         |       | **2002**         | ** ** |
|----------------------------------|--------|------------------|------------|------------------|------------|
| **Balance Sheet:**               |   | **US$’000** | ** ** | **US$’000** | ** ** |
|                             |   |             |       |             |       |
| Current assets                   |   | 942              |       | 650              |       |
|                             |   |             |       |             |       |
| Non-current assets               |   | 44               |       | 50               |       |
|                             |   |             |       |             |       |
| Total assets                     |   | 986              |       | 700              |       |
|                             |   |             |       |             |       |
| Current and total liabilities    |   | (414             | )          | (432             | )          |
|                             |   |             |       |             |       |
| Total shareholders’  equity |   | 572              |       | 268              |       |

 
|                   |   | **2003**         |       | **2002**         | ** ** |
|------------------------|--------|------------------|------------|------------------|------------|
| **Operating results:** |   | **US$’000** | ** ** | **US$’000** | ** ** |
|                   |   |             |       |             |       |
| Net sales              |   | 1,995            |       | 962              |       |
|                   |   |             |       |             |       |
| Operating  profits     |   | 348              |       | 25               |       |
|                   |   |             |       |             |       |
| Net profits            |   | 304              |       | 25               |       |

 

The above tablerepresents the combined financial information of entities in which the Grouphas an investment accounted for using the equity method of accounting.  These amounts are not the amounts reflectedon the Group’s accompanying consolidated financial statements.  Consistent with the Group's accountingpolicy for investments accounted for using the equity method of accounting, asdescribed in Note 2(a), the Group has recorded approximately US$91,000 ofequity in profit of affiliates, net of taxes, in the accompanying consolidatedstatements of income and comprehensive income, representing the Group's sharein the affiliates.  Similarly, the Grouphas included approximately US$434,000 in “Investment in affiliates” on theaccompanying consolidated balance sheet, representing the Group's investment inthe affiliates.

 

**9****              Other payables and accrued expenses**

 

Other payables andaccrued expenses mainly represent deposits received from customers and accrualsfor operating expenses.

 

F-14

----

 

**10****          ****Common stock**

 

In August 2001, theCompany effected a three-for-ten stock split in the form of a dividend,creating approximately 1,042,000 new ordinary shares of common stock of US$0.01each.

 

In September 2003,the Company paid a dividend in the form of 1,290,517 ordinary shares of commonstock of US$0.01 each, payable at the ratio of four shares of stock per tenshares of stock of the Company.

 

The effect of the abovehas been reflected retroactively in the accounts and the net income per common share computations.

 

**11****           Warrants**

 

A total of 2,620,800warrants were issued in 1997, which comprised 1,076,400 public warrants,1,450,800 private warrants and 93,600 underwriting warrants issued under theCompany’s warrants plan.

 

Each public and privatewarrant entitles the holder thereof to acquire one share of the Company’scommon stock at the exercise price of US$3.52 during the period fromMarch 14, 1998 to March 14, 2003. Each underwriter warrant entitles the holder thereof to acquire one shareof the Company’s common stock at the exercise price of US$5.29 during theperiod from March 14 1998 to March 14, 2002.  If the closing bid price of the Company’scommon stocks is above US$5.4487 for twenty consecutive days, the Company hasthe right to redeem the warrants at the price of US$0.10 each. For the yearsended December 31, 2003, 2002 and 2001, no warrants were exercised orredeemed and all the remaining unexercised warrants expired on March 14,2003.

 

**12****           Treasury stock**

 

The Company authorized astock buyback program in December 2000 pursuant to which up to 227,500shares, but not to exceed US$281,250 in value, of the Company’s common stockcould be purchased in the open market from time to time as market and businessconditions warrant.  The Company repurchaseda total of 24,297 shares and 202,804 shares of common stock during 2000 and2001 for considerations ofapproximately US$16,000 and US$221,000, respectively.  There was no reissuance of treasury stock during each of thethree years ended December 31, 2003.

 

**13****           Stock options**

 

(i)             Management OptionsPlan

 

A total of 3,057,600 shares of common stock havebeen reserved for issuance under the Company’s management option plan (the“Management Options”).  The ManagementOptions provide for the grant of options to its officers, directors and employeesas the Company’s Chairman of the Board of Directors and Chief Executive Officermay direct. In 1997, the Company granted its officers, directors and employeesoptions under the Management Options, which allow them to purchase up to2,902,536 shares of common stock. The exercise price of the options granted wasUS$ 1.8315 per share for 873,600 of such options and US$ 2.5183 per share forthe remaining 2,028,936.  During theyear ended December 31, 2000, 24,024 options with the exercise price ofUS$ 2.5183 were cancelled.  During thesame year, the Company further granted 161,798 options under the ManagementOptions with the exercise price of US$ 2.5183 per share to its officers,directors and employees, which allowed them to purchase up to 161,798 shares ofcommon stock. The options vested for a period of one year and will expire inMarch 2007.  During the year endedDecember 31, 2002, 18,382 options with the exercise price of US$2.58183were cancelled. During the year ended December 31, 2003, no options wereexercised, cancelled or granted.

 

F-15

----

 

(ii)          2000 Stock Option Plan

 

A total of 797,160 shares of common stock have beenreserved for issuance under the Company’s 2000 Stock Option Plan (the “2000Stock Options”).  The 2000 Stock Optionsprovide for the grant of options to its officers, directors and employees asthe Company’s Chairman of the Board of Directors and Chief Executive Officermay direct. During the year ended December 31, 2000, the Company grantedsuch options to its officers, directors and employees under the 2000 StockOptions, which allow them to purchase up to 495,040 shares of commonstock.  The exercise price of alloptions granted is US$ 0.8681 per share. During the year ended December 31,2002, 29,120 options with exercise price of US$0.8681 were cancelled. TheCompany further granted 318,500 options and 12,740 options under the 2000 StockOptions with an exercise price of US$1.2286 and US$1.0214 per share,respectively, to its officers, directors and employees, which allow them topurchase up to 331,240 shares of common stock. The options vested within a six-month to one-year period and will expirein August 2010.  During the yearended December 31, 2003, no options were exercised, cancelled or granted.

 

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

 

A total of 196,000 shares and 560,000 shares ofcommon stock have been reserved for issuance under the Company’s 2002Employees’ Stock Option and Incentive Plan (the “2002 Employee Stock Options”)and 2002 Officers’ and Directors’ Stock Option and Incentive Plan (the “2002D&O Stock Options”), respectively. Both 2002 Employee Stock Options and the 2002 D&O Stock Optionsprovide for the grant of options to its employees as the Company’s Chairman ofthe Board of Directors and Chief Executive Officer may direct.  During the year ended December 31,2002, the Company granted such options to its employees and officers and directorsunder the 2002 Employee Stock Options and the 2002 D&O Stock Options, whichallow them to purchase up to 196,000 and 560,000 shares of common stock at anexercise price of US$ 1.1427 and US$ 0.8786, respectively. The options vestedfor a period of a six-month period and will expire in April 2012 andNovember 2012, respectively. During the years ended December 31, 2003 and 2002, no options hadbeen exercised.

 

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

 
|                            |   | **2003**               |   | **2002**                               |   | **2001**               |   |
|---------------------------------|--------|------------------------|--------|----------------------------------------|--------|------------------------|--------|
|                            |   | **Number of  options** |   | **Weighted  average  exercise  price** |   | **Number of  options** |   | **Weighted  average  exercise  price** |   | **Number of  options** |   | **Weighted  average  exercise  price** |   |
|                            |   |                   |   | **US$**                                |   |                   |   | **US$** |   |   |   | **US$** |   |
|                            |   |                   |   |                                   |   |                   |   |   |   |   |   |   |   |
| Outstanding,  beginning of year |   | 4,575,088              |   | 1.87                                   |   | 3,535,350              |   | 2.12 |   | 3,535,350 |   | 2.12 |   |
| Granted                         |   | —                 |   | —                                 |   | 1,087,240              |   | 1.03 |   | — |   | — |   |
| Cancelled                       |   | —                 |   | —                                 |   | (47,502                | )      | (1.51 | ) | — |   | — |   |
| Outstanding,  end of year       |   | 4,575,088              |   | 1.87                                   |   | 4,575,088              |   | 1.87 |   | 3,535,350 |   | 2.12 |   |
|                            |   |                   |   |                                   |   |                   |   |   |   |   |   |   |   |
| Exercisable,  end of year       |   | 4,575,088              |   | 1.87                                   |   | 4,001,928              |   | 2.01 |   | 3,535,350 |   | 2.12 |   |

 

As of December 31,2003, the options outstanding and exercisable had exercise prices in the rangeof US$0.8681 to US$2.5183 and a weighted average unexpired life of approximately4.7 years.

 

F-16

----

 

The Company accounts forstock-based compensation using the intrinsic value method prescribed by APBOpinion No. 25, under which no compensation cost is recognized as all stockoptions granted under the Management Options, the 2000 Stock Options, the 2002Employee Stock Options and the 2002 D&O Stock Options have exercise pricesat or above the fair market value of the underlying stock at the date of grant.

 

Pro forma informationregarding net income and earnings per share is required by SFAS No. 123, andhas been determined as if the Company had accounted for its employee stockoptions under the fair value method of SFAS No. 123.  The weighted average fair value of stock options at date of grantof $2.34 per option for the year ended December 31, 2002, was estimatedusing the Black-Scholes option pricing model with the followingassumptions.  There were no optionsgranted during the year ended December 31, 2003 and 2001.

 
|                            |   | **2003** |   | **2002**  |   | **2001** |   |
|---------------------------------|--------|----------|--------|-----------|--------|----------|--------|
|                            |   |     |   |      |   |     |   |
| Risk-free interest rate         |   | —   |   | 4.3       | %      | —   |   |
| Expected dividend yield         |   | —   |   | 0         | %      | —   |   |
| Expected option life            |   | —   |   | 5.7 years |   | —   |   |
| Expected stock price volatility |   | —   |   | 177       | %      | —   |   |

 

TheBlack-Scholes option-pricing model requires the input of subjectiveassumptions, including the expected volatility of stock price.  Because changes in subjective inputassumptions can materially affect the fair value estimate, in directors’opinion, the existing model may not necessarily provide a realisable measure ofthe fair value of the stock options.

 

Had compensation expensefor the Company’s stock-based compensation plan been recognized based on thefair value of the options on the grant date in accordance with SFAS No. 123,the Company’s pro forma net income and earnings per common share would havebeen as follows:

 
|                                                                                 |   | **2003**         |   | **2002**         |   | **2001**         |   |
|--------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                 |   | **US$’000** |   | **US$’000** |   | **US$’000** |   |
|                                                                                 |   |             |   |             |   |             |   |
| Net income as reported                                                               |   | 531              |   | 500              |   | 584              |   |
| Less: Stock compensation expense determined  under the fair value method, net of tax |   | (332             | )      | (779             | )      | (259             | )      |
| Pro forma net income/(loss)                                                          |   | 199              |   | (279             | )      | 325              |   |
|                                                                                 |   |             |   |             |   |             |   |
| Income/(loss) per share:                                                             |   |             |   |             |   |             |   |
|                                                                                 |   |             |   |             |   |             |   |
| Basic and diluted, as reported                                                       |   | US$              | 0.12   |             | US$    | 0.11             |   | US$ | 0.13 |   |
|                                                                                 |   |             |   |             |   |             |   |
| Basic and diluted, pro forma                                                         |   | US$              | 0.04   |             | US$    | (0.06            | )      | US$ | 0.07 |   |

 

F-17

----

 

**14****           Pension plan**

 

Priorto December 1, 2000, the Group had only one defined contribution pensionplan for all its Hong Kong employees. Under this plan, all employees were entitled to pension benefits equalto their own contributions plus 50% to 100% of individual fund account balancescontributed by the Group, depending on their years of service with theGroup.  The Group was required to makespecific contributions at approximately 10% of the basic salaries of theemployees to an independent fund management company.

 

Withthe introduction of the Mandatory Provident Fund Scheme, a defined contributionscheme managed by an independent trustee on December 1, 2000, the Groupand its employees who joined the Group subsequently make monthly contributionsto the scheme at 5% of the employee’s cash income as defined under theMandatory Provident Fund legislation. Contributions of both the Group and its employees are subject to amaximum of HK$1,000 per month and thereafter contributions are voluntary andare not subject to any limitation.  TheGroup and its employees made their first contributions in December 2000.

 

Asstipulated by the rules and regulations in the PRC, the Group contributes tostate-sponsored retirement plans for its employees in Mainland China.  The Group contributes approximately 7% (2002and 2001 - 7%) of the basic salaries of its employees, and has no furtherobligations for the actual payment of pension or post-retirement benefits beyondthe annual contributions.  Thestate-sponsored retirement plans are responsible for the entire pensionobligations payable to retired employees.

 

Duringthe years ended December 31, 2003, 2002 and 2001, the aggregatecontributions of the Group to the aforementioned pension plans and retirementbenefit schemes were approximately US$137,000, US$131,000 and US$135,000,respectively.

 

**15****           Related partytransactions**

 

(i)            The transactions withrelated parties are summarized as follows:

 
|                                                               |   | **2003**         |   | **2002**         |   | **2001**         |   |
|--------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                               |   | **US$’000** |   | **US$’000** |   | **US$’000** |   |
|                                                               |   |             |   |             |   |             |   |
| Sale of goods to Eurotherm Limited                                 |   | 43               |   | 33               |   | 30               |   |
|                                                               |   |             |   |             |   |             |   |
| Purchase of goods from                                             |   |             |   |             |   |             |   |
| • Armtison Limited                                            |   | 4                |   | 33               |   | 68               |   |
| • Action  Instruments (China) Limited                         |   | 10               |   | 9                |   | 7                |   |
| • Eurotherm  Limited                                          |   | 7,219            |   | 2,800            |   | 2,114            |   |
|                                                               |   |             |   |             |   |             |   |
| Interest income on trade receivables earned  from Armtison Limited |   | 3                |   | 5                |   | 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   |   | 33               |   | 45               |   | 46               |   |
|                                                               |   |             |   |             |   |             |   |
| Management fees charged by Eurotherm Limited                       |   | 29               |   | 27               |   | 27               |   |
|                                                               |   |             |   |             |   |             |   |
| Management fees received from Pact Asia  Pacific Ltd               |   | 9                |   | 2                |   | —           |   |

 

F-18

----

 

(ii)           Details of the amountdue from/to related companies are as follows:

 

Detailsof amount due from a related company:

 
|                    |   | **2003**         |   | **2002**         |   |
|-------------------------|--------|------------------|--------|------------------|--------|
|                    |   | **US$’000** |   | **US$’000** |   |
|                    |   |             |   |             |   |
| Regent Earnings Limited |   | —           |   | 2                |   |

 

Detailsof amounts due to related companies:

 
|                               |   | **2003**         |   | **2002**         |   |
|------------------------------------|--------|------------------|--------|------------------|--------|
|                               |   | **US$’000** |   | **US$’000** |   |
|                               |   |             |   |             |   |
| Armtison Limited                   |   | —           |   | 2                |   |
| Action Instruments (China) Limited |   | —           |   | 2                |   |
| Eurotherm Limited                  |   | 1,330            |   | 662              |   |
|                               |   | 1,330            |   | 666              |   |

 

The amounts due from/torelated companies are trade in nature, unsecured, non-interest bearing and arerepayable in 2004.

 
|   |   | Armtison Limited, Action Instruments (China) Limited  and Regent Earnings Limited are beneficially owned by Mr. T. C. Leung, Chief  Executive Officer and Chairman of the Board of Directors.  Mr. T. C. Leung is also a director of  Eurotherm Limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (iii)  |   | As of December 31,  2003 and 2002, prepayments and other current assets included advances to  certain PRC employees of the Group, net of provision, of approximately US$261,000  and US$283,000, respectively.  The  advances are provided to those PRC employees in order for them to finance the  operations of certain retail shops established in the PRC by the employees to  market the Group’s products.  The  advances are unsecured, bear interest at a nominal rate and have no fixed  repayment terms.  During the years  ended December 31, 2003 and 2002, provisions in respect of the  recoverability of such advances of US$45,000 and US$89,000 were made by the  Group.  The Group does not account for  the related sales to these retail shops until the related inventories are  sold to third parties. |

 

**16****           Commitments andcontingencies**

 

(i)            Operating leases

 

The Group has variousoperating lease agreements for office and industrial premises.  Rental expenses for the years endedDecember 31, 2003, 2002 and 2001 were approximately US$139,000, US$210,000 and US$201,000,respectively.  Future minimum rentalpayments as of December 31, 2003, under agreements classified as operatingleases with non-cancellable terms amounted to US$145,000 of which US$108,000are payable in the year 2004 and US$37,000 are payable in the year from 2005 to2009.

 

(ii)           Banking facilities

 

The Group has variousbanking facilities available for overdraft, import and export credits andforeign exchange contracts from which the Group can access up to approximatelyUS$4,321,000.

 

F-19

----

 

**17****           Segment information**

 

(i)            Revenue

 

Geographical analysis ofrevenue by customer location is as follows:

 
|      |   | **2003**         |   | **2002**         |   | **2001**         |   |
|-----------|--------|------------------|--------|------------------|--------|------------------|--------|
|      |   | **US$’000** |   | **US$’000** |   | **US$’000** |   |
|      |   |             |   |             |   |             |   |
| Revenue - |   |             |   |             |   |             |   |
| Hong Kong |   | 7,092            |   | 6,787            |   | 5,119            |   |
| The PRC   |   | 20,194           |   | 16,635           |   | 14,173           |   |
| Others    |   | 156              |   | 75               |   | 393              |   |
|      |   | 27,442           |   | 23,497           |   | 19,685           |   |

 

(ii)           Long-lived assets (1)

 

Geographical analysis oflong-lived assets is as follows:

 
|      |   | **2003**         |   | **2002**         |   |
|-----------|--------|------------------|--------|------------------|--------|
|      |   | **US$’000** |   | **US$’000** |   |
|      |   |             |   |             |   |
| Hong Kong |   | 1,107            |   | 1,155            |   |
| The PRC   |   | 742              |   | 810              |   |
|      |   | 1,849            |   | 1,965            |   |

 

(1)           Long-lived assets represent property, plantand equipment, net.

 

(iii)          Major suppliers

 

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

 
|                                    |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                    |   |     |   |     |   |     |   |
| Wallace & Tiernan Pacific Pty. Ltd. |   | 3        | %      | 7        | %      | 5        | %      |
| Hach Company Inc.                       |   | 8        | %      | 19       | %      | 22       | %      |
| Hioki E.E. Corp.                        |   | 12       | %      | 15       | %      | 11       | %      |
| ThermoQuest Corporation                 |   | 3        | %      | 5        | %      | 9        | %      |
| Eurotherm Ltd.                          |   | 31       | %      | 15       | %      | 14       | %      |
| Lachat Instruments Inc.                 |   | 3        | %      | 6        | %      | 4        | %      |

 

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

 

 

F-20

----

 

**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 25, 2004 |                                               |

 

----