**FORM 20-F**

** **
| **o**                                                 | ** ** | **REGISTRATION  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|
| ** **                                            | ** ** | ** **                                                                                                          |
| **OR**                                                |
| ** **                                            | ** ** | ** **                                                                                                          |
| **x**                                                 | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                |
| ** **                                            | ** ** | ** **                                                                                                          |
| **For the  fiscal year ended December 31, 2007** |
| ** **                                            | ** ** | ** **                                                                                                          |
| **OR**                                                |
| ** **                                            | ** ** | ** **                                                                                                          |
| **o**                                                 | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**            |
| ** **                                            | ** ** | ** **                                                                                                          |
| **o**                                                 | ** ** | **SHELL  COMPANY 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**

 

**EUROTECH HOLDINGS COMPANY LIMITED**

(Exact name of Registrantas specified in its charter)

** **

**EURO TECH HOLDINGS COMPANYLIMITED**

(Translation of Registrant’s nameinto English)

 

**British Virgin Islands**

(Jurisdiction of incorporation ororganization)

 

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

(Address of principal executiveoffices)

 

Securities registered or to be registered pursuant to Section 12(b) ofthe Act.

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

 

Securities registered or to be registered pursuant to Section 12(g) ofthe Act.

 

**Ordinary Shares, $0.01 parvalue**

(Title of Class)

 

Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act.

 

 

(Title of Class)

 

Indicate the number of issued andoutstanding shares of each of the issuer’s classes of capital or common stockas of the close of the period covered by the annual report.

 

**11,684,250****OrdinaryShares**

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 
|   | Yes  x | No  o |   |
|--------|------------------|-----------------|--------|

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

 
|   | Yes  o | No  x |   |
|--------|------------------|-----------------|--------|

 

If this is an annual ortransitional report, indicate by check mark if the registrant is not requiredto file reports pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934

 
|   | Yes  o | No  x |   |
|--------|------------------|-----------------|--------|

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act (check one).

 
|   | Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer x |
|--------|--------------------------------|--------------------------|-------------------------|

 

Indicate by check markwhich basis of accounting the registrant has used to prepare the financialstatements included in this filing:

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

 

If this is an annual report,indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act)

 
|   | Yes  o | No  x |   |
|--------|------------------|-----------------|--------|

 

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

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

 

 

----

 

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

 
| INTRODUCTION               | 1                                                          |
|----------------------------|------------------------------------------------------------|
|                       |                                                       |   |
| FORWARD LOOKING STATEMENTS | 1                                                          |
|                       |                                                       |   |
| **GLOSSARY**               | **2**                                                      |
| ** **                 | ** **                                                 | ** ** |
| **PART I**            | ** **                                                 | **4** |
| ** **                 | ** **                                                 | ** ** |
| ITEM 3.                    | KEY INFORMATION                                            | 4 |
|                       |                                                       |   |
| *Item 3A.*                 | *Selected  Financial Data*                                 | *4* |
| *Item 3D.*                 | *Risk  Factors*                                            | *7* |
| ITEM 4.                    | INFORMATION ON  THE COMPANY                                | 16 |
|                       |                                                       |   |
| *Item 4A.*                 | *History and  Development of the Company*                  | *16* |
| *Item 4B.*                 | *Business  Overview*                                       | *17* |
| *Item 4C.*                 | *Organizational  Structure*                                | *27* |
| *Item 4D.*                 | *Property,  Plant and Equipment*                           | *28* |
| ITEM 5.                    | OPERATING AND FINANCIAL REVIEW AND  PROSPECTS              | 29 |
|                       |                                                       |   |
| *Item 5A.*                 | *Operating  Results*                                       | *30* |
| *Item 5B.*                 | *Liquidity  and Capital Resources*                         | *34* |
| *Item 5C.*                 | *Research and  Development, Patents and Licenses*          | *38* |
| *Item 5D.*                 | *Trend Information*                                        | *38* |
| *Item 5E.*                 | *Off Balance Sheet  Arrangements*                          | *38* |
| *Item 5F.*                 | *Tabular  Disclosure of Contractual Obligations*           | *38* |
| ITEM 6.                    | DIRECTORS, SENIOR MANAGEMENT AND  EMPLOYEES                | 39 |
|                       |                                                       |   |
| *Item 6A.*                 | *Directors and  Senior Management*                         | *39* |
| *Item 6B.*                 | *Compensation*                                             | *41* |
| *Item 6C.*                 | *Board Practices*                                          | *49* |
| *Item 6D.*                 | *Employees*                                                | *51* |
| *Item 6E.*                 | *Share Ownership*                                          | *51* |
| ITEM 7.                    | MAJOR SHAREHOLDERS AND RELATED PARTY  TRANSACTIONS         | 51 |
|                       |                                                       |   |
| *Item 7A.*                 | *Major  Shareholders*                                      | *51* |
| *Item 7B.*                 | *Related Party  Transactions*                              | *52* |
| ITEM 8.                    | FINANCIAL INFORMATION                                      | 53 |
|                       |                                                       |   |
| *Item 8A.*                 | *Consolidated  Statements and Other Financial Information* | *53* |
| *Item 8B.*                 | *Significant  Changes*                                     | *53* |
| ITEM 9.                    | THE OFFERING AND LISTING                                   | 54 |
|                       |                                                       |   |
| *Item 9A.*                 | *Listing Details*                                          | *54* |
| * *                   | * *                                                   | * * |
| *Item 9C.*                 | *Markets*                                                  | *55* |
| ITEM 10.                   | ADDITIONAL INFORMATION                                     | 55 |
|                       |                                                       |   |
| *Item 10A.*                | *Share Capital*                                            | *55* |
| *Item 10B.*                | *Memorandum and  Articles of Association*                  | *57* |
| *Item 10C.*                | *Material  Contracts*                                      | *59* |
| *Item 10D.*                | *Exchange Controls*                                        | *59* |
| *Item 10E.*                | *Taxation*                                                 | *60* |
| *Item 10H.*                | *Documents on  Display*                                    | *61* |

 

ii

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| ITEM 11.          | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                  | 62         |
|-------------------|------------------------------------------------------------------------------|------------|
|              |                                                                         |       |
| PART II           |                                                                         | 62         |
|              |                                                                         |       |
| ITEM 13.          | DEFAULTS, DIVIDENDS, ARREARAGES AND  DELINQUENCIES                           | 62         |
|              |                                                                         |       |
| ITEM 14.          | MATERIAL MODIFICATION TO THE RIGHTS OF  SECURITY HOLDERS AND USE OF PROCEEDS | 62         |
|              |                                                                         |       |
| ITEM 15.          | CONTROLS AND PROCEDURES                                                      | 62         |
|              |                                                                         |       |
| ITEM 16.          | [RESERVED]                                                                   | 63         |
|              |                                                                         |       |
| *Item 16A.*       | *Audit Committee  Financial Expert*                                          | *63*       |
| *Item 16B.*       | *Code Of Ethics*                                                             | *63*       |
| *Item 16C.*       | *Principal  Accountant Fees And Services*                                    | *64*       |
| *Item 16D.*       | *Exemptions From  Listing Standards*                                         | *64*       |
| * *          | * *                                                                     | * *   |
| **PART III** | ** **                                                                   | **66**     |
| ** **        | ** **                                                                   | ** ** |
| ITEM 17.          | FINANCIAL STATEMENTS                                                         | 66         |
|              |                                                                         |       |
| ITEM 18.          | FINANCIAL STATEMENTS                                                         | 66         |
|              |                                                                         |       |
| ITEM 19.          | EXHIBITS                                                                     | 66         |

 

iii

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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 report containsforward looking statements. Additional written or oral forward looking statementsmay be made by the Company from time to time in filings with the Securities andExchange Commission (the “Commission”) or otherwise. Such forward lookingstatements are within the meaning of that term in Section 21E of theExchange Act of 1934. Such statements may include, but not be limited to,projections of revenues, income, or loss, capital expenditures, plans forfuture operations, financing needs or plans, and plans relating to products orservices of the Company, as well as assumptions relating to the foregoing. Thewords “believe,” “expect,” “anticipate,” “estimate,” “project,” and similarexpressions identify forward looking statements, which speak only as of thedate the statement was made. Forward looking statements are inherently subjectto risks and uncertainties, some of which cannot be predicted or quantified.Future events and actual results could differ materially from those set forthin, contemplated by, or underlying the forward looking statements. Statementsin this Annual Report, including those contained in the sections entitled Part I,Item 3D. “Risk Factors” and Item 5. “Operating and Financial Review andProspects” and the notes to the Company’s Consolidated Financial Statements,describe factors, among others, that could contribute to or cause suchdifferences.

 

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# ** **

# **GLOSSARY**

# ** **

The following glossary of termsmay be helpful in understanding the terminology used in this Annual Report.

 
| Ambient Air:                       |   | Atmospheric air (outdoor as opposed to indoor air).                                                                                                                                                                                                                                                                       |
|------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |                                                                                                                                                                                                                                                                                                                      |
| Anaerobic:                         |   | Treating waste water biologically in the absence of air.                                                                                                                                                                                                                                                                  |
|                               |   |                                                                                                                                                                                                                                                                                                                      |
| Atomic Spectrometer:               |   | An analytical  instrument used to measure the presence of an element in a substance by  testing a sample which is aspirated into a flame and atomized. The amount of  light absorbed or emitted is measured. The amount of energy absorbed or  emitted is proportional to the concentration of the element in the sample. |
|                               |   |                                                                                                                                                                                                                                                                                                                      |
| Coalescer:                         |   | A process that coalesces smaller oil particles to form larger oil  particles that can readily float to a tank’s surface.                                                                                                                                                                                             |
|                               |   |                                                                                                                                                                                                                                                                                                                      |
| Colorimeter:                       |   | An analytical  instrument that measures substance concentration by color intensity when the  substance reacts to a chemical reagent.                                                                                                                                                                                      |
|                               |   |                                                                                                                                                                                                                                                                                                                      |
| Flow Injection Analyzer:           |   | An analytical instrument with a special sampling system that uses a  continuous stream of reagent(s) into which fluid samples are injected.                                                                                                                                                                          |
|                               |   |                                                                                                                                                                                                                                                                                                                      |
| Human Machine Interface Software:  |   | A type of software to interface (or coordinate) the interaction  between machine or equipment and a human being.                                                                                                                                                                                                          |
|                               |   |                                                                                                                                                                                                                                                                                                                      |
| Lamella:                           |   | Synthetic media installed in a clarifier tank to assist in particle  flocculation (coming together in a “floc” or “flakes”)                                                                                                                                                                           |
|                               |   |                                                                                                                                                                                                                                                                                                                      |
| Mass Spectrometer:                 |   | An analytical  instrument that separates and identifies chemical constituents according to  their mass-to-charge ratios and is used to identify organic compounds.                                                                                                                                                        |
|                               |   |                                                                                                                                                                                                                                                                                                                      |
| Membrane Biological Reactor (MBR): |   | A suspended-growth bioreactor combined with a  membrane liquid/solids separation unit. The “MBR” uses an advanced membrane  technology that treats biological wastes to a quality level which in many  industries is sufficient for reuse or low-cost disposal to sewers.                                       |

 

2

----

 
| Moving Bed Biofilm  Reactor (MBBR) |   | A biological  wastewater treatment process that uses synthetic plastic media floating or fixed  in the aeration stage of the treatment process to increase the contact area  between the wastewater and the biomass (bacteria). The result is a higher  efficiency of treatment in a unit volume of wastewater, hence smaller  footprint. An additional advantage is reduction of the amount of sludge  produced. |
|------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| Multi-Channel Digital Recorder:    |   | A device that  measures and records more than one input of a digitized signal (signal in the  form of pulses).                                                                                                                                                                                                                                                                                                    |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| pH Controller:                     |   | A process instrument  that measures and controls the acidity or alkalinity of a fluid.                                                                                                                                                                                                                                                                                                                            |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| Reagent:                           |   | A chemical substance  used to cause a chemical reaction and detect another substance.                                                                                                                                                                                                                                                                                                                             |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| Sequential Batch Reactor (SBR):    |   | A waste-water treatment process that combines  aeration and settling in one reactor tank thus saving on space. Used for the  treatment of industrial waste-water as well as municipal sewage. The SBR is a  batch process that is ideal for waste-waters of changing characteristics.                                                                                                                             |

 

3

----

 

# **PART I**

# ** **

## **ITEM 3.           KEYINFORMATION**

## ** **

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

### *** ***

**SELECTED FINANCIAL INFORMATION**

(Amounts expressed in thousands, except

share and per share data and unless otherwise stated)

 

The selected consolidatedincome statement data for years ended December 31, 2007, 2006 and 2005,and the selected consolidated balance sheet data as of December 31, 2007and 2006 set forth below are derived from audited consolidated financialstatements of the Company included herein and should be read in conjunctionwith, and are qualified in their entirety by reference to such financialstatements, including the notes thereto and Item 5. “Operating and FinancialReview and Prospects.” The selected consolidated income statement data for theyears ended December 31, 2004 and 2003 and the selected consolidatedbalance sheet data as of December 31, 2005, 2004 and 2003 set forth beloware derived from audited consolidated financial statements of the Company whichare not included herein.

 
| ** **                        | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                        | ** ** | **US$**    | ** ** | **US$**    | ** ** | **US$**    | ** ** | **US$**    | ** ** | **US$**    | ** ** |
| **Balance Sheet Data:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents        |       | 9,387      |       | 9,160      |       | 5,362      |       | 5,242      |       | 2,752      |       |
| Working capital(1)                |       | 10,099     |       | 10,267     |       | 6,931      |       | 5,457      |       | 4,914      |       |
| Total assets                      |       | 25,482     |       | 19,975     |       | 17,377     |       | 15,699     |       | 13,308     |       |
| Short-term debt(2)                |       | 0          |       | 0          |       | 0          |       | 0          |       | 0          |       |
| Net assets                        |       | 17,958     |       | 12,990     |       | 9,754      |       | 7,837      |       | 7,243      |       |
| Capital Stock                     |       | 120        |       | 94         |       | 74         |       | 68         |       | 45         |       |

 

----

(1)   Current assets minus current liabilities.

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

 

4

----

 
| ** **                                              | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                              | ** ** | **US$**    | ** ** | **US$**    | ** ** | **US$**    | ** ** | **US$**    | ** ** | **US$**    | ** ** |
| **Income Statement Data:**                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                 |       | 27,230     |       | 27,161     |       | 31,250     |       | 32,282     |       | 27,442     |       |
|                                                    |       |       |       |       |       |       |       |       |       |       |       |
| Cost of revenue                                         |       | (20,398    | )          | (20,606    | )          | (24,681    | )          | (27,033    | )          | (22,805    | )          |
| Gross profit                                            |       | 6,832      |       | 6,555      |       | 6,569      |       | 5,249      |       | 4,637      |       |
| Selling and  Administrative Expenses                    |       | (6,585     | )          | (5,961     | )          | (5,418     | )          | (4,801     | )          | (4,108     | )          |
|                                                    |       |       |       |       |       |       |       |       |       |       |       |
| Operating income                                        |       | 247        |       | 594        |       | 1,151      |       | 448        |       | 529        |       |
| Interest Income                                         |       | 256        |       | 95         |       | 35         |       | 17         |       | 13         |       |
| Other income,  net                                      |       | 161        |       | 146        |       | 172        |       | 104        |       | 6          |       |
| Income before  taxes                                    |       | 664        |       | 835        |       | 1,358      |       | 569        |       | 548        |       |
|                                                    |       |       |       |       |       |       |       |       |       |       |       |
| Income taxes                                            |       | (144       | )          | (156       | )          | (328       | )          | (167       | )          | (108       | )          |
| Minority  Interest in profits of subsidiaries           |       | (345       | )          | (318       | )          | (318       | )          | —     |       | —     |       |
| Equity in profit  of affiliates                         |       | 247        |       | —     |       | 21         |       | 192        |       | 91         |       |
| Net income                                              |       | 422        |       | 361        |       | 733        |       | 594        |       | 531        |       |
|                                                    |       |       |       |       |       |       |       |       |       |       |       |
| Net income per  Ordinary Share                          |       |       |       |       |       |       |       |       |       |       |       |
| Basic                                                   |       | 0.04       |       | 0.04       |       | 0.11       |       | 0.09       |       | 0.08       |       |
|                                                    |       |       |       |       |       |       |       |       |       |       |       |
| Diluted                                                 |       | 0.03       |       | 0.03       |       | 0.07       |       | 0.06       |       | 0.08       |       |
|                                                    |       |       |       |       |       |       |       |       |       |       |       |
| Weighted Average  Number of Ordinary Shares Outstanding |       |       |       |       |       |       |       |       |       |       |       |
|                                                    |       |       |       |       |       |       |       |       |       |       |       |
| Basic                                                   |       | 11,105,556 |       | 8,047,911  |       | 6,598,201  |       | 6,434,667  |       | 6,434,667  |       |
|                                                    |       |       |       |       |       |       |       |       |       |       |       |
| Diluted                                                 |       | 12,095,335 |       | 10,787,420 |       | 10,698,482 |       | 10,034,687 |       | 6,434,667  |       |

 

5

----

 

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

 

TheHong Kong dollar is freely convertible into other currencies (including the USdollar). Since 1983, the Hong Kong dollar has effectively been officiallylinked to the US dollar at the rate of approximately HK$7.80 = US$1.00.  However, the market exchange rate of the HongKong dollar against the US dollar continues to be influenced by the forces ofsupply and demand in the foreign exchange market. Exchange rates between theHong Kong dollar and other currencies are influenced by the rate between the USdollar and the Hong Kong dollar.

 

Since1994, the conversion of Renminbi into foreign currencies, including U.S.dollars, has been based on rates set by the People’s Bank of China, which areset daily based on the previous day’s interbank foreign exchange market rates.From 1994 through 2004, the official exchange rate for the conversion ofRenminbi to U.S. dollars has generally beenstable and maintained at the rate of approximately RMB8.30 = US$1.00. However,in 2007, the Renminbi appreciated and at the end of 2007, the exchange rate wasapproximately RMB 7.3141 = US$1.00.  The value of the Renminbi fluctuates and issubject to changes in PRC political and economic conditions.

 

The high, low and average exchange rate set forth below:

 
| ** **      | ** ** | **Rate at Period End** | ** ** | **Low** | ** ** | **High** | ** ** | **Average** | ** ** |
|-----------------|------------|---------------------------------------|------------|---------|------------|----------|------------|-------------|------------|
| US$ to RMB |       |                                  |       |    |       |     |       |        |       |
| Fiscal 2003     |       | 8.2867                                |       | 8.2570  |       | 8.2700   |       | 8.2872      |       |
| Fiscal 2004     |       | 8.2865                                |       | 8.2354  |       | 8.2870   |       | 8.2782      |       |
| Fiscal 2005     |       | 8.0734                                |       | 8.0566  |       | 8.2666   |       | 8.2033      |       |
| Fiscal 2006     |       | 7.8175                                |       | 7.7845  |       | 8.0715   |       | 7.9819      |       |
| Fiscal 2007     |       | 7.3141                                |       | 7.2941  |       | 7.8062   |       | 7.6172      |       |
|            |       |                                  |       |    |       |     |       |        |       |
| US$ to HK$ |       |                                  |       |    |       |     |       |        |       |
| Fiscal 2003     |       | 7.7648                                |       | 7.6886  |       | 7.8931   |       | 7.7885      |       |
| Fiscal 2004     |       | 7.7760                                |       | 7.7511  |       | 7.8063   |       | 7.7893      |       |
| Fiscal 2005     |       | 7.7535                                |       | 7.7431  |       | 7.8116   |       | 7.7779      |       |
| Fiscal 2006     |       | 7.7794                                |       | 7.7502  |       | 7.7946   |       | 7.7690      |       |
| Fiscal 2007     |       | 7.8049                                |       | 7.7488  |       | 7.9102   |       | 7.8026      |       |

 
| **The Following Months** | ** ** | **Low** | ** ** | **High** | ** ** | **Average** | ** ** |
|------------------------------------|------------|---------|------------|----------|------------|-------------|------------|
| US$ to RMB                    |       |    |       |     |       |        |       |
| July 2007                     |       | 7.5445  |       | 7.6035   |       | 7.5877      |       |
| August 2007                   |       | 7.5330  |       | 7.5955   |       | 7.5849      |       |
| September 2007                |       | 7.4915  |       | 7.5413   |       | 7.5335      |       |
| October 2007                  |       | 7.4515  |       | 7.5183   |       | 7.5135      |       |
| November 2007                 |       | 7.3673  |       | 7.4615   |       | 7.4334      |       |
| December 2007                 |       | 7.2941  |       | 7.4035   |       | 7.3832      |       |

 

6

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| US$ to HK$     |   |   |   |   |   |   |   |
|---------------------|--------|--------|--------|--------|--------|--------|--------|
| July 2007      |   | 7.8109 |   | 7.8254 |   | 7.8201 |   |
| August 2007    |   | 7.7952 |   | 7.8301 |   | 7.8175 |   |
| September 2007 |   | 7.7556 |   | 7.8007 |   | 7.7855 |   |
| October 2007   |   | 7.7488 |   | 7.7731 |   | 7.7560 |   |
| November 2007  |   | 7.7494 |   | 7.7942 |   | 7.7762 |   |
| December 2007  |   | 7.7843 |   | 7.8076 |   | 7.7983 |   |

### *** ***

### ***Item 3D.          Risk Factors***

### *** ***

Youshould carefully consider all of the information set forth in this annualreport and the following risk factors. The risks below are not the only ones weface. Additional risks not currently known by us or that we deem immaterial mayalso impair our business operations. Our business, financial condition orresults of operations could be materially adversely effected by any of theserisks. This annual report also contains forward looking statements that involverisks and uncertainties. Our results could materially differ from thoseanticipated in these forward looking statements as a result of certain factors,including the risks we face as described below and elsewhere. See “ForwardLooking Statements.”

 

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

 

**PRC Sovereignty Over Hong KongStill Developing.**

 

The Company’s executiveand principal offices are located in Hong Kong, a Special Administrative Regionof China (or “SAR”; Hong Kong is sometimes herein referred to as the “Hong KongSAR”).

 

As provided in theSino-British Joint Declaration on the Question of Hong Kong (the “JointDeclaration”) 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 anddefense affairs. The PRC’s political system and policies are not practiced inHong Kong. Under this principle of “one country, two systems”, Hong Kongmaintains a legal system that is based on common law and is different from thatof the PRC.

 

The Company’s results ofoperations and financial condition may be influenced by the political situationin Hong Kong and by the general state of the Hong Kong economy. See “ –Economic Stability Uncertain.”

 

There can be no assurancethat these past or any prospective future changes in political, economic orcommercial conditions in Hong Kong and the PRC will not result in a materialadverse effect upon the Company.

 

**Economic Stability Uncertain; Earthquake.**

 

Most economies in the FarEast had suffered from an economic instability. Although the region, includingthe PRC, appears to have recovered, there can be no assurance that the recovery

 

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will continue, mostespecially in light of the recent catastrophic earthquakes that caused manydeaths and widespread destruction. Continued growth in the PRC is dependent upon an adequate supply ofenergy and the recovery from recent earthquakes.  There is no assurance that adequate suppliesof energy can be developed or found to fuel the PRC’s continued economicgrowth.  The impact, if any, upon theCompany of the recent catastrophes in the PRC cannot be predicted at this time.

 

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

 

The PRC economy differsfrom the economies of most developed countries in many respects, including theamount of government involvement, level of development, growth rate, control offoreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the pasttwenty years, growth has been uneven, both geographically and among the varioussectors of the economy.  The PRCgovernment has implemented various measures to encourage economic growth andguide the allocation of resources.  Someof these measures benefit the overall PRC economy, but may also have a negativeeffect on us.  For example, our financialcondition and results of operations may be adversely affected by changes inapplicable tax regulations.

 

The PRC economy appearsto be moving from a planned economy to a more market-oriented economy.  Although the PRC government has implementedmeasures since the late 1970s emphasizing the utilization of market forces foreconomic reform, the reduction of state ownership of productive assets and the establishmentof improved corporate governance in business enterprises, a substantial portionof productive assets in the PRC are still owned by the PRC government.  In addition, the PRC government continues toplay a significant role in regulating industry development by imposingindustrial policies.  The PRC governmentalso exercises significant control over the PRC’s economic growth through theallocation of resources, controlling payment of foreign currency-denominatedobligations, setting monetary policy and providing preferential treatment toparticular industries or companies. These actions, as well as future actions and policies of the PRCgovernment, could materially affect our business and operations.

 

The success of theCompany’s activities in the PRC depends on the Company’s continued ability toovercome circumstances specifically effecting the industrial sector, includingthe relatively poor infrastructure, road transportation and communicationsnetwork and an uncertain legal and regulatory environment.

 

**Economic Reforms May Not Continue Or ImpactPositively On The Company; Changing Business Environment.**

 

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

 

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business and operating results. The nationalization or otherexpropriations of private enterprises by the PRC government could result in aloss of our investments in actual funds and time and effort, in China.

 

The Company’s results attimes may also be adversely effected by: (1) changes in political,economic and social conditions in the PRC; (2) changes in government policies such as changes in laws and regulations(or their interpretation); (3) the introduction of additional measures tocontrol inflation; (4) changes in the rate or method of taxation; (5) impositionof additional restrictions on currency conversion remittances abroad; (6) reductionin tariff protection and other import restrictions; and (7) a return tothe more centrally-planned economy that existed previously.

 

**We Are Subject ToInternational Economic And Political Risks, Over Which We Have Little Or NoControl.**

 

Doing business outsidethe United States subjects us to various risks, including changing economic andpolitical conditions, exchange controls, currency fluctuations, armed conflictsand unexpected changes in United States and foreign laws relating to tariffs,trade restrictions, transportation regulations, foreign investments andtaxation. We have no control over most of these risks and other unforeseeablerisks and may be unable to anticipate changes in international economic andpolitical conditions and, therefore, unable to alter our business practice intime to avoid the adverse effect of any of these changes.

 

**Uneven Economic Growth.**

 

The PRC’s economy has experiencedsignificant growth in recent years, but that growth has been uneven amongvarious geographic regions and economic sectors. Economic reforms and growth inthe PRC have been more successful in certain provinces than in others, and thecontinuation or increase of such disparities could adversely effect politicalor social stability.

 

**PRCInflation**.

 

In recent years, the PRChas not experienced significant inflation, and thus inflation has not had asignificant effect on our business historically.  In response to the increased inflation rateduring 2004, the Chinese government announced measures to restrict lending andinvestment in the PRC in order to reduce inflationary pressure on the PRC’seconomy; and the inflation rate was reduced in 2005 and 2006, but escalated in2007. If the PRC rate of inflation continues to increase, the Chinesegovernment may introduce further measures intended to reduce the inflation ratein the PRC.  Any such measures adopted bythe Chinese government may not be successful in reducing or slowing theincrease in the PRC’s inflation rate. Sustained or increased inflation in the PRC may have an adverse impacton the PRC’s economy and may materially and adversely affect our business andfinancial results.

 

**Uncertain Legal System AndApplication Of Laws.**

 

The legislative trend inthe PRC over the past decade has been to enhance the protection afforded toforeign investment and allow for more active control by foreign parties offoreign

 

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invested enterprises.There can be no assurance that this will continue. In addition, as the PRCeconomy, business and commercial framework and legal system all continue todevelop, that development may adversely effect the Company’s activities in thePRC or the ability of the Company to enter into Sino-foreign agreements.

 

**PRC Legal System BusinessLaws Developing.**

 

The PRC does not yetpossess a comprehensive body of business law or a consolidated body of lawsgoverning foreign investment enterprises. As a result, the enforcement,interpretation and implementation of existing laws, regulations or agreementsmay be sporadic, inconsistent and subject to considerable discretion. The PRC’sjudiciary has not had sufficient opportunity to gain experience in enforcinglaws that exist, leading to a higher than usual degree of uncertainty as to theoutcome of any litigation. As the legal system develops, entities such as theCompany may be adversely effected by new laws, changes to existing laws (orinterpretations thereof) and preemption of provincial or local laws by nationallaws. Even when adequate law exists in the PRC, it may not be possible toobtain speedy and equitable enforcement of the law.

 

**Government CurrencyControls.**

 

The PRC government imposescontrol over its foreign currency reserves in part through direct regulation ofthe conversion of its currency, Renminbi (“RMB”) into foreign exchange andthrough restrictions on foreign imports. The conversion of RMB into Hong Kongand United States Dollars (“U.S. Dollars”) must be based on rates set by thePeople’s Bank of China (“PBOC”), which rates are set daily based on theprevious day’s Chinese interbank foreign exchange market rate with reference tocurrent exchange rates on the world financial markets.

 

Although the RMB to U.S.dollar exchange rate has generally been stable from 1994 through 2004, in 2007,the RMB appreciated against the U.S. Dollar. The PRC government has stated its intention to intervene in the futureto support the value of the RMB, there can be no assurance that exchange rateswill not become volatile. Exchange rate fluctuations may adversely effect theCompany because of foreign currency denominated liabilities, and may materiallyadversely effect the value, translated into U.S. dollars, of the Company’s netfixed assets situated and to be situated in the PRC, earnings and dividends.

 

**Foreign Currency Risk.**

 

The Company operates inHong Kong, the PRC and trades with both local and overseas customers, and isexposed to foreign exchange risk arising from various currency exposures,primarily with respect to purchases in, Hong Kong dollar, Renminbi andEuro.  Foreign exchange risk arises fromcommitted and unmatched future commercial transactions, such as confirmedimport purchase orders and sales orders, recognized assets and liabilities, andnet investment in the PRC operations. The Company uses derivative financial instruments such as foreignexchange contracts to hedge certain foreign currency exposures.  There can be no assurances that the Company’shedging strategies will be adequate to avoid this foreign exchange risk.

 

**TurbulentRelations With The United States Of America (“United States”).**

 

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

 

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**Certain Risks Relating To The Company’s Business**

 

**We Have Made And May MakeFurther Acquisitions Without Your Approval.**

 

Although we endeavor toevaluate the risks inherent in any particular acquisition, there can be noassurance that we will properly or accurately ascertain all such risks. We willhave virtually unrestricted flexibility in identifying and selectingprospective acquisition candidates and in deciding if they should be acquiredfor cash, equity or debt, and in what combination of cash, equity and/or debt.

 

In October of 2005,we completed our acquisition of 51% of the capital stock of two entities,making the two entities our majority owned subsidiaries, and we have taken andare seeking to take equity positions in related businesses.  We will not seek stockholder approval for anyadditional acquisitions unless required by applicable law and regulations. Ourstockholders will not have an opportunity to review financial and otherinformation on acquisition candidates prior to consummation of any acquisitionsunder almost all circumstances.

 

Investors will be relyingupon our management, upon whose judgment the investor must depend, with onlylimited information concerning management’s specific intentions.

 

There can be no assurancethat the Company will locate and successfully complete any such additionalacquisitions, or any acquisition will perform as anticipated, will not resultin significant unexpected liabilities or will ever contribute significantrevenues or profits to the Company or that the Company will not lose its entireinvestment in any acquisition.

 

**Dependence Upon Management.**

 

The Company is dependentupon the services of its executive officers, in particular Mr. T.C.Leung, the Chairman of the Company’s Board of Directors and its Chief ExecutiveOfficer. The business of the Company could be adversely effected by the loss ofservices of, or a material reduction in the amount of time devoted to theCompany by its executive officers. The Company does not maintain “Key Man” lifeinsurance on the lives of any of its officers and directors.  See Item 6. “Directors, Senior Management andEmployees.”

 

**AdverseImpact Upon The Company Of PRC’s Credit Restrictions.**

 

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

 

**Competition With Vendors.**

 

As the Company plans toassemble products of the kind that it presently distributes, the Company maydirectly compete with certain of its vendors. Any such direct competition may 

 

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adversely effect itsrelationship with its vendors. See Item 4. “Information on the Company.”

 

**Dependence On Vendors;Lack Of Long Term Agreements.**

 

The Company distributessupplies manufactured by a number of vendors, including Hioki E.E. Corp. (“Hioki”),US Filter/Chemical Feed and Disinfection Group (“USF”) and Lachat Instruments, Inc.(“Lachat”)**,** which are the Company’s largestsuppliers. The Company has only a letter from Hioki appointing the Company asHioki’s sales representative in the PRC, Hong Kong and Macau. Althoughalternative sources of supply exist, there can be no assurance that thetermination of the Company’s relationship with any of the above or othervendors would not have a short-term adverse effect on the Company’s operationsdue to the Company’s dependence on these vendors.  A substantial number of the Company’ssuppliers have been selling their products into China directly and throughother distributors.

 

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

 

T.C. Leung, the Company’sChairman of the Board and Chief Executive Officer, as a practical matter, isable to nominate and cause the election of all the members of the Company’sBoard of Directors, control the appointment of its officers and the day-to-dayaffairs and management of the Company. As a consequence, Mr. Leung canhave the Company managed in a manner that would be in his own interests and notin the interests of the other shareholders of the Company. See Item 7. “MajorShareholders and Related Party Transactions” and Item 6. “Directors, SeniorManagement and Employees.”

 

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

 

Principles of BritishVirgin Islands (“BVI”) corporate law relating to such matters as the validityof the Company procedures, the fiduciary duties of management and the rights ofthe Company’s shareholders may differ from those that would apply if theCompany were incorporated in a jurisdiction within the United States.

 

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

 

The BVI law protectingthe interests of the minority shareholders is not as protective in allcircumstances as the law protecting minority shareholders in United Statesjurisdictions. The shareholders of the Company may have more difficulty inprotecting their interests in the face of actions by the Company’s Board ofDirectors, and may have more limited rights, than they might have asshareholders of a company incorporated in many United States jurisdictions.

 

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**Anti-Takeover Provisions.**

** **

The Company has 5,000,000shares of “blank check preferred stock” authorized. The “blank check preferredstock” is intended to strengthen the Company’s ability to resist an unsolicitedtakeover bid and may be deemed to have an anti-takeover effect. The Board ofDirectors has the right to fix the rights, terms and preferences at the time ofissue of “blank check preferred stock” without further action by ourshareholders.

 

**Uncertainty Of EnforcingUnited States Judgments.**

** **

There is some uncertaintywhether BVI courts would enforce judgments of the courts of the United Statesand of other foreign jurisdictions, or enforce actions brought in the BVI whichare based upon the securities laws of the United States. A final monetaryjudgment obtained in the United States will be treated as a cause of action initself by the BVI courts so that no retrial of the issues would be necessary,provided that material preconditions are met and the proceedings pursuant towhich judgment was obtained were not contrary to the rules of naturaljustice.

 

All of the Company’sdirectors and executive officers reside outside of the United States, serviceof process upon the Company and such persons may be difficult to effect in theUnited States upon all such directors and officers.

 

All of the Company’sassets are and will be located outside of the United States, in Hong Kong andthe PRC, and any judgment obtained in the United States may not be enforced inthose jurisdictions. Hong Kong courts will not directly enforce against theCompany or such persons judgments obtained in the United States. There is alsosubstantial doubt as to the enforceability in the PRC of actions to enforcejudgments of the United States’ courts arising out of or based on the ownershipof the securities, including judgments arising out of or based on the civilliability provisions of United States federal or state securities laws orotherwise. See “– Certain Legal Consequences of Incorporation in the BritishVirgin Islands; Rights of Shareholders not as Extensive as in U.S.Corporations.”

 

**Being AForeign Private****Issuer Exempts Us From********Certain Securities And****Exchange Commission (“Commission”) And National Association Of SecuritiesDealers Automated Quotation System (“NASDAQ”) Requirements.**

 

Weare a foreign private issuer within the meaning of rules promulgated underthe Securities Exchange Act of 1934 (the “Exchange Act”). As such, we areexempt from certain provisions applicable to United States public companiesincluding:****(1) the rules under theExchange Act requiring the filing with the Commission of quarterly reports on Form 10-Qor current reports on Form 8-K;****(2) thesections of the Exchange Act regulating the solicitation of proxies, consentsor authorizations in respect of a security registered under the Exchange Act;****(3) the provisions of Regulation FD aimed atpreventing issuers from making selective disclosures of material information; (4) thesections of the Exchange Act requiring insiders to file public reports of theirstock ownership and trading activities and establishing insider liability forprofits realized from any “short-swing” trading transaction (i.e., a purchaseand sale, or sale and purchase, of the

 

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issuer’sequity securities within less than six months);****(5)Becauseof these exemptions, investors are not afforded the same protections orinformation generally available to investors holding shares in public companiesorganized in the United States.

 

**Our Securities Must Continue ToMeet Qualitative And Quantitative Listing Maintenance Criteria For The NASDAQSmallCap Market.**

 

Our securities are quotedand traded on the NASDAQ SmallCap Market. There can be no assurance that wewill continue to meet both the qualitative and quantitative criteria forcontinued quotation and trading of our securities on the NASDAQ SmallCapMarket. That criteria undergoes periodic review.

 

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

 

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

 

Although, in the past, wehave been able to satisfy corporate governance criteria applicable to NASDAQ’sSmallCap Market, those criteria are difficult to comply with and include, amongother things: (a) a heightened degree of independence of members of theboard of directors with independent directors to, among other things: holdregular meetings among themselves only; (b) establishment of a code ofconduct addressing compliance with laws; and (c) a limit on payments toindependent directors and their family members (other than for services on theboard of directors).

 

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

 

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**Being A “Controlled Company”Exempts Us From Certain Other Corporate Governance Criteria Applicable ToNASDAQ Listed Issuers.**

 

As a result of T.C. Leung, the Company’s Chairman of the         Board and Chief Executive Officerbeneficially owning in excess of the majority voting power of our OrdinaryShares, we are a “controlled company” as that term is defined in rules andregulations applicable to NASDAQ listed issuers. As a “controlled company”, weare not required to comply with certain NASDAQ corporate governance criteriaincluding, among other things, the requirements that the majority of our Boardbe independent directors, and their having the authority to approve directornominations and executive officer compensation.

 

**We Are Not Subject To Various Corporate****Governance Measures, WhichMay Result In Shareholders Having Limited Protections.**

 

Recent Federallegislation, including the Sarbanes-Oxley Act of 2002 (“SOX”), has resulted inthe adoption of various corporate governance measures by securities exchangesand NASDAQ designed to promote the integrity of the corporate management andthe securities markets.  Being a “controlledcompany,” we are exempt from many, but not all, of those requirements.  Furthermore, the absence of such practiceswith respect to our Company may leave our shareholders without protectionsagainst interested director transactions, conflicts of interest and similarmatters.

 

**We May Be Exposed To Potential Risks RelatingTo Our Internal Controls Over Financial Reporting And Having Those ControlsAttested To By Our Independent Auditors.**

 

Pursuant to Section 404 of SOX, the SEC adopted rules requiringpublic companies to include a report of management on the company’s internalcontrols over financial reporting in their annual reports, including Form 20-F.  In addition, the independent registeredpublic accounting firm auditing a company’s financial statements must alsoattest to and report on management’s assessment of the effectiveness of acompany’s internal controls over financial reporting as well as the operatingeffectiveness of a company’s internal controls. We were not subject to these requirements for the fiscal year ended December 31,2007 as a result of temporary rules adopted by the SEC.  We are evaluating our internal control systemsin order to allow our management to report on, and our independent auditorsattest to, our internal controls, as a required part of our Annual Report on Form 20-Fbeginning with that report required when the temporary rules cease beingeffective**.**

 

While we expect to expendsignificant resources in developing the necessary documentation and testingprocedures required by SOX, there is a risk that we will not comply with all ofthese requirements.  At present, there isno precedent available with which to measure compliance adequacy.  Accordingly, there can be no assurance thatwe will receive a positive attestation from our independent auditors.

 

In the event we identify significant deficiencies ormaterial weaknesses in our internal controls that we cannot remediate in atimely manner or we are unable to receive a positive attestation from ourindependent auditors with respect to our internal controls, investors and 

 

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others may lose confidence in the reliability of our financialstatements, our ability to obtain equity or debt financing could suffer and themarket price of our shares could decline.

 

**The Market Price Of OurSecurities Has Been Fluctuating Widely.**

 

During the past fiveyears, the market price of our Ordinary Shares has fluctuated widely onoccasion. Additionally, the Company knows of no reason for these widefluctuations. See Item 9.C- “Markets.”

 

**There Are Risks In Purchasing Low-PricedSecurities.**

 

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

 

In the event our securities are no longer listed on the NASDAQ SmallCapMarket or are not otherwise exempt from the provisions of the SEC’s “pennystock” rules, such rules may also affect the ability of broker-dealers andinvestors to sell our securities.

 

**There Is No Assurance Of AContinued Public Market For Our Securities.**

 

There can be no assurancethat a trading market for our Ordinary Shares will continue.

 

## **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) Limited, a Hong Kong corporation involved in thedistribution of advanced water treatment equipment (“Far East”). In March 1997,the Company acquired all the issued and outstanding capital stock of Far Eastand it became a wholly-owned subsidiary and was the primary operational entityof the Company.

 

During Fiscal 2005, we completed our plan to increase our equityposition in Yixing Pact Environmental Technology Company Limited (“Yixing”) andPact Asia Pacific Limited (“Pact”), a company engaged in water and waste-watertreatment solution business.  We hadpreviously owned thirty (30%) percent of their capital stock.  With the addition of twenty-one (21%) percentof Pact’s and Yixing’s capital stock in October 2005, they became ourmajority-owned subsidiaries.

 

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DuringFiscal 2007, we purchased twenty (20%)percent of the equity in a company engaged inthe air pollution control business.  In January 2008,we purchased twenty (20%) percent of the equity in another related industrybusiness.         China’s rapid economic growth had led it to become one of the world’s largestemitters of sulfur dioxide.  The damagedue to acid rain caused by sulfur dioxide is vast, and is also affecting theneighboring countries as air currents transport sulfur dioxide.  To tackle these environmental andgeo-political issues, China has established targets to reduce key pollutants,namely, sulfur dioxide, nitrogen oxides and suspended particulates.  Heavy polluters are being warned to reducetheir emissions or face penalties.  Webelieve that as a result, the demand of desulphurization and dust removalequipment will increase accordingly.

 

We are in the process ofshifting our emphasis from the distribution of instruments and equipment to engineeringand manufacturing activities.  Revenuesfrom our “trading” activities have fallen-off as a substantial number of oursuppliers have been selling their products into China directly and throughother distributors.  Revenues and netincome generated from our environmental engineering department and our majorityowned subsidiaries, Pact and Yixing (companies engaged in the water and wastewater treatment solution business), have more than offset our falling “trading”revenues.

 

In November of 2006we established Shanghai Euro Tech Environmental Engineering Company Ltd. (“Shanghai– Environmental”) as a wholly-owned subsidiary under the laws of the People’sRepublic of China, to carry on our environmental engineering department withthat line of business and its personnel transferred from our subsidiary, EuroTech (Far East) Ltd.  Shanghai –Environmental is focusing on our water and waste-water treatment engineeringbusiness and is planned to be the home of our planned expansion into the airpollution control business.

 

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

### *** ***

The Company is engaged in three different major activities:

 

(1)           *Equipmentand Instrument Distribution.*

 

The Company had been primarily a distributor of a wide range ofadvanced water treatment equipment (including chlorination equipment),laboratory instruments, analyzers, test kits and related supplies and powergeneration equipment (including recorders and power quality analyzers). TheCompany acts as an exclusive and non-exclusive distributor for well-knownmanufacturers of such equipment, primarily to commercial customers andgovernmental agencies or instrumentalities in Hong Kong and the PRC. During itsfiscal year ended December 31, 2007 (“Fiscal 2007”) the Companydistributed products to in excess of 1,000 customers, including the Hong KongEnvironmental Protection Department, Hong Kong Water Supplies Department,Government Laboratory, Drainage Services Department China’s NationalEnvironmental Protection Agency, Harbin Water, Harbin Environmental MonitoringCenter, Guangzhou Water, Guiyang Environmental Monitoring Centre and tosubdistributors located in Hong Kong, the PRC and Macau. These products aremanufactured by a substantial number of major American, European

 

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andJapanese corporations, including Hioki, USF and Lachat, which are the Company’slargest suppliers, with purchases from them accounting for approximately 36%,9% and 8%, respectively, of the Company’s sales during Fiscal 2006 andapproximately 32%, 10%, and 5%, respectively of the Company’s sales during Fiscal 2007.

 

TheCompany distributes products through its Hong Kong headquarters, its retail shops and representative offices located in Beijing, Shanghai,Guangzhou, Chongqing, Xi ́An, Shenyang, Wuhan, Fuzhou, Chengdu and Urumqi and through non-exclusive arrangements withindependent sub-distributors located in Hong Kong, the PRC and Macau.

 

(2)                                  *Manufacturing.*

 

The Company believes that by assembling theproducts it distributes, it may realize increased gross profit margins andgreater revenues and net income than if it remains only a distributor of suchproducts with sales of the Company first product offering, an InfraredPhotometric Oil Analyzer, commencing in 2003. Similarly, the Company believesthat by using its existing regional sales efforts in the PRC, it may be betterable to compete with increased competition from our own suppliers and otherdistributors.

 

(3)           *Environmental Services.*

 

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

 

In August 2007, Far East acquired a 20% equity interest in ZhejiangTianlan Desulfurization and Dust-Removal Co. Ltd. (“BlueSky”), a company influe gas desulphurization, flue gas de-nitration, dust removal and purificationof industrial waste gases, for approximately US$4,648,000.

 

Blue Sky, founded in2000, is a growing concern that we believe provides a comprehensive service fordesign, general contract, equipment manufacturing, installation, testing andoperation management of the treatment of waste gases emitted from variousboilers and industrial furnaces of power plants, steel works and chemicalplants.

 

We expect that bysecuring an equity stake in BlueSky’s business, we have a strategic partner towork within China’s environmental protection business.  With BlueSky’s technology and technicalsupport, we believe we are able to provide services and environmental solutionsnot only for water and waste-water treatment but also for air pollution controlfor industrial clients in China.

 

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**ExpansionPlans.**

 

Acidrain and sulfur dioxide emissions are serious problems in China. We areplanning to expand our activities in the air pollution control business by forming joint ventures, investing or acquiring someinterest in companies, such as Blue Sky, involved in (i) the dust removaland/or (ii) the flue gas desulphurization for power plant industries andother similar industries.

 

Wecontinuously search for other companiesengaged in manufacturing these products and equipment and in engineeringcompanies which design and build pollution control systems.  We anticipate that the costs of any suchacquisition would be drawn from our general working capital and, possibly, byprivate sales of our securities including the potential exercise by officersand directors of their options.  We haveno commitments or indications of interest for the private sales of oursecurities.

 

In January 2008,we  acquired a 20% equity interestin  Zhejiang Jia Huan Electronic Co.Ltd., (“Jia Huan”) for approximately US$2,500,000. Jia Huan has been in theenvironmental protection business since 1969 and is based in Jin Hua, Zhejiang.

 

In June 2006, PACT enteredinto a letter of intent with Pact Engineering FZC (“PACTFZC”), a Middle Easternwater treatment company based in Dubai, and Ecomacchine S.p.A. (“ECO”), an Italian based companyengaged in the manufacture of sludge and dewatering equipment.  In June 2007, the joint venture PactEnvironmental Equipment Co. Limited, was registered in the PRC. PACT investedUS$300,000 and has a 60% controlling interest of the JV, and ECO and PACTFCZ,(a company majority owned by George Hayek, the Company’s Managing Director),  each invested US$100,000 in consideration for20% interests.

 

Revenueand income from distribution activities are declining gradually due toa greater number of our significant suppliers marketing and selling theirproducts into the China market through other distributors as well as theCompany.  Many of these otherdistributors are local Chinese companies and can operate with a lower overhead.

 

Ourplans for the near term also include:  (a) continueduse of our retail shops to sell “low-tech” products and our own products.  We believe that these shops are operatingwith a lower overhead than the rest of the Company; and (b) we believethat the continued “low-tech” product sales through our retail shops coupledwith our “on-line” product sales will allow us to continue to offer products atlower 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 directly withcustomers and potential customers.

 

Manufacturing

 

Salesof the Infrared Photometric Oil Analyzer commenced in 2003.  During 2004, we began selling turbidityinstruments and spectrometers that we developed and manufactured

 

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ourselves and began assemblingand selling the Total Organic Analyzer of O.I. Corporation.  In November 2006, we began actively marketing ourTotal Organic Carbon (TOC) analytical instrument that measures the degree ofthe pollution level of drinking water, ground water and waste water. Our TOCanalyzer has been two and a half years in research, development and fieldtesting of prototypes sold to our customers. A number of targetcustomers showed their interest in this product during our trade shows andseminars. We had made some modifications to this product to improve the qualityand obtained updated ChineseMetrology Certification, a certificate issued by Bureau of Quality andTechnical Supervision in November 2007. We have also upgraded otherexisting instruments and developed a quick response Chemical Oxygen Demand (“COD”)test instrument in 2007, for use on surface water, underground water anddomestic and industrial wastewater.

 

In2005, the Company also began offering two new company manufacturedturbidimeters.  One of the newturbidimeters is directed at water treatment plants, environmentalmonitoring status, hydrological stations and the second is directed at beer andother beverage processing facilities and it analyzes the particles contained inthe beverage.  See “- Product AssemblyOperations”. During the next twelve months, we intend to assemble and/ormanufacture additional products in the future and seek opportunities with oursuppliers to assemble their products, secure manufacturing and/or assemblyfacilities and seek another manufacturer of analytical instruments to acquire.

 

EnvironmentalServices

 

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

 

Pact-Yixing have completed a substantial number ofindustrial water and waste-water treatment projects in the PRC.  The majority of these projects are for largemultinational manufacturing facilities for clients from the USA, Europe andJapan.  Process design as well asmechanical and electrical engineering are completed in-house and manufacturingcontracted to approved fabricators of components.  Fabrication drawings are also done in-housefor submittal to said fabricators under the supervision of Pact-Yixing’squality control engineers.

 

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

 

The water and waste-water treatment processes appliedat Pact-Yixing cover chemical, physical, biological and membraneseparation.  A combination of thoseprocesses are normally used to treat a specific industrial process feed oreffluent.  With respect to the watertreatment side of Pact-Yixing’s business, they design and build filtrationequipment, ion-exchange softeners and demineralizers, reverse osmosis,electro-deionization, chemical treatment systems and package type mobile watertreatment plants.  As for waste-watertreatment, Pact-Yixing design and build biological treatment systems, oilcoalescers, dissolved air flotation, lamella clarifiers, chemical reactortanks, ultrafiltration, microfilitration, dewatering systems and package

 

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type mobile sewage treatment plants.  Biological treatment plants cover bothaerobic and anaerobic processes. State-of-the-art aerobic processes of SBR (sequential batch reactors)and MBR (membrane biological reactors) are technologies also covered byPact-Yixing.  See **“**Glossary**.”**

 

In 2006, Pact-Yixingcommenced selling water and waste-water treatment equipment.  The equipment are components of systemstraditionally marketed by Pact-Yixing. The equipment are partially manufactured to Pact-Yixing’s in-housedesign and partially procured from approved Chinese suppliers.  It is contemplated that Pact-Yixing’s tradingoperation will mainly sell equipment to clients from outside China, startingwith the Middle East, Africa and European and American companies operating inthe Middle East and Africa.

 

TheCompany believes that the Pact-Yixing business is complementary to the Company’sbusiness as the Company continues to sell and market products of others. TheCompany expects that with this acquisition it may be able to gain a competitiveadvantage by offering customers and potential customers not only hardware butsolutions to engineering problems as well. Also, the Company believes that itsequity stake in Pact-Yixing enhances its position as a supplier to Pact. TheCompany continues to seek to make a similar acquisition of an engineeringcompany specializing in air pollution control or other complementaryenvironmental protection fields or in the power generation field.

 

A purpose of thisacquisition was to reconfirm our direction to place a greater emphasis ondeveloping an engineering solution business, instead of relying on its thencurrent activities.

 

During Fiscal 2007 and Fiscal 2006, our share of Pact-Yixing’s revenuerepresented 25% and 15%, respectively, of ourrevenue.

 

**Equipment and InstrumentDistribution**

 

**Environmental Protection Equipment.**

 

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

 

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

 

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TheCompany also distributes continuous-reading process analyzers, processturbidimeters, pH controllers and analyzer accessories. These products aregenerally used to monitor and control drinking water quality to ensure thatwater treatment procedures comply with regulatory standards. See “Glossary.”

 

*Scientific Instruments.* The Companydistributes analytical instruments, environmental monitoring instruments andgeneral purpose laboratory instruments. Analytical instruments include, but arenot limited to, chromatographs, mass spectrometers, flow injector analyzers andatomic spectrometers. Environmental monitoring instruments include both air andwater quality monitoring instruments. Air quality monitoring instruments aregenerally divided into those which monitor ambient (i.e., atmospheric) air, andthose which monitor pollution sources. Additionally, the Company offers generalpurpose laboratory instruments including a variety of water quality monitoringand analysis equipment, such as continuous reading process analyzers, processturbidimeters, pH controllers, and test kits for monitoring chemical content inwater (i.e., chlorine, fluorides, etc.). See “Glossary.”

 

Customers for the analytical instruments includegovernment agencies, academic and research institutions and major laboratories.The Company also distributes products to beverage producers and restaurants,including water quality test kits to more than twelve bottling plants of a wellknown United States soft drink producer, which are located in the PRC; water qualitymonitoring instruments to well known United States fast food franchisor’srestaurants located in Hong Kong and the PRC, and to well known United Statesand European beer producers bottling plants located in Wuhan, PRC. Each suchsoda producer, restaurant and beer bottler does not account for a significantportion of our sales.

 

Customersfor air and water quality monitoring instruments also include governmentagencies such as the Hong Kong Environmental Protection Department, which usesa Company distributed water quality monitoring system to monitor the waterquality of Hong Kong’s Victoria Harbor, more than ten water treatment plantslocated in the PRC (including sites at Beijing, Tianjin, Guangzhou and Wuhan),China’s National Environmental Protection Agency, Harbin Water, HarbinEnvironmental Monitoring Centre, Beijing Huai Rou, Shunyi District CDC andLiaoning Jinzhou Waste-water Treatment Plant and the Beijing EnvironmentalMonitoring Centre.

 

TheCompany derived approximately 38.7%, 33.2% and 34.8%of its revenues from the sale of Scientific Instruments during Fiscal 2007, Fiscal 2006 and Fiscal 2005, respectively.

 

**EnergyConservation And Related Products.** The Company distributes generaltesting and measuring equipment including multi-channel digital and analoguerecorders, signal amplifiers and calibration equipment for energy conservation,renewable energy equipment and power quality analyzers to industries includingpower plants, railway and aero-space industries, utilities, educational institutionsand telecommunications companies.

 

TheCompany derived approximately 36.9%, 45.7% and 34.2%of its revenues from the sale of these Energy Conservation and Related Productsduring Fiscal 2007, Fiscal 2006 and Fiscal 2005, respectively.

 

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**Process Control and EngineeringProducts*.***The Company provides process control systems specifically designed forthe industrial needs of clients including sensors, temperature gauges, pressuregauges, flow meters, valves, temperature and pressure transmitters and controldevices, temperature and pressure calibrators, moisture, power, energy andharmonic analyzers. Chlorination disinfection systems are also distributed byFar East in conjunction with water treatment, sewage discharge and swimmingpool water treatment. Customers for the foregoing distributed products includegovernment water supply agencies, water treatment facilities, power andelectric companies, petrochemical plants and instrument manufacturers. For example,the Company distributes chlorination disinfection systems to Hong Kong’s ChekLap Kok airport and its environs.

 

TheCompany derived approximately 18.9%, 13.1% and 19.5%of its revenues from the sale of Process Control and Engineering Productsduring Fiscal 2007, Fiscal 2006 and Fiscal 2005, respectively.

 

**SpecialProjects And Engineering Department.** In conjunction with thedistribution of products such as programmable logic controllers, telemetryunits and SCADA systems and software, the Company also provides systemsengineering to government agencies, waste-water treatment and power generationplants and beverage producers.

 

TheCompany derived approximately 4.1%, 6.9% and 10.2%of its revenue from its Special Project Operation during Fiscal 2007, Fiscal2006 and Fiscal 2005. This revenue was derived primarily from sales of productsand supply systems.  The Company isplacing a greater emphasis on developing an engineering solution to business asone of our key suppliers Eurotherm has been directly marketing and sellingtheir process automation product directly into the PRC and we have receivedfewer projects situated in Hong Kong.

 

Our special projects and engineering department is believed by theCompany to be the main contractor and system integrator of a large number ofindustrial and municipal waste-water, water treatment and power generationplants in the PRC. Specific services provided by this group include automatedcontrol system design, the operation and management of various waste-water, waterand power generation projects. We endeavor to introduce, develop, and promotenew and advanced technologies, products, and appropriate technical developmentsfrom abroad. We have also been cooperating with established technologycompanies and engage in systems and special projects in Programmable LogicControl, Telemetry unit, SCADA systems, Human Machine Interface Software andSequential Event Recording.

 

**TechnicalSupport.** The Company’s technical support staff providescustomers with maintenance, installation assistance, and calibration services,and assists sales personnel in giving technical advice to and performingproduct demonstrations for customers. Technical Support services derivedapproximately 1.4%, 1.1% and 1.3% ofits revenues from Technical Support Operations during Fiscal 2007, Fiscal 2006,Fiscal 2005, respectively.

 

**Customers.** During Fiscal2007, the Company distributed products to in excess of 1,000 customers,including sub-distributors, located in Hong Kong, the PRC and Macau. No single

 

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customer accounted for more than5% of the Company’s revenues during Fiscal 2007. The Company does not believethat any single customer or sub-distributor is material to its operations.

 

**Product Assembly Operations**

 

The Company, through its PRC Corporation, Shanghai Euro Tech Limitedestablished in 1999 in the Pudong Jin Qiao Export Processing Zone of Shanghai, engages in the development, production,sales and servicing of environmental equipment, including the development ofmodern laboratory analyzers, on-line measuring equipment and other analyzersfor chemicals. Our products are “tailor-made” for the diversified needs ofequipment users. Main products include Infrared Photometric Oil Analyzer(IPOA), COD analyzers, Total Organic Carbon Analyzer, turbidity meters, totalsuspended solid analyzers, dissolved oxygen analyzers, various types ofspectrophotometers as well as a full spectrum of matching chemical reagents. Inlate 2005, we began offering two new turbidity meters, manufactured by theCompany.** **In 2008 we introduced aFlue gas analyzer for use****in****environmentalcompliance monitoring. We are in the process of developing an energymeter (a device measuring electric energy consumption and corresponding carbondioxide emissions) and water toxicity analysis instruments.

 

The Company believes that by establishing product assembly operationsin the PRC will not only increase revenues, expand its customer base, 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.

 

**Sources ofSupply**

 

The Company distributes products manufactured by a number of vendors,including Hioki, USF and Lachat, which are the Company’s primary suppliers, see“- Business Overview”. The Company has exclusivity agreements for specifiedgeographic areas with many of its suppliers for certain products. Thoseagreements do not encompass all products distributed by the Company or all ofthe market areas serviced by the Company. In addition, some of these agreementsare memorialized not as formal contracts but rather through otheracknowledgements or correspondence which may contain a vague, if any,description of the terms and conditions of such agreement or arrangement, andtherefore may be unenforceable.  TheCompany has only a letter from Hioki appointing the Company as Hioki’s salesrepresentative in the PRC, Hong Kong and Macau. Hioki has its own PRC distribution company and appointeda Japanese trading company and other distributors to sell its products in China.  The Company continues to be one of Hioki’s non-exclusive distributors.  TheCompany’s agreement with USF continues in effect for successive renewal termsof one year each, unless either party gives written notice of non-renewal atleast 30 days prior to the end of any renewal term.  The Company’s agreement with Lachat continuesin effect for successive renewal terms of one year and is terminable on ninetydays notice by either party.  The Company’sagreement with Hach is terminable on ninety days notice by either party.Although alternative sources of supply exist, there can be no assurance thatthe termination of the Company’s relationship with any of the above or othervendors would not have a short-term adverse effect on operations.

 

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**Expansion**

 

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

 

**RegulatoryEnvironment**

 

Concerns about and awareness of pollution problems andenvironmental issues have grown at all levels of PRC government as the PRCexperienced economic growth. Environmental protection laws and strictregulations have been enacted and are buttressed by increased budgetallocations for environmental regulation, monitoring and enforcement. The PRC’sprimary environmental protection agency is the State Environmental ProtectionAgency (SEPA), under which there are Environment Protection Bureaus in eachcity and county. According to oral information received by management fromSEPA, under bureau management, there are two environment monitoring systems:one system consists of over 2,200 monitoring stations to collect and analyzethe environmental data of each city and county; another system consists of over2,500 stations to monitor specific industrial districts or factories which havebeen identified as major pollution sources due to their non-compliance withenvironmental regulations. The PRC government has established ambitious targetsin its 11th Five-Year Program (2006-2010) to slash emissions ofpollutants, including sulfur dioxide emissions, by 10%.  The PRC government passed a law requiringpower distributors to combatglobal warming.  A central government fund, financed by anational tariff increase, will subside the tariff gap between more expensiverenewable energy and the national average tariff.** **Preferential policies alsoencourage construction of renewable energy projects, projects in poorerinterior regions that are often rich in water, solar and wind resources.  The Company has supplied water and airquality monitoring and analytic instruments to these monitoring stations forseveral years. There can be no assurance that the agencies will continue to usethe Company’s products for these purposes, or that other market competitorswill not enter the market with superior products, distribution systems or morecompetitive prices. See “Competition.”

 

**Competition**

 

The Company faces competition from other distributorsof substantially similar products as well as the manufacturers of suchproducts, and in both foreign and Chinese markets.  The Company faces its principal competitionfrom manufacturers and other distributors of its core products located in HongKong and the PRC.  Moreover, the Companyhas implemented plans to assemble products of the kind that it presentlydistributes (see “-Product Assembly Operations”).  Assembly operations have developed to thestage where some products have already been presented to the market and theCompany is in direct and unavoidable competition with certain of its vendors.  There can be no assurance that the existenceof this direct competition will not impair the Company’s ability or suchcompetitor’s willingness to continue providing other 

 

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products for continueddistribution by the Company and that such a development would not materiallyadversely effect the Company’s core business.

 

During Fiscal 2007, Fiscal 2006 and Fiscal 2005, theCompany’s gross profit margins were approximately 25.1%, 24.1% and 21%, respectively.The Company believes that it competes with the PRC manufacturers on the basisof quality and technology. The Company believes it offers foreign-manufacturedproducts which are of higher quality and use more advanced technology thanproducts manufactured in the PRC. The Company believes that it competes withforeign manufacturers and other distributors of their products on the basis ofthe Company’s more extensive distribution network and an establishedreputation. Pact-Yixing focuses on amarket of providing water and waste water treatment services to multinationalcompanies.  The Company competes in thismarket based upon the quality of its products and having knowledgeable staff.

 

**Website**

 

The Company,through its subsidiary, ChinaH2O.com Limited, a Hong Kong corporation, has ainternet platform. The website is located at (http://www.chinah2o.com). Thewebsite is directed at environmental businesses in China.  The website provides environmental news,directories of western suppliers, potential clients in China, advertisementspace and business opportunities.  Thebusiness and other activities generated by ChinaH2O.com Limited have had asynergistic effect with those of the Company indirectly by feeding marketinformation, sales leads and tender information to the Company.

 

**Sales andMarketing**

 

The Company distributes products through its principaloffice located in Hong Kong and its representative PRC offices located inBeijing, Shanghai, Guangzhou and Fuzhou.  During 2007, theCompany closed 1 representativeoffice and consolidated their personnel into our retail shop, as the office did not financially contribute to theCompany as anticipated. The Company has a marketing and sales force of 72 people who are paid a salary pluscommission based on sales. The Company’s offices also coordinate the sales effortsof approximately fifty other companies located in the PRC which act assub-distributors. These sub-distributors are engaged on a non-exclusive basisto distribute the products of other distributors. Each of the fiftysub-distributors accounted for less than two percent of the Company’s salesduring Fiscal 2007, Fiscal 2006 and Fiscal 2005.

 

Following the opening of our first retail shop inShanghai in 2001, (closed in 2007 but absorbed into our own Shanghai Euro TechTrading (“Shanghai Limited”))****Euro Techretail outlets are now found in a number of major cities in the PRC, includingBeijing and Guangzhou. Our staff at these shops assists customers in selectingthe equipment, auxiliary parts and products to suit customer specifications.Equipment that needs to be repaired or provided with routine maintenance can bereturned to us via these shops, as our retail shops, except for the Beijingshop, are also maintenance centers. The Company has found the six existing shops to be useful asdemonstration locations easily accessed by local customers who can pay in localcurrency while “off the shelf” sales are made which move its inventory morereadily. In addition to the shops, we also have four branches or representativeoffices of these shops.  All of the foregoingare perceived by the Company to have had a positive impact on its businessreputation while reducing the 

 

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Company’sdependency on sub-distributors who may not be loyal to the Company and distributeproducts of our competitors. As foreign entities are not generally permitted toown these facilities, these shops are owned by non-officer/director, employeesof the Company with funds from the Company through non-fixed term loansaggregating approximately US$267,000 bearing a nominal rate of interest. The shops do not havefinancing from other sources. There can be no assurance that these shops willcontinue to be economically viable, that the Company will not sustain losses inconnection with the loans to the shops; or the shops will result in anysignificant revenues or profits for the Company. Also, similar shops may beestablished by our competitors and/or third parties.

 

Foreign entities are now permitted to own retail shopsin some regions of PRC.  The Company hasestablished two wholly-owned retail shops in Chongqing and Xi’An. We plan toestablish another  wholly-owned retail shop in Guangzhou and  close the current retail shop in Guangzhou owned by non-officer/director, employees of theCompany.  During 2007, we closed the Wuhan representative office, mergingpersonnel into our Wuhanshop.  We will continue to consolidateour operations by combining the retail shops and representative offices in thesame cities or close shops and offices that do not appear to be contributing tothe Company as expected.

 

These shops (or theirrepresentative offices) were opened on the following dates:

 

Retail Shops

 

Ownedby non-officer/director, employees of the Company:

 

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

 

Ownedby the Company:

 

| Chongqing  |   | November 2006 |
|------------|--------|--------------------|
| Xi ́An |   | April 2007    |

 

RepresentativeOffices

 

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

 

### ***Item4C.          Organizational Structure***

### *** ***

The Company presently wholly owns Far East, a HongKong corporation, which, in turn, owns the following corporations:

 

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**Wholly-Owned**

 

·      Euro Tech Trading (Shanghai)Limited – a People’s Republic of China corporation

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

·      ChinaH2O.com Limited – aHong Kong corporation

·      Shanghai Euro Tech Limited –a People’s Republic of China corporation

·      Shanghai Euro TechEnvironmental Engineering Company, Ltd. – a People’s Republic of Chinacorporation

·      Chongqing Euro Tech Rizhi Technology Company, Limited – a People’s Republic of China corporation

·      Rizhi Euro Tech Instrument (Shaanxi) Company Limited– a People’s Republic ofChina corporation

 

**MajorityOwned**

 

·      YixingPact Environmental Technology Company Limited – a PRC corporation

·      PactAsia Pacific Limited – a BVI corporation

 

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

 

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

### *** ***

The Companymaintains an executive office at 18/F Gee Chang Hong Centre, 65 Wong Chuk HangRoad, Hong Kong. The Company occupies approximately 12,800 square feet ofoffice and warehouse storage space under a two (2) year lease that expiresin May 2009****for monthly rental payments of approximately US$8,140. The warehouse storage space isused to hold products for distribution to our customers via common carriers.

 

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

 

The Company also maintains representative offices within the PRC in thecities of Beijing, Shanghai, Guangzhou and Fuzhou. The Beijing and Shanghaisales offices are owned by the Company. The remaining sales offices are rentedpursuant to short-term leases aggregating approximately US$1,774 per month**.**

 

Euro Tech Trading (Shanghai) Ltd. has two officesrented pursuant to short term leases, at an aggregate monthly rental ofapproximately US$963.  Shanghai Euro Tech Limited’s premises are also rented pursuant to a shortterm lease for a monthly rental of approximately US$2,882.

 

Pact occupies a 700 square meter facility in Shanghai,pursuant to a 3 year lease expiring in January 2009, providing for a monthly rental ofapproximately US$5,705.

 

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

 

## **ITEM 5.           OPERATING AND FINANCIAL REVIEW ANDPROSPECTS**

## ** **

**Overview**

 

The Company isengaged in three different major activities, namely Equipment and InstrumentDistribution, Manufacturing, and Environmental Services.

 

The Company isprimarily a distributor of a wide range of advanced water treatment equipment(including chlorination equipment), laboratory instruments, analyzers, testkits and related supplies and power generation equipment (including recordersand power quality analyzers).

 

The Company,through its PRC corporation, Shanghai Euro Tech Limited established in 1999 inthe Pudong Jin Qiao Export Processing Zone of Shanghai, engages in thedevelopment, production, sales and servicing of environmental protectionequipment, and energy conservation and related products.

 

The Company,through its majority owned subsidiaries, Pact and Yixing, its wholly-ownedsubsidiary, Shanghai – Environmental, and its affiliate, BlueSky, engages inwater and waste-water treatment engineering business and air pollution controlbusiness.

 

The Company’soperations are located almost entirely within, and revenues are almost entirelygenerated from Hong Kong and the PRC. The Company derived approximately 20% and approximately 79% of its revenue from Hong Kong andthe PRC, respectively in Fiscal 2007. Net income increased approximately US$61,000,or 17%, in Fiscal 2007 to US$422,000, compared to US$361,000 in Fiscal 2006,primarily due to the contribution from the share of equity in net income ofBlueSky of approximately US$247,000, partially offset by the increase inselling and administrative expenses.

 

The Company continued to consolidate its tradingbusiness by combining some of its regional sales efforts in the PRC with theretail shops and using online ordering in the PRC to sell the Company’sproducts. The Company manufactures and sells its own developed products such asInfrared Photometric Oil Analyzer, turbidity instruments, spectrophotometers and the TotalOrganic Analyzer. The Company intends to assemble and/or manufacture additionalproducts in the future and seek opportunities with its suppliers to assembletheir products, secure manufacturing and/or assembly facilities and seekanother manufacturer of analytical instruments to acquire.

 

The Companycontinued to accept more engineering projects in water and waste-waterindustries and also in power generation industries.  The Company intends to continue its searchfor acquisition candidates of other firms engaged in engineering and/or systemintegration or

 

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enter into a jointventure with a third party to work in connection with its process control andengineering department.

 

### ***Item5A.          Operating Results***

### *** ***

**Background- Political and Economic Conditions in Hong Kong and the People’s Republic ofChina**

 

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

 

| **Fiscal Year** | ** ** | **PRC** | ** ** | **Hong Kong** | ** ** |
|----------------------|------------|---------|------------|--------------------|------------|
|                 |       |    |       |               |       |
| 2005                 |       | 80      | %          | 19                 | %          |
| 2006                 |       | 83      | %          | 16                 | %          |
| 2007                 |       | 79      | %          | 20                 | %          |

 

Sales to customers situated in Macau and elsewherethrough Fiscal 2007 were nominal. This makes the Company particularlysusceptible to changes in the political and economic climate of either HongKong or the PRC.

 

**Hong Kong.** Hong Kong has beenone of the prime centers for commercial activity and economic developmentrecently in Southeast Asia. On July 1, 1997, sovereignty over Hong Kongwas transferred from the United Kingdom to the PRC. As provided in theSino-British Joint Declaration and the Basic Law, the Hong Kong SAR is provideda high degree of autonomy except in foreign and defense affairs. The Basic Lawprovides that the Hong Kong SAR is to have its own legislature, legal andjudicial system and full economic autonomy for 50 years after the transfer ofsovereignty. Based on the current political conditions and the Company’s understandingof the Basic Law, the Company does not believe that the transfer of sovereigntyover Hong Kong has had or will have an adverse impact on its financial andoperating environment. Although the Chinese government has pledged to maintainthe economic and political autonomy of Hong Kong over its internal affairs,there is no assurance that such pledge will continue to be honored if there arechanges in the Chinese political or economic climate. See Item 3D. “KeyInformation – Risk Factors.”

 

**PRC.** The PRC has been asocialist state since 1949. For more than forty years, the PRC’s economy hasbeen, and presently continues to be, a socialist economy operating undergovernment controls promulgated under various State Plans adopted by centralChinese government authorities and implemented, to a large extent, byprovincial and local authorities which may set production and developmenttargets. However, since approximately the early 1980s, the PRC’s nationalgovernment has undertaken certain reforms to permit greater provincial andlocal economic autonomy and private economic activities. Any change inpolitical or economic conditions may substantially adversely effect thesereform initiatives and, in turn, the Company. See Item 3D. “Key Information –Risk Factors.”

 

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**Resultsfrom Operations**

 

Thefollowing operating and financial review should be read in conjunction with theConsolidated Financial Statements and notes thereto appearing elsewhere in thisAnnual Report. All financial data referred to in the following discussion hasbeen prepared in accordance with accounting principles generally accepted inthe United States (“US GAAP”).

 

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

 
| ** **                                    | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | **US$**    | ** ** | **US$**    | ** ** | **US$**    | ** ** | **US$**    | ** ** | **US$**    | ** ** |
| ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                       |       | 27,230     |       | 100        | %          | 27,161     |       | 100        | %          | 31,250     |       | 100 | % | 32,282 |   | 100 | % | 27,442 |   | 100 | % |
| Cost of revenue                               |       | 20,398     |       | 74.9       | %          | 20,606     |       | 75.9       | %          | 24,681     |       | 79.0 | % | 27,033 |   | 83.7 | % | 22,805 |   | 83.1 | % |
| Gross Profit                                  |       | 6,832      |       | 25.1       | %          | 6,555      |       | 24.1       | %          | 6,569      |       | 21.0 | % | 5,249 |   | 16.3 | % | 4,637 |   | 16.9 | % |
| Selling and  administrative Expenses          |       | 6,585      |       | 24.2       | %          | 5,961      |       | 21.9       | %          | 5,418      |       | 17.3 | % | 4,801 |   | 14.9 | % | 4,108 |   | 15.0 | % |
| Income before  income taxes                   |       | 664        |       | 2.4        | %          | 835        |       | 3.1        | %          | 1,358      |       | 4.3 | % | 569 |   | 1.8 | % | 548 |   | 2.0 | % |
| Income taxes                                  |       | 144        |       | 0.5        | %          | 156        |       | 0.6        | %          | 328        |       | 1.0 | % | 167 |   | 0.5 | % | 108 |   | 0.4 | % |
| Minority Interest  in profits of subsidiaries |       | (345       | )          | 1.3        | %          | (318       | )          | 1.2        | %          | (318       | )          | 1.0 | % | — |   | 0.0 | % | — |   | 0.0 | % |
| Equity in profit of  affiliates               |       | 247        |       | 0.9        | %          | —     |       | 0.0        | %          | 21         |       | 0.0 | % | 192 |   | 0.6 | % | 91 |   | 0.3 | % |
| Net income                                    |       | 422        |       | 1.5        | %          | 361        |       | 1.3        | %          | 733        |       | 2.3 | % | 594 |   | 1.8 | % | 531 |   | 1.9 | % |

 

**Fiscal Year ended December 31, 2007 comparedto Fiscal Year Ended December 31, 2006**

 

*Revenue; Gross Profit and Cost of Revenue.*Revenue increased byapproximately US$69,000 or 0.3% to approximately US$27,230,000 in Fiscal 2007from approximately US$27,161,000 in Fiscal 2006. The increase in revenues was primarily due to increasing revenues of approximately US$2,302,000 from engineeringactivities as there was an increase in the number of engineering jobs completedin Fiscal 2007, as a result of Pact and Yixing having established operations inthe PRC and they have been receiving a greater volume of orders in the recentyears, despite declining revenuesof approximately US$2,233,000 from trading activities as a greaternumber of our key or exclusive suppliers have been marketing their products orselling into the China market, either directly or through distributors otherthan the Company.  After theCompany acquired its majority interest in Pact-Yixing in October 2005,Pact-Yixing’s revenues of approximately US$6,981,000 andUS$3,953,000 were included inour revenues in Fiscal 2007 andFiscal 2006, respectively.

 

Gross profits increased by approximately US$277,000 or 4.2% to approximately US$6,832,000 for Fiscal 2007 as compared to approximately US$6,555,000 for Fiscal 2006.

 

31

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During Fiscal 2007, the Company’s cost of revenue wasapproximately US$20,398,000, or 74.9% of revenue, in comparison to approximately US$20,606,000, or 75.9%for Fiscal 2006.  Cost of revenue expressed as a percentage ofrevenue decreased by 1.0% in Fiscal 2007 as compared with Fiscal 2006. The gross profit margin percentage increase was due principally to an increase in revenue fromengineering activities which are of higher gross margin percentage than those oftrading activities.  Yixing-Pact contributedapproximately US$2,126,000 to our gross profit margin in Fiscal 2007.

 

*Sellingand Administrative Expenses.* Selling and administrativeexpenses were approximately US$6,585,000in Fiscal 2007, an increase ofapproximately US$624,000 or 10.5% from approximately US$5,961,000 in Fiscal 2006.The increase was principally due to the increase of Yixing-Pact expenses of approximately US$512,000 due to expenses of approximately US$211,000for the manufacturing jointventure and increase in expensesrelated to increase in revenue. The PRC inflation rate of 4.8% and average appreciation rate of 6% for RMBagainst the US$ in 2007 also accounted for the increase in selling andadministrative expenses.

 

*Equity inProfit of Affiliates.*Equity in profit of affiliates of approximately US$247,000 represented theshare of net profit after tax of BlueSky after its acquisition in August 2007.

 

*InterestIncome.* Interest income increased by approximately US$161,000 or 169.5% to approximately US$256,000 in Fiscal 2007from approximately US$95,000for Fiscal 2006. The increasewas primarily due to the increase in bank deposits during the year.

 

*OtherIncome.* Other income increasedby approximately US$15,000 or 10.3% to approximately US$161,000 in Fiscal 2007 from approximately US$146,000 in Fiscal 2006. The increase in other income was principally due to increase in gain of disposal of plant andequipment.

 

*IncomeTaxes.* Taxes decreased by US$12,000 to approximately US$144,000 in Fiscal 2007from approximately US$156,000in Fiscal 2006. This decreasewas primarily the result of decreased taxable profits and an increase in income which are not subject toincome taxes, such as offshore income and interest income.

 

*NetIncome.* Income from continuing operations increased by approximately US$61,000 or 17% to approximately US$422,000 in Fiscal 2007 from approximately US$361,000 inFiscal 2006.   The increase was primarily due to thecontribution from shares of equity in BlueSky’s net income of approximatelyUS$247,000, partially offset by the increase in selling and administrativeexpenses.

 

**Fiscal Year ended December 31, 2006 Comparedto Fiscal Year Ended December 31, 2005**

 

*Revenue; Gross Profit and Cost of Revenue.*Revenue decreased byapproximately US$4,089,000 or 13.1% to approximately US$27,161,000 in Fiscal 2006 from approximately US$31,250,000 inFiscal 2005. The decrease in revenues was primarilydue to declining revenues 

 

32

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ofapproximately US$4,105,000from trading and manufacturing activities as a greater number of our key orexclusive suppliers have been marketing their products or selling into theChina market, either directly or through distributors other than the Company.  After the Company acquired its majorityinterest in Pact-Yixing in October 2005, Pact-Yixing’s revenues ofapproximately US$3,953,000 and US$3,662,000 were included in our revenues inFiscal 2006 and Fiscal 2005, respectively.

 

Gross profitsdecreased by approximately US$14,000 or 0.2% toapproximately US$6,555,000 for Fiscal 2006 as compared to approximately US$6,569,000 for Fiscal 2005.During Fiscal 2006, the Company’scost of revenue was approximately US$20,606,000, or 75.9% of revenue, in comparison to approximately US$24,681,000, or 79%for Fiscal 2005.  Cost of revenueexpressed as a percentage of revenue decreasedby 3.1% in Fiscal 2006 as compared with Fiscal 2005. The gross profit margin percentage increase was due principally to an increase in gross marginpercentage of approximately 4% for trading activities as the Company’s sales oflower gross margin products declined. Yixing-Pact contributed approximately US$1,417,000 to our gross profitmargin in Fiscal 2006.

 

*Sellingand Administrative Expenses.* Selling and administrativeexpenses were approximately US$5,961,000 in Fiscal 2006, an increase of approximately US$543,000 or 10.9% from approximately US$5,418,000 in Fiscal 2005.The increase was principally due to the inclusion of our share of Yixing-Pactexpenses, approximately $568,000 for a full year, while the Yixing-Pactexpenses of approximately US$122,000, included in Fiscal 2005, were for only apartial year, with Yixing-Pact not becoming our majority-owned subsidiariesuntil October 2005.  The selling andadministrative expenses for trading and manufacturing activities decreasedslightly as the Company streamlined operations.

 

*Equity inProfit of Affiliates.*Equity in profit of affiliates decreased by approximately US $21,000 or 100% to approximately US$Nil in Fiscal 2006 from approximately US $21,000 in Fiscal 2005. The decrease in equity in profit of affiliates was due to the results of Yixing-Pact being consolidatedafter the Company owned its majority interest in October 2005.

 

*InterestIncome.* Interest income increased by approximately US$60,000 or 171.4% to approximately US$95,000 in Fiscal 2006from approximately US$35,000for Fiscal 2005. The increasewas primarily due to the increase in bank deposits.

 

*OtherIncome.* Other income decreased by approximately US$26,000 or 15.1% to approximately US$146,000 in Fiscal 2006 from approximately US$172,000 in Fiscal 2005. The decrease in other income wasprincipally due to decrease in ourforeign exchange gains of US$28,000in Fiscal 2006.

 

*IncomeTaxes.* Taxes decreased by US$172,000 to approximately US$156,000 in Fiscal 2006from approximately US$328,000in Fiscal 2005. This decreasewas primarily the result of decreased taxable profits and a decrease ofeffective tax rates from 24.2% in Fiscal 2005 to 18.7% in Fiscal 2006.  The decrease in the effective tax rate wasprincipally due to a tax rate decrease on the net income of Pact-Yixing, as aresult of establishing a service company that paid taxes at a lower rate.

 

33

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*Net Income.* Income from continuingoperations decreased by approximately US$372,000 or 50.8% to approximately US$361,000 in Fiscal 2006 from approximately US$733,000 inFiscal 2005. The decrease wasprimarily due to the decrease in revenues from trading activities, partiallyoffset by higher gross margin and selling and administrative expensepercentages resulting from inclusion of Pact-Yixing’s operating results after October 2005.

 

### ***Item5B.          Liquidity and CapitalResources***

### *** ***

The Company has primarily used its funds to financeaccounts receivable, inventories, and capital expenditures including purchasesof property, office furniture and equipment, computers and calibrationequipment. The Company has historically met its cash requirements from cashflows from operations, short-term borrowings, bank lines of credit, andlong-term mortgage bank loans. The Company expects, but can make no assurancesthat its present cash reserves, cash from operations, existing available bankcredit facilities and proceeds from the issuance of our ordinary sharespursuant to stock option exercises would be sufficient to fund its futurecapital expenditure requirements. Working capital at the end of Fiscal 2007 andFiscal 2006 were approximately US$10,099,000 and US$10,267,000, respectively.

 

Atthe end of Fiscal 2007 and Fiscal 2006, the Company’s accounts receivable wereapproximately US$4,968,000and US$4,914,000, respectively.  DuringFiscal 2007, the Company generated net cash of approximately US$449,000 from its operating activitiesfrom net income, reduction in inventories, and increase in other payables and accrued expenses while fundingan increase in accountsreceivable, prepayments and other current assets and decrease in accounts payable.

 

DuringFiscal 2007, the Company used approximately US$4,415,000 in investingactivities.  In Fiscal 2006, the Companyused approximately US$352,000 from investing activities.  The Company used approximately US$250,000 and US$106,000 to purchasefacilities and equipment in Fiscal 2007 and Fiscal 2006, respectively.  During Fiscal 2007 and Fiscal 2006, the Company releasedapproximately US$83,000 and used US$111,000, respectively, as restricted cashto issue performance guarantees to its customers through its banks.  During Fiscal 2007, Yixing-Pact paid adividend of approximately US$140,000 to minority interest shareholders. DuringFiscal 2007, the Company used approximately US$4,151,000 to acquire 20% equityinterest in Blue Sky. Additionally, a final payment of US$648,000 is to be madeby the end of June 30, 2008, based on Blue Sky’s net profits for itsfiscal year ended December 31, 2007.

 

TheCompany received approximately US$3,720,000 and US$2,607,000, respectively, in Fiscal 2007 andFiscal 2006 from financing activities resulting from the issuance of itsordinary shares being issued on stock options that were exercised. During Fiscal2007, the Company received approximately US$200,000 as a return on its interestin the Yixing-Pact’s manufacturing joint venture. The Company hadvarious banking facilities available for overdraft, import and export creditsand foreign exchange contracts from

 

34

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which the Company can access up to approximately US$4,167,000 at December 31, 2007.The aforementioned available credit facilities were obtained on the conditionsthat, among other things, the Company 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 increased from approximately US$9,160,000 at the end of Fiscal2006 to approximately US$9,387,000 at the end of Fiscal 2007. The principal reasons forthe increase in cash were the increase in other payables by approximately US$896,000 and proceeds of approximately US$3,720,000 from the exercise of stock options byCompany management and employees. However, the Company used cash to fund its decrease in accounts payableby approximately US$1,080,000 and used US$4,151,000 for investment inaffiliates.** **The Company plans to use cash on hand primarily toacquire a manufacturing plant and/or environmental engineering company in thePRC and to expand its manufacturing plant and environmental engineeringbusiness.

 

TheCompany’s net accounts receivable slightly increased from approximately US$4,914,000 at the end ofFiscal 2006 to approximately US$4,968,000at the end of Fiscal 2007.

 

TheCompany’s inventory decreased from approximately US$2,028,000 at the end ofFiscal 2006 to approximately US$2,012,000 at the end of Fiscal 2007.

 

TheCompany’s capital expenditures were approximately US$106,000 and US$250,000 in Fiscal 2006 and Fiscal2007, respectively. Capital expenditures during Fiscal 2006 and Fiscal 2007were incurred primarily in connection with the purchase of office equipment,furniture and fixtures.  The Companycontinues to seek targets for acquisition and facilities for assemblyoperations or engineering companies. If such acquisitions are indeed made, theCompany may expect to incur significantly larger capital expenditures, forwhich the Company presently intends, but as to which no assurance can be made,to use existing cash reserves, cash from operations, available bank creditfacilities and proceeds from the issuance of our ordinary shares to fund suchcapital expenditures.

 

**Anticipated Future Resources and Uses of Cash**

 

The Company has historicallyfunded its working capital, capital expenditure, investing and expansions needsfrom operations, available bank credit facilities and proceeds from theissuances of our ordinary shares and expects to continue funding its Fiscal2008 these requirements from operations, available bank credit facilities andproceeds from the exercise of options. The Company may use its funds to acquireother businesses, make equity investments in related business, form strategicalliances with third parties, invest in product research and development, orexpand its sales offices and retail shops or, with third parties, seek toacquire new products or businesses or form strategic alliances. The Companyexpects, but can make no assurances that its present cash reserves, cash fromoperations and existing available bank credit facilities would be sufficient tofund its future cash requirements.

 

35

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**Inflation**

 

The Company believes generallydeclining rates of inflation in the PRC have had a positive effect on itsresults from operations.  As a result ofthe recent rise in the rate of inflation in the PRC, we anticipate increases inthe overhead costs of our PRC affiliates and offices.**** TheCompany believes, although no assurance can be given, that as creditrestrictions are gradually lifted, it will be able to increase prices in themarket for its products and thus realize increased profit margins.

 

**Critical Accounting Policies**

** **

***Revenue Recognition***

** **

Pursuant to the revenue recognition criteria set forth in Securitiesand Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 104: “RevenueRecognition”, the Company recognizes revenue when it is realized or realizableand earned. The Company considers revenue realized or realizable and earnedwhen it has persuasive evidence of an arrangement, the product has beendelivered, the sales price is fixed or determinable and collectibility isreasonably assured. For certain products where installation is necessary,revenue is recognized upon completion of installation.  Revenue earned from customer support, whichrepresents a minor percentage of total revenues, it is recognized when suchservices are provided.

 

Revenues and profits in long term fixed price contracts are recordedunder the percentage of completion method in accordance with SOP 81-1, “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts”.  This approach relies on estimates of totalexpected direct costs of completion, which are compared to actual direct costsincurred to date to arrive at an estimate of revenue and profit earned todate.  Recognized revenue and profit aresubject to revisions as the contract progresses to completion.  Revisions to profit estimate are reflected inincome in the period in which the facts that give rise to the revision becomeknown. For any contract where it is identified that a loss will be incurred,the full loss will be recognized immediately. There were no long-term fixedprice contracts during 2007.

 

***Inventory Valuation***

 

TheCompany writes down its inventory for estimated obsolescence or unmarketableinventory equal to the difference between the cost of inventory and theestimated market value based upon assumptions about future demand and marketconditions. If actual future demand or market conditions are less favorablethan those projected by management, additional write-downs may be required.

 

***Deferred Taxes***

** **

Aspart of the process of preparing its consolidated financial statements, theCompany is required to estimate its income taxes and tax bases of assets andliabilities in each of the jurisdictions in which it operates. This processinvolves the Company estimating its current tax exposure together withassessing temporary differences resulting from its differing treatment of itemsfor tax and accounting purposes. These differences result in deferred taxassets and liabilities, which are included in the Company’s consolidatedbalance sheet. The Company must then assess 

 

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the likelihood that its deferred tax assetswill be 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.

 

*RecentAccounting Pronouncements*

 

In September 2006, the FASB issuedFAS 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value,establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. The provisions of FAS 157 are effective for the fiscal yearbeginning after November 15, 2007. We are currently evaluating the impactof the provisions of FAS 157.

 

On February 15,2007, the FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities: Including an amendment of FASB Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 permits all entities to elect tomeasure many financial instruments and certain other items at fair value withchanges in fair value reported in earnings. SFAS No. 159 is effective as of the beginning of the first fiscal yearthat begins after November 15, 2007, with earlier adoption permitted.  The Company does not anticipate that theadoption of this statement will have a material effect on the Company’sfinancial condition and results of operations.

 

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

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), “BusinessCombinations,” (FAS No. 141(R)), which replaces FASB Statement No. 141.FAS No. 141(R) establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, any noncontrolling interest in the acquireeand the goodwill acquired. The Statement also establishes disclosure requirementswhich will enable users to evaluate the nature and financial effects of thebusiness combination. FAS No. 141(R) is effective as of the beginning of anentity’s fiscal year that begins after December 15, 2008, which will beour year beginning January 1, 2009. We are currently evaluating thepotential impact, if any, of the adoption of FAS No. 141(R) on the consolidatedfinancial statements.

 

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

 

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statements.

 

### ***Item 5C.***          Research and Development, Patents andLicenses

### *** ***

During Fiscal2007, Fiscal 2006 and Fiscal 2005, the Company expensed approximately US$47,000, US$55,000 and US$48,000,respectively, on the development of its products.  It is anticipated that an additionalUS$250,000 in research and development costs will be expended on similarprojects and potential research and development projects for the development ofair and water testing equipment and monitoring equipment during Fiscal 2008.

 

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

### *** ***

There areincreasing demands in the PRC for clean water, clean air, greater industrialpollution controls, waste management and electricity.  We also see additional distributors competingwith us.  However, given the politicalsituation in the PRC, trends could quickly disappear and we do not know if theywill continue in the future.  We notethat, as evidenced by our recent acquisition of Pact-Yixing, we are placinggreater emphasis on developing our engineering solution business in an effortto capitalize on these increased demands (clean water, pollution controls andwaste management).

 

**TheCompany believes that the expenses incurred in product development may resultin increases in revenue but such increases are unlikely to allow for a recoveryof the expenses for approximately the next two years.**

** **

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

### *** ***

None.

 

### ***Item 5F.***          Tabular Disclosure of Contractual Obligations

 
| **Contractual   Obligations**  | ** ** | **Total**  | ** ** | **Less than   1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After   5 Years** | ** ** |
|-------------------------------------|------------|------------|------------|---------------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | ** **                            | ** ** | ** **         | ** ** | ** **         | ** ** | ** **                    | ** ** |
| Operating Leases                    |       | US$        | 263,000    |                                  | US$        | 235,000            |       | US$                | 28,000     |                          | —     |   | — |   |
|                                |       |       |       |                                  |       |               |       |               |       |                          |       |   |   |   |
| Total  Contractual Cash Obligations |       | US$        | 263,000    |                                  | US$        | 235,000            |       | US$                | 28,000     |                          | —     |   | — |   |

 

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

## ** **

### ***Item 6A.***          Directors and Senior Management

### *** ***

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

 
| **Name**        | ** ** | **Age** | ** ** | **Position**                                                    |
|-----------------|------------|---------|------------|-----------------------------------------------------------------|
|            |       |    |       |                                                            |
| T.C. Leung      |       | 64      |       | Chairman of the Board of Directors and Chief  Executive Officer |
|            |       |    |       |                                                            |
| Jerry Wong      |       | 49      |       | Director and Chief Financial Officer                            |
|            |       |    |       |                                                            |
| Alex Sham       |       | 44      |       | Director                                                        |
|            |       |    |       |                                                            |
| Y.K. Liang      |       | 78      |       | Director                                                        |
|            |       |    |       |                                                            |
| Ka Chong Cheang |       | 79      |       | Director                                                        |
|            |       |    |       |                                                            |
| Xu Hong Wang    |       | 40      |       | Director                                                        |
|            |       |    |       |                                                            |
| Li Da Weng      |       | 63      |       | Director                                                        |

 

Set forth below is a brief background of theexecutive officers and directors based upon the information supplied by them tothe Company:

 

**T.C. Leung** has been Chief Executive Officer and Chairman ofthe Board of Directors of both the Company and Far East since their inception.Before establishing Far East, Mr. Leung was an engineer for EnglishElectric in England, from 1965 to 1968, and Lockheed Aircraft in Hong Kong,from 1968 to 1970. Mr. Leung also served as managing director of Eurotherm(Far East) Ltd. (“Eurotherm”) between 1971 and 1992. From 1988 until he retiredin February 2005, Mr. Leung had 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** has served as Director and Chief FinancialOfficer of Far East since 1994 and has been with Far East since 1987. Mr. Wonghas been the Chief Financial Officer and a Director of the Company since itsinception. From 1985 until 1987, Mr. Wong worked for MUA Agencies Ltd., asubsidiary of a Hong Kong publicly listed company engaged in the insurancebusiness, as deputy manager of its secretarial, legal and accountingdepartment. From 1981 until 1985, Mr. Wong served as a senior accountantin Price Waterhouse-Hong Kong. He is a Fellow of the Association of CharteredCertified Accountants in the United Kingdom and a Certified Public Accountantin Hong Kong.

 

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**Alex Sham** has been a Director of the Company since itsinception. Mr. Sham joined Far East in 1988 and has been its Sales Managersince 1993 and became a Director of Far East in 1996. Mr. Sham received aBachelor of Science in Applied Chemistry from Hong Kong Baptist University in1990. Prior to joining Far East, Mr. Sham was employed by theEnvironmental Protection Department of the Hong Kong Government from 1986 until1988.  Mr. Sham received a Master’sDegree in Business Administration from the University of Adelaide in 2003.

 

**Y.K. Liang** has been a Director of the Company since February 1998.Mr. Liang is a director of Wong Liang Consultants Ltd. (“Consultants”) anda member of the certified public accounting firm of Y.K. Liang & Co. (“LCO”).Mr. Liang has been associated with both Consultants and LCO for more thanthe past five years. Consultants is a general business consulting firm.

 

**Ka Chong Cheang** has been a Director of the Company since December 2005.From 1952 until 1977, he had been shipping manager for John Swire &Sons (Hong Kong) Ltd., a firm engaged in the importing and exporting shippingindustry.  For more than the past fiveyears, Mr. Chong has been a business consultant.

 

**Xu Hong****Wang** has been adirector of the Company since August 2002. Mr. Wang is the East Chinasales manager of Euro Tech (Far East) Limited, a wholly-owned subsidiary of theCompany, since mid 1994. From mid 1997 until joining Euro Tech, he was employedas a Research Associate and Lecturer at the Analysis and Research Center ofShanghai’s Tongji University. Wang Xu Hong received Bachelor’s and Master’sdegrees in Science from Fudan University in 1984 and 1988, respectively.

 

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

 

Directors of the Company serve until the nextannual meeting of shareholders of the Company and until their successors areelected and duly qualified. Officers of the Company are elected annually by theBoard of Directors and serve at the discretion of the Board of Directors.

 

None of the Company’s directors, officers orbeneficial owners of ten percent or more of its Common Stock are required tofile any reports pursuant to Section 16(a) of the Securities ExchangeAct of 1934, as amended (the “1934 Act”).

 

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The Company had 2 meetings of its Board of Directors during Fiscal2007, while its Audit Committee had 3meetings during Fiscal 2007.

 

There are no material legal proceedings involvingany director, officer or affiliate of the Company, owner of record orbeneficially of more than five percent of the Company’s Common Stock or anyassociate of any of the foregoing.

 

Two prior directors of the Company, Nancy Wongand C.P. Kwan, were not elected by stockholders of the Company at the lastannual meeting of stockholders.

 

**Key Employees**

 

**George Hayek**,Managing Director.  He is the founder ofPact and Yixing and is a civil engineer (1967) and post-graduate certificateholder in sanitary engineering and environmental management from the AmericanUniversity of Beirut and the University of California at Irvine (in 1971 and1988, respectively).  Since 1971, he hasoccupied several key posts in water and waste-water treatment companies in theUSA, the UK, Spain, Cyprus, The Middle East, Southeast Asia and the last 14 years in the PRC.  From 1998 to date, he has been the managingdirector of Pact.  His internationalexperience helped Pact in securing most of the contracts with European and Americanmultinational industries in the PRC.

 

**Yvonne Xia**manages Pact and Yixing’s Procurement Department, as well as assisting themanaging director in management of the various departments.  She joined Pact-Yixing at the time of theirformation in 1998.  Ms. Xia is anenvironmental engineering graduate from Qing Hua University of Beijing (1989)and an EMBA graduate from the Olin School of Management of the WashingtonUniversity (2003).  She has severalpositions of increasing responsibility, including management of engineering,sales, procurement and projects while with Pact-Yixing.

 

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

### *** ***

The following table sets forth certain summaryinformation with respect to the compensation paid by the Company and itssubsidiaries, for services rendered in all capacities to the Company and its subsidiaryduring Fiscal 2007, Fiscal 2006 and Fiscal 2005 to the Chairman of the Boardand Chief Executive Officer and a key employee of the Company.  No other executive officer or employeereceived in excess of US$100,000 as cash compensation during those fiscalperiods.

 

**Summary Compensation Table**

 
| **Key Employees**                         | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                 | ** ** |
|------------------------------------------------|------------|------------|------------|-----------------------------|------------|----------------------------|------------|
| **Name and Principal Position** | ** ** | **Year**   | ** ** | **Salary (US$ )** | ** ** | **Bonus (US$ )** | ** ** |
|                                           |       |       |       |                        |       |                       |       |
| T.C. Leung,  Chairman of the Board of     |       | 2007       |       | 155,000                     |       | —                     |       |
| Directors and  Chief Executive Officer         |       | 2006       |       | 159,000                     |       | —                     |       |
|                                           |       | 2005       |       | 162,000                     | ** ** | —                     |       |
|                                           |       |       |       |                        | ** ** | ** **                 |       |
| George Hayek                                   |       | 2007       |       | 110,000                     |       | —                     |       |
|                                           |       | 2006       |       | 110,000                     |       | —                     |       |
|                                           |       | 2005       |       | 108,000                     | ** ** | —                     |       |

 

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Mr. Hayek isto continue his employment relationship with Pact and Yixing for a period ofthree years ending October 2008.

 

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

 

**PensionPlan.****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.

 

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

 

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

 

During the years ended December 31,2007, 2006 and 2005, the aggregate contributions of the Company to theaforementioned pension plans and retirement benefit schemes were approximatelyUS$245,000, US$202.000 andUS$191,000, respectively.

 

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

 

42

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The followingexecutive officers and directors of the Company had exercised the ManagementOptions at prices/price ranges as indicated below prior to the end terms of theoptions.

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

 

**CompanyOption Plans.** The Company’s 2000 Officers and DirectorsPlan and 2002 Officers and Directors Plan (collectively referred to as the “OfficersPlans”) provide for the grant of options to acquire Ordinary Shares to theCompany’s executive officers and directors and persons holding the same positionswith the Company’s subsidiaries. The 2000 Employees Plan and 2002 EmployeesPlan (collectively referred to as the “Employees Plan”) provides for the grantof options to acquire Ordinary Shares to key employees of the Company and itssubsidiaries. All four plans are collectively referred to as the “Plans”.

 

692,580 and1,637,160 shares had been originally authorized for issuance under theEmployees Plan and the Officers Plans, respectively.

 

The Board ofDirectors or a committee (the “Committee”) appointed by the Board of Directorsadministers the Plans. The Board of Directors or the Committee also has theauthority to delegate decisions with respect to Options granted to keyemployees under the Employees Plan who are not elected officers or directors ofthe Company or its subsidiaries and to delegate decisions with respect to keyemployees to the Chief Executive Officer.

 

Any decision bythe Committee or the Chief Executive Officer to grant an award under the Plansis subject to ratification by the Board of Directors of the Company. The Boardis also to ratify any decision that effects the terms or conditions of optionsawarded to elected officers or directors of the Company or its subsidiaries.

 

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

 

43

----

 

enlargement of rightsunder the options. In addition, the Board may also change the kind ofsecurities available for grant under the Plans to reflect any such corporatechanges.

 

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

 

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

 

The purchase priceper share of the Ordinary Shares to be paid upon the exercise of the optionmust be at least 100% of the fair market value of an Ordinary Shares on thedate on which the option was granted. Under the Plans, if the Ordinary Sharesare principally traded on a national securities exchange or the Nasdaq StockMarket’s National Market or Small Cap Market at the time of grant, the Companyis required to use, as fair market value, the average of the closing prices ofthe Ordinary Shares for the ten consecutive trading days immediately before thedate of grant. If the Ordinary Shares are traded on a national securitiesexchange or the Nasdaq Stock Market’s National Market or Small Cap Market, butno closing prices are reported for such ten-day period, or if the OrdinaryShares are principally traded in the over-the-counter market, the Company isrequired to use, as fair market value, the average of the mean between the bidand asked prices reported for the Company’s Ordinary Shares at the close oftrading during such ten-day period before the date of grant. If the OrdinaryShares are traded neither on a national securities exchange, the Nasdaq StockMarket’s National Market, Small Cap Market nor in the over-the-counter marketor if bid and asked prices are otherwise not available, the fair market 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 ofDirectors or the Committee, as the case may be, or, to the extent that suchauthority has been delegated to the Chief Executive Officer, the ChiefExecutive Officer determines, at the time of grant, when each option grantedunder the Plans will become exercisable. Notwithstanding the foregoing, alloptions held by a key employee of the Company or its subsidiaries becomeimmediately exercisable, whether or not exercisable at the time, upon the deathor disability.

 

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

 

Payment 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 OrdinaryShares valued at the fair market value of such shares on the date of exercise,provided that such shares were held by the optionholder for not less than sixmonths prior to the date of exercise of the option; (3) by any othermedium of payment that the Board, Committee or the Chief Executive Officer, asapplicable, has authorized at the time of grant (other than the withholding ofshares issuable upon the exercise of options); or (4) by any combinationof the preceding methods.

 

44

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

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

 

These assignments are only permitted if the assigningoptionee does not receive any compensation in connection with the assignmentand the assignment is expressly approved by the Board or Committee, as the casemay be.

 

The Company indemnifies the members of any Committeeand its delegates and the Chief Executive Officer against (1) reasonableexpenses incurred in connection with the defense of any action, suit orproceeding to which they may be a party by reason of any action taken orfailure to act in connection with the Plans, and (2) all amounts paid bythem in settlement of or satisfaction of a judgment entered in any such action,suit or proceeding, except in cases where such a person is adjudged liable forgross negligence or gross misconduct in the performance of his or her duties.

 

The Board may terminate, suspend, or amend the Plansat any time without the authorization of shareholders to the extent allowed bylaw or the rules of any market on which the Company’s shares are thenlisted or quoted.

 

During Fiscal 2000 and in January 2002, theCompany granted options to certain of its officers and directors pursuant tothe 2000 Officers and Directors Plan and, in November 2002, options weregranted to certain of its officers and directors pursuant to the 2002 Officersand Directors Plan. The table below shows, as to each of the executive officersand directors of the Company and as to all executive officers and directors ofthe Company as a group, the aggregate amounts of Ordinary Shares remaining(unexercised), subject to such options.

 
| ** **                                                  | ** ** | **Shares Subject**                                                  | ** ** | ** **                         | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------|------------|
| **Names of Executive****Officers  and Directors** | ** ** | **To the (Remaining)   Officers Plans Options** | ** ** | **Per Share  Exercise Price** | ** ** |
| ** **                                                  | ** ** | ** **                                                               | ** ** | **(US$)**                          | ** ** |
| T.C. Leung                                                  |       | 170,000                                                                  | (1)        | 0.5857                             |       |
|                                                        |       |                                                                     |       |                               |       |
| Xu Hong Wang                                                |       | 10,000                                                                   | (1)        | 0.5857                             |       |
|                                                        |       | 10,920                                                                   | (2)        | 0.5787                             |       |

 

45

----

 
| ** **                                               | ** ** | **Shares Subject**                                                  | ** ** | ** **                         | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------|------------|
| **Names of Executive  Officers and Directors** | ** ** | **To the (Remaining)   Officers Plans Options** | ** ** | **Per Share  Exercise Price** | ** ** |
| ** **                                               | ** ** | ** **                                                               | ** ** | **(US$)**                          | ** ** |
| ** **                                               | ** ** | ** **                                                               | ** ** | ** **                         | ** ** |
|                                                     |       | 31,500                                                                   | (2)        | 0.8191                             |       |
|                                                     |       |                                                                     |       |                               |       |
| All executive officers and Directors as a group          |       |                                                                     |       | 0.5787                             | –     |
|                                                     |       | 222,420                                                                  |       | 0.8191                             | (3)        |

 

----

(1)     Granted pursuant to the 2002 Officers andDirectors Plan.

 

(2)     Granted pursuant to the2000 Employees Plan.

 

(3)     Price range.

 

The foregoing options will expire in August 2010.

 

Pursuant to its 2000 Employees Plan, the Company hadoriginally granted options to 32 of its non-officer/director employees topurchase an aggregate of 398,580 of its Ordinary Shares exercisable at a priceof US$0.5787 per share for a ten year term expiring in February 2011.

 

Pursuant to its 2002 Employees Plan, the Company hadoriginally granted options to 32 of its non-officer/director employees topurchase an aggregate of 294,000 of its Ordinary Shares exercisable at a priceof US$0.7618 per share for a ten year term expiring in April 2012.

 

As of December 31, 2007, 1,322,920 options had been exercised,including 572,300 options and 205,800 options exercised by Mr. Leungat prices of US$0.5857 and US$0.8191per share, respectively.

 

2007 Officers’ and Directors’ Stock Option and Incentive Plan

 

A total of 880,000 ordinary shares have beenreserved for issuance under the Company’s 2007 Officers’ and Directors’ Stock Option and Incentive Plan (the “2007 D&O Stock Options”).  The2007 D&O Stock Optionsprovide for the grant of options to its directorsand officers as the Company’s Chairman of the Board of Directors andChief Executive Officer may direct.  Themanagement, terms and conditions of the 2007 Officers’ and Directors’ StockOption Plan are substantially similar to the Company’s 2000 Officers andDirectors Plan.  The table below shows,as to each of the executive officers and directors of the Company and as to allexecutive officers and directors of the Company as a group, the aggregateamounts of Ordinary Shares remaining (unexercised), as of June 1, 2008,subject to such options.

 

46

----

 
| ** **                                                         | ** ** | **Shares Subject**                                                  | ** ** | ** **                              | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Names of Executive  Officers and Directors** | ** ** | **To the (Remaining)   Officers Plans Options** | ** ** | **Per Share  Exercise Price** | ** ** |
| ** **                                                         | ** ** | ** **                                                               | ** ** | **(US$ )**                         | ** ** |
| T.C. Leung                                                         |       | 125,000                                                                  |       | 2.85                                    |       |
|                                                               |       | 62,500                                                                   |       | 4.00                                    |       |
|                                                               |       | 62,500                                                                   |       | 4.05                                    |       |
|                                                               |       | 100,000                                                                  |       | 3.66                                    |       |
|                                                               |       | 125,000                                                                  |       | 2.66                                    |       |
|                                                               |       | 150,000                                                                  |       | 2.56                                    |       |
|                                                               |       |                                                                     |       |                                    |       |
| Jerry Wong                                                         |       | 8,000                                                                    |       | 2.85                                    |       |
|                                                               |       | 4,000                                                                    |       | 4.00                                    |       |
|                                                               |       | 4,000                                                                    |       | 4.05                                    |       |
|                                                               |       | 8,000                                                                    |       | 2.66                                    |       |
|                                                               |       | 13,000                                                                   |       | 2.56                                    |       |
|                                                               |       |                                                                     |       |                                    |       |
| Xu Hong Wang                                                       |       | 10,000                                                                   |       | 2.56                                    |       |
|                                                               |       |                                                                     |       |                                    |       |
| All executive officers and                                         |       | 672,000                                                                  |       | 2.56                                    | –     |
| Directors as a group                                               |       |                                                                     |       | 4.05                                    | (1)        |

 

----

(1)  Pricerange.

 

The foregoing options will expire in January 2010.

 

The Company has set forth in this Report all requireddisclosure of additional compensation to its executive officers and directorsincluding personal benefits and securities or properties paid or distributedwhich was not offered on the same terms to all full time employees duringFiscal 2007.

 

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

 

47

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| ** **                      | ** ** | **As of December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **Number   of   Options**   | ** ** | **Weighted   average   exercise   price** | ** ** | **Number of   Options** | ** ** | **Weighted   average   exercise   price** | ** ** | **Number   of   options** | ** ** | **Weighted   average   exercise   price** | ** ** |
|                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding,  beginning of year |       | 3,938,296                             |       | 1.32 |   | 5,978,806 |   | 1.31 |   | 6,724,042 |   | 1.26 |   |
| Granted                         |       | 499,000                               |       | 3.27 |   | 55,000 |   | 2.91 |   | — |   | — |   |
| Cancelled                       |       | (451,210                              | )          | (1.58 | ) | (46,620 | ) | (1.13 | ) | (104,706 | ) | (1.16 | ) |
| Exercised                       |       | (2,695,246                            | )          | (1.44 | ) | (2,048,890 | ) | (1.33 | ) | (640,530 | ) | (0.78 | ) |
|                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding, end  of year       |       | 1,290,840                             |       | 1.74 |   | 3,938,296 |   | 1.32 |   | 5,978,806 |   | 1.31 |   |
|                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable, end  of year       |       | 791,840                               |       | 0.78 |   | 3,923,296 |   | 1.32 |   | 5,978,806 |   | 1.31 |   |

 

As of December 31,2007, the options outstanding and exercisable had exercise prices in the rangeof US$0.5787 to US$4.05and a weighted average unexpired life of approximately 3.1 years.

 

On January 1, 2006, theGroup adopted the provisions of Statement 123 (revised 2004) (Statement 123(R),Share-Based Payment, which revises Statement 123, Accounting for Stock-BasedCompensation using the modified prospective application transitionmethod, and supersedes APBOpinion 25, Accounting for Stock Issued to Employees.  Statement 123(R) requires us torecognize expense related to the fair value of our stock-based compensationawards, including employee stock options.

 

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

 

Had compensation expense forthe Company’s stock-based compensation plan been recognized based on the fairvalue 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:

 

48

----

 

 
| ** **                                                                           | ** ** | **As of December 31,**                                                                                      | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                                                                                                   | ** ** |
| ** **                                                                           | ** ** | **US$**                                                                                                                    | ** ** |
| ** **                                                                           | ** ** | **(amounts expressed in thousands, except share**** ****and per share date)** | ** ** |
| Net income as reported                                                               |       | 733                                                                                                                        |       |
| Less: Stock compensation expense determined under  the fair value method, net of tax |       | (39                                                                                                                        | )          |
|                                                                                 |       |                                                                                                                       |       |
| Pro forma net income                                                                 |       | 694                                                                                                                        |       |
|                                                                                 |       |                                                                                                                       |       |
| Income per share:                                                                    |       |                                                                                                                       |       |
|                                                                                 |       |                                                                                                                       |       |
| Basic, as reported                                                                   |       | US$                                                                                                                        | 0.11       |   |   |
|                                                                                 |       |                                                                                                                       |       |   |   |
| Diluted, as reported                                                                 |       | US$                                                                                                                        | 0.07       |   |   |
|                                                                                 |       |                                                                                                                       |       |   |   |
| Basic, pro forma                                                                     |       | US$                                                                                                                        | 0.11       |   |   |
|                                                                                 |       |                                                                                                                       |       |   |   |
| Diluted, pro forma                                                                   |       | US$                                                                                                                        | 0.07       |   |   |

 

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

### *** ***

The term of each of the Company’s directors expires atthe election and qualification of their successors at the next annual meetingof the Company’s shareholders, anticipated to be held in August of thisyear. Of the Company’s nine directors, seven were re-elected at the Company’slast annual meeting of shareholders in August 2007.

 

The Board has a standingAudit Committee to assist the Board in carrying out its duties. The Audit Committeehas a written charter approved by the Board. The chair of the Audit Committeedetermines the meeting agenda of the Audit Committee. The Audit Committeemembers receive materials in advance of Committee meetings allowing them toprepare for the meeting.

 

During Fiscal 2007, the AuditCommittee met 3 times, being attended byall members.

 

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

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

 

49

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

 

The Audit Committee is currently composed of Y.K.Liang, Ka Chong Cheang and Li Da Weng. The Audit Committee’s “financial expert” is Y.K. Liang.  The Board has determined that the membershipof the Audit Committee meets the current independence requirements of theNASDAQ listing standards as same applies to private foreign issuers and theapplicable rules and regulations of the SEC.

 

50

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

 

The Company(exclusive of Yixing-Pact) has approximately 146 full-time employees. At December 31,2007, 2006 and 2005, staffing levels were approximately as follows:

 
| ** **                 | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marketing and  sales       |       | 65         |       | 71         |       | 76         |       |
|                       |       |       |       |       |       |       |       |
| Administrative             |       | 49         |       | 55         |       | 59         |       |
| Technical                  |       | 32         |       | 32         |       | 45         |       |
| Total full time  employees |       | 146        |       | 158        |       | 180        |       |

 

Pact and Yixing have approximately 57 full-time employees.  At December 31, 2007, 2006 and 2005, respectively, staffing levels wereapproximately as follows:

 
| ** **              | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Engineers               |       | 35         |       | 24         |       | 21         |       |
|                    |       |       |       |       |       |       |       |
| Administrative  Persons |       | 22         |       | 11         |       | 9          |       |

 

The Company’s managementconsists of its officers and directors.

 

The Company is not subject to any collective bargaining agreement andbelieves that its relations with its employees are good.

 

### ***Item 6E.***          Share Ownership

### *** ***

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

 

## **ITEM 7.**           MAJOR SHAREHOLDERS ANDRELATED PARTY TRANSACTIONS

## ** **

### ***Item 7A.***          Major Shareholders

### *** ***

The followingtable sets forth, as of June 1, 2008, certain information concerning beneficial ownership of theCompany’s Ordinary Shares with respect to (i) each person known to theCompany to own 5% or more of the outstanding Ordinary Shares, (ii) eachdirector and executive officer of the Company, and (iii) all officers anddirectors of the Company as a group:

 

51

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| ** **                                                                              | ** ** | **Amount and   Nature of   Beneficial   Ownership(3)** | ** ** | **Approximate   Percentage   Of Ordinary   Shares Owned (4)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | ** **                                                                      | ** ** | ** **                                                                                  | ** ** |
| T.C. Leung  (1)(2)(3)                                                                   |       | 6,730,998                                                                       |       | 53.2                                                                                        | %          |
|                                                                                    |       |                                                                            |       |                                                                                        |       |
| Pearl Venture  Ltd.(1)(2)                                                               |       | 1,474,075                                                                       |       | 12.4                                                                                        | %          |
|                                                                                    |       |                                                                            |       |                                                                                        |       |
| Alex Sham(1)                                                                            |       | 342,300                                                                         |       | 2.9                                                                                         | %          |
|                                                                                    |       |                                                                            |       |                                                                                        |       |
| Jerry Wong(1)(3)                                                                        |       | 228,766                                                                         |       | 1.9                                                                                         | %          |
|                                                                                    |       |                                                                            |       |                                                                                        |       |
| Y.K. Liang(1)                                                                           |       | *                                                                               |       | *                                                                                           |       |
|                                                                                    |       |                                                                            |       |                                                                                        |       |
| Xu Hong Wang(1)(3)                                                                      |       | 94,420                                                                          |       | 0.8                                                                                         | %          |
|                                                                                    |       |                                                                            |       |                                                                                        |       |
| Ka Chong Cheang(1)                                                                      |       | *                                                                               |       | *                                                                                           |       |
|                                                                                    |       |                                                                            |       |                                                                                        |       |
| Li Da Weng(1)                                                                           |       | *                                                                               |       | *                                                                                           |       |
|                                                                                    |       |                                                                            |       |                                                                                        |       |
| All Executive  Officers And Directors of the Company as a group (7 persons)(2) (3) |       | 7,396,483                                                                       |       | 58.0                                                                                        | %          |

 

----

| * |   | Denotes Nil. |
|---|--------|--------------|

 
| (1)    |   | The address for the Company’s officers and directors  is c/o Euro Tech (Far East) Ltd., 18/F Gee Chang Hong Centre, 65 Wong Chuk  Hang Road, Hong Kong. The address for Pearl is Columbus Centre Building,  Wichhams Cay, Road Town, Tortola, British Virgin Islands.                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| (2)    |   | Includes shares of the Company’s Common Stock owned  of record by Pearl, which is a trust established for the benefit of  Mr. Leung. Also includes those Company Ordinary Shares owned of record  by Regent, of which Pearl is the majority shareholder.                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| (3)    |   | Gives effect to the exercise of the 2000 Officers  and Directors Plan, 2000 Employees Plan, 2002 Officers and Directors Plan and 2007 Officers and Directors Plan  Options owned of record by such persons and which have vested or will vest  within six (6) months of the date of this Report. See Item 6B.  “Compensation.” |
|   |   |                                                                                                                                                                                                                                                                                                                                          |
| (4)    |   | Calculated on the basis of 11,861,380 Ordinary Shares issued and  outstanding on June 1, 2008.                                                                                                                                                                                                                                           |

 

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

### *** ***

During Fiscal 2005, the Company made purchases from Eurotherm of approximatelyUS$242,000.

 

52

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Additionally, during Fiscal 2005, the Companypaid Eurotherm approximately US$4,000in management fees to assist in the management of some of the Company’s PRCoffices while the Company earned approximately US$2,000 from Eurotherm foroffice space rentals in Fiscal 2005.

 

The payments to Eurotherm were based on actualoffice space usage and the time cost of personnel used, respectively.

 

T.C. Leung, the Company’s Chairman of the Boardand Chief Executive Officer was also a director of Eurotherm until he retired from thatposition in February 2005.

 

## **ITEM 8.**           FINANCIAL INFORMATION

## ** **

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

### *** ***

Item 8A.1               See Item 18.

 

Item 8A.2               See Item 18.

 

Item 8A.3               See Report ofIndependent Registered Public Accounting Firms, pages F-2 and F-3.

 

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

 

Item 8A.5               Not applicable.

 

Item 8A.6               Not applicable.

 

Item 8A.7               Legal Proceedings.

 

The Company is nota party to any material legal proceedings.

 

Item 8A.8               Dividend Policy.

 

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

 

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

### *** ***

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

 

53

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

## ** **

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

### *** ***

The Company has one class ofsecurities 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 in March 1997.

 

The following prices are notadjusted to reflect stock dividends of 40% and 50% issued in September 2003and August 2004, respectively.

 

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

 
| **Years Ended December 31,** | ** ** | **Low**    | ** ** | **High**   | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                  | ** ** | **US$**    | ** ** | **US$**    | ** ** |
| ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                        |       |       |       |       |       |
| 2003                                        |       | 0.650      |       | 3.7143     |       |
| 2004                                        |       | 0.933      |       | 7.327      |       |
| 2005                                        |       | 2.700      |       | 6.590      |       |
| 2006                                        |       | 1.680      |       | 5.740      |       |
| 2007                                        |       | 1.81       |       | 5.14       |       |

 
| **Quarters Ended**  | ** ** | **Low** | ** ** | **High** | ** ** |
|--------------------------|------------|---------|------------|----------|------------|
| ** **               | ** ** | **US$** | ** ** | **US$**  | ** ** |
|                     |       |    |       |     |       |
| June 30,  2006      |       | 2.850   |       | 3.880    |       |
| September 30,  2006 |       | 1.680   |       | 2.980    |       |
| December 31,  2006  |       | 1.940   |       | 5.740    |       |
| March 31,  2007     |       | 2.450   |       | 4.520    |       |
| June 30,  2007      |       | 2.18    |       | 3.70     |       |
| September 30,  2007 |       | 1.81    |       | 3.97     |       |
| December 31,  2007  |       | 2.21    |       | 5.14     |       |
| March 31,  2008     |       | 1.93    |       | 3.04     |       |

 
| **The Following Months** | ** ** | **Low** | ** ** | **High** | ** ** |
|------------------------------------|------------|---------|------------|----------|------------|
| ** **                         | ** ** | **US$** | ** ** | **US$**  | ** ** |
|                               |       |    |       |     |       |
| January 2008                  |       | 2.300   |       | 3.040    |       |
| February 2008                 |       | 2.230   |       | 2.720    |       |
| March 2008                    |       | 1.930   |       | 2.460    |       |
| April 2008                    |       | 2.160   |       | 2.620    |       |
| May 2008                      |       | 2.300   |       | 2.150    |       |

 

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The Ordinary Shares were held by approximately 52holders of record as of June 12, 2008 Based upon information received frombroker-dealers, clearing firms and others, the Company believes that it hasapproximately 1,930 beneficial shareholders of its Ordinary Shares.

 
| ***Item 9B.***  | *** *** | ***Plan of Distribution***                |
|-----------------|--------------|-------------------------------------------|
| *** ***    | *** *** | *** ***                              |
| *** ***    | *** *** | Not Applicable.                           |
|            |         |                                      |
| **Item 9C.**    | *** *** | ***Markets***                             |
|            |         |                                      |
|            |         | See Item 9A. “Listing Details.” |
|            |         |                                      |
| ***Item 9D.***  | *** *** | ***Selling Shareholders***                |
| *** ***    | *** *** | *** ***                              |
| *** ***    | *** *** | Not Applicable.                           |
|            |         |                                      |
| ***Item 9E.***  | *** *** | ***Dilution***                            |
| *** ***    | *** *** | *** ***                              |
| *** ***    | *** *** | ***Not Applicable.***                     |
|            |         |                                      |
| ***Item 9F.***  | *** *** | ***Expenses Of The Issue***               |
| *** ***    | *** *** | *** ***                              |
| *** ***    | *** *** | ***Not Applicable.***                     |
|            |         |                                      |
| **ITEM 10.**    | ** **   | **ADDITIONAL INFORMATION**                |
| ** **      | ** **   | ** **                                |
| ***Item 10A.*** | *** *** | ***Share Capital***                       |

### *** ***

**Authorized Capital**. Theauthorized capital of the Company is US$250,000 comprised of 20,000,000Ordinary Shares and 5,000,000 shares of Preferred Stock. As of December 31,2007, there were 11,684,250Ordinary Shares and no shares of Preferred Stock, issued and outstanding. Anadditional approximately 341**,**000 OrdinaryShares were repurchased by the Company as treasury stock and are non-voting.All of the Company’s shares of capital stock have a par value of US$0.01 pershare.

 

Holders of the Company’s Ordinary Shares are entitled to one vote foreach whole share on all matters to be voted upon by shareholders, including theelection of directors. Holders of Ordinary Shares do not have cumulative votingrights in the election of directors. All shares of Ordinary Shares are equal toeach other with respect to liquidation and dividend rights. Holders of OrdinaryShares are entitled to receive dividends if and when declared by the Company’sBoard of Directors out of funds legally available under British Virgin Islandslaw. In the event of the liquidation of the Company, all assets available fordistribution to the holders of Ordinary 

 

55

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Shares are distributableamong them according to their respective share holdings. All of the outstandingshares of Ordinary Shares of the Company are duly authorized, validly issued,fully paid and non-assessable.

 

Pursuant to the Company’s Memorandum and Articles of Association andpursuant to the laws of the British Virgin Islands, the Company’s Memorandumand Articles of Association may be amended by a resolution of the Board ofDirectors without shareholder approval. This includes amendments to increase orreduce the authorized capital stock of the Company or to increase or reduce thepar value of its shares. The ability of the Company to amend its Memorandum andArticles of Association without shareholder approval could have the effect ofdelaying, deterring or preventing a change in control of the Company withoutany further action by the shareholders including but not limited to, a tenderoffer to purchase the Common Stock at a premium over then current market prices.

 

Under United States law, majority and controlling shareholdersgenerally have certain “fiduciary” responsibilities to the minorityshareholders. Shareholder action must be taken in good faith and actions bycontrolling shareholders which are obviously unreasonable may be declared nulland void. The British Virgin Islands law protecting the interests of theminority shareholders is not as protective in all circumstances as the lawprotecting minority shareholders in United States jurisdictions. While BritishVirgin Islands law does not permit a shareholder of a British Virgin Islandscompany to sue its directors derivatively, i.e., in the name of and forthe benefit of the Company, and to sue the Company and its directors for hisbenefit and the benefit of others similarly situated, the circumstances inwhich any such action may be brought that may be available in respect of anysuch action may result in the rights of shareholders of a British Virgin Islandcompany being more limited than those rights of shareholders in a United Statescompany.

 

The Board of Directors of the Company, without further shareholderaction, may issue shares of Preferred Stock in any number of series and mayestablish as to each such series the designation and number of shares to beissued and the relative rights and preferences of the shares of each series,including provisions regarding voting powers, redemption, dividend rights,rights upon liquidation and conversion rights. The issuance of shares ofPreferred Stock by the Board of Directors could adversely effect the rights ofholders of Ordinary Shares by, among other matters, establishing preferentialdividends, liquidation rights and voting power. The Company has not issued anyshares of Preferred Stock and has no present intention to issue shares ofPreferred Stock. The issuance thereof could discourage or defeat efforts toacquire control of the Company through acquisition of Ordinary Shares.

 

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

### *** ***

Set forth below is a summary of the material provisions of ourMemorandum and Articles of Association (the “Articles) and the British VirginIslands’ (“BVI”) International Business Companies Act of 1984 relating to theshares. This description does not purport to be complete and is qualified inits entirety by reference to BVI statutory law and to the Articles.

 

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

 

**Shareholders Meeting.** Thedirectors 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.

 

A shareholder may participate at a meeting of shareholders by telephoneor other electronic means, as long as all shareholders participating in themeeting are able to hear each other.

 

A meeting of shareholders is duly constituted if, at the commencementof the meeting, there are present in person or by proxy not less than fifty(50%) percent of the votes of the shares or class series of shares entitled tovote on resolutions of shareholders to be considered at the meeting.

 

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

 

Any action that may be taken by the shareholders at a meeting may alsobe taken by a resolution of shareholders consented to in writing or by writtenelectronic communication, without the need for any notice, but if not aunanimous writing, a copy of such resolution shall be sent to allnon-consenting shareholders.

 

**Net Profits and Dividends.** UnderBVI law, dividends may only be declared and paid out of surplus, such thatafter payment of dividends the Company must be able to satisfy its liabilitiesas

 

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they become due in theordinary course of business and the realizable value of the assets of suchcompany must not be less than the sum of its liabilities (other than deferredtaxes and capital). There are no other BVI restrictions regarding dividends.

 

**Pre-emptive Rights.** The holdersof Ordinary Shares and Preferred Shares are not entitled to any pre-emptive orsimilar rights.

 

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

 

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

 

(a)                                  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 maynot purchase, 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 shallbe made unless the directors determine that immediately after purchase,redemption or other acquisition the Company will be able to satisfy itsliabilities as they become due in the ordinary course of its business and therealizable value of the assets of the Company will not be less than the sum ofits total liabilities, other than deferred taxes, as shown in the books ofaccount, and its capital and, in the absence of fraud, the decision of thedirectors as to the realizable value of the assets of the Company isconclusive, unless a question of law is involved.

 

**Duration, Liquidation, Merger.**  The Company shall continue until wound-up anddissolved by a resolution of shareholders, or under the terms of any insolvencyor liquidation laws in force in the BVI. Under BVI law the Company may mergewith another company, including a parent company or subsidiary, incorporated inthe BVI, or in a jurisdiction outside of the BVI where the laws of thatjurisdiction permit the merger. A merger must be authorized by the directors ofthe Company and approved by the shareholders.

 

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**Board of Directors.** The businessand affairs of the Company are managed by the directors who may exercise allsuch powers of the Company as are not by BVI law or by the Company’s Articlesreserved to the shareholders of the Company.

 

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

### *** ***

On April 29, 2007,Far East entered into a subscription agreement with Blue Sky and Blue Sky’smanagement shareholders to purchase twenty (20%) percent of the equity capitalof Blue Sky (the “Blue Sky Agreement”) for a total of US$4,700,000 of whichUS$4,000,000 was paid in August 2007 with a final payment of US$648,000 tobe paid by the end of June 2008 based upon Blue Sky’s net profits for itsfiscal year ended December 31, 2007. The Blue Sky Agreement containscertain provisions requiring Far East’s written consent prior to Blue Sky;taking on new shareholders, pledging or selling assets, declaring a dividend,amending its constitution, guaranteeing the obligations of third parties,dismissing management or changing their rates of compensation, appointingdirectors and similar provisions. Far East also has the right to appoint anon-executive director to Blue Sky, who will not participate in the day to daymanagement of Blue Sky.  In the eventBlue Sky sells additional shares, Far East has the right to maintain its 20%interest by paying the same price as any proposed purchaser.  Pursuant to the Blue Sky Agreement, in March 2008,Blue Sky declared a dividend to be paid in December 2008, to itsshareholders.  The Company estimates BlueSky’s dividends to Far East will approximate US$80,000. As part of the Blue SkyAgreement, Far East agreed that if it was able and circumstances permit, itwould undertake the obligation of guaranteeing loans of not more thanUS$2,900,000****for Blue Sky.

 

On July 18, 2007,Far East entered into a subscription agreement with Jia Huan and Jia Huan’smanagement shareholders to purchase twenty (20%) percent of the equity capitalof Jia Huan for US$2,500,000 (the “Jia Huan Agreement”).  The Jia Huan Agreement contains certainprovisions requiring Far East’s written consent prior to Jia Huan; taking onnew shareholders, pledging or selling assets, declaring a dividend, amendingits constitution, guaranteeing the obligations of third parties, dismissingmanagement or changing their rates of compensation, appointing directors andsimilar provisions. Far East also has the right to appoint a non-executivedirector who will not participate in the day to day management of JiaHuan.  In the event Jia Huan sellsadditional shares, Far East has the right to maintain its 20% interest bypaying the same price as any proposed purchaser.  The Jia Huan transaction was completed on January 20,2008.

 

As part of itsacquisitions of Yixing and Pact, the Company granted the minority shareholdersof both entities the right to require the Company to purchase the remainingsecurities of Yixing and Pact pursuant to a formula that would obligate theCompany to pay the minority shareholders approximately $1,758,000.  There has been no indication to the Companyfrom the minority shareholders that they desire to sell their shares.  See Item 4A. “History and Development of theCompany” and Item 4B. “Business Overview”.

 

***Item 10D.******             Exchange Controls***

 

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

 

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

 

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

### *** ***

The Company is exemptedfrom taxation in the British Virgin Islands.

 

The Company’ssubsidiaries organized in Hong Kong, Far East, Euro Tech (China) Limited andChinaH2O.com Limited, provide for Hong Kong profits tax at a rate of 17.5% onthe basis of their income for financial reporting purposes, adjusting forincome and expense items which are not assessable or deductible for profits taxpurposes. Hong Kong levies no capital gains or dividends tax.

 

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

 

In accordance 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 its first profit-making year, after offsetting losses brought forward, ifany, followed by a 50% reduction for the next three years thereafter. As of December 31,2007, SET remained exempt from the PRC enterprise income tax.

 

According to the relevantPRC tax rules and regulations, Shanghai Euro Tech EnvironmentalEngineering Limited is exempt from the PRC Enterprise Income Tax of 15% for twoyears starting from 2007, followed by a 50% reduction for the next three yearsthereafter. Chongqing Euro Tech Rizhi Technology Co., Ltd and Rizhi Euro TechInstrument (Shaanxi) Co., Ltd provide for PRC Enterprise Income Tax at a rateof 30%, after offsetting losses brought forward, if any, on the basis of itsincome for financial reporting purposes, adjusting for income and expense itemswhich are not assessable or deductible for PRC Enterprise Income Tax purposes.

 

According to the relevantPRC tax rules and regulations, Yixing Pact Environmental Technology Co.,Ltd is registered in Shanghai as Foreign Owned Enterprise that is entitled to alower Enterprise Income Tax rate of 27%. Pact Asia Pacific Limited is situated in the British Virgin Islandswhere there are no taxes imposed on it. However, part of its profits is subject to Hong Kong profits tax at arate of 17.5% in Fiscal 2007 as to those profits earned in Hong Kong.

 

VIES of the Group providefor PRC Enterprise Income Tax at a rate of 33%, after offsetting losses broughtforward, if any, on the basis of its income for financial reporting purposes,adjusting for income and expense items which are not assessable or deductiblefor PRC Enterprise Income Tax purposes.

 

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As of December 31, 2007, certain VIEs hadaggregated assessable losses carried forward of US$118,161 as agreed by the local taxauthority.

 

The Company’s effective tax rates for Fiscal 2007,Fiscal 2006 and Fiscal 2005 were 21.6%, 18.7% and 24.2%, respectively. Weighted averagestatutory tax rates of 11.3%,14.3% and 23% were in effect for Fiscal 2007, Fiscal 2006 and Fiscal 2005,respectively. Principal adjustments to this statutory tax rate were valuationallowances of 17.1%, 5.5% and0.3% during Fiscal 2007, Fiscal 2006 and Fiscal 2005, respectively.

 

PRC Enterprise Income Tax applied at 15% for Euro TechTrading (Shanghai) Limited, a subsidiary incorporated in the PRC, for the yearended December 31, 2005. Accumulated tax losses of Shanghai Euro TechLimited, another subsidiary incorporated in the PRC, available to offsetagainst future profit were US$225,300 and US$305,975, respectively, during Fiscal 2007 andFiscal 2006.

 

On March 16,2007, the PRC National People’s Congress passed the China Corporate Income TaxLaw (“Income Tax Law”), which became effective January 1, 2008 and appliesa unified income tax rate for foreign invested enterprises and domesticenterprise. The Income Tax Law is effective immediately for companiespreviously subject to higher taxation rates and provides a five-year transitionperiod from its effective date for those enterprises which were establishedbefore the effective date of the new tax law and previously entitled to apreferential tax treatment.

 

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

 

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

 

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

### *** ***

The documents thatare exhibits to or incorporated by reference in this annual report can be readat the U.S. Securities and Exchange Commission’s public reference facilities at100 F Street, N.E., Washington, DC 20549-2001 or on the Commission’s website:www.sec.gov.

 

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## ** **

## **ITEM 11.**                 QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUTMARKET RISK

## ** **

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

 

*ForeignCurrency Risks*

 

The Company isexposed to risk from changing foreign currency exchange rates. The Company’ssales are denominated either in HK dollar or RMB. The majority of the Company’sexpenses and cost of revenue are denominated in HK dollars, followed by RMB, USdollars, Japanese yen and the Euro. The Company is subject to a variety ofrisks associated with changes among the relative value of the US dollar, HKdollar, RMB, Japanese yen and the Euro. The Company does not currentlyadequately hedge its foreign exchange positions. Any material increase in thevalue of the HK dollar, RMB, Japanese yen and the Euro relative to the USdollar would increase the Company’s expenses and cost of revenue and thereforewould have a material adverse effect on the Company’s business, financialcondition and results of operations.

 

*Inflation*

 

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

 

The Company iscurrently not exposed to material future earnings or cash flow exposures fromchanges in interest rates on debt obligations as the Company had no bankindebtedness in Fiscal 2007.**** The Company does not currently anticipateentering into interest rate swaps and/or similar instruments.

 

**PART II**

 

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

## ** **

None.

 

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

## ** **

Not Applicable.

 

## **ITEM 15.**                 CONTROLS ANDPROCEDURES

## ** **

(a)                                  Evaluation of Disclosure Controls andProcedures

 

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Our ChiefExecutive Officer and Chief Financial Officer has evaluated the effectivenessof our disclosure controls and procedures (as defined in Rules 13a-14(c) and15d -14(c) under the Securities Exchange Act of 1934 (“Exchange Act”) as of theend of the period covered by this Annual Report on Form 20-F.  Based on such evaluation, he has concludedthat as of such date, our disclosure controls and procedures are effective anddesigned to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in applicable SECrules and forms.

 

(b)                                 Management’sAnnual Report on Internal Control over Financial Reporting

 

Our management,under the supervision of our Chief Executive Officer and Chief FinancialOfficer, is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rule 13a-15(c) and Rule15d-15(e) of the Exchange Act.  Ourinternal control system was designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation and fairpresentation of our consolidated financial statements for external purposes inaccordance with generally accepted accounting principles.  Our Chief Executive Officer and ChiefFinancial Officer assessed the effectiveness of our internal control overfinancial reporting as of December 31, 2007. In making this assessment, they used the criteria established inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”).  Based on this assessment, our Chief ExecutiveOfficer and Chief Financial Officer have conducted that, as of December 31,2007, our internal control over financial reporting is effective based on thosecriteria.  Notwithstanding the foregoing,all internal control systems, no matter how well designed, have inherentlimitations.  Therefore, even thosesystems determined to be effective may not prevent or detect misstatements andcan provide only reasonable assurance with respect to financial statementpreparation and presentation.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Management of theCompany has performed preliminary evaluations of internal controls during theperiod ended December 31, 2007 and that some deficiencies have been noted.  Furthermore, Management of the Company is inthe process of developing complete evaluations in order to rectify thosedeficiencies.

 

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

 

(c)                                  Changesin Internal Controls

 

No significantchanges in our internal controls or in other factors that could significantlyeffect these controls subsequent to the date of the evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses, were made as a result of the evaluation.

 

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

## ** **

### ***Item 16A.***             Audit Committee Financial Expert

### *** ***

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

 

### ***Item 16B.***             Code Of Ethics

### *** ***

Our Board ofDirectors has 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 provide toany person without charge, a copy of our code of business conduct and ethicswithin ten working days after we receive such person’s written request.

 

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### ***Item 16C.***             Principal Accountant Fees And Services

### *** ***

The followingtable sets forth the aggregate fees by categories specified below in connectionwith certain professional services rendered by BDO McCabe Lo Limited who wereour principal external auditors, for 2005, 2006 and 2007.

 
| ** **             | ** ** | **For the Year Ended December, 31** | ** ** |
|------------------------|------------|--------------------------------------------------------------|------------|
| ** **             | ** ** | **2005**                                                     | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **             | ** ** | **US$  **                                          | ** ** | **US$** | ** ** | **US$** | ** ** |
|                   |       |                                                         |       |   |   |   |   |
| Audit fees(1)          |       | 103,500                                                      |       | 127,000 |   | 189,800 |   |
| Audit-related  fees(2) |       | Nil                                                          |       | Nil |   | 25,000 |   |
| Tax fees(3)            |       | 6,000                                                        |       | 3,300 |   | 8,100 |   |
| All other fees         |       | Nil                                                          |       | Nil |   | Nil |   |

 

Our Audit Committeehas adopted a pre-approval policy for the engagement of our independentaccountant to perform permitted audit and non-audit services. Under thispolicy, which is designed to assure that such engagements do not impair theindependence of our auditors, the Audit Committee pre-approves annually a rangeof specific audit and non-audit services in the categories of Audit Service,Audit-Related Services, Tax Services and other services that may be performedby our independent accountants, and the maximum pre-approved fees that may bepaid as compensation for each pre-approved service in those categories. Anyproposed services exceeding the maximum pre-approved fees require specificapproval by the Audit Committee.

 

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

 

(2)          “Audit-related fees” means the aggregatefees billed in each of the fiscal years listed for assurance and relatedservices by our principal auditors that are reasonably related to theperformance of the audit or review of our financial statements and are notreported under “Audit fees.” Services comprising the fees disclosed under thecategory of “Audit-related fees” involve principally the performance of certainagreed upon procedures for the years ended December 31, 2005, 2006 and2007, respectively.

 

(3)          “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.

 

### ***Item 16D.***             Exemptions From Listing Standards

### *** ***

The Company is a “ControlledCompany” as defined in NASDAQ’s corporate governance rules as a majorityof our shares are owned by a “control group” consisting of T.C. Leung, PearlVenture Ltd. and Regent Earnings Limited, who have disclosed their “controlgroup” status in their filings with the Commission.  So long as that “controlled company” statusremains in effect, the Company will be exempt from certain of NASDAQ corporategovernance

 

64

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rules that,including among other things, would require: (a) a majority of ourdirectors be independent; (b) the compensation of our chief executiveofficer be determined or recommended by independent directors; and (c) directornominations be determined or recommended by independent directors.

 

The Companybelieves it is in compliance with NASDAQ’s corporate governance rules asin effect and intends to comply with the changes to said rules no laterthan the date that they become effective.

 

*[Remainder of Page Intentionally Left Blank]*

 

65

----

 

# **PART III**

# ** **

## **ITEM 17.**                 FINANCIALSTATEMENTS

## ** **

Not applicable.

 

## **ITEM 18.**                 FINANCIALSTATEMENTS

## ** **

The following financial statements are filed as part of this annualreport on Form 20-F.

 

Index to consolidated financial statements

 

Reports of Independent Registered Public Accounting Firms

 

Consolidated balance sheets

 

Consolidated income statements

 

Consolidated cash flow statements

 

Consolidated statement of changes in shareholders’ equity

 

Notes to the consolidated financial statements

 

## **ITEM 19.**                 EXHIBITS

## ** **

Lists of Exhibits

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

 

66

----

 
| 4.12   |   | 2007 Officers  and Directors Option Plan (8)                                                                                                                                     |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                             |
| 8.1    |   | List of  Subsidiaries (9)                                                                                                                                                        |
|   |   |                                                                                                                                                                             |
| 10.1   |   | Share Sale and  Purchase Agreement between Tamworth Industrial Ltd. And Registrant’s  subsidiary (5)                                                                        |
|   |   |                                                                                                                                                                             |
| 10.2   |   | Equity Interest  Transfer Agreement between Tamworth Industrial Ltd. And the Registrant’s  subsidiary (5)                                                                   |
|   |   |                                                                                                                                                                             |
| 10.3   |   | Share Transfer  and Subscription Agreement among Registrant’s subsidiary, Zhejiang Jia Huan  Limited (“Jia Huan”) and the Management Shareholders of Jia Huan (9) |
|   |   |                                                                                                                                                                             |
| 10.4   |   | Share  Subscription Agreement among Registrant’s subsidiary, Zhejang Tianlan Limited  (“Blue Sky”) and the Management Shareholders of Blue Sky (9)                |
|   |   |                                                                                                                                                                             |
| 12.1   |   | Certification of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (9)                                                                    |
|   |   |                                                                                                                                                                             |
| 12.2   |   | Certification of  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (9)                                                                    |
|   |   |                                                                                                                                                                             |
| 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 (9)             |
|   |   |                                                                                                                                                                             |
| 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 (9)            |

 

----

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

 

67

----

 

**SIGNATURES**

 

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

 

 
|                      | **EURO TECH HOLDINGS COMPANY LIMITED**            | ** ** |
|---------------------------|---------------------------------------------------|------------|
|                      | (Registrant)                                      | ** ** |
|                      |                                              |
|                      |                                              |
|                      | /s/ T.C. Leung                                    |       |
|                      | T.C. Leung,                                       |
|                      | Chief Executive Officer and Chairman of the Board |
|                      |                                              |
|                      |                                              |
| Dated: June 27, 2008 |                                              |

 

68

----

 

**EURO TECH HOLDINGS COMPANYLIMITED**

 

**AUDITED CONSOLIDATED BALANCESHEETS**

 

**AS OF DECEMBER 31, 200****7****AND 200****6****AND**

 

**CONSOLIDATED STATEMENTS OFINCOME,**

 

**CONSOLIDATED CASH FLOWS ANDCHANGES IN SHAREHOLDERS’ EQUITY**

 

**FOR THE YEARS ENDED DECEMBER 31,200****7****, 200****6****AND 200****5**

 

**TOGETHER WITH REPORT OFINDEPENDENT REGISTERED**

 

**PUBLIC ACCOUNTING FIRM**

 

----

 

**Report of Independent RegisteredPublic Accounting Firm**

 

Tothe Board of Directors and shareholders of

EuroTech Holdings Company Limited

 

We have audited theaccompanying consolidated balance sheets of Euro Tech Holdings Company Limitedas of December 31, 2007 and 2006 and the related consolidated statementsof operations, shareholders’ equity and cash flows for the years ended December 31,2007, 2006 and 2005. These financial statements are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on these financial statements based on our audits.

 

We conducted our audit inaccordance with standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  The audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion.  An audit includes examining, ona test basis, 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 statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Euro Tech HoldingsCompany Limited as of December 31, 2007 and 2006 and the results of itsconsolidated operations and cash flows for the years ended December 31,2007, 2006 and 2005, in conformity with generally accepted accountingprinciples in the United States of America.

 

 

/s/ BDO McCabe Lo Limited

 

 

Hong Kong, June 27, 2008

 

F-1

----

 

**EURO TECH HOLDINGS COMPANYLIMITED**

 

**CONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31**

 
| ** **                                                                                                                                            | ** ** | **Note**                  | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                                            | ** ** | ** **                | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                                                                                                  |       |                      |       |             |       |             |       |   |
| Assets                                                                                                                                                |       |                      |       |             |       |             |       |   |
|                                                                                                                                                  |       |                      |       |             |       |             |       |   |
| Current assets:                                                                                                                                       |       |                      |       |             |       |             |       |   |
| Cash and cash equivalents                                                                                                                             |       |                      |       |             | 9,387      |             | 9,160      |   |
| Restricted  cash                                                                                                                                      |       |                      |       |             | 332        |             | 415        |   |
| Accounts receivable, net                                                                                                                              |       | 6                         |       |             | 4,968      |             | 4,914      |   |
| Prepayments and other  current assets                                                                                                                 |       |                      |       |             | 912        |             | 723        |   |
| Inventories, net                                                                                                                                      |       | 7                         |       |             | 2,012      |             | 2,028      |   |
| Taxation recoverable                                                                                                                                  |       |                      |       |             | 12         |             | 12         |   |
| Total current assets                                                                                                                                  |       |                      |       |             | 17,623     |             | 17,252     |   |
|                                                                                                                                                  |       |                      |       |             |       |             |       |   |
| Property, plant and  equipment, net                                                                                                                   |       | 8 & 21(iii) |       |             | 1,622      |             | 1,628      |   |
| Investments in affiliates                                                                                                                             |       | 9                         |       |             | 5,046      |             | —     |   |
| Goodwill                                                                                                                                              |       | 12                        |       |             | 1,060      |             | 1,060      |   |
| Deferred tax assets                                                                                                                                   |       | 4                         |       |             | 131        |             | 35         |   |
|                                                                                                                                                  |       |                      |       |             |       |             |       |   |
| Total assets                                                                                                                                          |       |                      |       |             | 25,482     |             | 19,975     |   |
|                                                                                                                                                  |       |                      |       |             |       |             |       |   |
| Liabilities and  shareholders’ equity                                                                                                            |       |                      |       |             |       |             |       |   |
|                                                                                                                                                  |       |                      |       |             |       |             |       |   |
| Current liabilities:                                                                                                                                  |       |                      |       |             |       |             |       |   |
| Accounts payable                                                                                                                                      |       |                      |       |             | 3,112      |             | 4,192      |   |
| Amounts due to related  companies                                                                                                                     |       | 18                        |       |             | —     |             | —     |   |
| Other payables and accrued  expenses                                                                                                                  |       | 10                        |       |             | 3,892      |             | 2,348      |   |
| Taxation payable                                                                                                                                      |       |                      |       |             | 520        |             | 445        |   |
| Total current liabilities                                                                                                                             |       |                      |       |             | 7,524      |             | 6,985      |   |
|                                                                                                                                                  |       |                      |       |             |       |             |       |   |
| Minority interest                                                                                                                                     |       |                      |       |             | 1,545      |             | 1,067      |   |
|                                                                                                                                                  |       |                      |       |             |       |             |       |   |
| Commitments and  contingencies                                                                                                                        |       | 19                        |       |             | —     |             | —     |   |
|                                                                                                                                                  |       |                      |       |             |       |             |       |   |
| Shareholders’ equity:                                                                                                                            |       |                      |       |             |       |             |       |   |
| Ordinary share, par value  US$0.01 each, 20,000,000 (2006: 20,000,000)  shares authorized; 12,024,901 (2006: 9,375,192) shares issued and outstanding |       | 11                        |       |             | 120        |             | 94         |   |
| Additional paid-in capital                                                                                                                            |       |                      |       |             | 9,229      |             | 5,387      |   |
| Treasury stock, 340,651  (2006: 340,651) shares at cost                                                                                               |       | 13                        |       |             | (237       | )                | (237       | ) |
| PRC statutory reserve                                                                                                                                 |       | 14                        |       |             | 165        |             | 88         |   |
| Accumulated other  comprehensive income                                                                                                               |       |                      |       |             | 271        |             | 69         |   |
| Retained earnings                                                                                                                                     |       |                      |       |             | 6,865      |             | 6,522      |   |
| Total shareholders’ equity                                                                                                                       |       |                      |       |             | 16,413     |             | 11,923     |   |
|                                                                                                                                                  |       |                      |       |             |       |             |       |   |
| Total liabilities and  shareholders’ equity                                                                                                      |       |                      |       |             | 25,482     |             | 19,975     |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-2

----

 

**EURO TECH HOLDINGS COMPANYLIMITED**

 

**CONSOLIDATED STATEMENTS OF INCOMEAND COMPREHENSIVE INCOME**

**FOR THE YEARS ENDED DECEMBER 31,200****7****, 200****6****AND 200****5**

 
| ** **                                                                        | ** ** | **Note**              | ** ** | **200****7**     | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                        | ** ** | ** **            | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                              |       |                  |       |             |       |             |       |             |       |   |
| Revenue                                                                           |       | 21(i) & (ii) |       |             | 27,230     |             | 27,161     |             | 31,250     |   |
| Cost of revenue                                                                   |       |                  |       |             | (20,398    | )                | (20,606    | )                | (24,681    | ) |
| Gross profit                                                                      |       |                  |       |             | 6,832      |             | 6,555      |             | 6,569      |   |
|                                                                              |       |                  |       |             |       |             |       |             |       |   |
| Selling and administrative  expenses                                              |       |                  |       |             | (6,585     | )                | (5,961     | )                | (5,418     | ) |
| Operating income                                                                  |       |                  |       |             | 247        |             | 594        |             | 1,151      |   |
| Interest income                                                                   |       |                  |       |             | 256        |             | 95         |             | 35         |   |
| Other income, net                                                                 |       | 3                     |       |             | 161        |             | 146        |             | 172        |   |
| Income before income taxes,  minority interest and equity in profit of affiliates |       |                  |       |             | 664        |             | 835        |             | 1,358      |   |
|                                                                              |       |                  |       |             |       |             |       |             |       |   |
| Income taxes                                                                      |       | 4                     |       |             | (144       | )                | (156       | )                | (328       | ) |
|                                                                              |       |                  |       |             |       |             |       |             |       |   |
| Minority  interest in profits of subsidiaries                                     |       |                  |       |             | (345       | )                | (318       | )                | (318       | ) |
| Equity in profit of  affiliates                                                   |       |                  |       |             | 247        |             | —     |             | 21         |   |
| Net income for the year                                                           |       |                  |       |             | 422        |             | 361        |             | 733        |   |
|                                                                              |       |                  |       |             |       |             |       |             |       |   |
| Net income per ordinary  share                                                    |       |                  |       |             |       |             |       |             |       |   |
| - Basic                                                                           |       |                  |       |             | US$        | 0.04             |       | US$              | 0.04       |   | US$ | 0.11 |   |
|                                                                              |       |                  |       |             |       |             |       |             |       |   |
| - Diluted                                                                         |       |                  |       |             | US$        | 0.03             |       | US$              | 0.03       |   | US$ | 0.07 |   |
| Weighted average number of  ordinary shares outstanding                           |       |                  |       |             |       |             |       |             |       |   |
| - Basic                                                                           |       | 5                     |       |             | 11,105,556 |             | 8,047,911  |             | 6,598,201  |   |
|                                                                              |       |                  |       |             |       |             |       |             |       |   |
| - Diluted                                                                         |       | 5                     |       |             | 12,095,335 |             | 10,787,420 |             | 10,689,482 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-3

----

 

**EURO TECH HOLDINGS COMPANYLIMITED**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**FOR THE YEARS ENDED DECEMBER 31,200****7****, 200****6****AND 200****5**

 
| ** **                                                                                   | ** ** | **200****7**     | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Cash flows from operating  activities:                                                       |       |             |       |             |       |             |       |
| Net income                                                                                   |       | 422              |       | 361              |       | 733              |       |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |             |       |             |       |             |       |
| Depreciation of property,  plant and equipment                                               |       | 232              |       | 216              |       | 181              |       |
| Stock  based compensation expense                                                            |       | 148              |       | —           |       | —           |       |
| (Gain)  loss on disposal of property, plant and equipment                                    |       | (19              | )          | 1                |       | 1                |       |
| Minority  interest in profits of subsidiaries                                                |       | 345              |       | 318              |       | 318              |       |
| Equity in profit of  affiliates                                                              |       | (247             | )          | —           |       | (21              | )          |
| Deferred tax assets                                                                          |       | (96              | )          | —           |       | 11               |       |
| Deferred  tax liabilities                                                                    |       | —           |       | (4               | )          | 4                |       |
| (Increase) decrease in  current assets:                                                      |       |             |       |             |       |             |       |
| Accounts receivable, net                                                                     |       | (54              | )          | 553              |       | (1,237           | )          |
| Prepayments and other  current assets                                                        |       | (189             | )          | (80              | )          | 327              |       |
| Inventories, net                                                                             |       | 16               |       | 704              |       | 2,387            |       |
| Taxation recoverable                                                                         |       | —           |       | 30               |       | (35              | )          |
| Increase (decrease) in  current liabilities:                                                 |       |             |       |             |       |             |       |
| Accounts payable                                                                             |       | (1,080           | )          | (435             | )          | (148             | )          |
| Amounts due to related  companies                                                            |       | —           |       | —           |       | (1,267           | )          |
| Other payables and accrued  expenses                                                         |       | 896              |       | (222             | )          | (1,665           | )          |
| Taxation payable                                                                             |       | 75               |       | 23               |       | 137              |       |
| Net cash provided by/(used  in) operating activities                                         |       | 449              |       | 465              |       | (274             | )          |
|                                                                                         |       |             |       |             |       |             |       |
| Cash flows from investing  activities:                                                       |       |             |       |             |       |             |       |
| Purchase of property,  plant and equipment                                                   |       | (250             | )          | (106             | )          | (110             | )          |
| Proceeds  on disposal of property, plant and equipment                                       |       | 43               |       | —           |       | —           |       |
| Cash  flow on business combination, net of cash acquired                                     |       | —           |       | —           |       | 486              |       |
| Investments  in affiliates                                                                   |       | (4,151           | )          | —           |       | —           |       |
| Restricted  cash for issuance of bank guarantees                                             |       | 83               |       | (111             | )          | (304             | )          |
| Dividend  paid to minority interest                                                          |       | (140             | )          | (135             | )          | —           |       |
| Net cash (used in)/provided by investing activities                                          |       | (4,415           | )          | (352             | )          | 72               |       |
|                                                                                         |       |             |       |             |       |             |       |
| Cash flows from financing  activities:                                                       |       |             |       |             |       |             |       |
| Issuance  of ordinary shares on exercise of options                                          |       | 3,720            |       | 2,607            |       | 306              |       |
| Cash  from issuance of registered capital in subsidiary to minority interest                 |       | 200              |       | —           |       | —           |       |
|                                                                                         |       |             |       |             |       |             |       |
| Net cash provided by financing activities                                                    |       | 3,920            |       | 2,607            |       | 306              |       |
| Effect of exchange rate  changes on cash and cash equivalents                                |       | 273              |       | 78               |       | 16               |       |
|                                                                                         |       |             |       |             |       |             |       |
| Net increase in cash and cash  equivalents                                                   |       | 227              |       | 3,798            |       | 120              |       |
| Cash and cash equivalents,  beginning of year                                                |       | 9,160            |       | 5,362            |       | 5,242            |       |
| Cash and cash equivalents,  end of year                                                      |       | 9,387            |       | 9,160            |       | 5,362            |       |
|                                                                                         |       |             |       |             |       |             |       |
| Supplementary information                                                                    |       | US$’000     |       | US$’000     |       | US$’000     |       |
| Interest received                                                                            |       | 256              |       | 95               |       | 35               |       |
| Interest paid                                                                                |       | —           |       | —           |       | —           |       |
| Income taxes paid                                                                            |       | 166              |       | 125              |       | 121              |       |
| Shares  surrendered for exercise of stock options                                            |       | 155              |       | 168              |       | 195              |       |

 

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

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-4

----

 

**EURO TECH HOLDINGS COMPANYLIMITED**

 

**CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 200****7****, 200****6****AND 200****5**

 
| ** **                                                           | ** ** | **Number of****Ordinary  share** | ** ** | **Ordinary  share** | ** ** | **Additional  paid-in  capital** | ** ** | **Treasury  stock** | ** ** | **Accumulated  other  comprehensive  income  (loss)** | ** ** | **PRC  statutory  reserve** | ** ** | **Retained  earnings** | ** ** | **Total**        | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------|------------|----------------------------------|------------|---------------------|------------|-------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|------------------|------------|
| ** **                                                           | ** ** | ** **                            | ** ** | **US$’000**    | ** ** | **US$’000**                 | ** ** | **US$’000**    | ** ** | **US$’000**                                      | ** ** | **US$’000**            | ** ** | **US$’000**       | ** ** | **US$’000** | ** ** |
|                                                                 |       |                                  |       |                |       |                             |       |                |       |                                                  |       |                        |       |                   |       |             |       |
| Balance as of January 1, 2005                                   |       | 6,775,318                             |       | 68                  |       | 2,500                            |       | (237                | )          | (26                                                   | )          | 69                          |       | 5,463                  |       | 7,837            |       |
| Net income                                                           |       | —                                |       | —              |       | —                           |       | —              |       | —                                                |       | —                      |       | 733                    |       | 733              |       |
| Other  comprehensive income: Foreign exchange translation adjustment |       | —                                |       | —              |       | —                           |       | —              |       | 16                                                    |       | —                      |       | —                 |       | 16               |       |
| Total  comprehensive income                                          |       |                                  |       |                |       |                             |       |                |       |                                                  |       |                        |       |                   |       | 749              |       |
| Shares  surrendered for exercise of stock options                    |       | (52,846                               | )          | (1                  | )          | (194                             | )          | —              |       | —                                                |       | —                      |       | —                 |       | (195             | )          |
| Exercise  of stock options                                           |       | 640,530                               |       | 7                   |       | 494                              |       | —              |       | —                                                |       | —                      |       | —                 |       | 501              |       |
| Transfer of reserve                                                  |       | —                                |       | —              |       | —                           |       | —              |       | —                                                |       | 3                           |       | (3                     | )          | —           |       |
| Balance  as of December 31, 2005                                |       | 7,363,002                             |       | 74                  |       | 2,800                            |       | (237                | )          | (10                                                   | )          | 72                          |       | 6,193                  |       | 8,892            |       |
| Net income                                                           |       | —                                |       | —              |       | —                           |       | —              |       | —                                                |       | —                      |       | 361                    |       | 361              |       |
| Other  comprehensive income: Foreign exchange translation adjustment |       | —                                |       | —              |       | —                           |       | —              |       | 79                                                    |       | —                      |       | —                 |       | 79               |       |
| Total  comprehensive income                                          |       |                                  |       |                |       |                             |       |                |       |                                                  |       |                        |       |                   |       | 440              |       |
| Shares  surrendered for exercise of stock options                    |       | (36,700                               | )          | —              |       | (168                             | )          | —              |       | —                                                |       | —                      |       | —                 |       | (168             | )          |
| Exercise  of stock options                                           |       | 2,048,890                             |       | 20                  |       | 2,706                            |       | —              |       | —                                                |       | —                      |       | —                 |       | 2,726            |       |
| Transfer of reserve                                                  |       | —                                |       | —              |       | —                           |       | —              |       | —                                                |       | 16                          |       | (32                    | )          | (16              | )          |
| Stock-based  compensation expense                                    |       | —                                |       | —              |       | 49                               |       | —              |       | —                                                |       | —                      |       | —                 |       | 49               |       |
| Balance  as of December 31, 2006                                |       | 9,375,192                             |       | 94                  |       | 5,387                            |       | (237                | )          | 69                                                    |       | 88                          |       | 6,522                  |       | 11,923           |       |
| Net income                                                           |       | —                                |       | —              |       | —                           |       | —              |       | —                                                |       | —                      |       | 422                    |       | 422              |       |
| Other  comprehensive income: Foreign exchange translation adjustment |       | —                                |       | —              |       | —                           |       | —              |       | 202                                                   |       | —                      |       | —                 |       | 202              |       |
| Total  comprehensive income                                          |       |                                  |       |                |       |                             |       |                |       |                                                  |       |                        |       |                   |       | 624              |       |
| Shares  surrendered for exercise of stock options                    |       | (45,537                               | )          | (1                  | )          | (154                             | )          | —              |       | —                                                |       | —                      |       | —                 |       | (155             | )          |
| Exercise  of stock options                                           |       | 2,695,246                             |       | 27                  |       | 3,848                            |       | —              |       | —                                                |       | —                      |       | —                 |       | 3,875            |       |
| Transfer of reserve                                                  |       | —                                |       | —              |       | —                           |       | —              |       | —                                                |       | 77                          |       | (79                    | )          | (2               | )          |
| Stock-based  compensation expense                                    |       | —                                |       | —              |       | 148                              |       | —              |       | —                                                |       | —                      |       | —                 |       | 148              |       |
| Balance  as of December 31, 2007                                |       | 12,024,901                            |       | 120                 |       | 9,229                            |       | (237                | )          | 271                                                   |       | 165                         |       | 6,865                  |       | 16,413           |       |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-5

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

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

 

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

 

Euro Tech (Far East) Limited (“Far East”) is the principal operatingsubsidiary of the Company.  It isprincipally engaged in the marketing and trading of water and waste waterrelated process control, analytical and testing instruments, disinfection equipment,supplies and related automation systems in Hong Kong and in the People’sRepublic of China (the “PRC”).

 

Details of the Company’s significant subsidiaries and affiliates aresummarized as follows:

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

 

F-6

----

 
|                                                             |   |   |   |                       |   | testing instruments, disinfection equipment, supplies and related automation  systems                                                                                    |
|------------------------------------------------------------------|--------|--------|--------|----------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                             |   |   |   |                       |   |                                                                                                                                                                     |
| Yixing Pact Environmental Technology Co.,  Ltd                   |   | 51     | %*     | The PRC                    |   | Design, manufacturing and operation of  water and waste water treatment machinery and equipment                                                                          |
|                                                             |   |   |   |                       |   |                                                                                                                                                                     |
| Pact Asia Pacific Limited                                        |   | 51     | %*     | The British Virgin Islands |   | Producing and selling of environment  protection equipment, undertaking environment protection projects and  providing relevant technology advice, training and services |
|                                                             |   |   |   |                       |   |                                                                                                                                                                     |
| Affiliates:                                                      |   |   |   |                       |   |                                                                                                                                                                     |
|                                                             |   |   |   |                       |   |                                                                                                                                                                     |
| Zhejiang Tianlan  Desulfurization and Dust–Removal Co. Ltd. |   | 20     | %*     | The PRC                    |   | Design, general contract,  equipment manufacturing, installation, testing and operation management of  the treatment of waste gases emitted                              |

 

----

* In the year 2004, these two companies areaffiliates of the Company, with 30% of equity ownership by the Company.  The Company acquired additional 21% of equityinterest of each of the affiliate on October 18, 2005.  (See also note 9).

 

** In the year 2007, the Company acquired 20%equity interest of this company.

 

F-7

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

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

 

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

 

The consolidated financial statements include the accounts of Euro TechHoldings Company Limited and its subsidiaries (the “Group”).  The financial statements of variable interestentities (“VIEs”),as defined by the Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R) (“FIN 46 (R)”), are included in the consolidated financialstatements, if applicable.  In January 2003,the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidationof Variable Interest Entities” and amended it by issuing FIN 46 (R) inDecember 2003.  FIN 46 (R) addressesconsolidation by business enterprises of VIEs that either: (1) do not havesufficient equity investment at risk to permit the entity to finance itsactivities without additional subordinated financial support, or (2) haveequity investors that lack an essential characteristic of a controllingfinancial interest.

 

The Group identified that certain retail shops established in the PRCqualified as variable interest entities as defined in FIN 46 (R).  The retail shops are principally engaged inthe retailing business of water and waste water related process control,analytical and testing instruments, disinfection equipment, supplies andrelated automation systems.  The Companyis the primary beneficiary of these retail shops and, accordingly, consolidatedtheir financial statements effective December 31, 2004.  The Company has a controlling financialinterest in these retail shops and is subject to a majority of the risk of lossfrom the retailing activities, and is entitled to receive a majority of theretail shops’ residual returns.  Totalassets and liabilities of these consolidated VIEs total US$150,602     and US$289,127, as of December 31, 2007 and US$392,162 and US$297,377,as of December 31, 2006,respectively.  The cumulative profits on consolidating these VIEsin the Group’s consolidated statement of income in 2007 were US$17,638 (2006:losses of US$152,723 and 2005: losses of US$174,902), including taxes ofUS$11,118 (2006: US$6,814 and 2005:US$658).  The assets of theentities consist mainly of cash and bank balances, trade and other receivables,inventories and property, plant and equipment.  The creditors of these entities do not have recourse to the generalcredit of the Group.

 

Investments in business entities in which the Company does not havecontrol, but has the ability to exercise significant influence over operatingand financial policies (generally 20-50 percent ownership), are accounted forusing the equity method of accounting. All material intercompany balances and transactions have been eliminatedon consolidation.

 

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

 

A subsidiary is a company in which the Company holds, directly orindirectly, more than 50% of its outstanding voting share capital and overwhich it is able to exercise control.

 

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

 

The Group’s main source of revenue is the sale of water and waste waterrelated process control, analytical and testing instruments, disinfectionequipment, supplies and related automation systems. The Company recognizesrevenue when the product is delivered and the title is transferred.  For certain products where installation isnecessary, revenue is recognized upon completion of installation. Revenueearned from customer support services, which represents a minor percentage oftotal revenues, is recognized when such services are provided.

 

F-8

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

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

 

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

 

Revenues and profits in long term fixed price contracts are recordedunder the percentage of completion method in accordance with SOP 81-1,“Accounting for Performance of Construction-Type and Certain Production-TypeContracts”..  This approach relieson estimates of total expected direct costs at completion, which are comparedto actual direct costs incurred to date to arrive at an estimate of revenue andprofit earned to date.  Recognizedrevenue and profit are subject to revisions as the contract progresses tocompletion.  Revisions to profitestimates are reflected in income in the period in which the facts that giverise to the revision become known. Forany contract where it is identified that a loss will be incurred, the full losswill be recognized immediately. There were no long term fixed price contracts during2007.

 

** (d)****          Research and DevelopmentCosts**

 

Research and development costs (“R&D” costs) are expensed asincurred.  The R&D costs amounted toapproximately US$47,000,US$55,000 and US$48,000 for the years December 31,2007, 2006 and 2005 respectively and were included in “Selling and Administrative”expenses****in the Group’s consolidated statementof income.

 

** (e)****          Advertising andpromotional expenses**

 

Advertising and promotional expenses (“A&P” expenses) are expensedas incurred.  The A&P expensesamounted to approximately US$78,000, US$76,000and US$240,000 for the years December 31,2007, 2006 and 2005 respectively and were included in “Selling and Administrative”expenses****in the Group’s consolidated statementof income.

 

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

 

The Group accounts for income and deferred tax under the provision ofStatement of Financial Accounting Standards (“SFAS”) No. 109: “Accountingfor Income Taxes”, under which deferred taxes are recognized for all temporarydifferences between the applicable tax balance sheets and the consolidatedbalance sheet.  Deferred tax assets andliabilities are recognized for the estimated future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  SFAS No. 109 also requires therecognition of the future tax benefits of net operating loss carryforwards.  A valuation allowance isestablished when the deferred tax assets are not expected to be realized withina reasonable period of time.

 

EffectiveJanuary 1, 2007, the Company adopted FIN No. 48, “Accounting forUncertainty in Income Taxes.” In accordance with FIN No. 48, the Companyrecognizes tax benefits that satisfy a greater than 50% probability thresholdand provides for the estimated impact of interest and penalties for such taxbenefits.

 

Deferred tax assets and liabilities are measured using the enacted taxrates expected to be applicable for taxable income in the years in whichtemporary differences are expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income for the periodthat includes the enactment date.

 

F-9

----

 

Note 4 shows the applicable tax rates for individual subsidiary andvariable interest entities, as well as the major temporary differences sorecorded.

 

F-10

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

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

 

** (g)****          Cash and CashEquivalents**

 

Cash and cash equivalents include cash on hand, demand deposits with banks.

 

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

 

Receivables and other assets are recorded at their nominal values.  Valuation allowances are provided foridentified individual risks for these line items.  If the loss of a certain part of thereceivables is probable, valuation allowances are provided to cover theexpected loss.

 

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

 

Inventories are stated at the lower of cost, on the first-in, first-outmethod, or marketvalue.  Costs include purchase andrelated costs incurred in bringing each product to its present location andcondition.  Market value is calculated based on the estimated normal sellingprice, less further costs expected to be incurred for disposal.  Provision is made for obsolete, slow movingor defective items, where appropriate.

 

** (j)****           Property, Plant andEquipment**

 

Property, plant and equipment are stated at cost less accumulateddepreciation. Gains or losses on disposal are reflected in currentoperations.  Major expenditures forbetterments and renewals are capitalized. All ordinary repair and maintenance costs are expensed as incurred.  Depreciation of property, plant and equipmentis computed using the straight-line method over the assets’ estimated usefullives as follows:

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

 

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

 

The Group has adopted SFAS No. 144: “Accounting for Impairment orDisposal of Long-Lived Assets” which requires impairment losses to be recordedfor property, plant and equipment to be held and used in operations whenindicators of impairment are present. Reviews are regularly performed to determine whether the carrying valueof assets is impaired.  The Groupdetermines the existence of such impairment by measuring the expected futurecash flows (undiscounted and without interest charges) and comparing suchamount to the carrying amount of the assets. An impairment loss, if one exists, is then measured as the amount bywhich the carrying amount of the asset exceeds the discounted estimated futurecash flows. Assets to be disposed of are reported at the lower of the carryingamount or fair value of such assets less costs to sell.  There were no impairment losses recordedduring each of the three years ended December 31, 2007.

 

F-11

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

**2****              Summary ofsignificant accounting policies (Continued)**

 

** (l)****           Operating Leases**

 

Leases where substantially all the risks and rewards of ownership ofthe leased assets remain with the lessors are accounted for as operatingleases.  Rental payments under operatingleases are charged to expense on the straight-line basis over the period of therelevant leases.

 

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

 

The Group has adopted SFAS No.142: “Goodwill and other intangibleassets” which assess the possible impairment of goodwill existing at the dateof adoption and perform a subsequent impairment test on an annual basis.

 

** (n)****          Foreign CurrencyTranslation**

 

The Company maintains its books and records in United Statesdollars.  Its subsidiaries and affiliatesmaintain their 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 consolidatedstatements of income during the year in which they occur.  Translation adjustments on subsidiaries’equity are included as cumulative translation adjustments.

 

** (o)****          Derivative Instrumentsand Hedging Activities**

 

SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities” (“SFAS 133”), as amended by SFAS No. 137, “Accounting forDerivative Instruments and Hedging Activities – Deferral of the Effective Dateof FASB Statement No. 133 – an amendment of FASB Statement No. 133”,and SFAS No. 138, “Accounting for Certain Derivative Instruments andCertain Hedging Activities – an amendment of FASB Statement No. 133”, aswell as the interpretations of the Derivatives Implementation Group (“DIG”),are applied as amended by SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities”. SFAS No. 133 contains accounting and reporting standards forhedging accounting and for derivative financial instruments, including certainderivative financial instruments embedded in other contracts.

 

SFAS No. 133 requires that all derivatives be recognized as eitherassets or liabilities in the consolidated balance sheet and measured at fairvalue.  Depending on the documenteddesignation of a derivative instrument, any change in fair value is recognizedeither in net income or shareholders’ equity (as a component of accumulatedother comprehensive income).

 

Fair values of derivative instruments are classified as operatingassets or liabilities.  Changes in fairvalue of derivative instruments affecting income are classified as otheroperating income or expenses.  Please seenote 17for additional information regarding the Company’s use of derivativeinstruments.

 

F-12

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

OnJanuary 1, 2006, the Group adopted the provisions of Statement 123(revised 2004) (Statement 123(R)), Share-Based Payment, which revises Statement123, Accounting for Stock-Based Compensation using the modified prospectiveapplication transition method,and supersedes APB Opinion 25, Accounting for Stock Issued to Employees.Statement 123(R) requires the Group to recognize expense related to the fairvalue of our stock-based compensation awards, including employee stock options.

 

Priorto the adoption of Statement 123(R), in accordance with the provisions of SFAS No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure”, theGroup has selected the disclosure only of provisions related to employee stockoptions and share purchases and follows the provisions of Accounting PrinciplesBoard Opinion No. 25: “Accounting for Stock Issued to Employees” (“APB 25”)and related interpretations in accounting for stock options and shares issuedto employees.  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 Company accounts for share-basedcompensation using the intrinsic value method prescribed by APB 25, underwhich no compensation cost is recognized as all stock options granted under theManagement Options, the 2000 Stock Options, the 2002 Employee Stock Options andthe 2002 D&O 

 

F-13

----

 

Stock Options have exercise prices at or above the fair market value ofthe underlying stock at the date of grant.

 

F-14

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

**2****              Summary ofsignificant accounting policies (Continued)**

 

**(s)****           Stock-basedCompensation****(Continued)**

 

Had compensation expense for the Company’s share-based compensationplan been recognized based on the fair value of the options on the grant datein accordance with SFAS No. 123, the Company’s pro forma net income andearnings per ordinary share for the year ended December 31, 2005 would have been as follows:

 
| ** **                                                                           | ** ** | **200****5**     | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **US$’000** | ** ** |
|                                                                                 |       |             |       |
| Net income  as reported                                                              |       | 733              |       |
| Less: Stock  compensation expense determined under the fair value method, net of tax |       | (39              | )          |
|                                                                                 |       |             |       |
| Pro forma  net income                                                                |       | 694              |       |
|                                                                                 |       |             |       |
| Income per  share:                                                                   |       |             |       |
|                                                                                 |       |             |       |
| Basic, as  reported                                                                  |       | US$              | 0.11       |   |
|                                                                                 |       |             |       |
| Diluted,  as reported                                                                |       | US$              | 0.07       |   |
|                                                                                 |       |             |       |
| Basic, pro  forma                                                                    |       | US$              | 0.11       |   |
|                                                                                 |       |             |       |
| Diluted, pro  forma                                                                  |       | US$              | 0.07       |   |

 

**(t)****            Useof Estimates**

 

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America (“GAAP”)requires management to make estimates and assumptions that affect the amountsthat are reported in the consolidated financial statements and accompanyingdisclosures.  Although these estimatesare based on management’s best knowledge of current events and actions that theCompany may undertake in the future, actual results may be different from theestimates.

 

F-15

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

**2****              Summary ofsignificant accounting policies (Continued)**

 

** (u)**          **RelatedParties**

 

Entities are considered to be related to theGroup if the parties, directly or indirectly, through one or moreintermediaries, control, are controlled by, or are under common control withthe Group.  Related parties also includeprincipal 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.

 

** (v)**           **SegmentInformation**

 

The Company’s segment reporting is prepared in accordance with SFAS No. 131,“Disclosures about Segments of an Enterprise and Related Information”.  The management approach required by SFAS No. 131designates that the internal reporting structure that is used by management formaking operating decisions and assessing performance should be used as thesource for presenting the Company’s reportable segments.

 

** (w)**          **RecentAccounting Pronouncements**

 

InSeptember 2006, the FASB issued FAS 157, Fair Value Measurements (FAS157). FAS 157 defines fair value, establishes a framework for measuring fairvalue in accordance with generally accepted accounting principles, and expandsdisclosures about fair value measurements. The provisions of FAS 157 areeffective for the fiscal year beginning after November 15, 2007. TheCompany is currently evaluating the impact of the provisions of FAS 157.

 

OnFebruary 15, 2007, the FASB issued SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities: Including an amendmentof FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits allentities to elect to measure many financial instruments and certain other itemsat fair value with changes in fair value reported in earnings. SFAS 159 iseffective as of the beginning of the first fiscal year that begins after November 15,2007, with earlier adoption permitted. The Company does not anticipate that theadoption of this statement will have a material effect on the Company’sfinancial condition and results of operations.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests inConsolidated Financial Statements—an amendment of ARB No. 51.” SFAS No. 160establishes accounting and reporting standards for noncontrolling interests insubsidiaries. This statement requires the reporting of all noncontrollinginterests as a separate component of stockholders’ equity, the reporting ofconsolidated net income (loss) as the amount attributable to both the parentand the noncontrolling interests and the separate disclosure of net income(loss) attributable to the parent and to the 

 

F-16

----

 

noncontrollinginterests. In addition, this statement provides accounting and reportingguidance related to changes in noncontrolling ownership interests. Other thanthe reporting requirements described above which require retrospectiveapplication, the provisions of SFAS No. 160 are to be appliedprospectively in the first annual reporting period beginning on or after December 15,2008. The Company is currently evaluating the potential impact, if any, of theadoption of FAS No. 160 on the consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,”(FAS No. 141(R)), which replaces FASB Statement No. 141. FAS No. 141(R)establishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, any noncontrolling interest in the acquiree and thegoodwill acquired. The Statement also establishes disclosure requirements whichwill enable users to evaluate the nature and financial effects of the businesscombination. FAS No. 141(R) is effective as of the beginning of an entity’sfiscal year that begins after December 15, 2008, which will be the Company’syear beginning January 1, 2009. The Company is currently evaluating thepotential impact, if any, of the adoption of FAS No. 141(R) on the consolidatedfinancial statements.

 

The Company does not believe that any other of the recently issued andadopted, but not yet effective, accounting standards would have a materialeffect on the accompanying financial statements.

 

F-17

----

 

**EURO TECHHOLDINGS COMPANY LIMITED**

 

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| ** **                                               | ** ** | **200****7**     | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
|----------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                               | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Gain/(loss) on disposal of property, plant and equipment |       | 19               |       | (1               | )          | (1               | )          |
| Exchange gain, net                                       |       | 104              |       | 130              |       | 158              |       |
| Rental income                                            |       | 38               |       | 17               |       | 15               |       |
|                                                     |       | 161              |       | 146              |       | 172              |       |

 

**4****              Income taxes**

 

The Company isexempt from taxation in the British Virgin Islands.

 

Euro Tech (FarEast) Limited, Euro Tech (China) Limited and ChinaH2O.com Limited provided forHong Kong profits tax at a rate of 17.5% in the years of 2007, 2006 and 2005 on the basis of their income forfinancial reporting purposes, adjusting for income and expense items which arenot assessable or deductible for profits tax purposes.

 

Euro TechTrading (Shanghai) Limited, a subsidiary of the Company, provides for PRCEnterprise Income Tax at a rate of 15%, after offsetting losses broughtforward, if any, on the basis of its income for financial reporting purposes,adjusting for income and expense items which are not assessable or deductiblefor PRC Enterprise Income Tax purposes.

 

In accordancewith the relevant income tax laws and regulations applicable to foreigninvestment enterprises in the PRC, Shanghai Euro Tech Limited (“SET”), asubsidiary of the Company, is exempt from the PRC Enterprise Income Tax of 15%for two years starting from its first profit-making year, after offsettinglosses brought forward, if any, followed by a 50% reduction for the next threeyears thereafter. As of December 31, 2007, SET is still exempt from the PRCenterprise income tax as it had an assessable loss brought forward of US$225,300 as agreed by the local tax authority tooffset its profit for the coming year (2006: US$305,975).

 

According tothe relevant PRC tax rules and regulations, Shanghai Euro Tech EnvironmentalEngineering Limited is exempt from the PRC Enterprise Income Tax of 15%for two years starting from 2007,followed by a 50% reduction for the next three years thereafter. Chongqing Euro Tech Rizhi Technology Co., Ltd and Rizhi Euro Tech Instrument (Shaanxi) Co., Ltd provide for PRC Enterprise IncomeTax at a rate of 30%, afteroffsetting losses brought forward, if any, on the basis of its income forfinancial reporting purposes, adjusting for income and expense items which arenot assessable or deductible for PRC Enterprise Income Tax purposes.

 

F-18

----

 

According tothe relevant PRC tax rules and regulations, Yixing Pact Environmental TechnologyCo., Ltd is registered inShanghai as Foreign Owned Enterprise that are entitled to a lower Enterprise Income Tax rate of 27%.  Pact Asia Pacific Limited operates in the British Virgin Islands where there are no taxes imposed on it. However, part of its profit is subject to HongKong profits tax at a rate of 17.5% in year 2007 as the profit is earned in Hong Kong.

 

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

 

As of December 31,2007,certain VIEs had aggregated assessable losses carried forward of US$118,161 as agreed by the local taxauthority (2006: US$143,318).

 

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

 

On December 26, 2007, theState Council and on February 20, 2008 the Ministry of Finance issuedimplementation guidelines (“Guidelines”) setting out how the transition of taxrates will occur. The Guidelines state that those enterprises which enjoyed apreferential tax rate of 15% are eligible for a graduated rate increase to 25%over the 5-year period beginning from January 1, 2008. The applicablerates under such an agreements for such enterprises are 18%, 20%, 22%, 24% and25% for 2008, 2009, 2010, 2011, 2012 and thereafter, respectively. In addition,foreign investment manufacturing enterprises which have not fully utilized anypreferential tax treatments, such as tax holidays or reduced rates of taxation,will be able to continue to receive them during the transitional period. TheGroup has applied the new rate in relation to deferred tax balances.

 

F-19

----

 

**EURO TECHHOLDINGS COMPANY LIMITED**

 

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

 

**4****              Income taxes(Continued)**

 

Income before income taxes:

 
| ** ** | ** ** | **200****7**     | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|       |       |             |       |             |       |             |       |
| Domestic   |       | —           |       | —           |       | —           |       |
| Foreign    |       | 664              |       | 835              |       | 1,358            |       |
|       |       | 664              |       | 835              |       | 1,358            |       |

 

The provision for income taxes consists of:

 
| ** **                        | ** ** | **200****7**     | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
|-----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                        | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Current tax expenses:             |       |             |       |             |       |             |       |
| Domestic                          |       | —           |       | —           |       | —           |       |
| Foreign                           |       | 240              |       | 163              |       | 313              |       |
| Total current provision           |       | 240              |       | 163              |       | 313              |       |
|                              |       |             |       |             |       |             |       |
| Deferred tax expense / (benefit): |       |             |       |             |       |             |       |
| Domestic                          |       | —           |       | —           |       | —           |       |
| Foreign                           |       | (96              | )          | (7               | )          | 15               |       |
| Total deferred provision          |       | (96              | )          | (7               | )          | 15               |       |

 

Thereconciliation of the weighted average statutory income tax rate to theeffective income tax rate as stated in the consolidated statements of income isas follows:

 
| ** **                                   | ** ** | **200****7** | ** ** | **200****6** | ** ** | **200****5** | ** ** |
|----------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
|                                         |       |         |       |         |       |         |       |
| Weighted average statutory tax rate          |       | 11.3         | %          | 14.3         | %          | 23.0         | %          |
| Change in valuation allowances               |       | 17.1         | %          | 5.5          | %          | 0.3          | %          |
| Over-provision for income tax in prior years |       | —       | %          | (0.5         | )%         | (0.2         | )%         |
| Others                                       |       | (6.8         | )%         | (0.6         | )%         | 1.1          | %          |
|                                         |       |         |       |         |       |         |       |
| Effective tax rate                           |       | 21.6         | %          | 18.7         | %          | 24.2         | %          |

 

The componentsof deferred tax assets are as follows:

 
| ** **                                                            | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                            | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                  |       |             |       |             |       |
| Deferred tax  assets arising from tax losses                          |       | 137              |       | 27               |       |
| Deferred tax  (liabilities)/assets arising from temporary differences |       | (6               | )          | 8                |       |
| Less:  Valuation allowances                                           |       | —           |       | —           |       |
|                                                                  |       |             |       |             |       |
| Net deferred  tax assets                                              |       | 131              |       | 35               |       |

 

F-20

----

 

**EURO TECHHOLDINGS COMPANY LIMITED**

 

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

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

 
| ** **                                                                                    | ** ** | **200****7**     | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                    | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Number of shares                                                                              |       |             |       |             |       |             |       |
| Weighted  average number of ordinary shares for  the purposes of basic net income per share   |       | 11,105,556       |       | 8,047,911        |       | 6,598,201        |       |
| Effect of dilutive potential ordinary shares:                                                 |       |             |       |             |       |             |       |
| Stock options                                                                                 |       | 989,779          |       | 2,739,509        |       | 4,091,281        |       |
|                                                                                          |       |             |       |             |       |             |       |
| Weighted  average number of ordinary shares for  the purposes of diluted net income per share |       | 12,095,335       |       | 10,787,420       |       | 10,689,482       |       |

 

**6****              Accountsreceivable**

** **
| ** **                         | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                         | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                               |       |             |       |             |       |
| Trade receivables                  |       | 5,063            |       | 5,000            |       |
| Less: Allowance for doubtful debts |       | (95              | )          | (86              | )          |
|                               |       | 4,968            |       | 4,914            |       |

 
| ** **                               | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                               | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Allowance for doubtful debts             |       |             |       |             |       |
| Balance at beginning                     |       | 86               |       | 122              |       |
| Released/(charged) to costs and expenses |       | 28               |       | (26              | )          |
| Write off                                |       | (19              | )          | (10              | )          |
| Balance at end                           |       | 95               |       | 86               |       |

 

As of December 31, 2007, accounts receivables in the form of billsreceivable through banks amounted to US$26,000 (2006: US$ 187,000).

 

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

** **
| ** **       | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|------------------|------------|------------------|------------|------------------|------------|
| ** **       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|             |       |             |       |             |       |
| Raw materials    |       | 76               |       | 59               |       |
| Work in progress |       | 108              |       | 21               |       |
| Finished goods   |       | 1,828            |       | 1,948            |       |
|             |       | 2,012            |       | 2,028            |       |

 

F-21

----

 

Management continuously reviews obsolete and slow moving inventoriesand assesses the inventory valuation to determine if the provision is deemedappropriate. At December 31, 2007 and 2006, provision for obsolete and slow moving inventories amounted toUS$28,064 and US$15,581, respectively.

 

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

 
| ** **                               | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                               | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                     |       |             |       |             |       |
| Office premises                          |       | 2,257            |       | 2,257            |       |
| Leasehold improvements                   |       | 140              |       | 131              |       |
| Furniture, fixtures and office equipment |       | 776              |       | 656              |       |
| Motor vehicles                           |       | 173              |       | 127              |       |
| Testing equipment                        |       | 77               |       | 71               |       |
|                                     |       | 3,423            |       | 3,242            |       |
|                                     |       |             |       |             |       |
| Less: Accumulated depreciation           |       | (1,801           | )          | (1,614           | )          |
|                                     |       | 1,622            |       | 1,628            |       |

 
| ** **          | ** ** | **200****7**     | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
|---------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **          | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Depreciation charge |       | 232              |       | 216              |       | 181              |       |

 

F-22

----

 

**EURO TECHHOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED ACCOUNTS**

 

**9****              Investmentsin affiliates****andacquisition of subsidiaries**

 

During theyear ended December 31, 2002, the Group acquired 30% equity interests inYixing Pact Environmental Technology Co., Ltd, a company incorporated in thePRC, and Pact Asia Pacific Limited, a company incorporated in the BritishVirgin Islands, from an independent third party for a total consideration ofUS$335,000.  The Group believes that the business of these two investments wascomplementary to the Group’s business as the Group continued to focus on salesand marketing of other products. The Group believes that by aligning itselfwith an engineering firm, such as these affiliates, it was able to gain acompetitive advantage by offering customers and potential customers not onlyhardware but solutions to engineering problems as well. Details of theseaffiliates are disclosed in Note 1. Investments in these affiliates areaccounted for using the equity method of accounting.

 

During the year ended December 31, 2005, the Group acquired additional 21% equity interests inYixing Pact Environmental Technology Co., Ltd and Pact Asia Pacific Limited fora total consideration of US$1,000,000 and these two companies become subsidiariesof the Group. The acquisition has been accounted for as an asset purchase.Assets acquired and liabilities assumed were recorded on the Company’sConsolidated Balance Sheet as of the acquisition date based upon theirestimated fair values at such date. The results of operations have beenincluded in the Consolidated Statements of Income since date of acquisition.

 

The aggregate purchase price was calculated as follows:

 
| ** **                                                        | ** ** | **US$’000** | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|
|                                                              |       |             |       |
| Cash consideration                                                |       | 1,000            |       |
| Direct costs  relating to the acquisition                         |       | 34               |       |
| Total  purchase consideration for 21% equity                      |       | 1,034            |       |
| Investment in affiliates for 30% equity at December 31, 2004 |       | 571              |       |
| Equity in profit of affiliates for the year                       |       | 21               |       |
| Total consideration                                               |       | 1,626            |       |

 

The purchase price has been allocated based on the estimated fairvalues of the assets acquired and liabilities assumed as of the date ofacquisition. The following represents the allocation of the purchase price:

 
| Current assets            |   | 1,922  |   |
|--------------------------------|--------|--------|--------|
| Property,  plant and equipment |   | 21     |   |
| Goodwill                       |   | 1,060  |   |
| Total assets                   |   | 3,003  |   |
|                           |   |   |   |
| Current liabilities            |   | (1,377 | )      |
| Total liabilities              |   | (1,377 | )      |
| Total consideration            |   | 1,626  |   |

 

F-23

----

 

The value was based on an independent appraisal. The amount of goodwillallocated to the purchase was US$1,060,000. The following table sets forth theunaudited pro forma results of operations of the Company as if the acquisitionhad occurred at the beginning of the fiscal year. These pro forma amounts donot purport to be indicative of the results that would have actually beenobtained if the acquisition occurred as of the beginning of each of the periodspresented or that not be obtained in the future.

 

UnauditedPro Forma Results

 
| ** **                 | ** ** | **200****5**     | ** ** |
|----------------------------|------------|------------------|------------|
| ** **                 | ** ** | **US$’000** | ** ** |
|                       |       |             |       |
| Revenue                    |       | 32,415           |       |
| Net income                 |       | 1,101            |       |
|                       |       |             |       |
| Basic earnings per share   |       | US$              | 0.11       |   |
| Diluted earnings per share |       | US$              | 0.07       |   |

 

The Group granted The minority shareholder of Yixing Pact Environmental TechnologyCo., Ltd and Pact Asia Pacific Limited a three-year put option requiring the Group to acquire all remainingsecurities of these two companiesat 5.2 times of their averagenet income for the three priorfiscal years.

 

During theyear ended December 31, 2007, the Group acquired 20%equity interests in Zhejiang TianlanDesulfurization and Dust–Removal Co. Ltd, a company incorporated in thePRC for a total consideration of US$4,648,000.  The Groupbelieves that after this acquisition, ithas a strategic partner to work with in China for the environmentalprotection business. With this affiliate’stechnology and technical support, itcan now provide services and environmental solutions not only for water andwastewater treatment but also for air pollution control for industrial clientsin China. Investments in thisaffiliate are accounted for using the equity method of accounting.

 

A summary of the financial information of the affiliate, ZhejiangTianlan Desulfurization and Dust–Removal Co. Ltd, is set forth below:

 
| ** **                      | ** ** | **200****7**     | ** ** |
|---------------------------------|------------|------------------|------------|
|                            | ** ** | **US$’000** | ** ** |
| Balance Sheet:             |       |             |       |
| Current assets                  |       | 16,110           |       |
| Non-current assets              |       | 2,487            |       |
| Total assets                    |       | 18,597           |       |
|                            |       |             |       |
| Current and total liabilities   |       | (7,328           | )          |
| Total shareholders’ equity |       | 11,269           |       |

 

F-24

----

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

 

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

 

Other payablesand accrued expenses mainly represent deposits received from customers andaccruals for operating expenses.

 

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

 

During the year ended December 31, 2005, the Company issued 640,530 ordinaryshares for stock options exercised and cancelled 52,846 shares surrendered forexercise of stock options.

 

During the year ended December 31, 2006, the Company issued 2,048,890 ordinaryshares for stock options exercised and cancelled 36,700 shares surrendered forexercise of stock options.

 

During the year ended December 31, 2007, the Company issued 2,695,246 ordinaryshares for stock options exercised and cancelled 45,537 shares surrendered forexercise of stock options.

 

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

 

The Company accounted for the acquisition in accordance with SFAS No. 141“Business Combinations”, which resulted in the recognition of goodwill.Goodwill represents the excess of acquisition cost over the estimated fairvalue of net assets acquired as of October 18, 2005 as described in Note 9.

 

As of December 31, 2007, the Company completed the annual impairment test. (i.e.comparing the carrying amount of the net assets, including goodwill, with the fairvalue of the Company as of December 31,2007) Based on the result ofthe first step of the test, the Company believes that there was no furtherimpairment of goodwill as of December 31, 2007.

 

F-25

----

 

**EURO TECHHOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED ACCOUNTS**

 

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

 

The Companyauthorized a stock buyback program in December 2000 pursuant to which upto 341,250shares, but not to exceed US$281,250 in value, of the Company’s ordinary sharecould be purchased in the open market from time to time as market and businessconditions warrant.  The Companyrepurchased a total of 36,445 shares and 304,206 shares of ordinary shareduring 2000 and 2001 for considerations of approximately US$16,000 andUS$221,000, respectively.  There was noreissuance of treasury stock during each of the three years ended December 31,2007.

 

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

 

Under therelevant PRC laws and regulations, the PRC subsidiaries are required toappropriate certain percentage of their respective net income to two statutory funds i.e. the statutory reserve fund and thestatutory staff welfare fund.  The PRC subsidiaries also appropriated certainamount of their net income to the expansion funds.

 

(i) Statutoryreserve funds

 

Pursuant toapplicable PRC laws and regulations, the PRC subsidiaries are required toallocate at least 10% of the companies’ net income to the statutory reserve fundsuntil such funds reaches 50% of the companies’ registered capital. The statutoryreserve funds can be utilized upon the approval by the relevant authorities, tooffset accumulated losses or to increase registered capital of the companies,provided that such funds be maintained at a minimum of 25% of the companies’registered capital.

 

(ii) Statutorywelfare funds

 

Pursuant toapplicable PRC laws and regulations, the PRC subsidiaries are required toallocate certainamount of the companies’ net incometo the staff welfare funds determinedby the Company. The staff welfare funds can only be used to providestaff welfare facilities and other collective benefits to the companies’employees. This fund is non-distributable other than upon liquidation of thePRC subsidiaries.

 

(iii) Expansion funds

 

The expansion reserve shall only be usedto make up losses, expand the PRC subsidiaries’ production operations, orincrease the capital of the subsidiaries. The expansion fund can be utilizedupon approval by relevant authorities, to convert into registered capital andissue bonus capital to existing investors, provided that such funds bemaintained at a minimum of 25% of the companies’ registered capital.

 

F-26

----

 

**EURO TECHHOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED ACCOUNTS**

 

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

 

(i)            ManagementOptions Plan

 

A total of 4,586,400 shares of ordinary sharehave been 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 andemployees as the Company’s Chairman of the Board of Directors and ChiefExecutive Officer may direct.  In 1997,the Company granted its officers, directors and employees options under theManagement Options, which allow them to purchase up to 4,353,804 shares of ordinary share.  The exercise price of the options granted wasUS$ 1.221 per share for 1,310,400 of such options and US$ 1.6789 per share for the remaining 3,043,404.  During the year ended December 31, 2000,36,036 options with the exerciseprice of US$ 1.6789 werecancelled.  During the same year, theCompany further granted 242,697options under the Management Options with the exercise price of US$ 1.6789 per share to its officers,directors and employees, which allowed them to purchase up to 242,697 shares of ordinary share. Theoptions vested for a period of one year and expired in March 2007. During the year ended December 31, 2002, 27,573 options with theexercise price of US$1.6789 were cancelled. During the year ended December 31, 2003, no options were exercised,cancelled or granted.

 

In 2004, theCompany granted 46,000 shares with the exercise price of US$1.6789 per share toits officers,directors and employees, whichallowed them to purchase up to 46,000shares of ordinary share.  The optionsexpired in March 2007.  The Companyfurther cancelled 32,760 options with an exercise price of US$1.6789.  No options were exercised during thefinancial year 2004.

 

During the year ended December 31, 2005, 52,416options with the exercise price of US$ 1.6789 were cancelled.During the same year, 180,000options under the Management Options with the exercise price of US$ 1.221 per share were exercised.

 

During the year ended December 31, 2006, the Companygranted 10,000 shareswith the exercise price of US$1.6789 per share to its officers, directors and employees, which allowed them to purchase up to 10,000 shares of ordinary share.  The options expired in March 2007.  The Company further cancelled 21,840 options with an exercise priceof US$1.6789. During the same year, 1,015,740options and 757,000 options underthe Management Options with the exercise price of US$ 1.221 per share andUS$1.6789 per share, respectively, were exercised.

 

During the year ended December 31, 2007, 90,090 optionsand 2,018,916 options underthe Management Options with the exercise price of US$ 1.221 per share andUS$1.6789 per share, respectively, were exercised. All the remaining unexercised options expired in March 2007.

 

(ii)           2000Stock Option Plan

 

A total of 1,195,740 shares of ordinary sharehave been reserved for issuance under the Company’s 2000 Stock Option Plan (the“2000 Stock Options”).  The 2000 StockOptions provide for the grant of options to its officers, directors andemployees as the Company’s Chairman of the Board of Directors and ChiefExecutive Officer may direct. During the year ended December 31, 2000, theCompany granted such options to its officers, directors and employees under the2000 Stock Options, which allow them to purchase up to 742,560 shares of ordinary share. The exercise price of all options granted is US$ 0.5787 per share. During the year endedDecember 31, 2002, 43,680options with exercise price of US$0.5787were cancelled. The Company further granted 477,750 options and 19,110options under the 2000 Stock Options with an exercise price of US$0.8191 and US$0.6809 per share, respectively, to its officers, directors 

 

F-27

----

 

and employees,which allow them to purchase up to 496,860 shares of ordinary share. The options vested within a six-month to one-year period and will expirein August 2010.

 

During theyear ended December 31, 2004, 35,490 options with an exercise price ofUS$0.5787 per share and 23,940 options with exercise price of US$0.8191 yearshare were cancelled.  Further, therewere no options exercised or granted in 2004.

 

During the year ended December 31, 2005, 35,490options with the exercise price of US$ 0.5787 were cancelled.During the same year, 338,520options, 52,500 options and 6,510options with exercise price of US$ 0.5787, US$0.8191 and US$0.6809 per share, respectively, were exercised.

 

During theyear ended December 31, 2006, 16,380 optionswith exercise price of US$0.5787were cancelled. The Company further granted 40,000 options and 5,000options under the 2000 Stock Options with an exercise price of US$3.33 and US$2.02 per share, respectively, to its officers, directors andemployees, which allow them to purchase up to 45,000 shares of ordinary share. The options vested within asix-month period and willexpire in August 2010.During the same year, 40,950options and 214,200 options with exerciseprice of US$ 0.5787 and US$0.8191 pershare, respectively, wereexercised.

 

During theyear ended December 31, 2007, 16,380 options and 6,300 options with exerciseprice of US$0.5787 and US$0.6809, respectively, werecancelled.  During the same year, 46,410 options and 101,430 options with exerciseprice of US$ 0.5787 and US$0.8191 pershare, respectively, were exercised.

 

F-28

----

 

**EURO TECHHOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED ACCOUNTS**

 

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

 

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

 

A total of 294,000 shares and 840,000 shares of ordinary share havebeen reserved for issuance under the Company’s 2002 Employees’ Stock Option andIncentive Plan (the “2002 Employee Stock Options”) and 2002 Officers’ and Directors’Stock Option and Incentive Plan (the “2002 D&O Stock Options”),respectively.  Both 2002 Employee StockOptions and the 2002 D&O Stock Options provide for the grant of options toits employees as the Company’s Chairman of the Board of Directors and ChiefExecutive Officer may direct.  During theyear ended December 31, 2002, the Company granted such options to itsemployees, officers and directors under the 2002 Employee Stock Options and the2002 D&O Stock Options, which allow them to purchase up to 294,000 and 840,000 shares of ordinary share at an exercise price of US$0.7618 and US$0.5857, respectively. The options vested for a period of asix-month period and will expire in April 2012 and November 2012,respectively.  During the years ended December 31,2004, 2003 and 2002, no options were exercised.

 

In 2004,92,400 options with an exercise price of US$0.7618 per share were cancelled andno further options were granted.

 

During the year ended December 31, 2005, 16,800options with the exercise price of US$ 0.7618 were cancelled.During the same year, 63,000options with exercise price ofUS$ 0.5857 per share were exercised.

 

During the year ended December 31, 2006, 8,400options with the exercise price of US$ 0.7618 were cancelled.During the same year, 21,000options with exercise price ofUS$ 0.7618 per share were exercised.

 

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

 

(iv)          2007 Officers’ and Directors’ StockOption and Incentive Plan

 

A total of 880,000 shares of ordinary share havebeen reserved for issuance under the Company’s 2007 Officers’ and Directors’ Stock Option and Incentive Plan (the “2007 D&O Stock Options”).  The2007 D&O Stock Optionsprovide for the grant of options to its directorsand officers as the Company’s Chairman of the Board of Directors andChief Executive Officer may direct. During the year ended December 31, 2007, the Company granted such options to its officers and directors under the 2007 D&O Stock Options, which allowthem to purchase up to 133,000,66,500, 66,500, 100,000 and133,000 shares of ordinary share at an exercise price of US$2.85, US$4.00, US$4.05, US$3.66 and US$2.66, respectively. Theoptions vested for a period of a six-month period and will expire before end of November 2009.  During the same year, no options had been exercised.

 

The Companyestimate the fair value of the options granted under the Black-Scholes pricingmodel,

 

F-29

----

 

Changes inoutstanding options under various plans mentioned above were as follows:

 
| ** **                      | ** ** | **200****7**                | ** ** | **200****6**                                 | ** ** | **200****5**                | ** ** |
|---------------------------------|------------|-----------------------------|------------|----------------------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **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 |       | 3,938,296                   |       | 1.32                                         |       | 5,978,806                   |       | 1.31 |   | 6,724,042 |   | 1.26 |   |
| Granted                         |       | 499,000                     |       | 3.27                                         |       | 55,000                      |       | 2.91 |   | — |   | — |   |
| Cancelled/Expired               |       | (451,210                    | )          | (1.58                                        | )          | (46,620                     | )          | (1.13 | ) | (104,706 | ) | (1.16 | ) |
| Exercised                       |       | (2,695,246                  | )          | (1.44                                        | )          | (2,048,890                  | )          | (1.33 | ) | (640,530 | ) | (0.78 | ) |
| Outstanding,  end of year       |       | 1,290,840                   |       | 1.74                                         |       | 3,938,296                   |       | 1.32 |   | 5,978,806 |   | 1.31 |   |
|                            |       |                        |       |                                         |       |                        |       |   |   |   |   |   |   |
| Exercisable,  end of year       |       | 791,840                     |       | 0.78                                         |       | 3,923,296                   |       | 1.32 |   | 5,978,806 |   | 1.31 |   |

 

As of December 31,2007, theoptions outstanding and exercisable had exercise prices in the range ofUS$0.5787 to US$4.05 and aweighted average unexpired life of approximately 3.1 years.

 

F-30

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

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

 

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

 

Priorto the adoption of Statement 123(R), the Group accounted for stock-basedcompensation awards using the intrinsic value method of Opinion 25. Pro formainformation regarding net income and earnings per share is required by SFAS No. 123,and has been determined as if the Company had accounted for its employee stockoptions under the fair value method of SFAS No. 123.  There were no options granted during the yearended December 31, 2005.

 

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

 

The following table summarizes theassumptions used during the years ended December 31, 2007 and 2006;

 
| **Assumptions**       | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|-----------------------|------------|-----------|------------|-----------|------------|
|                  |       |      |       |      |       |
| Expected volatility   |       | 75.9-86.7 | %          | 64.97     | %          |
| Expected dividends    |       | 0         | %          | 0         | %          |
| Expected term (years) |       | 1.25      |       | 1.04-2.51 |       |
| Risk-free rate        |       | 3.2-4.3   | %          | 4.6-4.7   | %          |

 

As of December 31,2007 there was US$217,000 of total unrecognized compensation expense related tonon-vested stock acquisition rights. This expense is expected to be recognizedover a weighted-average period of 0.24 years.

F-31

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

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

 

Prior to December 1,2000, the Group had only one defined contribution pension plan for all its HongKong employees.  Under this plan, allemployees were entitled to pension benefits equal to their own contributionsplus 50% to 100% of individual fund account balances contributed by the Group, dependingon their years of service with the Group. The Group was required to make specific contributions at approximately10% of the basic salaries of the employees to an independent fund managementcompany.

 

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

 

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

 

During the years ended December 31,2007, 2006 and 2005, the aggregatecontributions of the Group to the aforementioned pension plans and retirementbenefit schemes were approximately US$245,000, US$202,000 and US$191,000 respectively.

 

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

 

Financial risk factors

 

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

 

(i)            Credit risk

 

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

 

F-32

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**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

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

 

(ii)           Foreign exchange risk

 

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

 

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

 

The Company’s policy generally permits the use of derivatives if theyare associated with underlying assets or liabilities, forecasted transactions,or legally binding rights or obligations.

 

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

 

Arelated party is an entity that can control or significantly influence themanagement or operating policies of another entity to the extent one of theentities may be prevented from pursuing its own interests.  A related party may also be any party the entitydeals with that can exercise that control.

 

Thetransactions with related parties are summarized as follows:

 
| ** **                                                       | ** ** | **200****7**     | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
|------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Purchase  of goods from - Eurotherm Limited                      |       | —           |       | —           |       | 242              |       |
|                                                             |       |             |       |             |       |             |       |
| Rental  income of office premises earned from Eurotherm Limited  |       | —           |       | —           |       | 2                |       |
|                                                             |       |             |       |             |       |             |       |
| Rental  expenses for office premises charged by Armtison Limited |       | —           |       | —           |       | 11               |       |

 

F-33

----

 

**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

**1****8****          ****Relatedparty transactions (Continued)**

 
| ** **                    | ** ** | **200****7**     | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
|-------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                    | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                          |       |             |       |             |       |             |       |
| Management fees charged by    |       |             |       |             |       |             |       |
| Eurotherm  Limited            |       | —           |       | —           |       | 4                |       |
| Patwin Inc.                   |       | —           |       | —           |       | 18               |       |
|                          |       |             |       |             |       |             |       |
| Management fees received from |       |             |       |             |       |             |       |
| Armtison  Limited             |       | —           |       | —           |       | 2                |       |

 

Armtison Limited is beneficially owned by Mr. T. C. Leung, Chief Executive Officerand Chairman of the Board of Directors.Patwin Inc. is beneficially owned by the brother of Mr. T.C. Leung.  Mr. T. C. Leung is also a director ofEurotherm Limited as at December 31, 2004and retired in February 2005.

 

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

 

 (i)           Operating leases

 

The Group has various operating leaseagreements for office and industrial premises. Rental expenses for the years ended December 31, 2007, 2006 and 2005 were approximately US$448,000, US$404,000, and US$321,000,respectively.  Future minimum rentalpayments as of December 31, 2007, underagreements classified as operating leases with non-cancellable terms amountedto US$263,000 of which US$235,000 are payable in the year 2008 and US$28,000 are payable each year from 2009 to 2011.

 

 (ii)          Banking facilities

 

As at December 31, 2007, 2006 and 2005, the Group has various banking facilities available for overdraft,import and export credits and foreign exchange contracts from which the Groupcan access up to approximately US$4,167,000, US$4,167,000 and US$4,167,000 respectively, of which approximatelyUS$138,000, US$726,000 and US$422,000 was utilized.

 

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

 

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

 

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

 

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

 

F-34

----

 

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

 
| ** **                | ** ** | **200****7**     | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Revenue                   |       |             |       |             |       |             |       |
| Trading and manufacturing |       | 20,010           |       | 22,243           |       | 26,348           |       |
| Engineering               |       | 7,220            |       | 4,918            |       | 4,902            |       |
|                      |       | 27,230           |       | 27,161           |       | 31,250           |       |
| Operating income          |       |             |       |             |       |             |       |
| Trading and manufacturing |       | (76              | )          | (237             | )          | (180             | )          |
| Engineering               |       | 323              |       | 831              |       | 1,331            |       |
|                      |       | 247              |       | 594              |       | 1,151            |       |

 
| ** **                   | ** ** | **200****7**     | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
|------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Depreciation:                |       |             |       |             |       |             |       |
| Trading and manufacturing    |       | 197              |       | 197              |       | 178              |       |
| Engineering                  |       | 35               |       | 19               |       | 3                |       |
|                         |       | 232              |       | 216              |       | 181              |       |
| Capital Expenditures,  Gross |       |             |       |             |       |             |       |
| Trading and manufacturing    |       | 147              |       | 63               |       | 108              |       |
| Engineering                  |       | 103              |       | 43               |       | 2                |       |
|                         |       | 250              |       | 106              |       | 110              |       |

 
| ** **                | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|
| ** **                | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Assets                    |       |             |       |             |       |
| Trading and manufacturing |       | 13,187           |       | 14,808           |       |
| Engineering               |       | 7,249            |       | 5,167            |       |
| Unallocated               |       | 5,046            |       | —           |       |
|                      |       | 25,482           |       | 19,975           |       |
| Liabilities               |       |             |       |             |       |
| Trading and manufacturing |       | 4,213            |       | 4,898            |       |
| Engineering               |       | 2,663            |       | 2,087            |       |
| Unallocated               |       |  648        |       | —           |       |
|                      |       | 7,524            |       | 6,985            |       |

 

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

 

F-35

----

 
| ** ** | ** ** | **200****7**     | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Revenue  - |       |             |       |             |       |             |       |
| The  PRC   |       | 21,595           |       | 22,457           |       | 25,005           |       |
| Hong  Kong |       | 5,401            |       | 4,324            |       | 5,932            |       |
| Others     |       | 234              |       | 380              |       | 313              |       |
|       |       | 27,230           |       | 27,161           |       | 31,250           |       |

 

F-36

----

 

**EURO TECH HOLDINGS COMPANYLIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

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

 

(iii)          Long-livedassets (1)

 

Geographical analysis oflong-lived assets is as follows:

 
| ** ** | ** ** | **200****7**     | ** ** | **200****6**     | ** ** |
|------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|       |       |             |       |             |       |
| Hong  Kong |       | 881              |       | 905              |       |
| The  PRC   |       | 741              |       | 723              |       |
|       |       | 1,622            |       | 1,628            |       |

 

----

(1)           Long-lived assets representproperty, plant and equipment, net.

 

(iv)          Major suppliers

 

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

 
| ** **                                     | ** ** | **200****7** | ** ** | **200****6** | ** ** | **200****5** | ** ** |
|------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
|                                           |       |         |       |         |       |         |       |
| Hioki  E.E. Corp.                              |       | 32           | %          | 36           | %          | 29           | %          |
| Hach  Company Inc.                             |       | 6            | %          | 9            | %          | 9            | %          |
| Lachat  Instruments Inc.                       |       | 5            | %          | 8            | %          | 6            | %          |
| US Filter/Chemical Feed and Disinfection Group |       | 10           | %          | 6            | %          | 8            | %          |
| ThermoQuest  Corporation                       |       | 5            | %          | 2            | %          | 2            | %          |
| Calipers Life Sciences Inc.                    |       | 6            | %          | 4            | %          | 5            | %          |
| Hach Ultra                                     |       | 5            | %          | 4            | %          | 3            | %          |

 

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.

 

**22****          ****Post balance sheet events**

 

In January 2008, theGroup acquired a 20% equity interest in Zhejiang Jia Huan Electronic Co.Ltd., (“Jia Huan”) a company incorporated in the PRC, for approximately$2,500,000. Jia Huan has been in the environmental protection business since1969 and is based in Jin Hua, Zhejiang. TheGroup believes that after this acquisition, ithas a strategic partner to help it make inroadsinto the rapidly growing air pollution control market in China.

 

F-37

----