**FORM 20-F**

**o****                                ****REGISTRATIONSTATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF1934**

**OR**

**x****                             ****ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

For the fiscal year ended**   December 31, 2006**

**OR**

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**o****                                ****SHELLCOMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

For the transition period from                    to

Commission file number  **000-22113**

**EURO TECH HOLDINGS COMPANY LIMITED**(Exact name of Registrant as 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, 65Wong Chuk Hong Road, Hong Kong**(Address of principal executive offices)

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

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

Securities registered or to beregistered pursuant to Section 12(g) of the Act.

**Ordinary Shares, $0.01 par value**(Title of Class)

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

(Title of Class)

Indicatethe number of issued and outstanding shares of each of the issuer’s classes ofcapital or common stock as of the close of the period covered by the annualreport.

**9,034,541Ordinary Shares**

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

Yes  x    No  o

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.

Yes  o    No  x

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

Yes  o    No  x

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

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

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

Yes  o    No  x

Indicateby check mark which financial statement item the registrant has elected tofollow.

Item 17  o    Item 18  x

 

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**TABLE OF CONTENTS**
| INTRODUCTION                |
|-----------------------------|
|                        |
| FORWARD  LOOKING STATEMENTS |
|                        |   |   |
| GLOSSARY                    | ** ** | ** ** |
|                        | ** ** | ** ** |
| PART I                      | ** ** | ** ** |
|                        | ** ** | ** ** |
| ITEM 1.                     |   | IDENTITY OF  DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
|                        |   |   |
| ITEM 2.                     |   | OFFER  STATISTICS AND EXPECTED TIMETABLE |
|                        |   |   |
| ITEM 3.                     |   | KEY  INFORMATION |
| Item 3A.                    |   | Selected Financial  Data |
| Item 3B.                    |   | Capitalization  and Indebtedness |
| Item 3C.                    |   | Reasons for  the Offer and Use of Proceeds |
| Item 3D.                    |   | Risk  Factors |
|                        |   |   |
| ITEM 4.                     |   | INFORMATION ON THE  COMPANY |
| Item 4A.                    |   | History and  Development of the Company |
| Item 4B.                    |   | Business Overview |
| Item 4C.                    |   | Organizational  Structure |
| Item 4D.                    |   | Property, Plant  and Equipment |
|                        |   |   |
| ITEM 5.                     |   | OPERATING AND  FINANCIAL REVIEW AND PROSPECTS |
| Item 5A.                    |   | Operating Results |
| Item 5B.                    |   | Liquidity and  Capital Resources |
| Item 5C.                    |   | Research and  Development, Patents and Licenses |
| Item 5D.                    |   | Trend Information |
| Item 5E.                    |   | Off Balance  Sheet Arrangements |
| Item 5F.                    |   | Tabular  Disclosure of Contractual Obligations |
|                        |   |   |
| ITEM 6.                     |   | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES |
| Item 6A.                    |   | Directors and  Senior Management |
| Item 6B.                    |   | Compensation |
| Item 6C.                    |   | Board  Practices |
| Item 6D.                    |   | Employees |
| Item 6E.                    |   | Share  Ownership |
|                        |   |   |
| ITEM 7.                     |   | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
| Item 7A.                    |   | Major Shareholders |
| Item 7B.                    |   | Related Party  Transactions |
| Item 7C.                    |   | Interest of  Experts and Counsel |
|                        |   |   |
| ITEM 8.                     |   | FINANCIAL INFORMATION |
| Item 8A.                    |   | Consolidated  Statements and Other Financial Information |
| Item 8B.                    |   | Significant Changes |
|                        |   |   |
| ITEM 9.                     |   | THE OFFERING AND  LISTING |
| Item 9A.                    |   | Listing  Details |
| Item 9B.                    |   | Plan of Distribution |
| Item 9C.                    |   | Markets |
| Item 9D.                    |   | Selling Shareholders |
| Item 9E.                    |   | Dilution |
| Item 9F.                    |   | Expenses Of The Issue |

 

ii

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| ITEM 10.  |       | ADDITIONAL  INFORMATION                                                      |
|-----------|------------|------------------------------------------------------------------------------|
| Item 10A. |       | Share  Capital                                                               |
| Item 10B. |       | Memorandum and  Articles of Association                                      |
| Item 10C. |       | Material Contracts                                                           |
| Item 10D. |       | Exchange Controls                                                            |
| Item 10E. |       | Taxation                                                                     |
| Item 10F. |       | Dividends And  Paying Agents                                                 |
| Item 10G. |       | Statement By Experts                                                         |
| Item 10H. |       | Documents on Display                                                         |
| Item 10I. |       | Subsidiary  Information                                                      |
|      |       |                                                                         |
| ITEM 11.  |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                 |
|      |       |                                                                         |
| ITEM 12.  |       | DESCRIPTION OF  SECURITIES OTHER THAN EQUITY SECURITIES                      |
|      |       |                                                                         |
| PART II   |       |                                                                         |
|      |       |                                                                         |
| ITEM 13.  |       | DEFAULTS,  DIVIDENDS, ARREARAGES AND DELINQUENCIES                           |
|      |       |                                                                         |
| ITEM 14.  |       | MATERIAL MODIFICATION TO THE RIGHTS OF  SECURITY HOLDERS AND USE OF PROCEEDS |
|      |       |                                                                         |
| ITEM 15.  |       | CONTROLS AND  PROCEDURES                                                     |
|      |       |                                                                         |
| ITEM 16.  |       | [RESERVED]                                                                   |
| Item 16A. |       | Audit  Committee Financial Expert                                            |
| Item 16B. |       | Code  Of Ethics                                                              |
| Item 16C. |       | Principal  Accountant Fees And Services                                      |
| Item 16D. |       | Exemptions  From Listing Standards                                           |
|      |       |                                                                         |
| PART III  | ** ** | ** **                                                                   |
|      | ** ** | ** **                                                                   |
| ITEM 17.  |       | FINANCIAL STATEMENTS                                                         |
|      |       |                                                                         |
| ITEM 18.  |       | FINANCIAL STATEMENTS                                                         |
|      |       |                                                                         |
| ITEM 19.  |       | EXHIBITS                                                                     |

 

iii

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# **INTRODUCTION**

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

## **ForwardLooking Statements**

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

1

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# **GLOSSARY**

The following glossary of terms may be helpful inunderstand­ing the terminology used in this Annual Report.
| Anaerobic:                        |   | Treating waste water biologically in the absence of  air.                                                                                                                                                                                                                                                                 |
|-----------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                              |   |                                                                                                                                                                                                                                                                                                                      |
| Ambient Air:                      |   | Atmospheric air (outdoor as opposed to indoor air).                                                                                                                                                                                                                                                                       |
|                              |   |                                                                                                                                                                                                                                                                                                                      |
| Atomic Spectrometer:              |   | An analytical instrument used to measure the  presence of an element in a substance by testing a sample which is aspirated  into a flame and atomized. The amount of light absorbed or emitted is  measured. The amount of energy absorbed or emitted is proportional to the  concentration of the element in the sample. |
|                              |   |                                                                                                                                                                                                                                                                                                                      |
| 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”)                                                                                                                                                                           |
|                              |   |                                                                                                                                                                                                                                                                                                                      |
| pH Controller:                    |   | A process instrument that measures and controls the  acidity or alkalinity of a fluid.                                                                                                                                                                                                                                    |
|                              |   |                                                                                                                                                                                                                                                                                                                      |
| Reagent:                          |   | A chemical substance used to cause a chemical reaction  and detect another substance.                                                                                                                                                                                                                                     |
|                              |   |                                                                                                                                                                                                                                                                                                                      |
| Mass Spectrometer:                |   | An analytical instrument that separates and  identifies chemical constituents according to their mass-to-charge ratios and  is used to identify organic compounds.                                                                                                                                                        |

 

2

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| Multi-Channel Digital Recorder:    |   | A device that measures and records more than one  input of a digitized signal (signal in the form of pulses).                                                                                                                                                                          |
|------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |                                                                                                                                                                                                                                                                                   |
| 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.   |
|                               |   |                                                                                                                                                                                                                                                                                   |
| 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

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# **PART I**

## **ITEM1.****                                   IDENTITYOF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**

Not applicable.

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

Not applicable.

## **ITEM3.  KEY INFORMATION**

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

**SELECTED FINANCIAL INFORMATION**

(Amounts expressed inthousands, except

share and pershare data and unless otherwise stated)

Theselected consolidated income statement data for years ended December 31,2006, 2005 and 2004, and the selected consolidated balance sheet data as ofDecember 31, 2006 and 2005 set forth below are derived from auditedconsolidated financial statements of the Company included herein and should beread in conjunction with, and are qualified in their entirety by reference tosuch financial statements, including the notes thereto and Item 5. “Operatingand Financial Review and Prospects.” The selected consolidated income statementdata for the years ended December 31, 2003 and 2002 and the selectedconsolidated balance sheet data as of December 31, 2004, 2003 and 2002 setforth below are derived from audited consolidated financial statements of theCompany which are not included herein. 
| ** **                        | ** ** | **As of December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|
| **Balance Sheet Data:** | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                        | ** ** | **US$**                               | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** |
| Cash and cash  equivalents        |       | 9,160                                 |       | 5,362 |   | 5,242 |   | 2,752 |   | 3,173 |   |
| Working capital(1)                |       | 10,267                                |       | 6,931 |   | 5,457 |   | 4,914 |   | 4,363 |   |
| Total assets                      |       | 19,975                                |       | 17,377 |   | 15,699 |   | 13,308 |   | 12,716 |   |
| Short-term debt(2)                |       | 0                                     |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Net assets                        |       | 12,990                                |       | 9,754 |   | 7,837 |   | 7,243 |   | 6,714 |   |
| Capital Stock                     |       | 94                                    |       | 74 |   | 68 |   | 45 |   | 32 |   |

----

(1)             Currentassets minus current liabilities.

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

4

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| ** **                                              | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **Income Statement Data:**                    | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                              | ** ** | **US$**                                                      | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** |
| Revenue                                                 |       | 27,161                                                       |       | 31,250 |   | 32,282 |   | 27,442 |   | 23,497 |   |
|                                                    |       |                                                         |       |   |   |   |   |   |   |   |   |
| Cost of revenue                                         |       | (20,606                                                      | )          | (24,681 | ) | (27,033 | ) | (22,805 | ) | (18,735 | ) |
| Gross profit                                            |       | 6,555                                                        |       | 6,569 |   | 5,249 |   | 4,637 |   | 4,762 |   |
| Selling and  Administrative Expenses                    |       | (5,961                                                       | )          | (5,418 | ) | (4,801 | ) | (4,108 | ) | (4,173 | ) |
| Operating income                                        |       | 594                                                          |       | 1,151 |   | 448 |   | 529 |   | 589 |   |
| Interest Income                                         |       | 95                                                           |       | 35 |   | 17 |   | 13 |   | 18 |   |
| Other income,  net                                      |       | 146                                                          |       | 172 |   | 104 |   | 6 |   | 9 |   |
| Income before  taxes                                    |       | 835                                                          |       | 1,358 |   | 569 |   | 548 |   | 616 |   |
|                                                    |       |                                                         |       |   |   |   |   |   |   |   |   |
| Income taxes                                            |       | (156                                                         | )          | (328 | ) | (167 | ) | (108 | ) | (123 | ) |
| Share of equity  in Net income of affiliates            |       | —                                                       |       | 21 |   | 192 |   | 91 |   | 7 |   |
| Minority  Interest                                      |       | (318                                                         | )          | (318 | ) | — |   | — |   | — |   |
| Net income                                              |       | 361                                                          |       | 733 |   | 594 |   | 531 |   | 500 |   |
|                                                    |       |                                                         |       |   |   |   |   |   |   |   |   |
| Net income per  Ordinary Share                          |       |                                                         |       |   |   |   |   |   |   |   |   |
| Basic                                                   |       | 0.04                                                         |       | 0.11 |   | 0.09 |   | 0.08 |   | 0.08 |   |
| Diluted                                                 |       | 0.03                                                         |       | 0.07 |   | 0.06 |   | 0.08 |   | 0.08 |   |
|                                                    |       |                                                         |       |   |   |   |   |   |   |   |   |
| Weighted Average  Number of Ordinary Shares Outstanding |       |                                                         |       |   |   |   |   |   |   |   |   |
| Basic                                                   |       | 8,047,911                                                    |       | 6,598,201 |   | 6,434,667 |   | 6,434,667 |   | 6,434,667 |   |
| Diluted                                                 |       | 10,787,420                                                   |       | 10,698,482 |   | 10,034,687 |   | 6,434,667 |   | 6,434,667 |   |

 

5

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

The Hong Kong dollar is freely convertible into other currencies(including the US dollar). Since 1983, the Hong Kong dollar has effectivelybeen officially linked to the US dollar at the rate of approximately HK$7.80 =US$1.00.  However, the market exchangerate of the Hong Kong dollar against the US dollar continues to be influencedby the forces of supply and demand in the foreign exchange market. Exchangerates between the Hong Kong dollar and other currencies are influenced by therate between the US dollar and the Hong Kong dollar.

Since 1994, the conversion of Renminbi into foreign currencies,including U.S. dollars, has been based on rates set by the People’s Bank ofChina, which are set daily based on the previous day’s interbank foreignexchange market rates. From 1994 through 2004, the official exchange rate forthe conversion of Renminbi to U.S. dollars has generally been stable and maintained at the rateof approximately RMB8.30 = US$1.00. However, in 2006, the Renminbi appreciatedand at the end of 2006, the exchange rate was approximately RMB 7.8051 = US$1.00. The value of the Renminbi fluctuates and is subject to changes in PRCpolitical and economic conditions.

The high, low and average exchange rate set forthbelow:
| ** **      | ** ** | **Rate at Period End** | ** ** | **Low** | ** ** | **High** | ** ** | **Average** | ** ** |
|-----------------|------------|---------------------------------------|------------|---------|------------|----------|------------|-------------|------------|
| US$ to RMB |       |                                  |       |    |       |     |       |        |       |
| Fiscal 2002     |       | 8.2871                                |       | 8.2569  |       | 8.2873   |       | 8.2869      |       |
| 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      |       |
|            |       |                                  |       |    |       |     |       |        |       |
| US$ to HK$ |       |                                  |       |    |       |     |       |        |       |
| Fiscal 2002     |       | 7.8002                                |       | 7.6794  |       | 7.8272   |       | 7.7998      |       |
| 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      |       |

 
| **The Following Months** | ** ** | **Low** | ** ** | **High** | ** ** | **Average** | ** ** |
|------------------------------------|------------|---------|------------|----------|------------|-------------|------------|
| US$ to RMB                    |       |    |       |     |       |        |       |
| July 2006                          |       | 7.9697  |       | 8.0007   |       | 7.9893      |       |
| August 2006                        |       | 7.9554  |       | 8.0036   |       | 7.9739      |       |
| September 2006                     |       | 7.9029  |       | 7.954    |       | 7.9339      |       |
| October 2006                       |       | 7.8786  |       | 7.9143   |       | 7.9028      |       |
| November 2006                      |       | 7.8346  |       | 7.875    |       | 7.8632      |       |
| December 2006                      |       | 7,8051  |       | 7.8291   |       | 7.8220      |       |
|                               |       |    |       |     |       |        |       |

 

6

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| US$ to HK$ |   |   |   |   |   |   |   |
|-----------------|--------|--------|--------|--------|--------|--------|--------|
| July 2006       |   | 7.7679 |   | 7.7779 |   | 7.7738 |   |
| August 2006     |   | 7.7737 |   | 7.7799 |   | 7.7765 |   |
| September 2006  |   | 7.7769 |   | 7.7916 |   | 7.7829 |   |
| October 2006    |   | 7.7749 |   | 7.7932 |   | 7.7852 |   |
| November 2006   |   | 7.7754 |   | 7.7878 |   | 7.7818 |   |
| December 2006   |   | 7.7668 |   | 7.7776 |   | 7.7733 |   |

 

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

Not applicable.

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

Not applicable.

***Item 3D.   RiskFactors***

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

**CertainRisks Relating to Doing Business in Hong Kong and the People’s Republic ofChina (**the **“PRC” or “China”).**
| **PRC Sovereignty Over Hong Kong Still Developing** |   | ·  The Company’s executive and principal  offices are located in Hong Kong, a Special Administrative Region of China  (or “SAR”; Hong Kong is sometimes herein referred to as the “Hong Kong SAR”).                                                                                                                                                                                                                                                                                                                                   |
|-----------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **                                          |   | ·  As provided in the Sino-British Joint  Declaration on the Question of Hong Kong (the ”Joint Declaration”) and  the Basic Law of the Hong Kong SAR of China (the “Basic Law”), the Hong Kong  SAR is provided a high degree of autonomy except in foreign and defense  affairs. The PRC’s political system  and policies are not practiced in Hong Kong. Under this principle of “one  country, two systems”, Hong Kong maintains a legal system that is based on  common law and is different from that of the PRC. |

 

7

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|                                                                |   | ·  The Company’s results of operations and  financial condition may be influenced by the political situation in Hong Kong  and by the general state of the Hong Kong economy. See “ — Economic Stability  Uncertain.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|----------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **                                                     |   | ·  There can be no assurance that these past or  any prospective future changes in political, economic or commercial  conditions in Hong Kong and the PRC will not result in a material adverse  effect upon the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                           |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| **Economic Stability Uncertain**                               |   | Most economies in the  Far East had suffered. Although the region, including the PRC, appears to  have recovered, there can be no assurance that the recovery will continue.  Continued growth in the PRC is dependent upon an adequate supply of energy.  There is no assurance that adequate supplies of energy can be developed or found  to fuel the PRC’s continued economic growth.                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** **                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| **The PRC’s Economic, Political and Social  Conditions.** |   | The PRC economy differs  from the economies of most developed countries in many respects, including  the amount of government involvement, level of development, growth rate,  control of foreign exchange and allocation of resources. While the PRC  economy has experienced significant growth in the past twenty years, growth  has been uneven, both geographically and among the various sectors of the  economy. The PRC government has implemented various measures to encourage  economic growth and guide the allocation of resources. Some of these measures  benefit the overall PRC economy, but may also have a negative effect on us.  For example, our financial condition and results of operations may be  adversely affected by changes in tax regulations that are applicable to us. |
| ** **                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **                                                     |   | ·  The PRC economy appears to be moving from a  planned economy to a more market-oriented economy. Although the PRC  government has implemented measures since the late 1970s emphasizing the  utilization of market forces for economic reform, the reduction of state  ownership of productive assets and the establishment of improved corporate  governance in business enterprises, a substantial portion of productive  assets in the PRC is still owned by the PRC government. In addition, the PRC  government continues to play a significant role in regulating industry  development by imposing industrial policies. The PRC                                                                                                                                                       |

 

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|                                                                                                           |   | government also  exercises significant control over the PRC’s economic growth through the  allocation of resources, controlling payment of foreign currency-denominated  obligations, setting monetary policy and providing preferential treatment to  particular industries or companies. These actions, as well as future actions  and policies of the PRC government, could materially affect our business and  operations.                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                           |   | ·  The success of the Company’s activities in  the PRC depends on the Company’s continued ability to overcome circumstances  specifically effecting the industrial sector, including the relatively poor  infrastructure, road transportation and communications network and an  uncertain legal and regulatory environment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **                                                                                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **Economic Reforms May Not Continue or Impact Positively  On The Company; Changing Business Environment** |   | ·  Over the past several years, the PRC’s  government has pursued economic reform policies including encouraging private  economic activities and decentralization of economic deregulation. The PRC  government may not continue to pursue these policies or may significantly  alter them to our detriment from time to time without notice. Changes in  policies by the PRC government resulting in changes in laws, regulations, or  their interpretation, or the imposition of confiscatory taxes, restrictions  on currency conversion and imports could materially and adversely effect our  business and operating results. The nationalization or other expropriations  of private enterprises by the PRC government could result in a loss of our  investments in actual funds and time and effort, in China. |
| ** **                                                                                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** **                                                                                                |   | ·  The Company’s results at times may also be  adversely effected by:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** **                                                                                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** **                                                                                                |   | ·   changes in political, economic and social  conditions in the PRC;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** **                                                                                                |   | ·   by changes in government policies such as  changes in laws and regulations (or their interpretation);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** **                                                                                                |   | ·   the introduction of additional measures to  control inflation;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **                                                                                                |   | ·   changes in the rate or method of taxation;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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|                                                                                                             |   | ·   imposition of additional restrictions on  currency conversion remittances abroad;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                        |   | ·   reduction in tariff protection and other  import restrictions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                        |   | ·   a return to the more centrally-planned  economy that existed previously.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **We are subject to international economic and  political risks, over which we have little or no control.** |   | ·  Doing business outside the United States  subjects us to various risks, including changing economic and political  conditions, exchange controls, currency fluctuations, armed conflicts and  unexpected changes in United States and foreign laws relating to tariffs,  trade restrictions, transportation regulations, foreign investments and  taxation. We have no control over most of these risks and other unforeseeable  risks and may be unable to anticipate changes in international economic and  political conditions and, therefore, unable to alter our business practice in  time to avoid the adverse effect of any of these changes.                                                                                                                                                                                          |
| ** **                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| **Uneven Economic Growth**                                                                                  |   | ·  The PRC’s economy has experienced  significant growth in recent years, but that growth has been uneven among  various geographic regions and economic sectors. Economic reforms and growth  in the PRC have been more successful in certain provinces than in others, and  the continuation or increase of such disparities could adversely effect  political or social stability.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **PRC Inflation**                                                                                           |   | ·  In recent years, the PRC has not experienced  significant inflation, and thus inflation has not had a significant effect on  our business historically. In response to the increased inflation rate during  2004, the Chinese government announced measures to restrict lending and  investment in the PRC in order to reduce inflationary pressure on the PRC’s  economy; and the inflation rate reduced in 2005. If the PRC experiences  increased inflation in future, the Chinese government may introduce further  measures intended to reduce the inflation rate in the PRC. Any such measures  adopted by the Chinese government may not be successful in reducing or  slowing the increase in the PRC’s inflation rate. Sustained or increased  inflation in the PRC may have an adverse impact on the PRC’s economy and |

 

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|                                                    |   | may materially  and adversely affect our business and financial results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|----------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **Uncertain Legal System and Application of Laws** |   | ·  The legislative trend in the PRC over the  past decade has been to enhance the protection afforded to foreign investment  and allow for more active control by foreign parties of foreign invested  enterprises. There can be no assurance that this will continue. In addition,  as the PRC economy, business and commercial framework and legal system all  continue to develop, that development may adversely effect the Company’s  activities in the PRC or the ability of the Company to enter into Sino-foreign  agreements.                                                                                                                                                                                                                                                                                                                                                    |
| ** **                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **PRC Legal System Business Laws Developing**      |   | ·  The PRC does not yet possess a comprehensive  body of business law or a consolidated body of laws governing foreign  investment enterprises. As a result, the enforcement, interpretation and  implementation of existing laws, regulations or agreements may be sporadic,  inconsistent and subject to considerable discretion. The PRC’s judiciary has  not had sufficient opportunity to gain experience in enforcing laws that  exist, leading to a higher than usual degree of uncertainty as to the outcome  of any litigation. As the legal system develops, entities such as the Company  may be adversely effected by new laws, changes to existing laws (or  interpretations thereof) and preemption of provincial or local laws by  national laws. Even when adequate law exists in the PRC, it may not be  possible to obtain speedy and equitable enforcement of the law. |
| ** **                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **Government Currency Controls**                   |   | ·  The PRC government imposes control over its  foreign currency reserves in part through direct regulation of the conversion  of its currency, Renminbi (“RMB”) into foreign exchange and through  restrictions on foreign imports. The conversion of RMB into Hong Kong and  United States Dollars (“U.S. Dollars”) must be based on rates set by the  People’s Bank of China (“PBOC”), which rates are set daily based on the  previous day’s Chinese interbank foreign exchange market rate with reference  to current exchange rates on the world financial markets.                                                                                                                                                                                                                                                                              |
| ** **                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **                                         |   | ·  Although the RMB to U.S. dollar exchange  rate has generally been stable from 1994 through 2004. However, in 2006, the  RMB appreciated against the U.S. Dollar. The                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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|                                                                                        |   | PRC government has  stated its intention to intervene in the future to support the value of the  RMB, there can be no assurance that exchange rates will not become volatile  or that the RMB will not devalue against the U.S. dollar or Hong Kong dollar  in the future. Exchange rate fluctuations may adversely effect the Company  because of foreign currency denominated liabilities, and may materially  adversely effect the value, translated into U.S. dollars, of the Company’s  net fixed assets situated and to be situated in the PRC, earnings and  dividends. |
|----------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Turbulent Relations with the United States of  America (“United States”)** |   | ·  Differences  between the United States and PRC governments on some political issues  continue occasionally to color the relationship. These occasional  controversies could materially and adversely effect our business and  operations. Political or trade friction between the two countries could also  materially and adversely effect the market price of our Ordinary Shares,  whether or not they adversely effect our business.                                                                                                                               |
| ** **                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Certain  Risks Relating to Company’s Business.**                                |
| ** **                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **We Have Made and May Make Further Acquisitions Without  Your Approval**              |   | ·  Although we endeavor to evaluate the risks  inherent in any particular acquisition, there can be no assurance that we  will properly or accurately ascertain all such risks. We will have virtually  unrestricted flexibility in identifying and selecting prospective acquisition  candidates and in deciding if they should be acquired for cash, equity or  debt, and in what combination of cash, equity and/or debt.                                                                                                                                              |
| ** **                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                   |   | 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 are seeking to take  equity positions in related business. We will not seek stockholder approval  for any additional acquisitions unless required by applicable law and  regulations. Our stockholders will not have an opportunity to review financial  and other information on acquisition candidates prior to consummation of any  acquisitions under almost all circumstances.                                 |

 

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|                                                                    |   | Investors will be  relying upon our management, upon whose judgment the investor must depend, with  only limited information concerning management’s specific intentions.                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                               |   | There can be no  assurance that the Company will locate and successfully complete any such  additional acquisitions, or any acquisition will perform as anticipated, will  not result in significant unexpected liabilities or will ever contribute  significant revenues or profits to the Company or that the Company will not  lose its entire investment in any acquisition.                                                                                                                                                                                                                |
|                                                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Dependence upon Management**                                     |   | ·  The Company is dependent upon the  services of its executive officers, in particular Mr. T.C. Leung, the  Chairman of the Company’s Board of Directors and its Chief Executive Officer.  The business of the Company could be adversely effected by the loss of  services of, or a material reduction in the amount of time devoted to the  Company by its executive officers. The Company does not maintain “Key Man”  life insurance on the lives of any of its officers and directors. See Item 6.  “Directors, Senior Management and Employees.” |
| ** **                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Adverse Impact upon Company of PRC’s Credit  Restrictions** |   | ·  The Company faces increasing competition  from other distribu­tors of substantially similar products and manufacturers  them­selves, both foreign and Chinese. The Company faces its principal  competition from foreign manufacturers and other distributors of their  products situated in Hong Kong and the PRC. Competition may cause purchaser  demands for price reductions and reduced profit margin.                                                                                                                                                             |
| ** **                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Competition with Vendors**                                       |   | ·  As the Company plans to assemble products of  the kind that it presently distributes, the Company may directly compete with  certain of its vendors. Any such direct competition may adversely effect its  relationship with its vendors. See Item 4. “Information on the Company.”                                                                                                                                                                                                                                                                                      |
| ** **                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Dependence on Vendors; Lack of Long Term Agreements**            |   | ·  The Company distributes supplies  manufactured by a number of vendors, including Hioki E.E. Corp. (“Hioki”), US  Filter/Chemical Feed and Disinfection Group (“USF”) and                                                                                                                                                                                                                                                                                                                                                                                       |

 

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|                                                                                                                                                  |   | Lachat Instruments,  Inc. (“Lachat”), which are the Company’s largest suppliers. The Company has  only a letter from Hioki appointing the Company as Hioki’s sales  representative in the PRC, Hong Kong and Macau. Although alternative sources  of supply exist, there can be no assurance that the termination of the  Company’s relationship with any of the above or other vendors would not have  a short-term adverse effect on the Company’s operations due to the  Company’s dependence on these vendors. A substantial number of the Company’s  suppliers have been selling their products into China directly and through  other distributors. |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Risks Relating to the Company Itself. Control by  T.C. Leung; Potential Conflict of Interests**                                                |   | ·  T.C. Leung, the Company’s Chairman of the  Board and Chief Executive Officer, as a practical matter, is able to nominate  and cause the election of all the members of the Company’s Board of  Directors, control the appointment of its officers and the day-to-day  affairs and management of the Company. As a consequence, Mr. Leung can  have the Company managed in a manner that would be in his own interests and  not in the interests of the other shareholders of the Company. See Item 7.  “Major Shareholders and Related Party Transactions” and Item 6. “Directors,  Senior Management and Employees.”                             |
| ** **                                                                                                                                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Certain Legal Consequences of Incorporation in  the British Virgin Islands; Rights of Shareholders Not as Extensive as in U.S.  Corporations** |   | ·  Principles of British Virgin Islands (“BVI”)  corporate law relating to such matters as the validity of the Company  procedures, the fiduciary duties of management and the rights of the  Company’s shareholders may differ from those that would apply if the Company  were incorporated in a jurisdiction within the United States.                                                                                                                                                                                                                                                                                                                                |
| ** **                                                                                                                                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                             |   | ·  The rights of shareholders under British  Virgin Islands law are not as extensive as the rights of shareholders under  legislation or judicial precedent in many United States jurisdictions. Under  United States law, majority and controlling shareholders generally have  certain “fiduciary” responsibilities to the minority shareholders. United  States shareholder action must be taken in good faith and actions by  controlling shareholders in a United States jurisdiction and                                                                                                                                                                                |

 

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|                                                      |   | executive compensation  which are obviously unreasonable may be declared null and void.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                           |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **                                           |   | ·  The BVI law protecting the interests of the  minority shareholders is not as protective in all circumstances as the law  protecting minority shareholders in United States jurisdictions. The  shareholders of the Company may have more difficulty in protecting their  interests in the face of actions by the Company’s Board of Directors, and may  have more limited rights, than they might have as shareholders of a company  incorporated in many United States jurisdictions.                                                                                                        |
| ** **                                           |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Anti-takeover Provisions**                         |   | ·  The Company has 5,000,000 shares of “blank  check preferred stock” authorized. The “blank check preferred stock” is  intended to strengthen the Company’s ability to resist an unsolicited  takeover bid and may be deemed to have an anti-takeover effect. The Board of  Directors has the right to fix the rights, terms and preferences at the time  of issue of “blank check preferred stock” without further action by our  shareholders.                                                                                                                  |
| ** **                                           |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Uncertainty of Enforcing United States Judgments** |   | ·  There is some uncertainty whether BVI courts  would enforce judgments of the courts of the United States and of other  foreign jurisdictions, or enforce actions brought in the BVI which are based  upon the securities laws of the United States. A final monetary judgment  obtained in the United States will be treated as a cause of action in itself  by the BVI courts so that no retrial of the issues would be necessary,  provided that material preconditions are met and the proceedings pursuant to  which judgment was obtained were not contrary to the rules of natural  justice. |
| ** **                                           |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                 |   | ·  All of the Company’s directors and executive  officers reside outside of the United States, service of process upon the  Company and such persons may be difficult to effect in the United States upon  all such directors and officers.                                                                                                                                                                                                                                                                                                                                                      |
|                                                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|                                                 |   | ·  All of the Company’s assets are and will be  located outside of the United States, in Hong Kong and the PRC, and any  judgment obtained in the United States may not be enforced in those  jurisdictions. Hong Kong courts will not directly enforce against the Company  or such persons judgments obtained in the United States. There is also  substantial doubt as to the enforceability in the PRC of actions to enforce                                                                                                                                                                 |

 

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|                                                                                                                                                                                                                                     |   | judgments of the United  States’ courts arising out of or based on the ownership of the securities,  including judgments arising out of or based on the civil liability provisions  of United States federal or state securities laws or otherwise. See “—  Certain Legal Consequences of Incorporation in the British Virgin Islands;  Rights of Shareholders not as Extensive as in U.S. Corporations.” |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Being a Foreign Private Issuer Exempts Us From Certain Securities and  Exchange Commission (“Commission”) and National Association of Securities  Dealers Automated Quotation System (“NASDAQ”)Requirements** |   | We are a foreign private issuer within the meaning  of rules promulgated under the Securities Exchange Act of 1934 (the “Exchange  Act”). As such, we are exempt from certain provisions applicable to United  States public companies including:                                                                                                                                                                   |
| ** **                                                                                                                                                                                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|                                                                                                                                                                                                                                |   | ·  the rules under the Exchange Act requiring  the filing with the Commission of quarterly reports on Form 10-Q or current  reports on Form 8-K;                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|                                                                                                                                                                                                                                |   | ·  the sections of the Exchange Act regulating  the solicitation of proxies, consents or authorizations in respect of a  security registered under the Exchange Act;                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                |   | ·  the provisions of Regulation FD aimed at  preventing issuers from making selective disclosures of material information;                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                |   | ·  the sections of the Exchange Act requiring  insiders to file public reports of their stock ownership and trading  activities and establishing insider liability for profits realized from any  “short-swing” trading transaction (i.e., a purchase and sale, or sale and  purchase, of the issuer’s equity securities within less than six months);                                               |
|                                                                                                                                                                                                                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                |   | Because of these  exemptions, investors are not afforded the same protections or information  generally available to investors holding shares in public companies organized  in the United States.                                                                                                                                                                                                                            |

 

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| **Our Securities Must Continue To Meet Qualitative And Quantitative  Listing Maintenance Criteria For The NASDAQ SmallCap Market** |   | ·  Our securities are quoted and traded on the  NASDAQ SmallCap Market. There can be no assurance that we will continue to  meet both the qualitative and quantitative criteria for continued quotation  and trading of our securities on the NASDAQ SmallCap Market. That criteria,  which undergoes periodic NASDAQ review.                                                                                                                                                                                                                                        |
|------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                               |   | If we are unable to  meet the continued quotation criteria of the NASDAQ SmallCap Market and are  suspended from trading on these markets, our securities could possibly be  traded in the over-the-counter market and be quoted in the so-called  “pink sheets” or, if then available, the OTC Bulletin Board. In such an  event, an investor would likely find it more difficult to dispose of, or even  obtain accurate quotations of, our securities. See “- We Are Also Required To  Meet Certain, But Not All NASDAQ Corporate Governance Criteria.” |
|                                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **We Are Also Required To Meet Certain, But Not  All, NASDAQ Corporate Governance Criteria**                                       |   | ·  Although, in the past, we have been able to  satisfy NASDAQ’s SmallCap Market corporate governance criteria, those  criteria are difficult to comply with and include, among other things:                                                                                                                                                                                                                                                                                                                                                                   |
| ** **                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                               |   | ·   a heightened degree of independence of  members of the board of directors with independent directors to, among other  things: hold regular meetings among themselves only;                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
|                                                                                                                               |   | ·   establishment of a code of conduct  addressing compliance with laws; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
|                                                                                                                               |   | ·   a limit on payments to independent  directors and their family members (other than for services on the board of  directors).                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                               |   | These corporate  governance requirements and a strict definition of “independent director”  make it more difficult                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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|                                                                                                                               |   | to find independent  directors for our Board of Directors. There is intense competition for  qualified independent directors, including those persons with accounting  experience and financial statement acumen to serve on audit committees. We  believe that continued compliance with NASDAQ’s corporate governance  requirements may be difficult and increase our costs and expenses as the  costs of finding and compensating independent directors escalate and the  costs of administering their new powers and responsibilities is an added  financial burden. If we are unable to attract and keep a sufficient number of  independent directors willing to take on the responsibilities imposed by such  rules on what we believe to be commercially reasonable terms, our securities  may be delisted from NASDAQ. (See “-Being a ‘Controlled Company’ Exempts Us  From Certain Other NASDAQ Corporate Governance Criteria.”) |
|-------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Being a “Controlled Company” Exempts Us From  Certain Other NASDAQ Corporate Governance Criteria**                |   | As a result of T.C.  Leung, the Company’s Chairman of the Board and Chief Executive Officer  beneficially owning in excess of the majority voting power of our Ordinary  Shares, we are a “controlled company” as that term is defined in NASDAQ’s  rules and regulations. As a “controlled company”, we are not required to  comply with certain NASDAQ corporate governance criteria, including, among  other things, the requirements that the majority of our Board be independent  directors, and their having the authority to approve director nominations and  executive officer compensation.                                                                                                                                                                                                                                                                                                                                |
| ** **                                                                                                                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **We Are Not Subject To Various Corporate Governance  Measures, Which May Result In Shareholders Having Limited Protections** |   | Recent Federal  legislation, including the Sarbanes-Oxley Act of 2002 (“SOX”), has resulted  in the adoption of various corporate governance measures by securities  exchanges and NASDAQ designed to promote the integrity of the corporate  management and the securities markets. Being a “controlled company,” we will  be exempt from many, but not all, of those requirements. Furthermore, the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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|                                                                                                                                                                         |   | absence of such  practices with respect to our Company may leave our shareholders without  protections against interested director transactions, conflicts of interest  and similar matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
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| ** **                                                                                                                                                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **We May Be Exposed To Potential Risks Relating To Our Internal Controls  Over Financial Reporting And Having Those Controls Attested To By Our  Independent Auditors** |   | ·  Pursuant to Section 404 of SOX, the SEC  adopted rules requiring public companies to include a report of management on  the company’s internal controls over financial reporting in their annual  reports, including Form 20-F. In addition, the independent registered public  accounting firm auditing a company’s financial statements must also attest to  and report on management’s assessment of the effectiveness of a company’s  internal controls over financial reporting as well as the operating  effectiveness of a company’s internal controls. We were not subject to these  requirements for the fiscal year ended December 31, 2006. We are evaluating  our internal control systems in order to allow our management to report on,  and our independent auditors attest to, our internal controls, as a required  part of our Annual Report on Form 20-F beginning with our report for our  fiscal year ending after December 15, 2008. |
| ** **                                                                                                                                                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                         |   | While we expect to  expend significant resources in developing the necessary documentation and  testing procedures required by SOX, there is a risk that we will not comply  with all of these requirements. At present, there is no precedent available  with which to measure compliance adequacy. Accordingly, there can be no  assurance that we will receive a positive attestation from our independent  auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

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|                                                                    |   | In the event we  identify significant deficiencies or material weaknesses in our internal  controls that we cannot remediate in a timely manner or we are unable to  receive a positive attestation from our independent auditors with respect to  our internal controls, investors and others may lose confidence in the  reliability of our financial statements, our ability to obtain equity or debt  financing could suffer and the market price of our shares could decline.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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| ** **                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **The Market Price Of Our Securities Has Been Fluctuating Widely** |   | ·  During the past five years, the market price  of our Ordinary Shares has been subject to wide fluctuations. Additionally,  the Company knows of no reason for these wide fluctuations. See Item 9.A -  “Markets.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
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| **There Are Risks In Purchasing Low-Priced Securities**            |   | ·  If our securities were to be suspended or  delisted from the NASDAQ SmallCap Market, they could be subject to rules  under the Securities Exchange Act of 1934 (“Exchange Act”) which impose  additional sales practice requirements on broker-dealers who sell such  securities to persons other than established clients and “accredited  investors” (for example, individuals with a net worth in excess of  US$1,000,000 or an annual income exceeding US$200,000 or US$300,000 together  with their spouses). For transactions covered by such rules, a broker-dealer  must make a special suitability determination of the purchaser and have  received the purchaser’s written consent to the transaction prior to the  sale. Consequently, such rules may affect the ability of broker-dealers  to sell our securities and the ability to sell any of our securities in any  secondary market that may develop for such securities. |
| ** **                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                    |   | The SEC has enacted  rules that define a “penny stock” to be any equity security that has a price  (as therein defined) of less than US$5.00 per share or an exercise price of  less than US$5.00 per share, subject to certain exceptions, including  securities listed on the NASDAQ SmallCap Market or on designated exchanges.  For any transaction involving a penny stock, unless exempt, the rules require  the delivery, prior to any transaction in a penny stock, of a disclosure  statement prepared by the SEC relating to the penny stock market. Disclosure  also has to be made about the risks of investing in penny stocks in both  public offerings and in                                                                                                                                                                                                                                                                                            |

 

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

** **

**ITEM 4.**                    INFORMATION ONTHE COMPANY

***Item 4A.****                History andDevelopment of the Company*

The Company was organized under the laws of theBritish Virgin Islands on September 30, 1996 for the purposes of raisingcapital and for acquiring all the outstanding capital stock of Euro Tech (FarEast) Limited, a Hong Kong corporation (“Far East”). The Company successfullycompleted a public offering (“Public Offering”) receiving net proceeds ofapproximately US$1,817,000, in March 1997. Contemporaneously, the Companyacquired all the issued and outstanding capital stock of Far East and it becamea wholly-owned subsidiary and was the primary operational entity of theCompany.

Far East was established in 1971 under the name of Eurotherm (Far East)Limited, to market and distribute its ex-parent’s industrial control equipmentin Hong Kong and Southeast Asia, and expanded its activities into the PRC in1973. In the early 1980’s, Far East began distributing high-techequipment manufactured in the United States, Europe and Japan within the PRC,in addition to its distribution of its parent’s products. In 1988, theactivities of the parent and Far East were separated into EurothermInternational and Far East. In or around 1994, all the capital stock of FarEast was purchased by its management, principally T.C. Leung, the Company’sChairman of the Board of Directors and Chief Executive Officer. See Item 7. “MajorShareholders and Related Party Transactions.”

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.

China’s rapid economic growth had led it to become oneof the world’s largest emitters of sulfur dioxide.  The damage due to acid rain caused by sulfurdioxide is vast, and is also affecting the neighboring countries as aircurrents transport sulfur dioxide.  Totackle these environmental and geo-political issues, China has establishedtargets to reduce key pollutants, namely, sulfur dioxide, nitrogen oxides andsuspended particulates.  Heavy pollutersare being warned to reduce 

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their emissions or facepenalties.  We believe that as a result,the demand of desulphurization and dust removal equipment will increaseaccordingly.

We are in theprocess of shifting our emphasis from the distribution of instruments andequipment to engineering and manufacturing activities.  Revenues from our “trading” activities havefallen-off as a substantial number of our suppliers have been selling theirproducts into China directly and through other distributors.  Revenues and net income generated from ourenvironmental engineering department and our majority owned subsidiaries, Pactand Yixing (companies engaged in the water and waste water treatment solutionbusiness), have more than offset our falling “trading” revenues.

In November of2006 we 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 engineer department with thatline of business and its personnel transferred from our subsidiary, Euro Tech (FarEast) Ltd.  Shanghai — Environmental isfocusing on our water and waste-water treatment engineering business and isplanned to be the home of our planned expansion into the air pollution controlbusiness.

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

The Company is engaged in three different major activities:

(1)           *Equipmentand Instrument Distribution.*

The Company has 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, 2006 (“Fiscal 2006”) the Company distributedproducts to in excess of 1,000 customers, including the Hong Kong EnvironmentalProtection Department, China Light & Power Co., Ltd., Hong Kong ElectricCo., Ltd., the Kowloon-Canton Railway Corporation,****China’sNational Environmental Protection Agency, Harbin Water, Harbin EnvironmentalMonitoring Center, Inbev Group, Beijing Huai Rou and Shunyi District CDC,Liaoning Jinzhou Waste-water Treatment Plant and to subdistributors located inHong Kong, the PRC and Macau. These products are manufactured by a substantialnumber of major American, European and Japanese corporations, including Hioki,USF and Lachat, which are the Company’s largest suppliers, with purchases fromthem accounting for approximately 29%, 8% and 6%, respectively, of the Company’ssales during Fiscal 2005 and approximately 36%, 8%, and 8%, respectively of theCompany’s sales during Fiscal 2006.

The Company distributes products through its Hong Kong headquarters,its retailshops and representative officeslocated in Beijing, Shanghai, Guangzhou, Chongqing, Xi ́An, Shenyang, Wuhan andFuzhou, and through non-exclusive arrangements with independent sub-distribu­torslocated in Hong Kong, the PRC and Macau.

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(2)                                  *Manufacturing.*

The Company believes that by assembling the products it distributes, itmay realize increased gross profit margins and greater revenues and net incomethan if it remains only a distributor of such products with sales of theCompany first product offering, an Infrared Photometric Oil Analyzer,commencing in 2003. Similarly, the Company believes that by expanding itsregional sales efforts in the PRC, it may be better able to compete withincreased competition from our own suppliers and other distributors.

(3)           *Environmental Services.*

In January 2002, we acquired a 30% equity interest inPact and Yixing.  Pact and Yixing wereprivately owned engineering firms situated in Shanghai specializing in thedesign, manufacture and operation of water and waste-water treatment plant inseveral industries situated in China, Pact and Yixing, through associates andbusiness alliances, also conduct similar operations in the Middle East.

In October 2005, we,through our subsidiary Euro Tech (Far East) Limited (“Far East”) purchasedapproximately 21% of the issued and outstanding shares of Pact and Yixing forapproximately US$1,000,000 from Tamworth Industrial Limited (“Tamworth”).

**Expansion Plans**

Acid rain and sulfur dioxide emissions are serious problems in China,we are planning to expand our activities in the air pollution control businessby investing or acquiring some interest in companies involved in (i) the dustremoval and/or (ii) the flue gas desulphurization for power plant industriesand other similar industries.

We have engaged a business consultant to assist in this search, and arein discussions with several companies engaged in manufacturing these productsand equipment and in engineering companies which design and build pollutioncontrol systems.  We anticipate that thecosts of any such acquisition would be drawn from our general working capitaland, possibly, by private sales of our securities including the potentialexercise by officers and directors of their options.  We have no commitments or indications ofinterest for the private sales of our securities and only a few persons haveexercised their options to date.

In July 2006, weentered into a letter of intent with Zhejiang Jia Huan Electronic Co. Ltd., (“JiaHuan”) to purchase a 20% equity interest in Jia Huan.  Jia Huan has been in the environmentalprotection business since 1969 and is based in Jin Hua, Zhejiang.  This equity purchase is subject to finalnegotiation of a definitive agreement, legal and financial due diligence.  There can be no assurance a definitiveagreement will be negotiated, the transaction will be completed, or, ifcompleted, will economically benefit the Company.

In that samemonth, PACT entered into a letter of intent with Pact Engineering FZC (“PACTFZC”),a Middle Eastern water treatment company based in Dubai, and a third party toform a manufacturing joint venture (“JV”) in China.  The initial third party withdrew and was 

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replaced by the ItalianCompany,Ecomacchine S.p.A. (“ECO”), acompany engaged in the manufacture of sludge and dewatering equipment.  It isplanned that PACT will invest US$300,000 and have a 60% controlling interest ofthe JV, and ECO and PACTFCZ, a company majority owned by George Hayek, theCompany’s Managing Director, will each invest US$100,000 in consideration for a20% interest.  The registration of the JV with the PRC is underway and isexpected to be completed by the end of June 2007.

In April of 2007, we signed a Subscription Agreementto acquire a 20% equity interest in Zhejiang Tianlan Desulfurization andDust-Removal Co. Ltd. (“BlueSky”), a company in flue gas desulphurization, fluegas de-nitration, dust removal and purification of industrial waste gases, fora maximum of US$4.5 million.

Blue Sky, foundedin 2000, is a growing concern that we believe provides a comprehensive servicefor design, general contract, equipment manufacturing, installation, testingand operation 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 will have a strategicpartner to work within China’s environmental protection business.  With BlueSky’s technology and technicalsupport, we believe we will then be able to provide services and environmentalsolutions not only for water and waste-water treatment but also for airpollution control for industrial clients in China.

The acquisition ofan equity stake in BlueSky is to befinanced from Euro Tech’s internal resources and is subject to local governmentapproval that is expected to be completed inJuly 2007.

As revenue and income from distribution activities are declining gradually due to a greater number of oursignificant suppliers marketing and selling their products into the Chinamarket through other distributors as well as the Company.  Many of these other distributors are localChinese companies and can operate with a lower overhead.

Our plans for the near term also include:  (a) continued use of our retail shops to sell“low-tech” products such as those manufactured by Hioki and our ownproducts.  We believe that these shopsare operating with a lower overhead than the rest of the Company; and (b) webelieve that the continued “low-tech” product sales through our retail shopscoupled with our “on-line” product sales will allow us to continue to offerproducts at lower prices than our competitors.

Having “low-tech” products offered through our retail shops and theavailability of “on-line” product offering are anticipated to allow our salesforce to focus on “high-tech” and other products requiring personal ortelephone contact directly with customers and potential customers.

Manufacturing

Sales of 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 activelymarketing our Total Organic Carbon (TOC) analytical instrument that measuresthe degree of the pollution level of drinking water, ground water and wastewater. Our TOC analyzer has been two and a half years in research, developmentand field testing of prototypes sold to our customers. A number of target customers showed theirinterest in this product during our trade shows and seminars. We had made somemodifications to this product to improve the quality. As a result, we have toupdate the Chinese Metrology Certification, a certificate issued by Bureau of Quality and Technical Supervision beforewe can continue to sell our TOC.  During 2005, the Company built a demonstrationIntegrated Water Quality Monitoring System (“*WQMS*”)that incorporates, among other features: intake sampling, flow through testing with the ability to “auto clean”sensors with monitoring for ammonia, nitrate and organic pollution; electronicmeasurements, transmission (via telephone, radio data network, cellular orsimilar transmission for monitoring purposes) and recordation; and housing tocustomer’s specifications.

In 2005, the Company also began offering two new company manufacturedturbidimeters.  One of the newturbidimeters is directed at water treatment plants, environmental monitoring status, hydrologicalstations and the second is directed at beer and other beverage processingfacilities and it analyzes the particles contained in the beverage.  See “- Product Assembly Operations”. Duringthe next twelve months, we intend to assemble and/or manufacture additionalproducts in the future and seek opportunities with our suppliers to assembletheir products, secure manufacturing and/or assembly facilities and seekanother manufacturer of analytical instruments to acquire.

Environmental Services

To allow the Company to bid on larger water, waste-water and powergeneration projects, we acquired Pact and Yixing and continue our search forother engineering companies and/or a system integrator (a company that provideshardware, software and solutions in the field of engineering) or enter into ajoint venture with a third party to work in connection with our process controland engineering department.

Pact-Yixinghave completed a substantial number of industrial water and waste-watertreatment projects in the PRC.  Themajority of these projects are for large multinational manufacturing facilitiesfor clients from the USA, Europe and Japan. Process design as well as mechanical and electrical engineering arecompleted in-house and manufacturing contracted to approved fabricators ofcomponents.  Fabrication drawings arealso done in-house for submittal to said fabricators under the supervision ofPact-Yixing’s quality control engineers.

Pact-Yixing clients covera varied spectrum of industries covering semiconductor, pharmaceutical,petrochemicals, auto & auto parts, steel, food & beverage and beautyproducts.

The water and waste-watertreatment processes applied at Pact-Yixing cover chemical, physical, biologicaland membrane separation.  A combinationof those processes are normally used to treat a specific industrial process feedor effluent.  With respect to the watertreatment side of Pact-Yixing’s business, they design and build filtrationequipment, ion-exchange softeners and demineralizers, reverse osmosis,electro-deionization, chemical treatment systems 

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and package type mobile water treatment plants.  As for waste-water treatment, Pact-Yixingdesign and build biological treatment systems, oil coalescers, dissolved airflotation, lamella clarifiers, chemical reactor tanks, ultrafiltration,microfilitration, dewatering systems and package type mobile sewage treatmentplants.  Biological treatment plantscover both aerobic and anaerobic processes. State-of-the-art aerobic processes of SBR (sequential batch reactors)and MBR (membrane biological reactors) are technologies also covered byPact-Yixing.  See **“**Glossary**.”**

In 2006,Pact-Yixing commenced selling water 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.

In February 2007, PACT was awarded a US$725,145contract by a Pakistan and US joint venture company in dyeing and finishingindustry in Lahore, Pakistan.  Thecontract covers design, manufacture, supply, and commissioning of a portion ofa 7680 cubic meterprocess waste-water treatment plant for the joint venture company.

The Company believes that the Pact-Yixing business is complementary tothe Company’s business as the Company continues to sell and market products ofothers. The Company expects that with this acquisition it may be able to gain acompetitive advantage by offering customers and potential customers not onlyhardware but solutions to engineering problems as well. Also, the Companybelieves that its equity stake in Pact-Yixing enhances its position as asupplier to Pact. The Company continues to seek to make a similar acquisitionof an engineering company specializing in air pollution control or othercomplementary environmental protection fields or in the power generation field.  See Item 10.C “Material Contracts.”

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 2006 and Fiscal 2005, our share of Pact-Yixing’s revenuerepresented 15% and 12%, respectively, of our revenue.  During Fiscal 2006, Fiscal 2005 and Fiscal2004, our share of Pact-Yixing’s net income represented 91%, 48% and 32%,respectively, of our net income.

**Distribution of Equipment and Instruments**

**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 tosupport testing systems of laboratory and portable instruments, processanalyzers and portable test kits and assist in the analysis process. TheCompany offers a wide variety of test kits to test water quality. The Company believesthat these portable test kits are easy 

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touse and preadapted for rugged field use. These test kits are used to monitordrinking 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 oxygendemand apparati, digestion apparati, and precision re-agent dispensingdevices which are used to test and monitor impurities and contaminants in watersystems. See “Glossary.”

The Company also distributes continuous-reading processanalyzers, process turbidimeters, pH controllers and analyzer accessories.These products are generally used to monitor and control drinking water qualityto ensure that water treatment procedures comply with regulatory standards. See“Glossary.”

*Scientific Instruments.* The Company distributes analytical instruments,environmental monitoring instruments and general purpose laboratoryinstruments. Analytical instruments include, but are not limited to,chromatographs, mass spectrometers, flow injector analyzers and atomicspectrometers. Environmental monitoring instruments include both air and waterquality monitoring instruments. Air quality monitoring instruments aregenerally divided into those which monitor ambient (i.e., atmospheric) air, andthose which monitor pollution sources. Additionally, the Company offers generalpurpose laboratory instruments including a variety of water quality monitoringand analysis 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.”

Customersfor the analytical instruments include government agencies, academic andresearch institutions and major laboratories. The Company also distributesproducts to beverage producers and restaurants, including water quality testkits to more than twelve bottling plants of a well known United States softdrink producer, which are located in the PRC; water quality monitoringinstruments to well known United States fast food franchisor’s restaurantslocated in Hong Kong and the PRC, and to well known United States and Europeanbeer producers bottling plants located in Wuhan, PRC. Each such soda producer,restaurant and beer bottler do not account for a significant portion of oursales.

Customers for air and water quality monitoring instruments also includegovernment agencies such as the Hong Kong Environmental Protection Department,which uses a Company distributed water quality monitoring system to monitor thewater quality of Hong Kong’s Victoria Harbor, more than ten water treatmentplants located in the PRC (including sites at Beijing, Tianjin, Guangzhou andWuhan), 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.

The Company derived approximately 33.2%, 34.8% and 37% of its revenuesfrom the sale of Scientific Instruments during Fiscal 2006, Fiscal 2005 andFiscal 2004, respectively.

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

The Company derived approximately 13.1%, 19.5% and 14.3% of itsrevenues from the sale of Process Control and Engineering Products duringFiscal 2006, Fiscal 2005 and Fiscal 2004, respectively.

**Energy Conservation and Related Products.** The Company distributes general testing andmeasuring equipment including multi-channel digital and analogue recorders,signal amplifiers and calibration equipment for energy conservation, renewableenergy equipment and power quality analyzers to industries including powerplants, railway and aero-space industries, utilities, educational institutionsand telecommunications companies.

The Company derived approximately 45.7%, 34.2% and 25.1% of its revenuesfrom the sale of these Energy Conservation and Related Products during Fiscal2006, Fiscal 2005 and Fiscal 2004, respectively.

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

The Company derived approximately 6.9%, 10.2% and 22.3% of its revenuefrom its Special Project Operation during Fiscal 2003 through Fiscal 2005. Thisrevenue was derived primarily from sales of products and supply systems.  The Company is placing a greater emphasis ondeveloping an engineering solution to business as one of our key suppliersEurotherm has been directly marketing and selling their process automationproduct directly into the PRC.

Our special projects and engineering department isbelieved by the Company to be the main contractor and system integrator of alarge number of industrial and municipal waste-water, water treatment and powergeneration plants in the PRC. Specific services provided by this group includeautomated control system design, the operation and management of various waste-water,water and power generation projects. We endeavor to introduce, develop, andpromote new and advanced technologies, products, and appropriate technicaldevelopments from abroad. We have also been cooperating with establishedtechnology companies and engage in systems and special projects in ProgrammableLogic Control, Telemetry unit, SCADA systems, Human Machine Interface Softwareand Sequential Event Recording.

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**Technical Support.**The Company’s technical support staff provides customers with maintenance,installation assistance, and calibration services, and assists sales personnelin giving technical advice to and performing product demonstrations forcustomers. The Company derived approximately 1.1%, 1.3% and 1.3% of itsrevenues from Technical Support Operations during Fiscal 2006, Fiscal 2005,Fiscal 2004, respectively.

**Customers.** DuringFiscal 2006, the Company distributed products to in excessof 1,000 customers, including sub-distributors, located in Hong Kong, thePRC and Macau. No single customer accounted for more than 5% of the Company’srevenues during Fiscal 2006. The Company does not believe that any singlecustomer 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, engagesin the development, production, sales and servicing of environmental equipment,including the development of modern laboratory analyzers, on-line measuringequipment and other analyzers for chemicals. Our products are “tailor-made” forthe diversified needs of equipment users. Main products include InfraredPhotometric Oil Analyzer (IPOA), COD analyzers, Total Organic Carbon Analyzer,turbidity meters, total suspended solid analyzers, dissolved oxygen analyzers,various types of spectrophotometers as well as a full spectrum of matchingchemical reagents. In late 2005, we began offering two new turbidity meters,manufactured by the Company and our own WQMS.

This facilityproduces the Infrared Photometric OilAnalyzer, together with the two types of specialized reagents have been thebest customer accepted products from this plant. Sale of the InfraredPhotometric Oil Analyzer commenced in 2003. This plant also manufacturesmulti-function reactors, spectrophotometers, reagents for chemical oxygendemand and chlorine and silica measurement, used in water-relatedtesting, monitoring and treatment. ** **It is contemplated that the Companywill import components, assemble the finished products and then distribute theproducts through its distribution network. The Company believes that byestablishing product assembly operations in the PRC and expanding the number ofits regional sales offices in the PRC, it will not only increase revenues byexpanding its customer base and increasing distribution capabilities, but alsoits net income since the Company believes it will enjoy higher overall profitmargins by assembling certain products which it now distributes rather than byonly purchasing the finished product from vendors.

In June 2003, the Company entered into an agreementwith O.I. Corporation (“O.I.”) permitting the Company to assemble O.I.’s TotalOrganic Carbon Analyzer (“TOC”) at the Company’s manufacturing facility. TheCompany believes that O.I.’s TOC is more advanced than the products currentlysold by the Company and that by assembling O.I.’s TOC, it may be able toincrease its market share for advanced analytical equipment at more competitiveprices than it is now offering. Also, the Company anticipates that thisagreement will trigger closer cooperation with its vendors to develop otherproducts. Although the Company had entered into assembly agreements forproducts with other vendors, this agreement is a departure from past practicebecause, for the first time, the Company is assembling advanced analyticalequipment 

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for one of our vendors as opposed to “lower tech” analyticalequipment.  We believe that by producingproducts locally in the PRC, we can reduce our production costs and be able tocompete better with lower costs to our customers while maintaining our profitmargins.

**Infrared Photometric Oil Analyzer**

The Company developed an Infrared Photometric OilAnalyzer by infrared absorption method and began sales of this product in 2004.This analyzer detects concentrations of petroleum, animal and vegetable oils insurface water, underground water, municipal and industrial waste-water.Customers are environmental water monitoring stations, water purification andwaste treatment facilities, underground water and harbor water monitoringstations located in China.

Our perceived advantage of the analyzer is thatsamples under its testing protocols are measured by three different wavelengthssimultaneously thus giving more accurate readings against one fixed wavelengthused by most of our potential competitors’ products.

**Sources of Supply**

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 recently established its own PRC distribution company and appointed aJapanese trading company to sell its products and intend to appoint one or two additionaldistributors in China.  The Company anticipates that it will continueto be one of Hioki’s 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.

**Expansion**

The Company continues to seek: development of manufacturing andengineering operations as part of its core business through (a) the developmentand assembly of more of the Company’s own environment-related equipment (see “ —Product Assembly Operations”), (b) forming joint ventures with some of oursuppliers, (c) potential acquisitions of manufacturing plants in the water, 

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air pollution and energy conversation and related businesses, and (d)potential acquisitions of engineering companies to enhance our ability to bidfor and take on larger engineering projects.

**Regulatory Environment**

Concerns about and awareness of pollution problems and environmentalissues have grown at all levels of PRC government as the PRC experiencedeconomic growth. Environmental protection laws and strict regulations have beenenacted and are buttressed by increased budget allocations for environmen­talregulation, monitoring and enforcement. The PRC’s primary environmentalprotection agency is the State Environmental Protection Agency (SEPA), underwhich there are Environment Protection Bureaus in each city and county.According to oral information received by management from SEPA, under bureaumanagement, there are two environment monitoring systems: one system consistsof over 2,200 monitoring stations to collect and analyze the environmental dataof each city and county; another system consists of over 2,500 stations tomonitor specific industrial districts or factories which have been identifiedas major pollution sources due to their non-compliance with environmentalregulations. The PRC government has established ambitious targets in its 11th Five-YearProgram (2006-2010) to slash emissions of pollutants, including sulfur dioxideemissions, by 10%.  The PRC governmentpassed a law requiring power distributors to combat global warming.  A central governmentfund, financed by a national tariff increase, will subside the tariff gapbetween more expensive renewable energy and the national average tariff.** **Preferential policiesalso encourage construction of renewable energy projects, projects in poorerinterior regions that are often rich in water, solar and wind resources.  The Company has supplied water and 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 facescompetition from other distributors of substantially similar products as wellas the manufacturers of such products, and in both foreign and Chinesemarkets.  The Company faces its principalcompetition from manufacturers and other distributors of its core productslocated in Hong Kong and the PRC. Moreover, the Company has implemented plans to assemble products of thekind that it presently distributes (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 itsvendors.  There can be no assurance thatthe existence of this direct competition will not impair the Company’s abilityor such competitor’s willingness to continue providing other products for continueddistribution by the Company and that such a development would not materiallyadversely effect the Company’s core business.

During Fiscal 2006, Fiscal 2005 and Fiscal 2004, the Company’s grossprofit margins were approximately 24.1%, 21% and 16.3%, respectively. TheCompany believes that it competes with the PRC manufacturers on the basis ofquality and technology. The Company believes it offers foreign-manufacturedproducts which are of higher quality and use more advanced technology than 

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productsmanufactured in the PRC. The Company believes that it competes with foreignmanufacturers and other distributors of their products on the basis of theCompany’s more extensive distribution network and an established reputation. Pact-Yixing focuses ona market 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.

**B2B Website**

The Company, through its subsidiary, ChinaH2O.com Limited,a Hong Kong corporation, has a bilingual Business-to-Business (“B2B”) internetplatform. The website is located at (http://www.chinah2o.com). The B2B websiteis directed at environmental businesses in China. The purpose of the B2Bwebsite is to connect manufacturers, distributors and suppliers ofenvironmental protection equipment and related consultants and engineeringfirms in the West with potential clients in China (i.e., water, waste-watertreatment plants, environmental protection bureaus, environmental monitoringstations, and related industries). 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 hada synergistic effect with those of the Company indirectly by feeding marketinformation, sales leads and tender information to the Company.

**Sales and Marketing**

The Company distributes products through its principal office locatedin Hong Kong and its representative PRC offices located in Beijing, Shanghai,Guangzhou and Wuhan.  During 2006, theCompany closed three representative offices and consolidated their personnelinto our remaining offices, as the offices did not financially contribute tothe Company as anticipated. The Company has a marketing and sales force of 80people who are paid a salary plus commission based on sales. The Company’soffices also coordinate the sales efforts of approximately fifty othercompanies located in the PRC which act as sub-distributors. These sub-distributorsare engaged on a non-exclusive basis to distribute the products of otherdistributors. Each of the fifty sub-distributors accounted for less thantwo percent of the Company’s sales during Fiscal 2006, Fiscal 2005 and Fiscal2004.

Following theopening of our first retail shop in Shanghai in 2001, Euro Tech retail outletsare now found in a number of major cities in the PRC, including Beijing andGuangzhou. Our staff at these shops assists customers in selecting theequipment, 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 Beijing shop,are also maintenance centers. The Companyhas found the seven existing shops to be useful as demonstration locationseasily accessed by local customers who can pay in local currency while “off theshelf” sales are made which move its inventory more readily. In addition to theshops, we also have four branches or representative offices of theseshops.  All of the foregoing areperceived by the Company to have had a positive impact on its businessreputation while reducing the Company’s dependency on sub-distributors who maynot be loyal to the Company and distribute products of our competitors. Asforeign entities are not generally permitted to own these facilities, theseshops are owned by non-officer/director, employees of the Company with fundsfrom the 

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Companythrough non-fixed term loans aggregating approximately US$388,000 bearing anominal rate of interest. The shops do not have financing from other sources.There can be no assurance that these shops will continue to be economicallyviable, that the Company will not sustain losses in connection with the loansto the shops; or the shops will result in any significant revenues or profitsfor the Company. Also, similar shops may be established by our competitorsand/or third parties. These shops (or their representative offices) were openedon the following dates:

Retail Shops

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

 

Representative Offices

| ChengDu  |   | February 2005  |
|----------|--------|----------------|
| Urumqi   |   | September 2005 |
| Dongguan |   | September 2004 |

 

Foreign entitiesare now permitted to own retail shops in some regions of PRC.  The Company has formed two wholly-ownedretail shops in Chongqing and Xian.  As aresult, we plan to close the current retail shops in Chongqing and Xian owned bynon-officer/director, employees of the Company. During 2006, we closed three representative offices, merging personnelinto our other shops.  We will continueto consolidate our operations by combining the retail shops and representativeoffices in the same cities or close shops and offices that do not appear to becontributing to the Company as expected.

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

The Company presently wholly-owns Far East, a Hong Kongcorporation, which, in turn, owns the following corporations:

**Wholly-Owned**

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

·                  Euro Tech (China) Limited — a Hong Kongcorporation

·                  ChinaH2O.com Limited — a Hong Kong corporation

·                  Shanghai Euro Tech Limited — a People’s Republicof China corporation

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

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**Majority Owned**

·                  Yixing Pact Environmental Technology CompanyLimited — a PRC corporation

·                  Pact Asia Pacific Limited — a BVI corporation

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

### ***Item 4D.   Property, Plant andEquipment***

The Company maintains an executive office at 18/F GeeChang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The Company occupiesapproximately 12,800 square feet of office and warehouse storage space under atwo (2) year lease that expired in May 2009****for monthly rental payments ofapproximately US$8,140. Thewarehouse storage space is used to hold products for distribution to ourcustomers via common carriers.

In August 1995, the Company purchased approximately 1,200 square feetof space in a building in Hong Kong. This property is now rented out to a thirdparty.

The Company alsomaintains representative offices within the PRC in the cities of Beijing,Shanghai, Guangzhou, Chongqing, Xi ́An, Wuhan and Fuzhou. The Beijing andShanghai sales offices are owned by the Company. The Beijing and Shanghai salesoffices are situated on Company owned property. The remaining sales offices arerented pursuant to short-term leases aggregating approximately US$3,000 permonth**.**

One of Euro Tech Trading (Shanghai) Ltd.’s office is rented pursuant toa lease expiring in September 2007 that provides for a monthly rental ofapproximately US$245, with a second office rented pursuant to a lease expiringin July 2008 that provides for a monthly rental of approximately US$652.  Shanghai Euro Tech Limited’s premisesare rented pursuant to a lease expiring in July 2007 with monthly rentalpayments of approximately US$2,686.

Pact occupies a 700 square meter facility in Shanghai, pursuant to a 3year lease expiring in March, 2008, providing for a monthly rental ofapproximately US$5,136.

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

## **ITEM5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS**

**Overview**

The Company is primarilya distributor of a wide range of advanced water treatment equipment (includingchlorination equipment), laboratory instruments, analyzers, test kits and 

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related supplies and power generation equipment(including recorders and power quality analyzers).

The Company’s operations are located almost entirelywithin, and revenues are almost entirely generated from Hong Kong and the PRC.The Company derived approximately 16% and approximately 83% of its revenue fromHong Kong and the PRC, respectively in Fiscal 2006. Net income decreasedapproximately US$372,000, or 35.4%, in Fiscal 2006 to US$679,000, compared toUS$1,051,000 in Fiscal 2005, primarily due to the Company’s drop in revenuefrom trading as more and more foreign suppliers and manufacturers sell theirproducts directly in China.

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 Company continued to accept more engineeringprojects in water and waste-water industries and also in power generationindustries.  The Company intends tocontinue its search for acquisition candidates of other firms engaged in engineeringand/or system integration or enter into a joint venture with a third party towork in connection with its process control and engineering department.

### ***Item 5A.   Operating Results***

**Background - Political and Economic Conditions in Hong Kong and thePeople’s Republic of China**

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

| Fiscal Year | ** ** | **PRC** | ** ** | **Hong Kong** |
|-------------|------------|---------|------------|---------------|
| 2004        |       | 78%     |       | 21%           |
| 2005        |       | 80%     |       | 19%           |
| 2006        |       | 83%     |       | 16%           |

 

Sales to customers situated in Macau and elsewhere through Fiscal 2006were nominal. This makes the Company particularly susceptible to changes in thepolitical and economic climate of either Hong Kong or the PRC.

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

**PRC.**   ThePRC has been a socialist state since 1949. For more than forty years, the PRC’seconomy has been, and presently continues to be, a socialist economy operatingunder government controls promulgated under various State Plans adopted bycentral Chinese 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.”

**Results from Operations**

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

The following table presents selected statement of operations dataexpressed in thousands of US$ and as a percentage of revenue for the Company’sfiscal****years indicated below:
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **US$**                                    | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** |
| Revenue                                      |       | 27,161                                     |       | 100 | % | 31,250 |   | 100 | % | 32,282 |   | 100 | % | 27,442 |   | 100 | % | 23,497 |   | 100.0 | % |
| Cost of revenue                              |       | 20,606                                     |       | 75.9 | % | 24,681 |   | 79.0 | % | 27,033 |   | 83.7 | % | 22,805 |   | 83.1 | % | 18,735 |   | 79.7 | % |
| Gross Profit                                 |       | 6,555                                      |       | 24.1 | % | 6,569 |   | 21.0 | % | 5,249 |   | 16.3 | % | 4,637 |   | 16.9 | % | 4,762 |   | 20.3 | % |
| Selling and  administrative Expenses         |       | 5,961                                      |       | 21.9 | % | 5,418 |   | 17.3 | % | 4,801 |   | 14.9 | % | 4,108 |   | 15.0 | % | 4,173 |   | 17.8 | % |
| Income before income  taxes                  |       | 835                                        |       | 3.1 | % | 1,358 |   | 4.3 | % | 569 |   | 1.8 | % | 548 |   | 2.0 | % | 616 |   | 2.6 | % |
| Income taxes                                 |       | 156                                        |       | 0.6 | % | 328 |   | 1.0 | % | 167 |   | 0.5 | % | 108 |   | 0.4 | % | 123 |   | 0.5 | % |
| Share of equity in net  income of affiliates |       | —                                     |       | 0.0 | % | 21 |   | 0.0 | % | 192 |   | 0.6 | % | 91 |   | 0.3 | % | 7 |   | 0.0 | % |
| Net income                                   |       | 679                                        |       | 2.5 | % | 1,051 |   | 3.3 | % | 594 |   | 1.8 | % | 531 |   | 1.9 | % | 500 |   | 2.1 | % |

 

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**FiscalYear ended December 31, 2006 Compared to Fiscal Year Ended December 31, 2005**

*Revenue; Gross Profit and Cost of Revenue.*   Revenuedecreased by approximately 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 of approximately US$4,15,000 fromtrading and manufacturing activities as a greater number of our key orexclusive suppliers have been marketing their products or selling into theChina market, either directly or through distributors other than the Company.  After the Company acquired its majorityinterest in Pact-Yixing in October 2005, Pact-Yixing’s revenues ofapproximately US$ 3,953,000 and US$ 3,662,000 were included in our revenues inFiscal 2006 and Fiscal 2005, respectively.

Gross profits decreasedby approximately US$14,000or 0.2% to approximately US$6,555,000 for Fiscal 2006as compared to approximately US$6,569,000 for Fiscal 2005. During Fiscal 2006, the Company’s cost of revenue wasapproximately 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.

*Selling and Administrative Expenses.*   Sellingand administrative expenses were approximately US$5,961,000 inFiscal 2006, an increase ofapproximately US$543,000 or 10.9% from approximately US$5,418,000 in Fiscal 2005. The increase was principally dueto the inclusion of our share of Yixing-Pact expenses, approximately $568,000for a full year, while the Yixing-Pact expenses of approximately US$122,000,included in Fiscal 2005, were for only a partial year, with Yixing-Pact notbecoming our majority-owned subsidiaries until October 2005.  The selling and administrative expenses fortrading and manufacturing activities decreased slightly as the Companystreamlined operations.

*Equity in Profit of Affiliates.  *Equityin profit of affiliates decreasedby approximately US $21,000 or 100% to approximately US $Nil inFiscal 2006 from approximatelyUS $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.

*Interest Income.*   Interestincome increased by approximately US$60,000or 171.4% to approximately US$95,000 in Fiscal 2006 from approximately US$35,000 for Fiscal 2005. The increase was primarily due tothe increase in bank deposits.

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

*Income Taxes.*   Taxes decreasedby US$172,000 to approximatelyUS$156,000 in Fiscal 2006 from approximately US$328,000 in Fiscal 2005. This decrease was primarily theresult of decreased taxable profits and a decrease of effective tax rates from24.2% in Fiscal 2005 to 18.7% in Fiscal 2006. The decrease in the effective tax rate was principally due to a tax ratedecrease on the net income of Pact-Yixing, as a result of establishing aservice company that paid taxes at a lower rate.

*NetIncome.*   Income from continuing operations decreased byapproximately US$372,000 or 35.4% to approximately US$679,000 in Fiscal 2006 from approximately US$1,051,000 in Fiscal 2005. The decrease was primarily due tothe decrease in revenues from trading activities, partially offset by highergross margin and selling and administrative expense percentages resulting frominclusion of Pact-Yixing’s operating results after October 2005.  Net income attributable to the shareholdersof the Company, after deducting minority interests amounted to US$361,000 andUS$733,000 for Fiscal 2006 and Fiscal 2005, respectively.

**Fiscal Year ended December 31,2005 Compared to Fiscal Year Ended December 31, 2004**

*Revenue; Gross Profit and Cost of Revenue.  *Revenuedecreased by approximately US$1,032,000 or 3.2% to approximately US$31,250,000 in Fiscal 2005 fromapproximately US$32,282,000 in Fiscal 2004. The decrease in revenues included a decrease of approximately US$4,694,000 in revenues from continuingoperations that were primarily due to declining revenues from tradingactivities as a greater number of our key or exclusive suppliers have beenmarketing their products or selling into the China market, either directly orthrough distributors other than the Company. This decrease was partially offset by the inclusion of revenuesapproximately US$3,662,000 from Yixing-Pact for the period after the Companyacquired its majority interest in October 2005 as their results wereconsolidated with the Company’s.

Gross profits increased by approximately US$1,320,000 or 25.1% to approximately US$6,569,000 for Fiscal 2005 as compared to approximately US$5,249,000 for Fiscal 2004. During Fiscal 2005, the Company’s cost of revenue wasapproximately US$24,681,000, or 79% of revenue, in comparison to approximately US$27,033,000, or83.7% of revenue for Fiscal 2004.  Costof revenue expressed as a percentage of revenue decreased by 4.7%in Fiscal 2005 as compared with Fiscal 2004. Gross profits from continuing operations increased by approximatelyUS$310,000 or 5.9% to approximately US$5,539,000 for Fiscal 2005 as compared toapproximately US$5,249,000 for Fiscal 2004. The gross profit margin percentage increase was due principally to anincrease in revenue from our engineering solution business of approximatelyUS$1,113,000, representing an approximately 41% of our gross profitmargin.  Yixing-Pact contributedapproximately US$1,010,000 to our gross profit margin in fiscal 2005.

*Selling and Administrative Expenses.*   Sellingand administrative expenses were approximately US$5,418,000 in Fiscal 2005, an increase of approximately US$617,000or 12.9% 

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from approximately US$4,801,000 in Fiscal 2004. Expenses from continuing operationsincreased approximately US$495,000 principally as a result of employee expensesincreasing as a result of the hiring of additional personnel, incrementalincreases in the salaries of our employees and other expenses resulting fromgeneral inflation.  Yixing-Pact expensesof approximately US$122,000 were included in our expenses for Fiscal 2005.

*Equity in Profit of Affiliates.  *Equityin profit of affiliates decreasedby approximately US$171,000 or 89% to approximately US$21,000 inFiscal 2005 from approximately US$192,000in Fiscal 2004. The decrease inequity in profit of affiliates was principally due to the results of Yixing-Pact being consolidatedafter the Company acquired its majority interest in October 2005.

*Interest Income.*   Interestincome increased by approximately US$18,000 or 105.9% to approximately US$35,000 in Fiscal 2005 fromapproximately US$17,000 for Fiscal 2004. The increase of US$12,000 from ourcontinuing operations was primarily due to the general increase in interestrates for bank deposits during Fiscal 2005. The US$6,000 balance of the increase in interest income was contributedby Yixing-Pact.

*Other Income.*   Other income increased by approximately US$68,000or 65.4% to approximately US$172,000in Fiscal 2005 from approximately US$104,000in Fiscal 2004. The increase in other income was principally due to increase in exchange gain of US$85,000in Fiscal 2005.

*Income Taxes.*   Taxes increased by US$161,000 to approximately US$328,000in Fiscal 2005 from approximately US$167,000 in Fiscal 2004. This increase wasprimarily the result of increased taxable profits.

*NetIncome.*   Income from continuing operations increased by approximately US$457,000or 76.9% to approximatelyUS$1,051,000 in Fiscal 2005 from approximately US$594,000 in Fiscal 2004. TheCompany’s net income, excluding Yixing-Pact’s contribution, was approximatelyUS$381,000 and US$402,000 for Fiscal 2005 and Fiscal 2004, respectively.  The slight decrease of US$21,000 wasprimarily due to the decrease in revenues with the effect on the Company beingcushioned by the increase in revenues from our engineering solution businessthat has a higher gross profit margin. The net income from Yixing-Pact was approximately US$670,000 for Fiscal2005.  The Company recognized equity inprofit of Yixing-Pact of approximately US$192,000 for its 30% share ownershipin Fiscal 2004.  Net income attributableto the shareholders of the Company, after deducting minority interest amountedto US$733,000 and US$594,000 for Fiscal 2005 and Fiscal 2004, respectively.

***Item 5B.****                Liquidity andCapital Resources*

The Company has primarily used its funds to finance accountsreceivable, inventories, and capital expenditures including purchases ofproperty, office furniture and equipment, computers and calibration equipment.The Company has historically met its cash requirements from cash flows fromoperations, short-term borrowings, bank lines of credit, and long-termmortgage bank loans. The Company expects, but can make no assurances that itspresent cash reserves, cash from 

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operations, existing available bank credit facilities and proceeds fromthe issuance of our ordinary shares pursuant to stock option exercises would besufficient to fund its future capital expenditure requirements. Working capitalat the end of Fiscal 2006 and Fiscal 2005 was approximately US$10,267,000 andUS$6,931,000, respectively.

During Fiscal 2005, theCompany used approximately US$258,000 in its operating activities to fund theincrease in accounts receivable, a reduction in the amounts due to relatedcompanies and other payables, that in total, exceeded the funds generated fromnet income and a decrease in inventory. At the end of Fiscal 2006 and Fiscal 2005, the Company’s accountsreceivable were approximately US$4,914,000 and US$5,467,000, respectively.  During Fiscal 2006, the Company generated netcash of approximately US$1,543,000 from its operating activities from netincome, reduction in accounts receivable, and inventories, while funding adecrease in accounts payable and other payables and accrued expenses.

During Fiscal 2006, theCompany used approximately US$352,000 in investing activities.  In Fiscal 2005, the Company generatedapproximately US$72,000from investing activities.  The Companyused approximately US$106,000 and US$110,000 to purchase facilities andequipment in Fiscal 2006 and Fiscal 2005, respectively.  During Fiscal 2005, the Company derivedapproximately US$486,000 from its acquisition of Yixing-Pact. Although the cashconsideration, plus other costs paid by the Company, was US$1,034,000 for****Yixing-Pact, Yixing-Pact had approximately US$1,520,000 incash on hand at the time of their acquisition** **During Fiscal 2006 and Fiscal 2005, theCompany used approximately US$111,000 and US$304,000, respectively, asrestricted cash to issue performance guarantees to its customers through itsbanks.  During Fiscal 2006, Yixing-Pactpaid a dividend of approximately US$135,000 to minority interest shareholders.

The Company receivedapproximately US$2,607,000 and US$306,000, respectively, in Fiscal 2006 andFiscal 2005 from financing activities resulting from the issuance of itsordinary shares being issued on stock options that were exercised. The Companyhad various banking facilities available for overdraft, import and exportcredits and foreign exchange contracts from which the Company can access up toapproximately US$4,167,000 at December 31, 2006. The aforementioned availablecredit facilities were obtained on the conditions that, among other things, theCompany not create a charge or lien on its other assets in favor of thirdparties without such bank’s consent, and the Company maintaining a certainlevel of net worth.

Cash increased fromapproximately US$5,362,000 at the end of Fiscal 2005 to approximatelyUS$9,160,000 at the end of Fiscal 2006. The principal reasons for the increasein cash were the decreases in accounts receivables of approximately US$553,000and inventories of approximately US$704,000, proceeds of approximatelyUS$2,607,000 from the exercise of stock options by Company management andemployees.  However, the Company usedcash to fund its decrease in accounts payable by approximately US$435,000 anddecreases in other payables by approximately US$222,000.** **The Company plans to use cash onhand primarily to acquire a manufacturing plant and/or environmentalengineering company in the PRC and to expand its manufacturing plant and environmentalengineering business.

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The Company’s netaccounts receivable decreased from approximately US$5,467,000 at the end ofFiscal 2005 to approximately US$4,914,000 at the end of Fiscal 2006.  This decrease is principally attributable to a decrease in revenues.

The Company’s inventorydecreased from approximately US$2,732,000 at the end of Fiscal 2005 toapproximately US$2,028,000 at the end of Fiscal 2005. This decrease at the endof Fiscal 2006 was principally due to a general decrease in inventory levels asa result of lowered sales**.**

The Company’s capitalexpenditures were approximately US$110,000 and US$106,000 in Fiscal 2005 andFiscal 2006, respectively. Capital expenditures during Fiscal 2005 and Fiscal2006 were 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 historically funded its working capital, capitalexpenditure, investing and expansions needs from operations, available bankcredit facilities and proceeds from the issuances of our ordinary shares andexpects to continue funding its Fiscal 2007 these requirements from operations,available bank credit facilities and proceeds from the exercise of options. TheCompany may use its funds to acquire other businesses, make equity investments inrelated business, form strategic alliances with third parties, invest inproduct research and development, or expand its sales offices and retail shopsor, with third parties, seek to acquire new products or businesses or formstrategic alliances. The Company expects, but can make no assurances that itspresent cash reserves, cash from operations and existing available bank creditfacilities would be sufficient to fund its future cash requirements.

**Inflation**

The Company believes generally declining rates of inflation in the PRChave had a positive effect on its results from operations.  The Company believes, although no assurancecan be given, that as credit restrictions are gradually lifted, it will be ableto increase prices in the market for its products and thus realize increasedprofit margins.

**CriticalAccounting Policies**

***Revenue Recognition***

Pursuantto the revenue recognition criteria set forth in Securities and ExchangeCommission’s Staff Accounting Bulletin (“SAB”) No. 104: “Revenue Recognition”, theCompany recognizes revenue when it is realized or realizable and earned. TheCompany considers revenue 

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realized or realizable andearned when it has persuasive evidence of an arrangement, the product has beendelivered, the sales price is fixed or determinable and collectibility isreasonably assured. For certain products where installation is necessary,revenue is recognized upon completion of installation.  Revenue earned from customer support, whichrepresents a minor percentage of total revenues, it is recognized when suchservices are provided.

Revenuesand profits in long term fixed price contracts are recorded under thepercentage 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 to date.  Recognized revenue and profit are subject torevisions 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.

***Inventory Valuation***

The Company writes down its inventory for estimatedobsolescence or unmarketable inventory equal to the difference between the costof inventory and the estimated market value based upon assumptions about futuredemand and market conditions. If actual future demand or market conditions areless favorable than those projected by management, additional write-downs maybe required.

***Deferred Taxes***

As part of the process of preparing its consolidatedfinancial statements, the Company is required to estimate its income taxes andtax bases of assets and liabilities in each of the jurisdictions in which itoperates. This process involves the Company estimating its current tax exposuretogether with assessing temporary differences resulting from its differingtreatment of items for tax and accounting purposes. These differences result indeferred tax assets and liabilities, which are included in the Company’sconsolidated balance sheet. The Company must then assess the likelihood thatits deferred tax assets will be recovered from future taxable income, and, tothe extent the Company believes that recovery is more unlikely than likely, itmust establish a valuation allowance. To the extent the Company establishes avaluation allowance or increases this allowance in a period, it must include anexpense within the tax provision in the statement of operations.

*Recent Accounting Pronouncements*

In July 2006, the FASB issued FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes-an interpretation of FASB Statement No. 109*( FIN48).This Interpretation provides guidance for recognizing and measuring uncertaintax positions, as defined in SFAS No. 109, *Accounting for IncomeTaxed*. FIN 48 prescribes a threshold condition that a tax positionmust meet for any of the benefit of the uncertain tax position to be recognizedn the financial statements. Guidance is also provided regarding derecognition,classification and disclosure of these uncertaintax positions.FIN 48 is effective for fiscal years beginning after December 15,2006. We do notexpect that this Interpretation will have a material impact on our financial position, results of operations or cash flows.

In June 2006, the EITF reached consensuson and ratified EITF Issue 06-03,*How Taxes*

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*Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement*(EITF 06-03). The scope of this Issueincludes any tax assessed by a governmental authority that is directly imposedon a revenue-producing transaction between a seller and a customer and mayinclude, but is not limited to, sales, use, value added, and some excise taxes.The Task Force concluded that the presentation of taxes within the scope of theIssue on either a gross (included in revenues and costs ) or a net ( excludedfrom revenues ) basis is an accounting policy decision that should be disclosedpursuant to Opinion 22. In addition, for any such taxes that are reported on agross basis, a company should disclose the amounts of those taxes in interimand annual financial statements for each period for which an income statementis presented if those amounts are significant. The disclosure of those taxescan be done on an aggregate basis. The consensus in this Issue should beapplied to financial reports for interim and annual reporting periods beginningafter December 15, 2006. We believe the adoption of EITF 06-03 will not have a materialimpact on our method for recording and reporting these types of taxes in ourconsolidated financial statements, as the Company’s policy is to exclude allsuch taxes form revenue.

In September 2006, the FASB issued FAS157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishesa framework for measuring fair value in accordance with generally acceptedaccounting principles, and expands disclosures about fair value measurements.The provisions of FAS 157 are effective for the fiscal year beginning afterNovember 15, 2007. We are currently evaluating the impact of the provisions ofFAS 157.

On February 15, 2007, the FASB issued SFASNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities:  Including an amendment ofFAS B Statement No. 115” (“SFAS 159”). SFAS 159 permits all entities to elect to measure many financialinstruments and certain other items at fair value with changes in fair valuereported in earnings.  SFAS 159 iseffective as of the beginning of the first fiscal year that begins afterNovember 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. 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.

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

During Fiscal 2006,Fiscal 2005 and Fiscal 2004, the Company expensed approximately US$55,000,US$48,000 and US$56,000, 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 ofon line water testing equipment during Fiscal 2007.

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

There are increasingdemands in the PRC for clean water, greater industrial pollution controls,waste management and electricity.  Wealso see additional distributors competing with us.  However, given the political situation in thePRC, trends could quickly disappear and we do not know if they will continue inthe future.  We note that, as evidencedby our recent acquisition of Pact-Yixing, we are placing greater emphasis ondeveloping our engineering solution business 

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in an effort to capitalize on these increased demands(clean water, pollution controls and waste 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$276,000 |       | US$200,000                      |       | US$76,000          |       | —             |       | —                  |       |
| Total Contractual Cash Obligations |       | US$276,000 |       | US$200,000                      |       | US$76,000          |       | —             |       | —                  |       |

 

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

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

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

| Name            | ** ** | **Age** | ** ** | **Position**                                                    |
|-----------------|------------|---------|------------|-----------------------------------------------------------------|
| T.C. Leung      |       | 63      |       | Chairman of the Board of Directors and Chief  Executive Officer |
| Jerry Wong      |       | 48      |       | Director and Chief Financial Officer                            |
| Nancy Wong      |       | 58      |       | Director                                                        |
| C.P. Kwan       |       | 48      |       | Director                                                        |
| Alex Sham       |       | 43      |       | Director                                                        |
| Y.K. Liang      |       | 77      |       | Director                                                        |
| Ka Chong Cheang |       | 78      |       | Director                                                        |
| Xu Hong Wang    |       | 39      |       | Director                                                        |
| Li Da Weng      |       | 62      |       | Director                                                        |

 

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Setforth below is a brief background of the executive officers and directors basedupon the information supplied by them to the Company:

**T.C. Leung** has been Chief Executive Officer and Chairman ofthe Board of Directors of both the Company and Far East since their inception.Before establishing Far East, Mr. Leung was an engineer for EnglishElectric in England, from 1965 to 1968, and Lockheed Aircraft in Hong Kong,from 1968 to 1970. Mr. Leung also served as managing director of Eurotherm(Far East) Ltd. between 1971 and 1992. From 1988 until he retired in February2005, Mr. Leung had also served as managing director of Eurotherm HongKong. Mr. Leung received a Masters degree in Business Administra­tion fromthe University of East Asia, Macau in 1986 and is a Chartered Engineer, a titlebestowed upon a member of the Council of Engineering Institutions in the UnitedKingdom.

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

**Nancy Wong** has been a Director of the Company since itsinception and a Director of Far East, and its Personnel Manager, since 1994.Ms. Wong has been with Far East since 1971. Ms. Wong is also Far East’sChief Representative in China. Ms. Wong received a Bachelor of Sciencedegree in Business Adminis­tration from the University of East Asia, Macau in1989.

**C.P. Kwan** joined Far East in 1984 and has served as aDirector and Manager of its Process Equipment Department since 1991.Mr. Kwan has been a Director of the Company since its inception. Beforejoining Far East, he was employed by Haven Automation (H.K.) Ltd., a companyinvolved in the water treatment and process control business between 1981 and1984.  Mr. Kwan received a Masters Degreein Business Administration from the Open University of Hong Kong in 2001.

**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.

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

**Ka ChongCheang** has been aDirector of the Company since December 2005. From 1952 until 1977, he had beenshipping manager for John Swine & Sons (Hong Kong) Ltd., a firm engaged inthe importing and exporting shipping industry. For more than the past five years, Mr. Chong has been a businessconsultant.

**Xu Hong****Wang** has been adirector of the Company since August 2002. Mr. Wang is the East China salesmanager 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**, from 1993 until January 2005, was theGeneral Director of the Yangtze Valley Water Resources Protection Bureau (“YVWRPB”).  He was employed by the YVWRPB in variouspositions, for more than 25 years, before he became the General Director in1993.  Since 2005, he has been theSecretary General of Yangtze Forum, a group of governments, businesses,universities and research institutes meeting on occasion to discuss issues onprotecting and developing the Yangtze River, and since 1994 he has been amember of the Science and Technical Committee of Changjiang Water ResourcesCommission.  Mr. Li Da Weng graduatedfrom Hengyang Mining and Metallurgy College (now known as Nanhua University) in1965 with a Bachelor’s Degree in Analytical Chemistry.  From December 1981 to December 1983, he was avisiting scholar at the Canada’s Centre for Inland Waters, National WaterResearch Institute.

Directorsof the Company serve until the next annual meeting of sharehold­ers of theCompany and until their successors are elected and duly qualified. Officers ofthe Company are elected annually by the Board of Directors and serve at thediscretion of the Board of Directors.

Noneof the Company’s directors, officers or beneficial owners of ten percent ormore of its Common Stock are required to file any reports pursuant to Section16(a) of the Securities Exchange Act of 1934, as amended (the “1934 Act”).

TheCompany had one meeting of its Board of Directors during Fiscal 2006, while itsAudit Committee had six meetings during Fiscal 2006.

Thereare no material legal proceedings involving any director, officer or affiliateof the Company, owner of record or beneficially of more than five percent ofthe Company’s Common Stock or any associate of any of the foregoing.

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**Key Employees**

**GeorgeHayek**, Managing Director. He is the founder of Pact and Yixing and is a civil engineer (1967) andpost-graduate certificate holder in sanitary engineering and environmentalmanagement from the American University of Beirut and the University ofCalifornia at Irvine (in 1971 and 1988, respectively).  Since 1971, he has occupied several key postsin water and waste-water treatment companies in the USA, the UK, Spain, Cyprus,The Middle East, Southeast Asia and the last 12 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 andAmerican multinational industries in the PRC.

**Yvonne Xia** manages Pact andYixing’s Procurement Department, as well as assisting the managing director inmanagement of the various departments. She joined Pact-Yixing at the time of their formation in 1998.  Ms. Xia is an environmental engineeringgraduate from Qing Hua University of Beijing (1989) and an EMBA graduate fromthe Olin School of Management of the Washington University (2003).  She has several positions of increasingresponsibility, including management of engineering, sales, procurement andprojects while with Pact-Yixing.

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

The following table sets forth certain summary information with respectto the compensation paid by the Company and its subsidiaries, for servicesrendered in all capacities to the Company and its subsidiary during Fiscal2006, Fiscal 2005 and Fiscal 2004 to the Chairman of the Board and ChiefExecutive 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.

**SummaryCompensation Table**

| Key Employees                             | ** ** | ** ** | ** ** | ** **            | ** ** | ** **           | ** ** |
|------------------------------------------------|------------|------------|------------|-----------------------|------------|----------------------|------------|
| **Name and Principal Position** | ** ** | **Year**   | ** ** | **Salary (US$)** | ** ** | **Bonus (US$)** | ** ** |
| T.C. Leung, Chairman of  the Board of     |       | 2006       |       | 159,000               |       | —               |       |
| Directors and Chief  Executive Officer         |       | 2005       |       | 162,000               |       | **—**           | ** ** |
|                                                |       | 2004       |       | 100,000               |       | 34,600               |       |
|                                           |       |       |       |                  |       |                 |       |
| George Hayek                                   |       | 2006       |       | 110,000               |       | —               |       |
|                                           |       | 2005       | ** ** | 108,000               |       | **—**           |       |

 

Mr. Hayek is to continue his employment relationshipwith Pact and Yixing for a period of three years ending October 2008, with asalary of US$108,000 per year for 2005, with annual salary increments**. **For 2006, hissalary has been increased to US$110,000.

**Compensation of Directors.**Directors of the Company do not receivecompensation for their services as directors; however, the Board of Directorsmay authorize the payment of compensation to directors for their attendance atregular and annual meetings of the Board and for attendance at meetings ofcommittees of the Board as is customary for similar companies. Directors 

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will be reimbursed for their reasonable out-of-pocketexpenses incurred in connection with their duties to the Company.

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

With the introduction of theMandatory Provident Fund Scheme, a defined contribution scheme managed by anindependent trustee on December 1, 2000, each of the Company and its employeeswho joined the Company subsequently makes monthly contributions to the schemeat 5% of the employee’s cash income as defined under the Mandatory ProvidentFund legislation. Contributions of both the Company and its employees aresubject to a maximum of HK$1,000 per month and thereafter contributions arevoluntary and are not subject to any limitation. The Company and its employeesmade their first contributions in December 2000.

As stipulated by the rulesand regulations in the PRC, the Company contributes to state-sponsoredretirement plans for its employees in the PRC. The Company contributesapproximately 10% 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 plansare responsible for the entire pension obligations payable to retiredemployees.

During the years endedDecember 31, 2006, 2005 and 2004, the aggregate contributions of the Company tothe aforementioned pension plans and retirement benefit schemes wereapproximately US$202.000, US$191,000 and US$166,000, respectively.

**Management Option Plan.****TheCompany had authorized the issuance of Options to purchase up to an aggregateof 4,586,400 Ordinary Shares (the “Management Options”) to its officers,directors and employees as the Company’s Chairman of the Board and ChiefExecutive Officer may direct. The Management Options became exercisable onMarch 14, 1998 and expired on March 14, 2007.

The exercise price and the number of Ordinary Sharespurchasable upon exercise of any Management Options are subject to adjustmentupon the occurrence of certain events, including stock dividends,reclassification, reorganizations, consolidations, mergers, and certainissuances and redemptions of Ordinary Shares and securities convertible into orexchangeable for Ordinary Shares excluding certain issuances of shares. Noadjustments in the exercise price will be required to be made with respect tothe Management Options until cumulative adjustments amount to US$0.05.

In the event of any capital reorganization, certainreclassifications of the Ordinary Shares, any consolidation or merger involvingthe Company (other than (i) a consolidation or merger which does not result inany reclassification or change in the outstanding Ordinary Shares, or (ii) 

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sale of the properties and assets of the Company, as, or substantiallyas, an entirety to any other corporation), Management Options will thereuponbecome exercisable only for the number of shares of stock or other securities,assets, or cash to which a holder of the number of Ordinary Shares of theCompany purchasable (at the time of such reorganization, reclassification,consolidation, merger, or sale) upon exercise of such Management Options wouldhave been entitled upon such reorganization, reclassification, consolidation,merger, or sale.

The table below shows, as to each of the executiveofficers and directors of the Company and as to all executive officers anddirectors of the Company as a group, the following information with respect toManagement Options: (i) the aggregate amounts of Ordinary Shares subject toManagement Options; and (ii) the per share exercise price for the ManagementOptions granted to these individuals at June 2, 2006.

From January 1, 2006 through March 14, 2007, when theManagement Options expired, the following executive officers and directors ofthe Company had exercised the Management Options at prices/price ranges asindicated below.

| 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             |       |

 

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

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

The Board of Directors or a committee (the “Committee”)appointed by the Board of Directors administers the Plans. The Board ofDirectors or the Committee has the authority to interpret the Plans, prescribe,amend and rescind rules and regulations relating to them, determine the termsand provisions of options granted under the Plans (which need not be identical),and make other determinations as it deems necessary and advisable for the

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administration of the Plans. The Board of Directors orthe Committee also has the authority to delegate decisions with respect toOptions granted to key employees under the Employees Plan who are not electedofficers or directors of the Company or its subsidiaries and to delegatedecisions with respect to key employees to the Chief Executive Officer.

Any decision by the Committee or the Chief ExecutiveOfficer to grant an award under the Plans is subject to ratification by theBoard of Directors of the Company. The Board is also to ratify any decisionthat effects the terms or conditions of options awarded to elected officers ordirectors of the Company or its subsidiaries.

In the event that the Ordinary Shares of the Companyare subdivided or consolidated as a result of a reorganization, stock split,payment of a stock dividend, reverse stock split or other change in the Company’scapitalization, the Committee or the Board of Directors has the authority tomake appropriate adjustments in the Ordinary Shares available for issuanceunder the Plans, the number of shares subject to options that may have been ormay be awarded to any participant in any 12 month period, the price, number ofOrdinary Shares or kind of securities subject to outstanding options, or theterms of such options in order to prevent dilution or 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 or the Chief Executive Officer has thediscretion to determine which employees constitute key employees to whomoptions will be awarded under the Employees Plan.

The Committee or Chief Executive Officer, as the casemay be, determines the number of Ordinary Shares subject to options to begranted.

The purchase price per share of the Ordinary Shares tobe paid upon the exercise of the option must be at least 100% of the fairmarket value of an Ordinary Shares on the date on which the option was granted.Under the Plans, if the Ordinary Shares are principally traded on a nationalsecurities exchange or the Nasdaq Stock Market’s National Market or Small CapMarket at the time of grant, the Company is required to use, as fair marketvalue, the average of the closing prices of the Ordinary Shares for the tenconsecutive trading days immediately before the date of grant. If the OrdinaryShares are traded on a national securities exchange or the Nasdaq Stock Market’sNational Market or Small Cap Market, but no closing prices are reported forsuch ten-day period, or if the Ordinary Shares are principally traded in theover-the-counter market, the Company is required to use, as fair market value,the average of the mean between the bid and asked prices reported for the Company’sOrdinary Shares at the close of trading during such ten-day period before thedate of grant. If the Ordinary Shares are traded neither on a nationalsecurities exchange, the Nasdaq Stock Market’s National Market, Small CapMarket nor in the over-the-counter market or if bid and asked prices areotherwise not available, the fair market value of the Ordinary Shares on thedate of grant will be determined in good faith by the Committee or the Board ofDirectors, as the case may be.

The Board of Directors or the Committee, as the casemay be, or, to the extent that such authority has been delegated to the ChiefExecutive Officer, the Chief Executive Officer 

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determines, at the time of grant, when each option granted under thePlans will become exercisable. Notwithstanding the foregoing, all options heldby a key employee of the Company or its subsidiaries become immediatelyexercisable, whether or not exercisable at the time, upon the death ordisability.

No option is to be exercisable more than ten years fromthe date the option is granted.

Payment of Exercise Price for Options.   Underthe Plans, payment for shares purchased upon exercise of an option may be madeby any of the following methods, subject to certain requirements: (1) in cash,paid by either the optionholder or a broker to whom the optionee has tenderedthe option; (2) in Ordinary Shares valued at the fair market value of suchshares on the date of exercise, provided that such shares were held by theoptionholder for not less than six months prior to the date of exercise of theoption; (3) by any other medium of payment that the Board, Committee or theChief Executive Officer, as applicable, has authorized at the time of grant(other than the withholding of shares issuable upon the exercise of options);or (4) by any combination of the preceding methods.

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

·                                          the spouse orlineal descendant of a plan participant;

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

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

·                                          a charitableorganization.

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 by themin settlement of or satisfaction of a judgment entered in any such action, suitor proceeding, except in cases where such a person is adjudged liable for grossnegligence 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 then listed orquoted.

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

|                                                  | ** ** | **Shares Subject**              | ** ** | ** **              | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|
| **Names of Executive**                 | ** ** | **To the (Remaining)**     | ** ** | **Per Share**      | ** ** |
| **Officers and Directors**             | ** ** | **Officers Plans Options** | ** ** | **Exercise Price** | ** ** |
|                                             |       |                                 | ** ** | **(US$)**               | ** ** |
| T.C. Leung                                       |       | 403,000                              | (1)        | 0.5857                  |       |
|                                             |       |                                 |       |                    |       |
| Alex Sham                                        |       | 94,500                               | (2)        | 0.8191                  |       |
|                                             |       |                                 |       |                    |       |
| Nancy Wong                                       |       | 42,000                               | (1)        | 0.5857                  |       |
|                                                  |       | 21,840                               | (2)        | 0.5787                  |       |
|                                                  |       | 23,100                               | (2)        | 0.8191                  |       |
|                                             |       |                                 |       |                    |       |
| C.P. Kwan                                        |       | 42,000                               | (1)        | 0.5857                  |       |
|                                                  |       | 16,380                               | (2)        | 0.5787                  |       |
|                                                  |       | 22,680                               | (2)        | 0.8191                  |       |
|                                             |       |                                 |       |                    |       |
| Xu Hong Wang                                     |       | 32,000                               | (1)        | 0.5857                  |       |
|                                                  |       | 10,920                               | (3)        | 0.5787                  |       |
|                                                  |       | 31,500                               | (3)        | 0.8191                  |       |
|                                             |       |                                 |       |                    |       |
| All executive officers and Directors  as a group |       | 739,920                              |       | 0.5787 — 0.8191    | (4)        |

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(1)             Granted pursuant tothe 2002 Officers and Directors Plan.

(2)             Granted pursuant tothe 2000 Officers and Directors Plan.

(3)             Granted pursuant tothe 2000 Employees Plan.

(4)             Pricerange.

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.

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As of December 31, 2006, 736,680 options had been exercised,including 300,300 options and 205,800 options exercised by Mr.Leung at prices of US$0.5857 andUS$0.8191 per share,respectively.

The Company has set forthin this Report all required disclosure of additional compensation to itsexecutive officers and directors including personal benefits and securities orproperties paid or distributed which was not offered on the same terms to allfull time employees during Fiscal 2006.

Changes in outstanding optionsunder various plans mentioned above were as follows:
| ** **                      | ** ** | **As of  December 31,**     | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **2006**                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **Number of  Options** | ** ** | **Weighted  average  exercise   price** | ** ** | **Number of  options** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number of  Options** | ** ** | **Weighted  average  exercise  price US$** | ** ** |
| Outstanding, beginning  of year |       | 5,978,806                   |       | 1.31 |   | 6,724,042 |   | 1.26 |   | 6,862,632 |   | 1.24 |   |
| Granted                         |       | 55,000                      |       | 2.91 |   | — |   | — |   | 46,000 |   | 1.68 |   |
| Cancelled                       |       | (46,620                     | )          | (1.13 | ) | (104,706 | ) | (1.16 | ) | (184,590 | ) | (0.93 | ) |
| Exercised                       |       | (2,048,890                  | )          | (1.33 | ) | (640,530 | ) | (0.78 | ) | — |   | — |   |
| Outstanding, end of  year       |       | 3,938,296                   |       | 1.32 |   | 5,978,806 |   | 1.31 |   | 6,724,042 |   | 1.26 |   |
|                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable, end of  year       |       | 3,923,296                   |       | 1.32 |   | 5,978,806 |   | 1.31 |   | 6,724,042 |   | 1.26 |   |

As of December 31, 2006,the options outstanding and exercisable had exercise prices in the range ofUS$0.5787 to US$3.33 and a weighted average unexpired life of approximately 1.9years.

On January 1, 2006, the Group adopted the provisionsof Statement 123 (revised 2004) (Statement 123(R), Share-Based Payment, whichrevises Statement 123, Accounting for Stock-Based Compensation using themodified prospective application transition method, and supersedes APB Opinion25, Accounting for Stock Issued to Employees. Statement 123(R) requires us to recognize expense related to the fairvalue of our stock-based compensation awards, including employee stock options.

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Prior to the adoption of Statement 123(R), the Groupaccounted for stock-based compensation awards using the intrinsic value methodof Opinion 25.  Pro forma informationregarding net income and earnings per share is required by SFAS No. 123, andhas been determined as if the Company had accounted for its employee stockoptions under the fair value method of SFAS No. 123.  The weighted average fair value of stockoptions at date of grant of $1.44 per option for the year ended December 31,2004, were estimated using the Black-Scholes option pricing model with thefollowing assumptions.  There were nooptions granted during the year ended December 31, 2005.

|                                 | ** ** | **2004**  | ** ** |
|---------------------------------|------------|-----------|------------|
| Risk-free interest rate         |       | 2.88      | %          |
| Expected dividend yield         |       | 0         | %          |
| Expected option life            |       | 2.3 years |       |
| Expected stock price volatility |       | 208       | %          |

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

Had compensation expense for the Company’s stock-basedcompensation plan been recognized based on the fair value of the options on thegrant date in accordance with SFAS No. 123, the Company’s pro forma net incomeand earnings per common share would have been as follows:
| ** **                                                                           | ** ** | **As of December 31,**                                                                                         | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                                                                                       | ** ** | **2004** | ** ** |
| ** **                                                                           | ** ** | **US$**                                                                                                        | ** ** | **US$** | ** ** |
| ** **                                                                           | ** ** | **(amounts expressed in thousands, except share  and per share date)** | ** ** |
| Net income as reported                                                               |       | 733                                                                                                            |       | 594 |   |
| Less: Stock  compensation expense determined under the fair value method, net of tax |       | (39                                                                                                            | )          | (27 | ) |
|                                                                                 |       |                                                                                                           |       |   |   |
| Pro forma net income                                                                 |       | 694                                                                                                            |       | 567 |   |
|                                                                                 |       |                                                                                                           |       |   |   |
| Income per share:                                                                    |       |                                                                                                           |       |   |   |
|                                                                                 |       |                                                                                                           |       |   |   |
| Basic, as reported                                                                   |       | US$0.11                                                                                                        |       | US$0.09 |   |
|                                                                                 |       |                                                                                                           |       |   |   |
| Diluted, as reported                                                                 |       | US$0.07                                                                                                        |       | US$0.06 |   |
|                                                                                 |       |                                                                                                           |       |   |   |
| Basic, pro forma                                                                     |       | US$0.11                                                                                                        |       | US$0.09 |   |
|                                                                                 |       |                                                                                                           |       |   |   |
| Diluted, pro forma                                                                   |       | US$0.07                                                                                                        |       | US$0.06 |   |

###  

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***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 this year.Of the Company’s nine directors, all were elected at the Company’s last annualmeeting of shareholders in August 2006.

The Board has a standing Audit Committee to assist theBoard in carrying out its duties. The Audit Committee has a written charterapproved by the Board. The chair of the Audit Committee determines the meetingagenda of the Audit Committee. The Audit Committee members receive materials inadvance of Committee meetings allowing them to prepare for the meeting.

During Fiscal 2006, the Audit Committee met six times,being attended by all members.

The Audit Committee assists the Board in monitoringthe Company’s financial accounting, controls, planning and reporting. Among itsduties, the Audit Committee:

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

·                                          reviews the adequacy of the Company’s internalcontrols;

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

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

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

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

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

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

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

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

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

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

The Company (exclusive ofYixing-Pact) has approximately 158 full-time employees. At December 31,2006, 2005 and 2004, staffing levels were approximately as follows:
| ** **                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Marketing and sales       |       | 71       |       | 76       |       | 72       |       |
| Administrative            |       | 55       |       | 59       |       | 53       |       |
| Technical                 |       | 32       |       | 45       |       | 37       |       |
| Total full time employees |       | 158      |       | 180      |       | 162      |       |

Pactand Yixing have approximately 30 full-time employees.  At December 31, 2006 and 2005, respectively,staffing levels were approximately as follows:
| ** **             | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Engineers              |       | 24       |       | 21       |       |
| Administrative Persons |       | 11       |       | 9        |       |

The Company’s management consists of its officers and directors.

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

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

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

**ITEM 7.**                    MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS

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

The following table setsforth, as of June 1, 2007, certain information concerning beneficial ownershipof the Company’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:
| ** **                                                                         | ** ** | **Amount and  Nature of  Beneficial  Ownership(3)** | ** ** | **Approximate  Percentage  Of Ordinary  Shares Owned (4)** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| T.C. Leung  (1)(2)                                                                 |       | 6,118,575                                                     |       | 51.8                                                                      | %          |
| Pearl Venture  Ltd.(1)(2)                                                          |       | 1,476,175                                                     |       | 12.9                                                                      | %          |
| Alex Sham(1)(3)                                                                    |       | 342,300                                                       |       | 3.0                                                                       | %          |
| Jerry Wong(1)(3)                                                                   |       | 191,766                                                       |       | 1.7                                                                       | %          |
| Nancy Wong(1)(3)                                                                   |       | 86,940                                                        |       | 0.8                                                                       | %          |
| C.P. Kwan(1)(3)                                                                    |       | 164,606                                                       |       | 1.4                                                                       | %          |
| Y.K. Liang(1)                                                                      |       | *                                                             |       | *                                                                         |       |
| Xu Hong Wang(1)(3)                                                                 |       | 84,420                                                        |       | 0.7                                                                       | %          |
| Ka Chong Cheang(1)                                                                 |       | *                                                             |       | *                                                                         |       |
| Li Da Weng(1)                                                                      |       | *                                                             |       | *                                                                         |       |
| All Executive Officers  And Directors of the Company as a group (9 persons)(2) (3) |       | 6,988,606                                                     |       | 57.6                                                                      | %          |

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*                            DenotesNil.

(1)                     The addressfor the Company’s officers and directors is c/o Euro Tech (Far East) Ltd., 18/FGee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong.  The address for Pearl is Columbus CentreBuilding, Wichhams Cay, Road Town, Tortola, British Virgin Islands.

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

(3)                                  Giveseffect to the exercise of the 2000 Officers and Directors Plan, 2000 EmployeesPlan and 2002 Officers and Directors Plan Options owned of record by suchpersons and which have vested or will vest within six (6) months of the date ofthis Report. See Item 6B. “Compensation.”

(4)                                  Calculatedon the basis of 11,399,757 Ordinary Shares issued and outstanding on June 1,2007.

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

The related companies with which the Company hasengaged in material transactions are Eurotherm and Armtison Limited (“Armtison”)and Patwin Inc. (“Patwin”).

During Fiscal 2004, the Company made sales toEurotherm of approximately US$27,000.

During Fiscal 2005 and 2004, the Company made purchases from Eurothermof approximately US$242,000 and US$7,503,000, respectively.

Additionally, during Fiscal 2005 and 2004, the Companypaid approximately US$11,000 and US$25,000, respectively to Armtison for officespace rentals, and for Fiscal 2005 and 2004, paid Eurotherm approximately US$4,000 and US$29,000, respectively,in management fees to assist in the management of some of the Company’s PRCoffices while the Company earned approximately US$2,000 and US$30,000 fromEurotherm for office space rentals during Fiscal 2005 and 2004, respectively.

The payments to Armtison and Eurotherm were based onactual office space usage and the time cost of personnel used, respectively.

During Fiscal 2005 and 2004, the Company receivedmanagement fees of US$2,000 and US$9,000 from Armiston for accounting andadministrative services.

The Company also paid approximately US$18,000 andUS$30,000 in management fees to Patwin to represent the Company in the United Statesfor each of Fiscal 2005 and 2004, respectively.

T.C. Leung, the Company’s Chairman of the Board andChief Executive Officer was also a director of Eurotherm until he retired from that position in February 2005.

Patwin is beneficially owned by the brother of T.C.Leung.

***Item 7C.****                Interest ofExperts and Counsel*

Not applicable.

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**ITEM 8.**                    FINANCIALINFORMATION

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

Item 8A.1          See Item 18.

Item 8A.2          See Item 18.

Item 8A.3          See Report of Independent RegisteredPublic Accounting Firms, pages F-2 and F-3.

Item 8A.4          We have complied with thisrequirement.

Item 8A.5          Not applicable.

Item 8A.6          Not applicable.

Item 8A.7          Legal Proceedings.

The Company is not aparty to any material legal proceedings.

Item 8A.8          Dividend Policy.

The Company has not paid cash dividends to date. Thepayment of cash dividends, if any, in the future is within the discretion ofthe Board of Directors. The payment of cash dividends, if any, in the futurewill depend upon the Company’s earnings, capital requirements and financialconditions and other relevant factors. The Company’s Board of Directors doesnot presently intend to declare any cash dividends in the foreseeable future,but instead intends to retain all earnings, if any, for use in the Company andFar East’s business operations.

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

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

**ITEM 9.**                 THE OFFERING ANDLISTING

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

The Company has one class of securities presentlyregistered: Ordinary Shares. These securities are presently traded on theNASDAQ SmallCap Market under the trading symbols “CLWT”, and have so tradedsince the Company’s Public Offering in March 1997.

The following prices are not adjusted to reflect stockdividends of 40% and 50% issued in September 2003 and August 2004,respectively.

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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$** | ** ** | **US$**  | ** ** |
| 2002                                        |       | 0.5786  |       | 1.3707   |       |
| 2003                                        |       | 0.650   |       | 3.7143   |       |
| 2004                                        |       | 0.933   |       | 7.327    |       |
| 2005                                        |       | 2.700   |       | 6.590    |       |
| 2006                                        |       | 1.680   |       | 5.740    |       |

 
| **Quarters Ended** | ** ** | **Low** | ** ** | **High** | ** ** |
|-------------------------|------------|---------|------------|----------|------------|
| ** **              | ** ** | **US$** | ** ** | **US$**  | ** ** |
| June 30, 2005           |       | 2.700   |       | 4.900    |       |
| September 30,  2005     |       | 3.300   |       | 6.590    |       |
| December 31,  2005      |       | 3.050   |       | 4.850    |       |
| March 31, 2006          |       | 3.250   |       | 3.800    |       |
| 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    |       |

 
| **The Following Months** | ** ** | **Low** | ** ** | **High** | ** ** |
|------------------------------------|------------|---------|------------|----------|------------|
| ** **                         | ** ** | **US$** | ** ** | **US$**  | ** ** |
| January 2007                       |       | 3.140   |       | 4.520    |       |
| February 2007                      |       | 2.710   |       | 3.450    |       |
| March 2007                         |       | 2.450   |       | 3.170    |       |
| April 2007                         |       | 2.650   |       | 3.700    |       |
| May 2007                           |       | 2.600   |       | 3.190    |       |

The Ordinary Shares wereheld by approximately 46 holders of record as of June 12, 2007 Based uponinformation received from broker-dealers, clearing firms and others, theCompany believes that it has approximately 1,700 beneficial shareholders of itsOrdinary Shares.

***Item 9B.****                Plan ofDistribution*

NotApplicable.

***Item 9C.****                Markets*

SeeItem 9A.  “Listing Details.”

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***Item 9D.****                SellingShareholders*

Not Applicable.

***Item 9E.****                Dilution*

NotApplicable.

***Item 9F.****                Expenses Of TheIssue*

NotApplicable.

**ITEM 10.**             ADDITIONALINFORMATION

***Item 10A.****         Share Capital*

**Authorized Capital**.The authorized capital of the Company is US$250,000 comprised of 20,000,000Ordinary Shares and 5,000,000 shares of Preferred Stock. As of December 31,2006, there were 9,034,541 Ordinary Shares and no shares of Preferred Stock,issued and outstanding. An additional approximately 341**,**000Ordinary Shares were repurchased by the Company as treasury stock and arenon-voting. All of the Company’s shares of capital stock have a par value ofUS$0.01 per share.

Holders of the Company’sOrdinary Shares are entitled to one vote for each whole share on all matters tobe voted upon by shareholders, including the election of directors. Holders ofOrdinary Shares do not have cumulative voting rights in the election ofdirectors. All shares of Ordinary Shares are equal to each other with respectto liquidation and dividend rights. Holders of Ordinary Shares are entitled toreceive dividends if and when declared by the Company’s Board of Directors outof funds legally available under British Virgin Islands law. In the event ofthe liquidation of the Company, all assets available for distribution to theholders of Ordinary Shares are distributable among them according to theirrespective share holdings. Holders of Ordinary Shares have no preemptive rightsto purchase any additional, unmissed shares of Ordinary Shares. All of theoutstanding shares of Ordinary Shares of the Company are duly authorized,validly issued, fully paid and non-assessable.

Pursuant to the Company’sMemorandum and Articles of Association and pursuant to the laws of the BritishVirgin Islands, the Company’s Memorandum and Articles of Association may beamended by a resolution of the Board of Directors without shareholder approval.This includes amendments to increase or reduce the authorized capital stock ofthe Company or to increase or reduce the par value of its shares. The abilityof the Company to amend its Memorandum and Articles of Association withoutshareholder approval could have the effect of delaying, deterring or preventinga change in control of the Company without any further action by theshareholders including but not limited to, a tender offer to purchase theCommon Stock at a premium over then current market prices.

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Under United States law, majority and controllingshareholders generally have certain “fiduciary” responsibilities to theminority shareholders. Shareholder action must be taken in good faith andactions by controlling shareholders which are obviously unreasonable may bedeclared null and void. The British Virgin Islands law protecting the interestsof the minority shareholders is not as protective in all circumstances as thelaw protecting minority shareholders in United States jurisdictions. WhileBritish Virgin Islands law does not permit a shareholder of a British VirginIslands company to sue its directors derivatively, i.e., in the name ofand for the benefit of the Company, and to sue the Company and its directorsfor his benefit and the benefit of others similarly situated, the circumstancesin which 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 furthershareholder action, may issue shares of Preferred Stock in any number of seriesand may establish as to each such series the designation and number of sharesto be issued and the relative rights and preferences of the shares of eachseries, including provisions regarding voting powers, redemption, dividendrights, rights upon liquidation and conversion rights. The issuance of sharesof Preferred Stock by the Board of Directors could adversely effect the rightsof holders of Ordinary Shares by, among other matters, establishingpreferential dividends, liquidation rights and voting power. The Company hasnot issued any shares of Preferred Stock and has no present intention to issueshares of Preferred Stock. The issuance thereof could discourage or defeatefforts to acquire control of the Company through acquisition of OrdinaryShares.

***Item 10B.****         Memorandum and Articlesof 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.**   TheCompany maintains a share register at its registered office in the BVI. TheCompany’s registered number is 200960. The objects of the Company are to engagein any act or activity that is not prohibited under any law of the BVI. SeeRegulation 4(1) of the Articles. Under the Articles, the Company is notrequired to treat the holder of a registered share in the Company as ashareholder until that person’s name has been entered in the share register.The holders of Ordinary Shares have one vote for each Ordinary Share held ofrecord. The holders of Preferred Shares have such voting powers, full orlimited, or no voting powers and such restrictions as may be stated andexpressed in the resolution providing for the issuance of the Preferred Shares.

**Shareholders Meeting.**   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. Thedirectors must give not less than seven days notice 

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of meetings of shareholders to those persons whose names on the date ofthe notice is given appear as shareholders in the share register of the Companyand are entitled to vote at the meeting. The directors may fix the date noticeis given of a meeting of shareholders as the record date for determining thoseshares that are entitled to vote at the meeting.

The inadvertent failure of the directors to givenotice of a meeting to a shareholder, or the fact that a shareholder has notreceived notice, does not invalidate the meeting. A shareholder may berepresented at a meeting of shareholders by a proxy who may speak and vote onbehalf of the shareholder.

A shareholder may participate at a meeting ofshareholders by telephone or other electronic means, as long as allshareholders participating in the meeting are able to hear each other.

A meeting of shareholders is duly constituted if, atthe commencement of the meeting, there are present in person or by proxy notless than fifty (50%) percent of the votes of the shares or class series ofshares entitled to vote on resolutions of shareholders to be considered at themeeting.

If a quorum is not present, the meeting, if convenedupon the requisition of shareholders, shall be dissolved; in any other case itshall stand adjourned to the next business day at the same time and place or tosuch other time and place as the directors may determine, and if at theadjourned meeting there are present in person or by proxy not less than onethird of the votes of the shares or each class or series of shares entitled tovote on the resolutions to be considered by the meeting, those present shallconstitute a quorum but otherwise the meeting shall be dissolved.

At every meeting of shareholders, the chairman of theboard of directors shall preside as chairman of the meeting.

The chairman may, with the consent of the meeting,adjourn any meeting from time to time, and from place to place, but no businessshall be transacted at any adjourned meeting other than the business leftunfinished at the meeting from which the adjournment took place.

At any meeting of the shareholders the chairman shallbe responsible for deciding in such manner as he shall consider appropriatewhether any resolution has been carried or not ant the result of his decisionshall be announced to the meeting and recorded in the minutes thereof.

Any action that may be taken by the shareholders at ameeting may also be taken by a resolution of shareholders consented to inwriting or by written electronic communication, without the need for anynotice, but if not a unanimous writing, a copy of such resolution shall be sentto all non-consenting shareholders.

**Net Profits and Dividends.**   Under BVI law, dividends may only bedeclared and paid by an International Business Company (which the Company isclassified as under BVI law) out of surplus, such that after payment ofdividends such company must be able to satisfy its liabilities as they becomedue in the ordinary course of business and the realizable value of the assetsof such 

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company must not be less than the sum of itsliabilities (other than deferred taxes and capital). There are no other BVIrestrictions regarding dividends.

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

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

**Conflictof Interests.  **No agreement or transaction between theCompany and one or more of its directors or any person in which any directorhas a financial interest or to whom any director is related, including as adirector of that other person, is void and avoidable for this reason only, orby reason only that the director is present at the meeting of directors, or atthe meeting of the committee of directors that approves the agreement ortransaction, or that the vote or consent of the director is counted for thatpurpose, if the material facts of the interest of each director in theagreement or transaction and his interest in or relationship to any other partyto the agreement or transaction are disclosed in good faith, or are known bythe other directors. A director who has an interest in any particular businessto be considered at a meeting of directors or shareholders may be counted forpurposes of determining whether the meeting is 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)           the subscription agreement for theissue of the shares,

the Company may not purchase, redeem or otherwise acquire its ownshares without the consent of shareholders whose shares are to be purchased,redeemed or otherwise acquired.

Generally, no purchase, redemption or otheracquisition of shares shall be made unless the directors determine thatimmediately after purchase, redemption or other acquisition the Company will beable to satisfy its liabilities as they become due in the ordinary course ofits business and the realizable value of the assets of the Company will not beless than the sum of its total liabilities, other than deferred taxes, as shownin the books of account, and its capital and, in the absence of fraud, thedecision of the directors as to the realizable value of the assets of theCompany is conclusive, unless a question of law is involved.

**Notices.**   Any notice,information or written statement to be given by the Company to shareholders maybe served, in the case of shareholders holding registered shares in any way bywhich it can reasonably be expected to reach each shareholder or by mailaddressed to each

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shareholder at the address shown in the share register and in the caseof shareholders holdings shares issued to bearer, in the manner provided in theMemorandum of Association.

**Purpose, Duration, Liquidation, Merger.**   TheCompany is empowered under BVI law and its Memorandum of Association to engagein any act or activity that is not prohibited under any law in the BVI. TheCompany shall continue until wound-up and dissolved by a resolution ofshareholders, or under the terms of any insolvency or liquidation laws in forcein the BVI. Under BVI law the Company may merge with another company, includinga parent company or subsidiary, incorporated in the BVI, or in a jurisdictionoutside of the BVI where the laws of that jurisdiction permit the merger. Amerger must be authorized by the directors of the Company and approved by theshareholders.

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

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

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

During Fiscal 2005, the Company agreed to and didacquire 21% of the capital stock of each of Pact and Yixing from Tamworth.  As part of the agreements with Tamworth,Tamworth and Far East each granted to the other a right of first refusal shouldeither elect to sell some or all of their shares to a third party at the sameprice and with the same conditions as that offered by the third party.

Far East also granted Tamworth a three-year put optionrequiring Far East to acquire part of all of the remaining shares of Pact ownedby Tamworth.  The acquisition price foreach remaining share is to be based on the following formula:

5.2 times theAverage Net Profit of the latest 3 years of Pact*[Divided By]*The Total Number of Shares Outstanding

Similarly, FarEast also granted Tamworth a three-year put option requiring Far East toacquire all remaining securities of Yixing held by Tamworth at 5.2 times ofYixing’s net profit for the three prior fiscal years.

As part of the foregoing agreements, Mr. George Hayekis to continue his employment relationship with Pact and Yixing.  See Item 11, “Executive Compensation.”  Mr. Hayek is the majority shareholder ofTamworth.  Also, as a substantial portionof Yixing’s income is derived from sales to a Middle East company that Mr.Hayek owns a beneficial interest in, Mr. Hayek is required to, and did,disclose the pricing policy for sales to that Middle East company and thispolicy has been adopted for future sales to the Middle East company.

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

There are no exchange control restrictions on payment of dividends onthe Company’s Ordinary Shares or on the conduct of the Company’s operationseither in Hong Kong, where the Company’s principal executive offices arelocated, or the British Virgin Islands, where the Company is incorporated.There are no British Virgin Islands laws which impose foreign exchange controlson the Company or that effect the payment of dividends, interest, or otherpayments to non-resident holders of the Company’s securities. BritishVirgin Islands laws and the Company’s Memorandum and Articles of Associationimpose no limitations on the right of non-resident or foreign owners tohold the Company’s securities or vote the Company’s Ordinary Shares. The PRCgovernment has established a unified exchange rate system and system ofexchange controls to which the Company is subject.

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

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

The Company’s subsidiaries organized in Hong Kong, Far East, Euro Tech(China) Limited and ChinaH2O.com Limited, provide for Hong Kong profits tax ata rate of 17.5% on the basis of their income for financial reporting purposes,adjusting for income and expense items which are not assessable or deductiblefor profits tax purposes. Hong Kong levies no capital gains or dividends tax.

Euro Tech Trading (Shanghai) Limited, a subsidiary of the Company,provides for PRC Enterprise Income Tax at a rate of 15%, after offsettinglosses brought forward, if any, on the basis of its income for financingreporting purposes, adjusting for income and expense items which are notassessable or deductible for PRC Enterprise Income Tax purposes.

In accordance with the relevant income tax laws and regulations applicableto foreign investment enterprises in the PRC, Shanghai Euro Tech Limited (“SET”),a subsidiary of the Company, is exempt from 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, 2006, SET remained exempt from the PRCenterprise income tax.

VIEs of the Group provide for PRC Enterprise Income Tax at a rate of33%, 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.

As of December 31, 2006, certain VIEs had aggregated assessable lossescarried forward of US$143,318 as agreed by the local tax authority.

The Company’s effective tax rates for Fiscal 2006,Fiscal 2005 and Fiscal 2004 were 18.7%, 24.2% and 29.3%, respectively. Weightedaverage statutory tax rates of 14.3%, 23% and 20.8% were in effect for Fiscal2006, Fiscal 2005 and Fiscal 2004, respectively. Principal

66

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adjustments to this statutory tax rate were valuationallowances of 5.5%, 0.3% and 7.0% during Fiscal 2006, Fiscal 2005 and Fiscal2004, respectively.

In 2003, Hong Kong changed the profits tax rate from 16% to 17.5% forthe fiscal year ended 2003/2004. PRC Enterprise Income Tax applied at 15% forEuro Tech Trading (Shanghai) Limited, a subsidiary incorporated in the PRC, forthe year ended December 31, 2005. Accumulated tax losses of Shanghai Euro TechLimited, another subsidiary incorporated in the PRC, available to offsetagainst future profit were US$305,975and US$208,525, respectively, during Fiscal 2006 and 2005.

***Item 10F.****         Dividends And PayingAgents*

Not applicable.

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

Not applicable.

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

Thedocuments that are exhibits to or incorporated by reference in this annualreport can be read at the U.S. Securities and Exchange Commission’s publicreference facilities at 100 F Street, N.E., Washington, DC 20549-2001 or on theCommission’s website: www.sec.gov.

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

Not applicable.

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

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

*Foreign Currency Risks*

The Company is exposed torisk from changing foreign currency exchange rates. The Company’s sales aredenominated either in HK dollar or RMB. The majority of the Company’s expensesand cost of revenue are denominated in HK dollars, followed by RMB, US dollars,Japanese yen and the Euro. The Company is subject to a variety of risksassociated with changes among the relative value of the US dollar, HK dollar,  RMB, Japanese yen and the Euro. The Companydoes not currently adequately hedge its foreign exchange positions. Anymaterial increase in the value of the HK dollar, RMB, Japanese yen and the Eurorelative to the US dollar would increase the Company’s expenses and cost ofrevenue and therefore would have a material adverse effect on the Company’sbusiness, financial condition and results of operations.

67

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*Inflation*

The Company cannot accurately determine the preciseeffect of inflation on its operations, it does not believe inflation has had amaterial effect on sales or results of operations during the past severalyears.

The Company is currently not exposed to materialfuture earnings or cash flow exposures from changes in interest rates on debtobligations as the Company had no bank indebtedness in Fiscal 2006.**** The Company does notcurrently anticipate entering into interest rate swaps and/or similarinstruments.

**ITEM 12.**             DESCRIPTION OFSECURITIES OTHER THAN EQUITY SECURITIES

Notapplicable

68

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**PART II**

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

None.

**ITEM 14.**             MATERIAL MODIFICATIONTO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not Applicable.

**ITEM 15.**             CONTROLS ANDPROCEDURES

(a)           Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer andChief Financial Officer have evaluated the effectiveness of our disclosurecontrols and procedures, as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, as of the end of the period covered by thisreport (the “Evaluation Date”). Based on such evaluation, such officers haveconcluded that, as of the Evaluation Date, our disclosure controls andprocedures are effective in relating to us, including our consolidatedsubsidiaries, that is required to be included in our reports filed or submittedunder the Exchange Act.

The Company’s management,including the Chief Executive Officer and Chief Financial Officer, does notexpect that our disclosure controls and procedures or our internal controlswill prevent all error and all fraud. A control system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the control system are met. Further, the designof a control system must reflect the fact that there are resource constraints,and the benefits of controls must be considered relative to their costs.

(b)           Changes in Internal Controls

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

**ITEM 16.**             [RESERVED]

***Item 16A.****         Audit Committee FinancialExpert*

The Committee includes one non-employee director whomeets the independence and “financial expert” requirements and two othermembers who meet the independence requirements of the NASDAQ listing standardsand the rules and regulations of U.S. Securities and Exchange Commission.  The Committee includes Messrs. Y.K. Liang and****Ka Chong Cheang and Li Da Weng.  Mr. Y.K. Liang is the “financial expert” onthat committee.

69

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

Our board of directors has adopted a code of businessconduct and ethics that applies to our directors, officers and employees,including certain provisions that specifically apply to our chief executiveofficer, chief financial officer and any other persons who perform similarfunctions for us.  The Company agrees toundertake to provide to any person without charge, a copy of our code ofbusiness conduct and ethics within ten working days after we receive suchperson’s written request.

***Item 16C.****         Principal Accountant FeesAnd Services*

The following table setsforth the aggregate fees by categories specified below in connection withcertain professional services rendered by PricewaterhouseCoopers who were ourprincipal external auditors for 2004, BDO McCabe Lo Limited for 2005 and 2006.
| ** **             | ** ** | **For the Year Ended December, 31** | ** ** |
|------------------------|------------|--------------------------------------------------------------|------------|
| ** **             | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **             | ** ** | **US$**                                                      | ** ** | **US$** | ** ** | **US$** | ** ** |
| Audit fees(1)          |       | 109,000                                                      |       | 103,500 |   | 127,000 |   |
|                   |       |                                                         |       |   |   |   |   |
| Audit-related  fees(2) |       | NIL                                                          |       | Nil |   | Nil |   |
|                   |       |                                                         |       |   |   |   |   |
| Tax fees(3)            |       | 6,000                                                        |       | 6,000 |   | 3,300 |   |
|                   |       |                                                         |       |   |   |   |   |
| All other fees         |       | NIL                                                          |       | NIL |   | Nil |   |

 

Our Audit Committee has adopted a pre-approval policyfor the engagement of our independent accountant to perform permitted audit andnon-audit services. Under this policy, which is designed to assure that suchengagements do not impair the independence of our auditors, the Audit Committeepre-approves annually a range of specific audit and non-audit services in thecategories of Audit Service, Audit-Related Services, Tax Services and otherservices that may be performed by our independent accountants, and the maximumpre-approved fees that may be paid as compensation for each pre-approvedservice in those categories. Any proposed services exceeding the maximumpre-approved fees require specific approval by the Audit Committee.

----

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

(2)             “Audit-relatedfees” means the aggregate fees billed in each of the fiscal years listed forassurance and related services by our principal auditors that are reasonablyrelated to the performance of the audit or review of our financial statementsand are not reported under “Audit fees.” Services comprising the fees disclosedunder the category of “Audit-related fees” involve principally the performanceof certain agreed upon procedures for the years ended December 31, 2004, 2005and 2006, 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.

70

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

The Company is a “Controlled Company” as defined inNASDAQ’s corporate governance rules as a majority of our shares are owned by a “controlgroup” consisting of T.C. Leung, Pearl Venture Ltd. and Regent EarningsLimited, who have disclosed their “control group” status in their filings withthe Commission.  So long as that “controlledcompany” status remains in effect, the Company will be exempt from certain ofNASDAQ corporate governance rules that, including among other things, wouldrequire: (a) a majority of our directors be independent; (b) the compensationof our chief executive officer be determined or recommended by independentdirectors; and (c) director nominations be determined or recommended byindependent directors.

The Company believes it is in compliance with NASDAQ’scorporate governance rules as in effect and intends to comply with the changesto said rules no later than the date that they become effective.

*[Remainderof Page Intentionally Left Blank]*

71

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**PART III**

**ITEM 17.**             FINANCIAL STATEMENTS

Not applicable.

**ITEM 18.**             FINANCIAL STATEMENTS

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

Index to consolidated financialstatements

Reports of IndependentRegistered Public Accounting Firms

Consolidated balance sheets

Consolidated income statements

Consolidated cash flowstatements

Consolidated statement ofchanges in shareholders’ equity

Notes to the consolidatedfinancial 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)                                      |
|        |       |                                                                                                          |
| 4.2         |       | Management Stock Option Plan(1)                                                                               |   |   |
|        |       |                                                                                                          |   |   |
| 4.3         |       | Agreement with Shanghai Institute of Optics  Instruments(2)                                                   |
|        |       |                                                                                                          |
| 4.4         |       | Agreement with Hach Company, Inc.(2)                                                                          |   |   |
|        |       |                                                                                                          |   |   |
| 4.5         |       | 2000 Officers and Directors Stock Option and  Incentive Plan(3)                                               |
|        |       |                                                                                                          |
| 4.6         |       | 2000 Employees’ Stock Option and Incentive Plan(3)                                                       |
|        |       |                                                                                                          |
| 4.7         |       | Equity Interest Transfer Agreement between Tamworth  Industrial Ltd. (“Tamworth”) and Registrant(4) |

 

72

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| 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)                                                                                                               |   |   |
|   |   |                                                                                                                                                       |   |   |
| 8.1    |   | List of Subsidiaries(8)                                                                                                                                    |   |   |
|   |   |                                                                                                                                                       |   |   |
| 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)                                               |
|   |   |                                                                                                                                                       |
| 12.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002(8)                                                     |
|   |   |                                                                                                                                                       |
| 12.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002(8)                                                     |
|   |   |                                                                                                                                                       |
| 13.1   |   | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002(8)  |
|   |   |                                                                                                                                                       |
| 13.2   |   | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002(8) |

----

(1)                                  Incorporated by reference, previously filed as anExhibit to Registration Statement, SEC File No. 333-16277 and is incorporatedby reference herein.

(2)                                  Incorporated by reference, previously filed as anExhibit to Registrant’s Report on Form 20-F for its year ended December 31,1999.

(3)                                  Incorporated by reference, previously filed as anExhibit to Registrant’s Report on Form 20-F for its year ended December 31,2000.

(4)                                  Incorporated by reference, previously filed as anExhibit to Registrant’s Report on Form 6-K filed on February 11, 2002.

(5)                                  Incorporated by reference, previously filed as anExhibit to Registrant’s Report on Form 6-K, filed on December 8, 2005.

(6)                                  Incorporated by reference, previously filed as anExhibit to Registrant’s Report on Form 6-K filed on July 24, 2002.

(7)                                  Incorporated by reference, previously filed as anExhibit to Registrant’s Report on Form 6-K filed on August 19, 2002.

(8)           Filedherewith.

73

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**SIGNATURES**

Pursuant to the requirements of Section 12 of the Securities ExchangeAct of 1934, the registrant certifies that it meets all of the requirements forfiling on Form 20-F and has duly caused this annual report to be signedon its behalf by the undersigned, 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 28, 2007 |                                              |

####  

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**EURO TECH HOLDINGS COMPANYLIMITED**

**AUDITED CONSOLIDATED BALANCESHEETS**

**AS OF DECEMBER 31, 200****6 AND 200****5 AND**

**CONSOLIDATED STATEMENTS OFINCOME,**

**CASH FLOWS AND CHANGES INSHAREHOLDERS’ EQUITY**

**FOR THE YEARS ENDED DECEMBER 31,200****6,200****5 AND 200****4**

**TOGETHER WITH REPORT OFINDEPENDENT REGISTERED**

**PUBLIC ACCOUNTING FIRM**

F-1

----

**Report of Independent RegisteredPublic Accounting Firm**

To theBoard of Directors and shareholders of

Euro Tech Holdings Company Limited

We have audited the accompanying consolidated balance sheets of EuroTech Holdings Company Limited as of December 31, 2006 and 2005 and the relatedconsolidated statements of operations, shareholders’ equity and cash flows forthe years ended December 31, 2006 and 2005. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits inaccordance with standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial 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 audits included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Euro Tech Holdings Company Limited as of December 31, 2006 and 2005 and theresults of its consolidated operations and cash flows for the years endedDecember 31, 2006 and 2005, in conformity with generally accepted accountingprinciples in the United States of America.

/s/ BDO McCabe Lo Limited

HongKong, June 27, 2007

F-2

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**TO THESHAREHOLDERS AND DIRECTORS OFEURO TECH HOLDINGS COMPANY LIMITED**

Inour opinion, the accompanying consolidated statements of income, shareholders’equity and cash flows for the year ended 31 December 2004 present fairly,in all material respects, the results of operations and cash flows of Euro TechHoldings Company Limited and its subsidiaries for the year ended31 December 2004, in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audit. We conducted our audit of thesestatements in accordance with the standards of the Public Companying AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audit provides a reasonable basis for ouropinion.

/s/PricewaterhouseCoopers

HongKong, 14 July 2005

F-3

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**EURO TECH HOLDINGS COMPANYLIMITED**

**CONSOLIDATED BALANCE SHEETS**

**AS OF DECEMBER 31**
| ** **                                                                                                                                         | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                                         | ** ** | **Note**        | ** ** | **200**6         | ** ** | **200**5         | ** ** |
| ** **                                                                                                                                         | ** ** | ** **      | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Assets                                                                                                                                             |       |            |       |             |       |             |       |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Current assets:                                                                                                                                    |       |            |       |             |       |             |       |
| Cash and cash  equivalents                                                                                                                         |       |            |       | 9,160            |       | 5,362            |       |
| Restricted cash                                                                                                                                    |       |            |       | 415              |       | 304              |       |
| Accounts  receivable, net                                                                                                                          |       | 6               |       | 4,914            |       | 5,467            |       |
| Prepayments and  other current assets                                                                                                              |       |            |       | 723              |       | 643              |       |
| Inventories, net                                                                                                                                   |       | 7               |       | 2,028            |       | 2,732            |       |
| Taxation  recoverable                                                                                                                              |       |            |       | 12               |       | 42               |       |
| Total current  assets                                                                                                                              |       |            |       | 17,252           |       | 14,550           |       |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Property, plant and  equipment, net                                                                                                                |       | 8 & 21(iii) |       | 1,628            |       | 1,735            |       |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Investments in  affiliates                                                                                                                         |       | 9               |       | —           |       | —           |       |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Goodwill                                                                                                                                           |       | 12              |       | 1,060            |       | 1,060            |       |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Deferred tax assets                                                                                                                                |       | 4               |       | 35               |       | 32               |       |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Total assets                                                                                                                                       |       |            |       | 19,975           |       | 17,377           |       |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Liabilities and  shareholders’ equity                                                                                                         |       |            |       |             |       |             |       |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Current liabilities:                                                                                                                               |       |            |       |             |       |             |       |
| Accounts payable                                                                                                                                   |       |            |       | 4,192            |       | 4,627            |       |
| Amounts due to  related companies                                                                                                                  |       | 18              |       | —           |       | —           |       |
| Other payables  and accrued expenses                                                                                                               |       | 10              |       | 2,348            |       | 2,570            |       |
| Taxation payable                                                                                                                                   |       |            |       | 445              |       | 422              |       |
| Total current  liabilities                                                                                                                         |       |            |       | 6,985            |       | 7,619            |       |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Deferred tax liabilities                                                                                                                           |       |            |       | —           |       | 4                |       |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Commitments and  contingencies                                                                                                                     |       | 19              |       | —           |       | —           |       |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Shareholders’ equity:                                                                                                                         |       |            |       |             |       |             |       |
| Ordinary share,  par value US$0.01 each,20,000,000 (2004: 20,000,000) shares authorized; 9,375,192 (2005: 7,363,002) shares issued and outstanding |       | 11              |       | 94               |       | 74               |       |
| Additional  paid-in capital                                                                                                                        |       |            |       | 5,387            |       | 2,800            |       |
| Treasury stock,  340,651 (2005:  340,651) shares at cost                                                                                           |       | 13              |       | (237             | )          | (237             | )          |
| PRC statutory  reserve                                                                                                                             |       | 14              |       | 88               |       | 72               |       |
| Accumulated  other comprehensive  income/(losses)                                                                                                  |       |            |       | 69               |       | (10              | )          |
| Retained earnings                                                                                                                                  |       |            |       | 6,522            |       | 6,193            |       |
| Total shareholders’  equity                                                                                                                   |       |            |       | 11,923           |       | 8,892            |       |
| Minority interest                                                                                                                                  |       |            |       | 1,067            |       | 862              |       |
| Total equity                                                                                                                                       |       |            |       | 12,990           |       | 9,754            |       |
|                                                                                                                                               |       |            |       |             |       |             |       |
| Total liabilities and shareholders’ equity                                                                                                    |       |            |       | 19,975           |       | 17,377           |       |

 

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

F-4

----

 

**EURO TECH HOLDINGS COMPANYLIMITED**

**CONSOLIDATED STATEMENTS OF INCOMEAND COMPREHENSIVE INCOMEFOR THE YEARS ENDED DECEMBER 31, 200****6, 200****5AND 200****4**

** **
| ** **                                               | ** ** | **Note**         | ** ** | **200**6         | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|----------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                               | ** ** | ** **       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                     |       |             |       |             |       |             |       |             |       |
|                                                     |       |             |       |             |       |             |       |             |       |
| Revenue                                                  |       | 21(i) & (ii) |       | 27,161           |       | 31,250           |       | 32,282           |       |
|                                                     |       |             |       |             |       |             |       |             |       |
| Cost of revenue                                          |       |             |       | (20,606          | )          | (24,681          | )          | (27,033          | )          |
|                                                     |       |             |       |             |       |             |       |             |       |
| Gross profit                                             |       |             |       | 6,555            |       | 6,569            |       | 5,249            |       |
|                                                     |       |             |       |             |       |             |       |             |       |
| Selling and  administrative expenses                     |       |             |       | (5,961           | )          | (5,418           | )          | (4,801           | )          |
|                                                     |       |             |       |             |       |             |       |             |       |
| Operating income                                         |       |             |       | 594              |       | 1,151            |       | 448              |       |
| Interest income                                          |       |             |       | 95               |       | 35               |       | 17               |       |
| Other income, net                                        |       | 3                |       | 146              |       | 172              |       | 104              |       |
|                                                     |       |             |       |             |       |             |       |             |       |
| Income before income  taxes                              |       |             |       | 835              |       | 1,358            |       | 569              |       |
|                                                     |       |             |       |             |       |             |       |             |       |
| Income taxes                                             |       | 4                |       | (156             | )          | (328             | )          | (167             | )          |
|                                                     |       |             |       |             |       |             |       |             |       |
| Equity in profit of  affiliates, net of taxes            |       |             |       | —           |       | 21               |       | 192              |       |
|                                                     |       |             |       |             |       |             |       |             |       |
| Net income                                               |       |             |       | 679              |       | 1,051            |       | 594              |       |
| Minority interest                                        |       |             |       | (318             | )          | (318             | )          | —           |       |
|                                                     |       |             |       |             |       |             |       |             |       |
| Profit attributable to the shareholders of the company   |       |             |       | 361              |       | 733              |       | 594              |       |
|                                                     |       |             |       |             |       |             |       |             |       |
|                                                     |       |             |       |             |       |             |       |             |       |
| Net income per ordinary  share                           |       |             |       |             |       |             |       |             |       |
| - Basic                                                  |       |             |       | US$0.04          |       | US$0.11          |       | US$0.09          |       |
|                                                     |       |             |       |             |       |             |       |             |       |
|                                                     |       |             |       |             |       |             |       |             |       |
| - Diluted                                                |       |             |       | US$0.03          |       | US$0.07          |       | US$0.06          |       |
|                                                     |       |             |       |             |       |             |       |             |       |
| Weighted average number  of ordinary shares  outstanding |       |             |       |             |       |             |       |             |       |
| - Basic                                                  |       | 5                |       | 8,047,911        |       | 6,598,201        |       | 6,434,667        |       |
|                                                     |       |             |       |             |       |             |       |             |       |
|                                                     |       |             |       |             |       |             |       |             |       |
| - Diluted                                                |       | 5                |       | 10,787,420       |       | 10,689,482       |       | 10,034,687       |       |
|                                                     |       |             |       |             |       |             |       |             |       |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

F-5

----

**EURO TECH HOLDINGS COMPANYLIMITED**

**CONSOLIDATED STATEMENTS OF CASHFLOWS****FOR THE YEARS ENDED DECEMBER 31, 200****6, 200****5 AND 200****4**
| ** **                                                                                   | ** ** | **200**6         | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Cash flows from  operating activities:                                                       |       |             |       |             |       |             |       |
| Net income                                                                                   |       | 679              |       | 1,051            |       | 594              |       |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |             |       |             |       |             |       |
| Depreciation of  property, plant and equipment                                               |       | 216              |       | 181              |       | 184              |       |
| Loss on disposal of property, plant and equipment                                            |       | 1                |       | 1                |       | —           |       |
| Equity in profit of  affiliates, net of taxes                                                |       | —           |       | (21              | )          | (192             | )          |
| Deferred tax assets                                                                          |       | —           |       | 11               |       | 3                |       |
| Deferred tax liabilities                                                                     |       | (4               | )          | 4                |       | —           |       |
| Translation reserve                                                                          |       | 78               |       | 16               |       | —           |       |
| (Increase) decrease in  current assets:                                                      |       |             |       |             |       |             |       |
| Accounts  receivable, net                                                                    |       | 553              |       | (1,237           | )          | 1,212            |       |
| Prepayments and  other current assets                                                        |       | (80              | )          | 327              |       | 248              |       |
| Inventories, net                                                                             |       | 704              |       | 2,387            |       | (1,318           | )          |
| Taxation  recoverable                                                                        |       | 30               |       | (35              | )          | 8                |       |
| Increase (decrease) in  current liabilities:                                                 |       |             |       |             |       |             |       |
| Accounts payable                                                                             |       | (435             | )          | (148             | )          | 1,170            |       |
| Amounts due to  related companies                                                            |       | —           |       | (1,267           | )          | (64              | )          |
| Other payables  and accrued expenses                                                         |       | (222             | )          | (1,665           | )          | 618              |       |
| Taxation payable                                                                             |       | 23               |       | 137              |       | 73               |       |
|                                                                                         |       |             |       |             |       |             |       |
| Net cash (used in)/provided by operating activities                                          |       | 1,543            |       | (258             | )          | 2,536            |       |
|                                                                                         |       |             |       |             |       |             |       |
| Cash flows from  investing activities:                                                       |       |             |       |             |       |             |       |
| Purchase of  property, plant and equipment                                                   |       | (106             | )          | (110             | )          | (101             | )          |
| Cash flow on business combination, net of cash acquired                                      |       | —           |       | 486              |       | —           |       |
| Restricted cash for issuance of bank guarantees                                              |       | (111             | )          | (304             | )          | —           |       |
| Dividend income                                                                              |       | —           |       | —           |       | 55               |       |
| Dividend paid to minority interest                                                           |       | (135             | )          | —           |       | —           |       |
|                                                                                         |       |             |       |             |       |             |       |
| Net cash provided by/(used in) investing  activities                                         |       | (352             | )          | 72               |       | (46              | )          |
|                                                                                         |       |             |       |             |       |             |       |
| Cash flows from  financing activities:                                                       |       |             |       |             |       |             |       |
| Issuance of ordinary shares on exercise of options                                           |       | 2,607            |       | 306              |       | —           |       |
| Net cash provided by financing activities                                                    |       | 2,607            |       | 306              |       | —           |       |
|                                                                                         |       |             |       |             |       |             |       |
| Effect of exchange rate  changes on cash and cash equivalents                                |       | —           |       | —           |       | —           |       |
|                                                                                         |       |             |       |             |       |             |       |
| Net increase in cash  and cash equivalents                                                   |       | 3,798            |       | 120              |       | 2,490            |       |
| Cash and cash  equivalents, beginning of year                                                |       | 5,362            |       | 5,242            |       | 2,752            |       |
| Cash and cash  equivalents, end of year                                                      |       | 9,160            |       | 5,362            |       | 5,242            |       |
| Supplementary  information                                                                   |       | US$              |       | US$              |       | US$              |       |
| Interest  received                                                                           |       | 95               |       | 35               |       | 17               |       |
| Interest paid                                                                                |       | —           |       | —           |       | —           |       |
| Income taxes  paid                                                                           |       | 125              |       | 121              |       | 121              |       |
| Shares surrendered for exercise of stock options                                             |       | 168              |       | 195              |       | —           |       |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

F-6

----

**EURO TECH HOLDINGS COMPANYLIMITED**

**CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY****FOR THE YEARS ENDED DECEMBER 31, 200****6, 200****5 AND 200****4**
| ** **                                                          | ** ** | **Number of**Ordinary  share | ** ** | **Ordinary  share** | ** ** | **Additional  paid-in  capital** | ** ** | **Treasury  stock** | ** ** | **Accumulated  other com-  prehensive  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, 2004                                       |       | 6,775,318                         |       | 45                  |       | 2,523                            |       | (237                | )          | (26                                                          | )          | —                      |       | 4,938                  |       | 7,243            |       |
| Net income                                                          |       | —                            |       | —              |       | —                           |       | —              |       | —                                                       |       | —                      |       | 594                    |       | 594              |       |
| Stock split effect in  the form of a dividend                       |       | —                            |       | 23                  |       | (23                              | )          | —              |       | —                                                       |       | —                      |       | —                 |       | —           |       |
| Transfer of reserve                                                 |       | —                            |       | —              |       | —                           |       | —              |       | —                                                       |       | 69                          |       | (69                    | )          | —           |       |
|                                                                |       |                              |       |                |       |                             |       |                |       |                                                         |       |                        |       |                   |       |             |       |
| Balance as of December  31, 2004                                    |       | 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           |       |

 

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

F-7

----

**EURO TECH HOLDINGSCOMPANY LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**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’ssubsidiaries and affiliates are summarized as follows:
| **Name**                                      | ** ** | **Percentage  of equity  ownership** | ** ** | **Place of  incorporation** | ** ** | **Principal activities**                                                                                                                                                      |
|-----------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          |       |                                 |       |                        |       |                                                                                                                                                                          |
| Subsidiaries:                                 |       |                                 |       |                        |       |                                                                                                                                                                          |
|                                          |       |                                 |       |                        |       |                                                                                                                                                                          |
| Euro Tech (Far East) Limited                  |       | 100%                                 |       | Hong Kong                   |       | Marketing and trading of water and waste water  related process control, analytical and testing instruments, disinfection  equipment, supplies and related automation systems |
|                                          |       |                                 |       |                        |       |                                                                                                                                                                          |
| Euro Tech (China) Limited                     |       | 100%                                 |       | Hong Kong                   |       | Inactive                                                                                                                                                                      |
|                                          |       |                                 |       |                        |       |                                                                                                                                                                          |
| ChinaH2O.com Limited                          |       | 100%                                 |       | Hong Kong                   |       | Internet content provider and provision of marketing  services for environmental industry to the Company and its subsidiaries                                                 |
|                                          |       |                                 |       |                        |       |                                                                                                                                                                          |
| Euro Tech Trading (Shanghai) Limited          |       | 100%                                 |       | The PRC                     |       | Marketing and trading of water and waste water  related process control, analytical and testing instruments, disinfection  equipment, supplies and related automation systems |
|                                          |       |                                 |       |                        |       |                                                                                                                                                                          |
| Shanghai Euro Tech Limited                    |       | 100%                                 |       | The PRC                     |       | Manufacturing of analytical and testing equipment                                                                                                                             |
|                                          |       |                                 |       |                        |       |                                                                                                                                                                          |
| 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      |

----

*                    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 in October 18, 2005.  (See also note 9).

F-8

----

 

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

**(a)****                                  Basisof 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) (“FIN46(R)”), are included in the consolidatedfinancial statements, if applicable.  InJanuary 2003, the FASB issued FASB Interpretation No. 46 (FIN46), “Consolidationof Variable Interest Entities” and amended it by issuing FIN 46(R) in December2003.  FIN 46 (R) addresses consolidationby business enterprises of VIEs that either: (1) do not have sufficient equityinvestment at risk to permit the entity to finance its activities withoutadditional subordinated financial support, or (2) have equity investors thatlack an essential characteristic of a controlling financial interest.

The Group identified that certain retail shops established in the PRCqualified as variable interest entities as defined in FIN46(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$392,162 and US$297,377, as of December 31, 2006 and US$464,415 and US$151,217, as ofDecember 31, 2005, respectively. The cumulative losses on consolidating these VIEs in the Group’sconsolidated statement of income in 2006were US$152,723 (2005: US$174,902 and2004: US$41,947), including taxes of US$6,814 (2005: US$658 and 2004: US$23,538).  The assets of the entities consist mainly ofcash and bank balances, trade and other receivables, inventories and property,plant and equipment.   The creditors ofthese entities do not have recourse to the general credit of the Group.

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

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

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 recognizes revenuewhen 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-9

----

 

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 relies onestimates of total expected direct costs at completion, which are compared toactual 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.

**(d)****                                  Researchand Development Costs**

Research and development costs (“R&D” costs) are expensed asincurred.  The R&D costs amounted toapproximately US$55,000,US$48,000 and US$56,000 for the years December 31, 2006, 2005 and 2004respectively and were included in “Selling and Administrative” expenses****in the Group’s consolidated statement of income.

**(e)****                                  Advertisingand promotional expenses**

Advertising and promotional expenses (“A&P” expenses) are expensedas incurred.  The A&P expensesamounted to approximately US$76,000, US$240,000and US$247,000 for the yearsDecember 31, 2006, 2005 and 2004 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: “Accounting forIncome 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 109 also requires the recognition of thefuture tax benefits of net operating loss carry forwards.  A valuation allowance is established when thedeferred tax assets are not expected to be realized within a reasonable periodof time.

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.

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

F-10

----

 

**(g)****                                 Cashand Cash Equivalents**

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

**(h)****                                 Receivablesand 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 net realizable value.  Costsinclude purchase and related costs incurred in bringing each product to itspresent location and condition.  Netrealizable value is calculated based on the estimated normal selling price,less further costs expected to be incurred for disposal.  Provision is made for obsolete, slow movingor defective items, where appropriate.

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

Property, plant 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, 2006.

F-11

----

 

**(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 possibleimpairment of goodwill existing at the date of adoption and perform asubsequent impairment test on an annual basis.

**(n)           Foreign Currency Translation**

The Company maintains its books and records in United Statesdollars.  Its subsidiaries and affiliatesmaintain their books and records either in Hong Kong dollars or ChineseRenminbi (“functional currencies”). Foreign currency transactions during the year are translated into therespective functional currencies at the applicable rates of exchange at thedates of the transactions.  Monetaryassets and liabilities denominated in foreign currencies are translated intothe respective 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 Instruments and 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 SFASNo. 138, “Accounting for Certain Derivative Instruments and Certain HedgingActivities — an amendment of FASB Statement No. 133”, as well as theinterpretations of the Derivatives Implementation Group (“DIG”), are applied asamended by SFAS No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities”.  SFAS 133contains accounting and reporting standards for hedging accounting and forderivative financial instruments, including certain derivative financialinstruments embedded in other contracts.

SFAS 133 requires that all derivatives be recognized as either assetsor 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 17 foradditional information regarding the Company’s use of derivative instruments.

F-12

----

 

**(p)           Comprehensive Income**

The Group has adopted SFAS No. 130: “Reporting Comprehensive Income,” which requires the Group to report allchanges in equity during a period, except for those resulting from investmentby owners and distribution to owners, in the financial statements for theperiod in which they are recognized.  TheGroup has presented comprehensive income, which encompasses net income andforeign currency translation adjustments, in the consolidated statement ofchanges in shareholders’ equity.

**(q)           Ordinary share**

Ordinary share refers to the $0.01 par value capital stock as designated in the Company’sCertificate of Incorporation.  Treasurystock is accounted for using the cost method. When treasury stock is reissued, the value is computed and recordedusing a weighted-average basis.

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

Net income per ordinaryshare is computed in accordance with SFAS No. 128 “Earnings Per Share”, bydividing the net income by the weighted average number of shares of ordinaryshare outstanding during the period.  TheCompany reports both basic earnings per share, which is based on the weightedaverage number of ordinary sharesoutstanding, and diluted earnings per share, which is based on the weightedaverage number of ordinaryshares outstanding and all dilutive potential ordinary shares outstanding. Outstanding stock options are the only dilutive potential shares of theCompany.

**(s)           Stock-based Compensation**

On January 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 forStock Issued to Employees. Statement 123(R) requires the Company to recognizeexpense related to the fair value of our stock-based compensation awards,including employee stock options.

Prior to the adoption of Statement 123(R), in accordance with theprovisions of SFAS No. 148, “Accounting for Stock-Based Compensation —Transition and Disclosure”, the Group has selected the disclosure only ofprovisions related to employee stock options and share purchases and followsthe provisions of Accounting Principles Board Opinion No. 25: “Accounting forStock Issued to Employees” (“APB 25”) and related interpretations in accountingfor stock options and shares issued to employees.  Under APB 25, compensation expense, if any,is recognized as the excess of the estimated fair value of the ordinary sharesover the exercise price on the measurement date, which is typically the date ofgrant, and is expensed ratably over the service period, which is typically thevesting period. The Company accounts for share-based compensation using theintrinsic value method prescribed by APB Opinion No. 25, under which nocompensation cost is recognized as all stock options granted under theManagement Options, the 2000 Stock Options, the 2002 Employee Stock Options andthe 2002 D&O Stock Options have exercise prices at or above the fair marketvalue of the underlying stock at the date of grant.

F-13

----

 

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 and 2004 would have been asfollows:

|                                                                                         | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                              | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                                    |       |             |       |             |       |
| Net income as reported                                                                  |       | 733              |       | 594              |       |
| Less: Stock compensation expense determined under the fair value  method, net of tax(1) |       | (39              | )          | (27              | )          |
| Pro forma net income                                                                    |       | 694              |       | 567              |       |
|                                                                                    |       |             |       |             |       |
| Income per share:                                                                       |       |             |       |             |       |
|                                                                                    |       |             |       |             |       |
| Basic, as reported                                                                      |       | US$0.11          |       | US$0.09          |       |
|                                                                                    |       |             |       |             |       |
| Diluted, as reported                                                                    |       | US$0.07          |       | US$0.06          |       |
|                                                                                    |       |             |       |             |       |
| Basic, pro forma                                                                        |       | US$0.11          |       | US$0.09          |       |
|                                                                                    |       |             |       |             |       |
| Diluted, pro forma                                                                      |       | US$0.07          |       | US$0.06          |       |

** **

**(t)            Use of 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 theamounts that are reported in the consolidated financial statements andaccompanying disclosures.  Although theseestimates are based on management’s best knowledge of current events andactions that the Company may undertake in the future, actual results may bedifferent from the estimates.

F-14

----

 

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

Entities are considered to be related to the Group if the parties,directly or indirectly, through one or more intermediaries, control, arecontrolled by, or are under common control with the Group.  Related parties also include principal ownersof the Group, its management, members of the immediate families of principalowners of the Group and its management and other parties with which the Groupmay deal if one party controls or can significantly influence the management oroperating policies of the other to an extent that one of the transactingparties might be prevented from fully pursuing its own separate interests.  A party which can significantly influence themanagement or operating policies of the transacting parties or if it has anownership interest in one of the transacting parties and can significantlyinfluence the other to an extent that one or more of the transacting partiesmight be prevented from fully pursuing its own separate interests is also arelated party.

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

The Company’s segment reporting is prepared in accordance with SFAS No.131, “Disclosures about Segments of an Enterprise and RelatedInformation”.  The management approachrequired by SFAS 131 designates that the internal reporting structure that isused by management for making operating decisions and assessing performanceshould be used as the source for presenting the Company’s reportable segments.

**(w)**           **Recent AccountingPronouncements**

In July 2006, the FASB issued FASB Interpretation No. 48, Accountingfor Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109(FIN48). This Interpretation provides guidance for recognizing and measuringuncertain tax positions, as defined in SFAS No. 109, Accounting for IncomeTaxed. FIN 48 prescribes a threshold condition that a tax position must meetfor any of the benefit of the uncertain tax position to be recognized n thefinancial statements. Guidance is also provided regarding derecognition,classification and disclosure of these uncertain tax positions. FIN 48 iseffective for fiscal years beginning after December 15, 2006. We do not expectthat this Interpretation will have a material impact on our financial position,results of operations or cash flows.

In June 2006, the EITF reached consensus on and ratified EITF Issue06-03, How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (EITF 06-03). The scopeof this Issue includes any tax assessed by a governmental authority that isdirectly imposed on a revenue-producing transaction between a seller and acustomer and may include, but is not limited to, sales, use, value added, andsome excise taxes. The Task Force concluded that the presentation of taxeswithin the scope of the Issue on either a gross( (included in revenues andcosts ) or a net ( excluded from revenues ) basis is an accounting policydecision that should be disclosed pursuant to Opinion 22. In addition, for anysuch taxes that are reported on a gross basis, a company should disclose theamounts of those taxes in interim and annual financial statements for eachperiod for which an income statement is presented if those amounts aresignificant. The disclosure of those taxes can be done on an aggregate basis.The consensus in this Issue should be applied to financial reports for interimand annual reporting periods beginning after December 15,

F-15

----

 

2006. We believe the adoption of EITF 06-03 will not have a materialimpact on our method for recording and reporting these types of taxes in ourconsolidated financial statements, as the Company’s policy is to exclude allsuch taxes form revenue.

In September 2006, the FASB issued FAS 157, Fair Value Measurements(FAS 157). FAS 157 defines fair value, establishes a framework for measuringfair value in accordance with generally accepted accounting principles, andexpands disclosures about fair value measurements. The provisions of FAS 157are effective for the fiscal year beginning after November 15, 2007. We arecurrently evaluating the impact of the provisions of FAS 157.

On February 15, 2007, the FASB issued SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities: Including an amendment of FASBStatement No. 115” (“SFAS 159”). SFAS 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 159 is effective as of thebeginning of the first fiscal year that begins after November 15, 2007, withearlier adoption permitted. The Company does not anticipate that the adoptionof this statement will have a material effect on the Company’s financialcondition and results of operations. The Company does not believe that anyother of the recently issued and adopted, but not yet effective, accountingstandards would have a material effect on the accompanying financialstatements.

F-16

----

**3              Otherincome, net**

 

|                                                   | ** ** | **200**6         | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|---------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                        | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Loss on disposal of property, plant and equipment |       | (1               | )          | (1               | )          | —           |       |
| Exchange gain, net                                |       | 130              |       | 158              |       | 73               |       |
| Rental income                                     |       | 17               |       | 15               |       | 31               |       |
|                                              |       | 146              |       | 172              |       | 104              |       |
|                                              |       |             |       |             |       |             |       |

 

**4              Incometaxes**

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

Euro Tech (Far East) Limited, Euro Tech (China) Limited andChinaH2O.com Limited provided for Hong Kong profits tax at a rate of 17.5% inthe year of 2006, 2005 and2004 on the basis of theirincome for financial reporting purposes, adjusting for income and expense itemswhich are not assessable or deductible for profits tax purposes.

Euro Tech Trading (Shanghai) Limited, a subsidiary of the Company,provides for PRC Enterprise Income Tax at a rate of 15%, after offsettinglosses brought forward, if any, on the basis of its income for financialreporting purposes, adjusting for income and expense items which are notassessable or deductible for PRC Enterprise Income Tax purposes.

In accordance with the relevant income tax laws and regulationsapplicable to foreign investment enterprises in the PRC, Shanghai Euro TechLimited (“SET”), a subsidiary of the Company, is exempt from the PRC EnterpriseIncome Tax of 15% for two years starting from its first profit-making year,after offsetting losses brought forward, if any, followed by a 50% reductionfor the next three years thereafter.  Asof December 31, 2006,SET is still exempt from the PRC enterprise income tax as it had an assessableloss brought forward of US$305,975asagreed by the local tax authority to offset its profit for the coming year(2005: US$208,525).

VIEs of the Group provide for 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.

As of December 31, 2006, certain VIEs had aggregated assessable losses carried forwardof US$143,318 as agreed by the PRC local tax authority (2005: US$128,591).

F-17

----

 

Income before income taxes:

 

|            | ** ** | **200**6         | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|       |       |             |       |             |       |             |       |
| Domestic   |       | —           |       | —           |       | —           |       |
| Foreign    |       | 835              |       | 1,358            |       | 569              |       |
|       |       | 835              |       | 1,358            |       | 569              |       |
|       |       |             |       |             |       |             |       |

 

The provision for income taxes consists of:

 

|                                   | ** ** | **200**6         | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|-----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                        | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Current tax expenses:             |       |             |       |             |       |             |       |
| Domestic                          |       | —           |       | —           |       | —           |       |
| Foreign                           |       | 163              |       | 313              |       | 164              |       |
|                              |       |             |       |             |       |             |       |
| Total current provision           |       | 163              |       | 313              |       | 164              |       |
|                              |       |             |       |             |       |             |       |
|                              |       |             |       |             |       |             |       |
| Deferred tax expense / (benefit): |       |             |       |             |       |             |       |
| Domestic                          |       | —           |       | —           |       | —           |       |
| Foreign                           |       | (7               | )          | 15               |       | 3                |       |
|                              |       |             |       |             |       |             |       |
| Total deferred provision          |       | (7               | )          | 15               |       | 3                |       |
|                              |       |             |       |             |       |             |       |

 

The reconciliation of the weighted average statutory income tax rate tothe effective income tax rate as stated in the consolidated statements ofincome is as follows:

 

|                                                       | ** ** | **200**6   | ** ** | **200**5   | ** ** | **200**4   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  statutory tax rate                  |       | 14.3       | %          | 23.0       | %          | 20.8       | %          |
| Change in valuation  allowances                       |       | 5.5        | %          | 0.3        | %          | 7.0        | %          |
| Under/(Over)-provision  for income tax in prior years |       | (0.5       | %)         | (0.2       | %)         | 0.4        | %          |
| Others                                                |       | (0.6       | %)         | 1.1        | %          | 1.1        | %          |
| Effective tax rate                                    |       | 18.7       | %          | 24.2       | %          | 29.3       | %          |
|                                                  |       |       |       |       |       |       |       |

 

The components of deferred tax assets are as follows:

 

|                                                        | ** ** | **200**6         | ** ** | **200**5         | ** ** |
|--------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                   |       |             |       |             |       |
| Deferred tax assets  arising from tax losses           |       | 27               |       | 74               |       |
| Deferred tax assets  arising from temporary difference |       | 8                |       | —           |       |
| Less: Valuation  allowances                            |       | —           |       | (42              | )          |
| Net deferred tax assets                                |       | 35               |       | 32               |       |
|                                                   |       |             |       |             |       |

 

F-18

----

 

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

The calculation ofthe basic and diluted net income per ordinary share is based on the followingdata:

 

|                                                                                               | ** ** | **200**6         | ** ** | **200**5         | ** ** | **2004**         | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                    | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Number of shares                                                                              |       |             |       |             |       |             |       |
| Weighted average number  of ordinary shares for the purposes of basic net income per  share   |       | 8,047,911        |       | 6,598,201        |       | 6,434,667        |       |
| Effect of dilutive  potential ordinary shares: Stock options                                  |       | 2,739,509        |       | 4,091,281        |       | 3,600,020        |       |
| Weighted average number  of ordinary shares for the purposes of diluted net income  per share |       | 10,787,420       |       | 10,689,482       |       | 10,034,687       |       |
|                                                                                          |       |             |       |             |       |             |       |

 

**6              Accounts receivable**

** **

|                                     | ** ** | **200**6         | ** ** | **200**5         | ** ** |
|-------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                |       |             |       |             |       |
| Trade receivables                   |       | 5,000            |       | 5,589            |       |
| Less: Allowance for  doubtful debts |       | (86              | )          | (122             | )          |
|                                |       |             |       |             |       |
|                                |       | 4,914            |       | 5,467            |       |
|                                |       |             |       |             |       |
|                                |       |             |       |             |       |
| ** **                          | ** ** | **200****6**     | ** ** | **200****5**     | ** ** |
| ** **                          | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Allowance for doubtful debts        |       |             |       |             |       |
| Balance at beginning                |       | 122              |       | 58               |       |
| Charged to costs and  expenses      |       | (26              | )          | 97               |       |
| Write off                           |       | (10              | )          | (33              | )          |
|                                |       |             |       |             |       |
| Balance at end                      |       | 86               |       | 122              |       |
|                                |       |             |       |             |       |

 

As of December 31, 2006, accountsreceivables in the form of bills receivable through banks amounted toUS$187,000 (2005: US$ 242,000).

**7              Inventories, net**

** **

|                  | ** ** | **200**6         | ** ** | **200**5         | ** ** |
|------------------|------------|------------------|------------|------------------|------------|
| ** **       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|             |       |             |       |             |       |
| Raw materials    |       | 59               |       | 93               |       |
| Work in progress |       | 21               |       | 387              |       |
| Finished goods   |       | 1,948            |       | 2,252            |       |
|             |       | 2,028            |       | 2,732            |       |
|             |       |             |       |             |       |

 

F-19

----

 

Management continuouslyreviews obsolete and slow moving inventories and assesses the inventoryvaluation to determine if the provision is deemed appropriate. At December 31,2006, 2005 and 2004, provision for obsolete and slow moving inventories amounted toUS$15,581, US$44,370 and US$86,341,respectively.

**8              Property, plant and equipment**

 

|                                           | ** ** | ** **       | ** ** | **200**6         | ** ** | **200**5         | ** ** |
|-------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                | ** ** | ** **       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                      |       |             |       |             |       |             |       |
| Office premises                           |       |             |       | 2,257            |       | 2,271            |       |
| Leasehold improvements                    |       |             |       | 131              |       | 96               |       |
| Furniture, fixtures and  office equipment |       |             |       | 656              |       | 591              |       |
| Motor vehicles                            |       |             |       | 127              |       | 127              |       |
| Testing equipment                         |       |             |       | 71               |       | 68               |       |
|                                      |       |             |       | 3,242            |       | 3,153            |       |
|                                      |       |             |       |             |       |             |       |
| Less: Accumulated  depreciation           |       |             |       | (1,614           | )          | (1,418           | )          |
|                                      |       |             |       |             |       |             |       |
|                                      |       |             |       | 1,628            |       | 1,735            |       |
|                                      |       |             |       |             |       |             |       |
|                                      |       |             |       |             |       |             |       |
| ** **                                | ** ** | **200****6**     | ** ** | **200****5**     | ** ** | **200****4**     | ** ** |
| ** **                                | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Depreciation charge                       |       | 216              |       | 181              |       | 184              |       |
|                                      |       |             |       |             |       |             |       |

 

 

F-20

----

**9              Investments in affiliates****and acquisition of subsidiaries**

During the year ended December 31, 2002, the Group acquired 30% equityinterests in Yixing Pact Environmental Technology Co., Ltd, a companyincorporated in the PRC, and Pact Asia Pacific Limited, a company incorporatedin the British Virgin Islands, from an independent third party for a totalconsideration of US$335,000.  The Group believes that the business of these twoinvestments was complementary to the Group’s business as the Group continued tofocus on sales and marketing of other products. The Group believes that byaligning itself with an engineering firm, such as these affiliates, it was ableto gain a competitive advantage by offering customers and potential customersnot only hardware but solutions to engineering problems as well. Detailsof these affiliates are disclosed in Note 1.  Investments in these affiliates are accountedfor using the equity method of accounting.

The excess of purchase price over the underlying fair value of equityin net assets of the investees was considered goodwill and amounted toUS$215,000.  The Group did not recognizeany separately identifiable intangible assets under the criteria prescribed inSFAS No. 141 “Business Combinations” pursuant to the acquisition.  Under this equity method,goodwill is not amortized, and the investment is tested annually forimpairment.  As of December 31,2004, management does not believe the investments were impaired.

A summary of the combined financial information of the affiliates isset forth below:

|                                  | ** ** | **2004**         | ** ** |
|----------------------------------|------------|------------------|------------|
| Balance Sheet:                   |       | **US$’000** |       |
|                             |       |             |       |
| Current assets                   |       | 2,795            |       |
| Non-current  assets              |       | 39               |       |
| Total assets                     |       | 2,834            |       |
| Current and  total liabilities   |       | (1,804           | )          |
| Total  shareholders’ equity |       | 1,030            |       |
|                             |       |             |       |
|                             |       | **2004**         |       |
| Operating  results:              |       | **US$’000** |       |
|                             |       |             |       |
| Net sales                        |       | 3,674            |       |
| Operating  profits               |       | 893              |       |
| Net profits                      |       | 641              |       |

 

F-21

----

 

The above table represents the combined financial information ofentities in which the Group has an investment accounted for using the equitymethod of accounting duringthe year ended December 31, 2004.  These amounts are not the amounts reflectedon the Group’s accompanying consolidated financial statements for the year ended December 31,2004.

During the year ended December 31,2005, the Group acquiredadditional 21% equity interestsin Yixing Pact Environmental Technology Co., Ltd and Pact Asia Pacific Limitedfor a 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 calculatedas 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 basedon the estimated fair values of the assets acquired and liabilities assumed asof the date of acquisition. The following represents the allocation of the purchaseprice:

| 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  |   |

 

The value was based on an independentappraisal. The amount of goodwill allocated to the purchase was US$1,060,000.The following table sets forth the unaudited pro forma results of operations ofthe Company as if the acquisition had occurred at the beginning of the fiscalyear. These pro forma amounts do not purport to be indicative of the results 

F-22

----

 

that would have actually been obtained ifthe acquisition occurred as of the beginning of each of the periods presentedor that not be obtained in the future.

UnauditedPro Forma Results

|                            | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|
|                       |       | **US$’000** | ** ** | **US$’000** |       |
|                       |       |             |       |             |       |
| Revenue                    |       | 32,415           |       | 35,956           |       |
| Net income                 |       | 1,101            |       | 1,043            |       |
|                       |       |             |       |             |       |
| Basic earnings per share   |       | US$0.11          |       | US$0.11          |       |
| Diluted earnings per share |       | US$0.07          |       | US$0.07          |       |

 

The Group granted The minority shareholder of Yixing PactEnvironmental Technology Co., Ltd and Pact Asia Pacific Limited a three-yearput option requiring the Groupto acquire all remaining securities of thesetwo companies at 5.2 times of theiraverage net income forthe three prior fiscal years.

**10           Other payables and accrued expenses**

Other payables and accrued expenses mainly represent deposits receivedfrom customers and accruals for operating expenses.

**11           Ordinary share**

In August 2004, theCompany paid a dividend in the form of 2,258,443 ordinary shares  of US$0.01 each, payable at the ratio of fiveshares of stock per ten shares of stock of the Company.

The effect of the above has been reflected retroactively in theaccounts and the net income per ordinary share computations.

During the year ended December 31,2005, the Company issued640,530 ordinary shares for stock options exercised and cancelled 52,846 sharessurrendered for exercise of stock options.

During the year ended December 31,2006, the Company issued2,048,890 ordinary shares for stock options exercised and cancelled 36,700shares surrendered for exercise of stock options.

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

The Company accounted for the acquisition inaccordance with SFAS No. 141 “Business Combinations”, which resulted in therecognition of goodwill. Goodwill represents the excess of acquisition costover the estimated fair value of net assets acquired as of October 18, 2005 asdescribed in Note 9.

As of December 31, 2006, the Company completed the annualimpairment test. (i.e. comparing the carrying amount of the net assets,including goodwill, with the fair value of the Company as of December 31, 2006). Based on the result of the firststep of the test, the Company believes that there was no further impairment ofgoodwill as of December 31, 2006.

F-23

----

** **

**1****3           Treasury stock**

The Company authorized a stock buyback program in December 2000pursuant to which up to 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 31,2006.

**1****4           PRC statutory reserve**

Under the relevant PRC laws and regulations, the PRC subsidiaries arerequired to appropriate 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) Statutory reserve funds

Pursuant to applicable PRC laws and regulations, the PRC subsidiariesare required to allocate at least 10% of the companies’ net income to the statutory reserve fundsuntil such funds reaches 50% of the companies’ registered capital. Thestatutory reserve funds can be utilized upon the approval by the relevantauthorities, to offset accumulated losses or to increase registered capital ofthe companies, provided that such funds be maintained at a minimum of 25% ofthe companies’ registered capital.

(ii) Statutory welfare funds

Pursuant to applicable PRC laws and regulations, the PRC subsidiariesare required to allocate 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) Expansionfunds

The expansionreserve shall only be used to make up losses, expand the PRC subsidiaries’production operations, or increase the capital of the subsidiaries. Theexpansion fund can be utilized upon approval by relevant authorities, toconvert into registered capital and issue bonus capital to existing investors,provided that such funds be maintained at a minimum of 25% of the companies’registered capital.

F-24

----

** **

**1****5           Stock options**

(i)                                     ManagementOptions Plan

A total of 4,586,400shares of ordinary share have been reserved for issuance under the Company’smanagement option plan (the “Management Options”).  The Management Options provide for the grantof options to its officers, directors and employees as the Company’s Chairmanof the Board of Directors and Chief Executive Officer may direct.  In 1997, the Company granted its officers,directors and employees options under the Management Options, which allow themto purchase up to 4,353,804shares of ordinary share.  The exerciseprice of the options granted was US$1.221per share for 1,310,400 of suchoptions and US$1.6789 per sharefor 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 will expire in March 2007.  During the year ended December 31, 2002,27,573 options with the exercise price of US$1.6789 were cancelled.  During the year ended December 31, 2003, nooptions were exercised, cancelled or granted.

In 2004, the Company granted 46,000 shares with the exercise price ofUS$1.6789 per share to its offices, director and employees, which allowed themto purchase up to 46,000shares of ordinary share.  The optionshave a vesting period of one year and will expire in March 2007.  The Company further cancelled 32,760 optionswith an exercise price of US$1.6789.  Nooptions were exercised during the financial year 2004.

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

During the year ended December 31, 2006, theCompany granted 10,000shares with the exercise price of US$1.6789 per share to its offices, directorand employees, which allowed them to purchase up to 10,000 shares of ordinary share. The options have a vesting period of one year and will expire in March2007.  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.

(ii)                                  2000Stock Option Plan

A total of 1,195,740shares of ordinary share have been reserved for issuance under the Company’s2000 Stock Option Plan (the “2000 Stock Options”).  The 2000 Stock Options provide for the grantof options to its officers, directors and employees as the Company’s Chairmanof the Board of Directors and Chief Executive Officer may direct. During theyear ended December 31, 2000, the Company granted such options to its officers,directors and employees under the 2000 Stock Options, which allow them topurchase up to 742,560 sharesof ordinary share.  The exercise price ofall options granted is US$0.5787per share. During the year ended December 31, 2002, 43,680 options with exercise price of US$0.5787 were cancelled. The Companyfurther granted 477,750 optionsand 19,110 options under the2000 Stock Options with an exercise price of US$0.8191 and US$0.6809per share, respectively, to its officers, directors and employees, which allowthem to purchase up to 496,860shares of ordinary share.  The optionsvested within a six-month to one-year period and will expire in August 2010.

F-25

----

 

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

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

During the year ended December 31, 2006, 16,380 options with exercise price of US$0.5787 were cancelled. The Companyfurther granted 40,000 optionsand 5,000 options under the2000 Stock Options with an exercise price of US$3.33 and US$2.02per share, respectively, to its officers, directors and employees, which allowthem to purchase up to 45,000shares of ordinary share. The options vested within a six-month period and will expire in August 2010. During the same year, 40,950 options and 214,200 options with exerciseprice of US$0.5787 and US$0.8191 pershare, respectively, wereexercised**.**

F-26

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

A total of 294,000shares and 840,000 shares ofordinary share have been reserved for issuance under the Company’s 2002Employees’ Stock Option and Incentive Plan (the “2002 Employee Stock Options”)and 2002 Officers’ and Directors’ Stock Option and Incentive Plan (the “2002D&O Stock Options”), respectively. Both 2002 Employee Stock Options and the 2002 D&O Stock Optionsprovide for the grant of options to its employees as the Company’s Chairman ofthe Board of Directors and Chief Executive Officer may direct.  During the year ended December 31, 2002, theCompany granted such options to its employees, officers and directors under the2002 Employee Stock Options and the 2002 D&O Stock Options, which allowthem to purchase up to 294,000and 840,000 shares of ordinaryshare at an exercise price of US$0.7618and US$0.5857, respectively.The options vested for a period of a six-month period and will expire in April2012 and November 2012, respectively. During the years ended December 31, 2004, 2003 and 2002, no options hadbeen exercised.

In 2004, 92,400 options with an exercise price of US$0.7618 per sharewere cancelled and no further options were granted.

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

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

Changes in outstanding options under various plans mentioned above wereas follows:

|                                 | ** ** | **200**6                    | ** ** | **200**5                               | ** ** | **200**4                    | ** ** |
|---------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **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 |       | 5,978,806                   |       | 1.31                                   |       | 6,724,042                   |       | 1.26 |   | 6,862,632 |   | 1.24 |   |
| Granted                         |       | 55,000                      |       | 2.91                                   |       | —                      |       | — |   | 46,000 |   | 1.68 |   |
| Cancelled                       |       | (46,620                     | )          | (1.13                                  | )          | (104,706                    | )          | (1.16 | ) | (184,590 | ) | (0.93 | ) |
| Exercised                       |       | (2,048,890                  | )          | (1.33                                  | )          | (640,530                    | )          | (0.78 | ) |   |   |   |   |
| Outstanding, end  of year       |       | 3,938,296                   |       | 1.32                                   |       | 5,978,806                   |       | 1.31 |   | 6,724,042 |   | 1.26 |   |
| Exercisable, end of year        |       | 3,923,296                   |       | 1.32                                   |       | 5,978,806                   |       | 1.31 |   | 6,724,042 |   | 1.26 |   |

 

F-27

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As of December 31, 2006, the options outstanding and exercisable had exercise prices inthe range of US$0.5787 to US$3.33and a weighted average unexpired life of approximately 1.95 years.

** **

F-28

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On January 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 employeestock options under the fair value method of SFAS No. 123.  The weighted average fair value of stockoptions at date of grant of $1.44 per option for the year ended December 31,2004, were estimated using the Black-Scholes option pricing model with thefollowing assumptions.  There were nooptions granted during the year ended December 31, 2005.

 

|                                  | ** ** | **200**5 | ** ** | **2004**  | ** ** |
|----------------------------------|------------|----------|------------|-----------|------------|
|                             |       |     |       |      |       |
| Risk-free  interest rate         |       | —   |       | 2.88%     |       |
| Expected  dividend yield         |       | —   |       | 0%        |       |
| Expected option  life            |       | —   |       | 2.3 years |       |
| Expected stock price  volatility |       | —   |       | 208%      |       |

 

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

F-29

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**1****6           Pension plan**

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

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

As stipulated by the rules and regulations in the PRC, the Groupcontributes to state-sponsored retirement plans for its employees in MainlandChina.  The Group contributesapproximately rangingfrom 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-sponsored retirement plans areresponsible for the entire pension obligations payable to retired employees.

During the years ended December 31, 2006, 2005 and 2004, theaggregate contributions of the Group to the aforementioned pension plans andretirement benefit schemes were approximately US$202,000, US$191,000and US$166,000 respectively.

**1****7           Risk factor and Derivative Instruments**

Financial risk factors

The Group’s activities expose it to a variety of financial risks:foreign exchange rate risk and credit risk.

(i)            Credit risk

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

F-30

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(ii)           Foreign exchange risk

The Group operates in Hong Kong, the PRC and trades with both local andoverseas customers, and is exposed to foreign exchange risk arising fromvarious currency exposures, primarily with respect to purchases in, Hong Kongdollar, Reminbi and Euro.  Foreignexchange risk arises from committed and unmatched future commercialtransactions, such as confirmed import purchase orders and sales orders,recognized assets and liabilities, and net investment in the PRC operations.The Group uses derivative financial instruments such as foreign exchangecontracts to hedge certain foreign currency exposures.

The Group’s prevailing risk management policy is to hedge the netcommitted transactions (mainly sales and import purchases) in each majorcurrency.

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.

As of December 31, 2006, the Company has noforeign forward contract commitments (2005:Nil and 2004: US$468,000).  The fair value of this derivative instrumentwas expensed in the consolidated statement of income as it is not qualified ashedge accounting treatment.

**18           Related party transactions**

A related party is an entity that can control or significantlyinfluence the management or operating policies of another entity to the extentone of the entities may be prevented from pursuing its own interests.  A related party may also be any party theentity deals with that can exercise that control

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

|                                                                    | ** ** | **200**6         | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|--------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Sale of goods to                                                   |       |             |       |             |       |             |       |
| Eurotherm Limited                                                  |       | —           |       | —           |       | 27               |       |
| Armtison Limited                                                   |       | —           |       | —           |       | 1                |       |
|                                                               |       |             |       |             |       |             |       |
| Purchase of  goods from                                            |       |             |       |             |       |             |       |
| - Eurotherm Limited                                                |       | —           |       | 242              |       | 7,503            |       |
| - Action Instruments (China) Limited                               |       | —           |       | —           |       | 5                |       |
| - Euro Electron (Far East) Limited                                 |       | —           |       | —           |       | 4                |       |
|                                                               |       |             |       |             |       |             |       |
| Interest income  on trade receivables earned from Armtison Limited |       | —           |       | —           |       | 2                |       |
|                                                               |       |             |       |             |       |             |       |
| Rental income of  office premises earned from Eurotherm Limited    |       | —           |       | 2                |       | 30               |       |
|                                                               |       |             |       |             |       |             |       |
| Rental expenses  for office premises charged by Armtison Limited   |       | —           |       | 11               |       | 25               |       |

 

F-31

----

 

|                                                  | ** ** | **200**6         | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|--------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                             |       |             |       |             |       |             |       |
| Management fees  charged by                      |       |             |       |             |       |             |       |
| Eurotherm Limited                                |       | —           |       | 4                |       | 29               |       |
| Patwin Inc.                                      |       | —           |       | 18               |       | 30               |       |
|                                             |       |             |       |             |       |             |       |
| Management fees  received from  Armtison Limited |       | —           |       | 2                |       | 9                |       |

 

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

**19           Commitments and contingencies**

 (i)           Operatingleases

The Group has various operating lease agreements foroffice and industrial premises.  Rentalexpenses for the years ended December 31, 2006, 2005 and 2004 wereapproximately US$404,000, US$321,000, and US$257,000, respectively.  Future minimum rental payments as of December31, 2006, under agreementsclassified as operating leases with non-cancellable terms amounted to US$276,000 of which US$200,000 are payable in the year 2007 and US$76,000 are payable each year from 2008 to 2010.

 (ii)          Banking facilities

As at December 31, 2006, 2005 and 2004, theGroup has various banking facilities available for overdraft, import and exportcredits and foreign exchange contracts from which the Group can access up toapproximately US$4,167,000, US$4,167,000and US$4,167,000 respectively,of which approximately US$ 726,000,US$422,000 and US$2,394,000 was utilized.

**20           Fair value of financial instruments**

The carrying values of financial instruments, whichconsist of cash and cash equivalents, accounts receivable and accounts payable,bills receivable, bills payable, other payables and balances with relatedcompanies approximate their fair values due to the short-term nature of theseinstruments.

F-32

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**2****1           Segment information**

(i) The Groupreports under two segments: Trading and manufacturing, and Engineering.

Operating income represents total revenues lessoperating expenses, excluding other expense, interest and income taxes. Theidentifiable assets by segment are those used in each segment’s operations.Intersegment amounts are not significant and are eliminated to arrive atconsolidated totals.

 

|                           | ** ** | **200**6         | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Revenue                   |       |             |       |             |       |             |       |
| Trading and manufacturing |       | 22,243           |       | 26,348           |       | 32,155           |       |
| Engineering               |       | 4,918            |       | 4,902            |       | 127              |       |
|                      |       | 27,161           |       | 31,250           |       | 32,282           |       |
| Operating income          |       |             |       |             |       |             |       |
| Trading and manufacturing |       | (237             | )          | (180             | )          | 462              |       |
| Engineering               |       | 811              |       | 1,331            |       | (14              | )          |
|                      |       | 594              |       | 1,151            |       | 448              |       |

 

|                              | ** ** | **200**6         | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Depreciation:                |       |             |       |             |       |             |       |
| Trading and manufacturing    |       | 197              |       | 178              |       | 184              |       |
| Engineering                  |       | 19               |       | 3                |       | —           |       |
|                         |       | 216              |       | 181              |       | 184              |       |
| Capital  Expenditures, Gross |       |             |       |             |       |             |       |
| Trading and manufacturing    |       | 63               |       | 108              |       | 101              |       |
| Engineering                  |       | 43               |       | 2                |       | —           |       |
|                         |       | 106              |       | 110              |       | 101              |       |

 

|                           | ** ** | **200**6         | ** ** | **200**5         | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|
| ** **                | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Assets                    |       |             |       |             |       |
| Trading and manufacturing |       | 14,888           |       | 11,623           |       |
| Engineering               |       | 5,167            |       | 5,754            |       |
|                      |       | 20,055           |       | 17,377           |       |
| Liabilities               |       |             |       |             |       |
| Trading and manufacturing |       | 4,898            |       | 5,731            |       |
| Engineering               |       | 2,087            |       | 1,892            |       |
|                      |       | 6,985            |       | 7,623            |       |

 

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

F-33

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|            | ** ** | **200**6         | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Revenue -  |       |             |       |             |       |             |       |
| The PRC    |       | 22,457           |       | 25,005           |       | 25,245           |       |
| Hong Kong  |       | 4,324            |       | 5,932            |       | 6,820            |       |
| Others     |       | 380              |       | 313              |       | 217              |       |
|       |       | 27,161           |       | 31,250           |       | 32,282           |       |

 

F-34

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(iii)          Long-livedassets(1)

Geographical analysis of long-lived assets is as follows:

 

|            | ** ** | **200**6         | ** ** | **200**5         | ** ** |
|------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Hong Kong  |       | 905              |       | 969              |       |
| The PRC    |       | 723              |       | 766              |       |
|       |       |             |       |             |       |
|       |       | 1,628            |       | 1,735            |       |

----

(1)           Long-lived assetsrepresent property, plant and equipment, net.

(iv)          Majorsuppliers

Details of individual suppliers accounting for more than 5% of theGroup’s purchases are as follows:

 

|                                                | ** ** | **200**6 | ** ** | **200**5 | ** ** | **200**4 | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Eurotherm  Limited                             |       | 0.4%     |       | 3%       |       | 29%      |       |
| Hioki E.E. Corp.                               |       | 36%      |       | 29%      |       | 15%      |       |
| Hach Company  Inc.                             |       | 9%       |       | 9%       |       | 11%      |       |
| Lachat  Instruments Inc.                       |       | 8%       |       | 6%       |       | 7%       |       |
| US Filter/Chemical Feed and Disinfection Group |       | 6%       |       | 8%       |       | 4%       |       |
| ThermoQuest  Corporation                       |       | 2%       |       | 2%       |       | 5%       |       |
| Calipers Life Sciences Inc.                    |       | 4%       |       | 5%       |       | 2%       |       |

 

Some of the purchase agreements signed with the Group’s suppliers arememorialized. They are not formal contracts and are arranged through otheracknowledgements or correspondence which may contain vague description of theterms and conditions of such arrangements, and therefore may be unenforceable.

 

F-35

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