**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 20-F**

| **o**      | **REGISTRATION STATEMENT PURSUANT TO  SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                         |
| **OR**     |
| ** ** | ** **                                                                                                         |
| **x**      | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**           |

 

**For the fiscal year ended  December 31, 2005**

 

OR

 

| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------|-------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                  |
| **o**      | **SHELL COMPANY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934** |

 

**For the transition period from                                    to                                   **

Commission file number  **000-22113**

**EURO TECHHOLDINGS COMPANY LIMITED**(Exact name of Registrant as specified in its charter)

**EURO TECH HOLDINGS COMPANYLIMITED**(Translation of Registrant’sname into English)

**British Virgin Islands**(Jurisdiction of incorporation or organization)

**18/F Gee Chang Hong Centre, 65Wong Chuk Hong Road, Hong Kong**(Address of principalexecutive offices)

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

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

 

Securitiesregistered or to be registered 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) ofthe Act.

(Titleof 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.

**8,198,641 Ordinary Shares**

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

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

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

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

If this report isan annual or transition report, indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934.

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

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one).

Large AcceleratedFiler o        AcceleratedFiler  o        Non-AcceleratedFiler  x

If this is anannual report, indicate by check mark whether the registrant is a shell 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 LOOKIING 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                                                 |   |   |

 

i

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| Item 9F.      |       | Expenses Of The Issue                                                                                            |       |       |
|---------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------|
|          |       |                                                                                                             |       |       |
| ITEM 10.      |       | ADDITIONAL  INFORMATION                                                                                          |       |       |
|          |       |                                                                                                             |       |       |
| Item 10A.     |       | Share  Capital                                                                                                   |       |       |
| Item 10B.     |       | Memorandum and  Articles of Association                                                                          |       |       |
| Item 10C.     |       | Material Contracts                                                                                               |       |       |
| Item 10D      |       | Exchange Controls                                                                                                |       |       |
| Item 10E.     |       | Taxation                                                                                                         |       |       |
| Item 10F.     |       | Dividends And  Paying Agents                                                                                     |       |       |
| Item 10G.     |       | Statement By Experts                                                                                             |       |       |
| Item 10H.     |       | Documents on Display                                                                                             |       |       |
| Item 10I.     |       | Subsidiary  Information                                                                                          |       |       |
|          |       |                                                                                                             |       |       |
| ITEM 11.      |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                                     |       |       |
|          |       |                                                                                                             |       |       |
| ITEM 12.      |       | DESCRIPTION OF  SECURITIES OTHER THAN EQUITY SECURITIES                                                          |       |       |
|          |       |                                                                                                             |       |       |
| ITEM 13.      |       | DEFAULTS,  DIVIDENDS, ARREARAGES AND DELINQUENCIES                                                               |       |       |
|          |       |                                                                                                             |       |       |
| ITEM 14.      |       | MATERIAL  MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS       |       |       |
|          |       |                                                                                                             |       |       |
| ITEM 15.      |       | CONTROLS AND  PROCEDURES                                                                                         |       |       |
|          |       |                                                                                                             |       |       |
| ITEM 16.      |       | [RESERVED]                                                                                                       |       |       |
|          |       |                                                                                                             |       |       |
| Item 16A.     |       | Audit  Committee Financial Expert                                                                                |       |       |
| Item 16B.     |       | Code  Of Ethics                                                                                                  |       |       |
| Item 16C.     |       | Principal  Accountant Fees And Services                                                                          |       |       |
| Item 16D.     |       | Exemptions  From Listing Standards                                                                               |       |       |
|          |       |                                                                                                             |       |       |
| PART III | ** ** | ** **                                                                                                       |
|          |       |                                                                                                             | ** ** | ** ** |
| ITEM 17.      |       | FINANCIAL STATEMENTS                                                                                             |       |       |
|          |       |                                                                                                             |       |       |
| ITEM 18.      |       | FINANCIAL STATEMENTS                                                                                             |       |       |
|          |       |                                                                                                             |       |       |
| ITEM 19.      |       | EXHIBITS                                                                                                         |       |       |

 

 

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#  

**INTRODUCTION**

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

**Forward Looking Statements**

This annual report contains forward lookingstatements. Additional written or oral forward looking statements may be madeby the Company from time to time in filings with the Securities and ExchangeCommission (the “Commission”) or otherwise. Such forward looking statements arewithin the meaning of that term in Section 21E of the Exchange Act of1934. Such statements may include, but not be limited to, projections ofrevenues, income, or loss, capital expenditures, plans for future operations,financing needs or plans, and plans relating to products or services of theCompany, as well as assumptions relating to the foregoing. The words “believe,”“expect,” “anticipate,” “estimate,” “project,” and similar expressions identifyforward looking statements, which speak only as of the date the statement wasmade. Forward looking statements are inherently subject to risks anduncertainties, some of which cannot be predicted or quantified. Future eventsand actual results could differ materially from those set forth in,contemplated by, or underlying the forward looking statements. Statements inthis Annual Report, including those contained in the sections entitledPart I, Item 3D. “Risk Factors” and Item 5. “Operating and FinancialReview and Prospects” and the notes to the Company’s Consolidated FinancialStatements, describe factors, among others, that could contribute to or causesuch differences.

iii

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# ** **

 

**GLOSSARY**

The following glossary of termsmay be helpful in understand­ing 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.                                                                                                                                                        |
| ** **                   |   |                                                                                                                                                                                                                                                                                                                      |
| **Multi-Channel Digital**    |   |                                                                                                                                                                                                                                                                                                                      |
| **Recorder:**                |   | A device that measures and records more than one  input of a digitized signal (signal in the form of pulses).                                                                                                                                                                                                             |

 

 

1

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|                                |   |                                                                                                                                                                                                  |
|--------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Multi-Channel and Analogue** |   |                                                                                                                                                                                                  |
| **Recorder:**                  |   | A device that measures and records more than one  input of a signal in multi-voltage or milliamp ere (e.g. temperature in  degrees Centigrade or degrees Fahrenheit).                                 |
| ** **                     |   |                                                                                                                                                                                                  |
| **Process Analyzer:**          |   | An analyzer that continuously samples, monitors and  measures fluids or gases.                                                                                                                        |
| ** **                     |   |                                                                                                                                                                                                  |
| **Process Feed:**              |   | Treating water that had been used industrially.                                                                                                                                                       |
| ** **                     |   |                                                                                                                                                                                                  |
| **Process Turbidimeter:**      |   | An analytical instrument that continually measures  the clarity of water based on light scattering or deflection.                                                                                     |
| ** **                     |   |                                                                                                                                                                                                  |
| **Programmable Logic**         |   |                                                                                                                                                                                                  |
| **Controller:**                |   | A device used to automate the monitoring and control  of an industrial plant.                                                                                                                         |
| ** **                     |   |                                                                                                                                                                                                  |
| **SCADA:**                     |   | Supervisory Control and Data Acquisition. An  industrial device used to monitor and control an industrial plant’s status  and provide facilities to record the progress of a machine or project. |
| ** **                     |   |                                                                                                                                                                                                  |
| **Sequential Event Recorder:** |   | High-speed instrumentation that can record a  sequence of events in chronological order in millisecond resolution.                                                                                    |
| ** **                     |   |                                                                                                                                                                                                  |
| **Telemetry:**                 |   | The science and technology of automatic measurement  and transmission of data by wire, radio or other means from remote sources.                                                                      |
| ** **                     |   |                                                                                                                                                                                                  |
| **Total Organic Carbon**       |   |                                                                                                                                                                                                  |
| **Analyzer:**                  |   | An analytical instrument that measures organic  contamination in water.                                                                                                                               |

#  

2

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#  

**PART I**

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

Notapplicable.

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

Notapplicable.

## **ITEM3.****                                   KEYINFORMATION**

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

**SELECTEDFINANCIAL INFORMATION**(Amounts expressed in thousands, exceptshare and per share data and unless otherwise stated)

The selected consolidated income statement data for years ended December 31,2005, 2004 and 2003, and the selected consolidated balance sheet data as of December 31,2005 and 2004 set forth below are derived from audited consolidated financialstatements of the Company included herein and should be read in conjunctionwith, and are qualified in their entirety by reference to such financialstatements, including the notes thereto and Item 5. “Operating and FinancialReview and Prospects.” The selected consolidated income statement data for theyears ended December 31, 2002 and 2001 and the selected consolidatedbalance sheet data as of December 31, 2003, 2002 and 2001 set forth beloware derived from audited consolidated financial statements of the Company whichare not included herein.

 

|                            | ** ** | **As of December 31,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                 | ** ** | **US$**                               | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** |
| **Balance Sheet Data:**    |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents |       | 5,362                                 |       | 5,242 |   | 2,752 |   | 3,173 |   | 3,551 |   |
| Working capital(1)         |       | 6,931                                 |       | 5,457 |   | 4,914 |   | 4,363 |   | 4,123 |   |
| Total assets               |       | 17,377                                |       | 15,699 |   | 13,308 |   | 12,716 |   | 11,379 |   |
| Short-term debt(2)         |       | 0                                     |       | 0 |   | 0 |   | 0 |   | 90 |   |
| Net assets                 |       | 9,754                                 |       | 7,837 |   | 7,243 |   | 6,714 |   | 6,206 |   |
| Capital Stock              |       | 74                                    |       | 68 |   | 45 |   | 32 |   | 32 |   |

----

(1)             Current assets minus current liabilities.

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

3

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| ** **                                              | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                              | ** ** | **US$**                                                      | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** |
| **Income Statement Data:**                    | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenue**                                             | ** ** | **31,250**                                                   | ** ** | **32,282** | ** ** | **27,442** | ** ** | **23,497** | ** ** | **19,685** | ** ** |
| Cost of revenue                                         |       | (24,681                                                      | )          | (27,033 | ) | (22,805 | ) | (18,735 | ) | (15,396 | ) |
| Gross profit                                            |       | 6,569                                                        |       | 5,249 |   | 4,637 |   | 4,762 |   | 4,289 |   |
| Selling and  Administrative Expenses                    |       | (5,418                                                       | )          | (4,801 | ) | (4,108 | ) | (4,173 | ) | (3,734 | ) |
| Operating income                                        |       | 1,151                                                        |       | 448 |   | 529 |   | 589 |   | 555 |   |
| Interest Income                                         |       | 35                                                           |       | 17 |   | 13 |   | 18 |   | 66 |   |
| Other income, net                                       |       | 172                                                          |       | 104 |   | 6 |   | 9 |   | 126 |   |
| Income before taxes                                     |       | 1,358                                                        |       | 569 |   | 548 |   | 616 |   | 747 |   |
|                                                    |       |                                                         |       |   |   |   |   |   |   |   |   |
| Income taxes                                            |       | (328                                                         | )          | (167 | ) | (108 | ) | (123 | ) | (163 | ) |
| Share of equity in net  income of affiliates            |       | 21                                                           |       | 192 |   | 91 |   | 7 |   | — |   |
| Minority Interest                                       |       | (318                                                         | )          | — |   | — |   | — |   | — |   |
| Net income                                              |       | 733                                                          |       | 594 |   | 531 |   | 500 |   | 584 |   |
|                                                    |       |                                                         |       |   |   |   | ** ** | ** ** |   |   |   |
| Net income per Ordinary  Share                          |       |                                                         |       |   |   |   | ** ** | ** ** |   |   |   |
| Basic                                                   |       | 0.11                                                         |       | 0.09 |   | 0.08 |   | 0.08 |   | 0.09 |   |
| Diluted                                                 |       | 0.07                                                         |       | 0.06 |   | 0.08 |   | 0.08 |   | 0.09 |   |
| Weighted Average Number  of Ordinary Shares Outstanding |       |                                                         |       |   |   |   |   |   |   |   |   |
|                                                    |       |                                                         |       |   |   |   |   |   |   |   |   |
| Basic                                                   |       | 6,598,201                                                    |       | 6,434,667 |   | 6,434,667 |   | 6,434,667 |   | 6,434,667 |   |
| Diluted                                                 |       | 10,698,482                                                   |       | 10,034,687 |   | 6,434,667 |   | 6,434,667 |   | 6,434,667 |   |

 

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

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

4

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foreign exchange market.Exchange rates between the Hong Kong dollar and other currencies are influencedby the rate between the US dollar and the Hong Kong dollar.

Since1994, the conversion of Renminbi into foreign currencies, including U.S.dollars, has been based on rates set by the People’s Bank of China, which areset daily based on the previous day’s interbank foreign exchange market rates.From 1994 through 2004, the official exchange rate for the conversion ofRenminbi to U.S. dollars was generally been stable and maintained at the rateof approximately RMB8.30 = US$1.00. However, in 2005, the Renminbi appreciatedand at the end of 2005, the exchange rate was approximately RMB8.0702 = US$1.00.The value of the Renminbi fluctuates and is subject to changes in PRC politicaland economic conditions.

The high, low and average exchange rate set forthbelow:
| ** **                         | ** ** | **Low**    | ** ** | **High**   | ** ** | **Average** | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|-------------|------------|
| **The Following Months** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| US$ to RMB                    |       |       |       |       |       |        |       |
| July 2005                     |       | 8.1156     |       | 8.2865     |       | 8.2381      |       |
| August 2005                   |       | 8.1054     |       | 8.1162     |       | 8.1116      |       |
| September 2005                |       | 8.0987     |       | 8.1118     |       | 8.1049      |       |
| October 2005                  |       | 8.0954     |       | 8.1078     |       | 8.1027      |       |
| November 2005                 |       | 8.0830     |       | 8.1068     |       | 8.0896      |       |
| December 2005                 |       | 8.0734     |       | 8.0860     |       | 8.0802      |       |
|                               |       |       |       |       |       |        |       |
| US$ to HK$                    |       |       |       |       |       |        |       |
| July 2005                     |       | 7.7650     |       | 7.7820     |       | 7.7749      |       |
| August 2005                   |       | 7.7692     |       | 7.7720     |       | 7.7718      |       |
| September 2005                |       | 7.7538     |       | 7.7722     |       | 7.7626      |       |
| October 2005                  |       | 7.7447     |       | 7.7595     |       | 7.7557      |       |
| November 2005                 |       | 7.7513     |       | 7.7577     |       | 7.7547      |       |
| December 2005                 |       | 7.7529     |       | 7.7561     |       | 7.7543      |       |

 

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

Notapplicable.

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

Notapplicable.

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

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

 

5

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statements as a result ofcertain factors, including the risks we face as described below and elsewhere.See “Forward Looking Statements.”

**Certain Risks Relating to DoingBusiness in Hong Kong and the People’s Republic of China (the****“PRC” or “China”).**
| **PRC Sovereignty Over  Hong Kong 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. |
| ** **                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **                                                     | · | 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 from  large debts, declining company earnings and economic growth, and significant  currency devaluation. Although the region, including the PRC, appears to have  recovered, there can be no assurance that the recovery will continue.                                                                                                                                                                                                                                                                        |
| ** **                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **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                                                                                                                                                                                                                 |

 

 

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

 

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|                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                  |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|--------|
| ** **                                                                                                    |   | 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;                                                            |
|                                                                                                          |   | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 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. |
| ** **                                                                                                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                  |
| **SARS and Avian Flu**                                                                                        | · | From December 2002 to June 2003, the PRC  and certain other countries experienced an outbreak of a new and highly  contagious form of atypical pneumonia now known as severe acute respiratory  syndrome, or SARS. On July 5, 2003, the World Health Organization  declared that the                                                                                                                                                                                                                                                                                                                                                    |

 

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|                            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|----------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                 |   | SARS outbreak had been contained. Since  September 2003, however, a number of isolated new cases of SARS have  been reported, most recently in central China in April 2004. During  May and June of 2003, many businesses in the PRC were closed by the  PRC government to prevent transmission of SARS. Recently, concerns have been  raised with respect to the spread of avian flu in various regions in the PRC.  Any recurrence of the SARS outbreak, outbreak of avian flu or the development  of a similar health hazard in the PRC, may adversely affect our business and  operating results. For instance, a recurrence of SARS, outbreak of avian flu  or any other epidemic may reduce the level of economic activity in affected  areas and, as a result, have a material and adverse effect on our business.  In addition, health or other government regulations may require temporary  closure of offices, or the offices of our suppliers and customers, which will  severely disrupt our business operations and have a material adverse effect  on our financial condition and results of operations. |
| ** **                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |
| **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                                                                                                                                                                                                                                                                                                                                                                                      |

 

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|                                                    |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
|----------------------------------------------------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| ** **                                         |   |   | increased inflation in the PRC may have an adverse  impact on the PRC’s economy and 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 since January 1, 1994 and the PRC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

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|                                                                                         |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-----------------------------------------------------------------------------------------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                    | · |   | government has stated its intention to intervene in  the future to support the value of the RMB, there can be no assurance that  exchange rates will not again become volatile or that the RMB will not  devalue further against the U.S. dollar or Hong Kong dollar. Exchange rate  fluctuations may adversely 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. 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 such additional acquisition, or any  acquisition will perform as anticipated, will not result in significant  unexpected liabilities or will ever contribute significant revenues or  profits to the Company or that the Company will not lose its entire  investment in any acquisition candidate.                                                                                                                                                                                                   |
| ** **                                                         |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
| **Dependence upon Management**                                     | · |   | The Company is dependent upon the services of  its executive officers, in particular Mr. T.C. Leung, the Chairman of  the Company’s Board of Directors and its Chief Executive Officer. The  business of the Company could be adversely 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 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 Lachat Instruments, Inc.  (“Lachat”), which are the                                                                                                                                                                                                                                                                                                                         |
| ** **                                                         |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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|                                                                                                                                                         |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                              |   |   | 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.                                                                                                                                                                  |
| ** **                                                                                                                                              |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
| **Risks Relating to the Company  Itself. Control by T.C. Leung;   Potential Conflict of Interests**                                                     | · |   | T.C. Leung, the Company’s Chairman of the Board and  Chief Executive Officer, as a practical matter, is able to nominate and cause  the election of all the members of the Company’s Board of Directors, control  the appointment of its officers and the day-to-day affairs and  management of the Company. As a consequence, Mr. Leung can have the  Company managed in a manner that would be in his own interests and not in the  interests of the other shareholders of the Company. See Item 7. “Major  Shareholders and Related Party Transactions” and Item 6. “Directors, Senior  Management and Employees.” |
| ** **                                                                                                                                              |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **Certain Legal Consequences  of Incorporation in the**

**British Virgin Islands;  Rights of Shareholders  Not as Extensive as in  U.S. Corporations** | · |   | Principles of British Virgin Islands (“BVI”)  corporate law relating to such matters as the validity of the Company  procedures, the fiduciary duties of management and the rights of the  Company’s shareholders may differ from those that would apply if the Company  were incorporated in a jurisdiction within the United States.                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                    | · |   | The rights of shareholders under British Virgin  Islands law are not as extensive as the rights of shareholders under  legislation or judicial precedent in many United States jurisdictions. Under  United States law, majority and controlling shareholders generally have  certain “fiduciary” responsibilities to the minority shareholders. United  States shareholder action must be taken in good faith and actions by controlling  shareholders in a United States jurisdiction and executive compensation which  are obviously unreasonable may be declared null and void.                                                            |
|                                                                                                                                                    |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

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|                                                        |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------------------------------------------------------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                   | · |   | 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 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 |

 

 

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|                                                                             | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         |
|-----------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                  |       |       |       | 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** | ** ** | ** ** | ** ** | 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:                                                                                                   |
| **Exchange Commission**                                                     | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         |
| **(“Commission”) and National  Association of Securities**        |       | ·     |       | 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;                                                                                                                                                                                                       |
| **Dealers Automated Quotation**                                             |       |       |       |                                                                                                                                                                                                                                                                                                                                                               |
| **System (“NASDAQ”)  Requirements**                               |       | ·     |       | 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. |
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|                                                                                                                                   |   | If we are unable to meet the continued quotation  criteria of the NASDAQ SmallCap Market and are suspended from trading on  these markets, our securities could possibly be traded in the over-the-counter  market and be quoted in the so-called “pink sheets” or, if then  available, the OTC Bulletin Board. In such an event, an investor would likely  find it more difficult to dispose of, or even obtain accurate quotations of,  our securities. See “- We Are Also Required To Meet Certain, But Not All  NASDAQ Corporate Governance Criteria.” |
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| **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                                                                                                                                                                                                                                                   |
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|                                                                                                                                   |   | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | a limit on payments to independent directors and  their family members (other than for services on the board of directors).                                                                                                                                                                                                |
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|                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | These corporate governance requirements and a strict  definition of “independent director” make it more difficult to find  independent directors for our Board of Directors. There is intense  competition for qualified independent directors, including those persons with  accounting                         |
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|                                                                                                                                   |   |   | 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.”) |
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| **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.                                                                                                                                                          |
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| **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 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,  2005. 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 the fiscal year to end December 31, 2007. |
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|                                                                                                                                                                              |   |   | 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.                             |
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|                                                                 |   |   | The SEC has enacted rules that define a “penny  stock” to be any equity security that has a price (as therein defined) of  less than US$5.00 per share or an exercise price of less than US$5.00 per  share, subject to certain exceptions, including securities listed on the  NASDAQ SmallCap Market or on designated exchanges. For any transaction  involving a penny stock, unless exempt, the rules require the delivery,  prior to any transaction in a penny stock, of a disclosure statement prepared  by the SEC relating to the penny stock market. Disclosure also has to be made  about the risks of investing in penny stocks in both public offerings and in  secondary trading. In the event our securities are no longer 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** |   |   |                                                                                    |   |
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|                                                                                |   | · | There can be no assurance that a trading market for  our Ordinary Shares will continue. |
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##  

## **ITEM4.****                                INFORMATIONON THE COMPANY**

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

The Company was organizedunder the laws of the British Virgin Islands on September 30, 1996 for thepurposes of raising capital and for acquiring all the outstanding capital stockof Euro Tech (Far East) Limited, a Hong Kong corporation (“Far East”). TheCompany successfully completed a public offering (“Public Offering”) receivingnet proceeds of approximately US$1,817,000, in March 1997.Contemporaneously, the Company acquired all the issued and outstanding capitalstock of Far East and it became a wholly-owned subsidiary and the primaryoperational entity of the Company. Far East was established in 1971 and hasbeen in continuous operation since that time. See Item 5. “Operating andFinancial Review and Prospects.” Far East engages in its core business ofdistributing various equip­ment, instruments and supplies used in connectionwith the treatment, analysis and testing of water and wastewater.

FarEast was established in 1971 under the name of Eurotherm (Far East) Limited, tomarket and distribute its ex-parent’s industrial control equipment in Hong Kongand Southeast Asia, and expanded its activities into the PRC in 1973. In theearly 1980’s, Far East began distributing high-tech equipmentmanufactured in the United States, Europe and Japan within the PRC, in additionto its distribution of its parent’s products. In 1988, the activities of theparent and Far East were separated into Eurotherm International and Far East.In or around 1994, all the capital stock of Far East was purchased by itsmanagement, principally T.C. Leung, the Company’s Chairman of the Board ofDirectors and Chief Executive Officer. See Item 7. “Major Shareholders andRelated Party Transactions.”

DuringFiscal 2005, we completed our plan to increase our equity position in YixingPact Environmental Technology Company Limited (“Yixing”) and Pact Asia PacificLimited (“Pact”). We had previously owned thirty (30%) percent of their capitalstock. With the addition of twenty-one (21%) percent of Pact’s and Yixing’scapital stock in October 2005, they became our majority-ownedsubsidiaries.

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

The Company is engaged in three different major activities:

(1)***      ****Trading.*

The Company is primarily a distributor of a wide range of advancedwater treatment equipment (including chlorination equipment), laboratoryinstruments, analyzers, test kits and related supplies and power generationequipment (including recorders and power quality analyzers).

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The Company acts as an exclusive and non-exclusive distributorfor well-known manufacturers of such equipment, primarily to commercialcustomers and governmental agencies or instrumentalities in Hong Kong and thePRC. During its fiscal year ended December 31, 2005 (“Fiscal 2005”) theCompany distributed products to in excess of 1,000 customers, including theHong Kong Environmental Protection Department, China Light & PowerCo., Ltd., Hong Kong Electric Co., Ltd., the Kowloon-Canton RailwayCorporation,****China’s National EnvironmentalProtection Agency, Harbin Water, Harbin Environmental Monitoring Center, InbevGroup, Beijing Huai Rou and Shunyi District CDC, Liaoning Jinzhou WastewaterTreatment Plant and to subdistributors located in Hong Kong, the PRC and Macau.These products are manufactured by a substantial number of major American,European and Japanese corporations, including Hioki, USF and Lachat, which arethe Company’s largest suppliers, with purchases from them accounting forapproximately 15%, 4% and 7%, respectively, of the Company’s Fiscal 2004 salesand approximately 29%, 8% and 6%, respectively, of the Company’s sales duringFiscal 2005.

TheCompany distributes products through its Hong Kong headquarters, itsrepresentative offices located in Beijing, Shanghai, Guangzhou, Chongqing,Xi ́An, Shenyang, Wuhan and Fuzhou, and through non-exclusive arrangementswith independent sub-distribu­tors located in Hong Kong, the PRC andMacau.

TheCompany believes that the continuing growth of industrial activity inparticular and overall business activity in general, in the PRC over the lastfive years has produced a strong and increasing demand for its products in thePRC. The Company further believes that in the near future the need and demandfor the products it distributes will grow as a result of increased regulationsgoverning the environment and industrial pollution output, projected growingdemands of the PRC’s population for clean water and a healthier and saferenvironment, the potential for the contamination or depletion of existing cleanfresh water sources and the burgeoning demand for power in the PRC.

(2)  *Manufacturing.*

TheCompany believes that by assembling the products it distributes, it may realizeincreased gross profit margins and greater revenues and net income than if itremained only a distributor of such products with sales of the Company firstproduct offering, an Infrared Photometric Oil Analyzer, commencing in 2003.Similarly, the Company believes that by expanding its regional sales efforts inthe PRC, it may realize higher revenues and net income.

(3)  *Engineering.*

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

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In October 2005, we, through our subsidiary EuroTech (Far East) Limited (“Far East”) purchased approximately 21% of the issuedand outstanding shares of Pact and Yixing for approximately US$1,000,000 fromTamworth Industrial Limited (“Tamworth”).

Also,during Fiscal 2005, our Special Products and Engineering Department continuedto take on engineering projects in the wastewater treatment for powergeneration industries. This department is currently working on a project to treat 40,000cubic meters ofwastewater per day for a power plant in Inner Mongolia.

**ExpansionPlans for the Near Term**

Acidrain and sulphur dioxide emissions are serious problems in China, we areplanning to expand our activities in the air pollution control business byinvesting or acquiring some interest in companies involved in (i) the dustremoval and/or (ii) the flue gas desulphurization for power plantindustries and 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 the costs of any such acquisition would bedrawn from our general working capital and, possibly, by private sales of oursecurities including the potential exercise by officers and directors of theiroptions. We have no commitments or indications of interest for the privatesales of our securities and only a few persons have exercised their options todate.

As revenue and income from trading activities are declining gradually due to a greater number of oursignificant suppliers apparently plan to market and sell their products intothe China market through other distributors as well as the Company. Many ofthese other distributors are local Chinese companies and can operate with alower overhead.

Ourplans for the near term, include, but are not limited to the following:

·                  Continued use of our retail shops to sell “low-tech”products such as those manufactured by Hioki and our own products. We believethat these shops are operating with a lower overhead than the rest of theCompany.

·                  We believe that the continued “low-tech” productsales through our retail shops coupled with our “on-line” product sales willallow us to continue to offer products at lower prices than our competitors.

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

Our plan to establish our own calibration laboratory in Hong Kong hasbeen cancelled in November 2005. Most of the equipment andinstruments that we planned to calibrate and issue certificates for, are nowsold in the PRC and it is not economical and, in some instances, not

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feasible to have theequipment and instruments returned to Hong Kong and then returned to theirorigin. We are in the process of gathering further information to determine ifestablishing a calibration laboratory in our Shanghai factory is feasible.

Manufacturing

Sales of the Infrared Photometric Oil Analyzer commenced in 2003. During2004, we began selling turbidity instruments and spectrometers that wedeveloped and manufactured ourselves and began assembling and selling the TotalOrganic Analyzer of O.I. Corporation. During 2005, the Company built ademonstration Integrated Water Quality Monitoring System (“WQMS”) thatincorporates, 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.

In2005, the Company also began offering two new company manufacturedturbidimeters. One of the new turbidimeters is directed at water treatmentplans, environmental monitoring status, hydrological stations and the second isdirected at beer and other beverage processing facilities and it analyzes theparticles contained in the beverage. See “- Product Assembly Operations”.During the next twelve months, we intend to assemble and/or manufactureadditional products in the future and seek opportunities with our suppliers toassemble their products, secure manufacturing and/or assembly facilities andseek another manufacturer of analytical instruments to acquire.

Engineering

Toallow the Company to bid on larger water, wastewater and power generationprojects, we acquired Pact and Yixing and continue our search for otherengineering 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-Yixing have completeda substantial number of industrial water and wastewater treatment projects inthe PRC. The majority of these projects are for large multinationalmanufacturing facilities for clients from the USA, Europe and Japan. Processdesign as well as mechanical and electrical engineering are completed in-houseand manufacturing contracted to approved fabricators of components. Fabricationdrawings are also done in-house for submittal to said fabricators under thesupervision of Pact-Yixing’s quality control engineers.

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

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

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and package type mobile water treatment plants. As forwastewater treatment, Pact-Yixing design and build biological treatmentsystems, oil coalscers, dissolved air flotation, lamella clarifiers, chemicalreactor tanks, ultrafiltration, microfilitration, dewatering systems andpackage type mobile sewage treatment plants. Biological treatment plants coverboth aerobic and anaerobic processes. State-of-the-art aerobic processes of SBR(sequential batch reactors) and MBBR (membrane bioreactors) are technologies alsocovered by Pact-Yixing. See **“**Glossary**.”**

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

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

DuringFiscal 2005, Fiscal 2004 and Fiscal 2003, our share of Pact-Yixing’s net incomerepresented 48%, 32% and 17%, respectively, of our net income.

**Products, Services andCustomers**

Laboratoryinstruments, analyzers and test kits are used to analyze the chemical contentand ascertain the level of impurities or other contaminants in water. TheCompany distributes analytical re-agents and chemicals to support testingsystems of laboratory and portable instruments, process analyzers and portabletest kits and assist in the analysis process. The Company offers a wide varietyof test kits to test water quality. The Company believes that these portabletest kits are easy to use and preadapted for rugged field use. These test kitsare used to monitor drinking water distribution systems.

Laboratoryand portable instruments generally consist of analytical instruments includingbut not limited to the following: spectrophotometers, colorimeters,turbidimeters, ion-selective electrodes, chemical oxygen demand apparati,digestion apparati, and precision re-agent dispensing devices which areused to test and monitor impurities and contaminants in water systems. See “Glossary.”

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

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

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.

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

TheCompany derived approximately 34.8%, 37% and 41.3% of its revenues from thesale of Scientific Instruments during Fiscal 2005, Fiscal 2004 and Fiscal 2003,respectively.

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

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TheCompany derived approximately 30.4%, 21.8% and 21.6% of its revenues from thesale of Process Control and Engineering Products during Fiscal 2005, Fiscal2004 and Fiscal 2003, respectively.

**Special Projectsand Engineering Department.**In conjunction with the distribution of products such as programmable logiccontrollers, telemetry units and SCADA systems and software, the Company alsoprovides systems engineering to government agencies, wastewater treatment andpower generation plants and beverage producers.

TheCompany derived approximately 10.2%, 22.3% and 20.7% of its revenue from itsSpecial Project Operation during Fiscal 2005, Fiscal 2004 and Fiscal 2003,respectively. This revenue was derived primarily from sales of products andsupply systems. The Company is placing a greater emphasis on developing anengineering solution to business as one of our key suppliers Eurotherm has beendirectly marketing and selling their process automation product directly intothe PRC.

Ourspecial projects and engineering department is believed by the Company to bethe main contractor and system integrator of a large number of industrial andmunicipal wastewater, water treatment and power generation plants in the PRC.Specific services provided by this group include automated control systemdesign, the operation and management of various wastewater, water and powergeneration projects. We endeavor to introduce, develop, and promote new andadvanced technologies, products, and appropriate technical developments fromabroad. We have also been cooperating with established technology companies andengage in systems and special projects in Programmable Logic Control, Telemetryunit, SCADA systems, Human Machine Interface Software and Sequential EventRecording.

**OtherProducts.** The Companydistributes general testing and measuring equipment including multi-channeldigital and analogue recorders, signal amplifiers and calibration equipment andpower quality analyzers to industries including power plants, railway andaero-space industries, utilities, educational institutions andtelecommunications companies.

TheCompany derived approximately 23.3%, 17.6% and 14.8% of its revenues from thesale of these Other Products during Fiscal 2005, Fiscal 2004 and Fiscal 2003,respectively.

**TechnicalSupport.** The Company’stechnical support staff provides customers with maintenance, installationassistance, and calibration services, and assists sales personnel in givingtechnical advice to and performing product demonstrations for customers. TheCompany derived approximately 1.3%, 1.3% and 1.6% of its revenues fromTechnical Support Operations during Fiscal 2005, Fiscal 2004, Fiscal 2003,respectively.

**Customers.** During Fiscal 2004, the Company distributedproducts to in excess of 1,000 customers, including sub-distributors,located in Hong Kong, the PRC and Macau. During Fiscal 2005, the StateEnvironmental Protection Agency accounted for approximately 6% of the Company’srevenues. No other single customer accounted for more than 5% of the Company’s

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revenues during Fiscal 2005. TheCompany does not believe that any single customer or sub-distributor ismaterial to its operations.

**ProductAssembly 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 facility produces the Infrared Photometric Oil Analyzer, togetherwith the two types of specialized reagents have been the best customer acceptedproducts from this plant. Sale of the Infrared Photometric Oil Analyzercommenced in 2003. This plant also manufactures multi-function reactors,spectrophotometers, reagents for chemical oxygen demand and chlorine and silicameasurement, used in water-related testing, monitoring and treatment. Themanufacturing plant moved to a larger facility in 2003 under a lease that nowexpires in July 2006. It is contemplated that the Company will importcomponents, assemble the finished products and then distribute the productsthrough its distribution network. The Company believes that by establishingproduct assembly operations in the PRC and expanding the number of its regionalsales offices in the PRC, it will not only increase revenues by expanding itscustomer base and increasing distribution capabilities, but also its net incomesince the Company believes it will enjoy higher overall profit margins byassembling certain products which it now distributes rather than by onlypurchasing the finished product from vendors.

In June 2003,the Company entered into an agreement with O.I. Corporation (“O.I.”) permittingthe Company to assemble O.I.’s Total Organic Carbon Analyzer (“TOC”) at theCompany’s manufacturing facility. The Company believes that O.I.’s TOC is moreadvanced than the products currently sold by the Company and that by assemblingO.I.’s TOC, it may be able to increase its market share for advanced analyticalequipment at more competitive prices than it is now offering. Also, the Companyanticipates that this agreement will trigger closer cooperation with itsvendors to develop other products. Although the Company had entered intoassembly agreements for products with other vendors, this agreement is adeparture from past practice because, for the first time, the Company isassembling advanced analytical equipment for one of our vendors as opposed to “lowertech” analytical equipment. We believe that by producing products locally inthe PRC, we can reduce our production costs and be able to compete better withlower costs to our customers while maintaining our profit margins. During 2005,we succeeded in producing all components locally in the PRC and developed aChinese version of the necessary software to build and operate the TOC. Previously,all component parts and only an English language version of the software wereprovided by O.I.

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**Infrared Photometric Oil Analyzer**

The Companydeveloped an Infrared Photometric Oil Analyzer by infrared absorption methodand began sales of this product in 2004. This analyzer detects concentrationsof petroleum, animal and vegetable oils in surface water, underground water,municipal and industrial wastewater. Customers are environmental watermonitoring stations, water purification and waste treatment facilities,underground water and harbor water monitoring stations located in China.

Ourperceived advantage of the analyzer is that samples under its testing protocolsare measured by three different wavelengths simultaneously thus giving moreaccurate readings against one fixed wavelength used by most of our potentialcompetitors’ products.

**Sources ofSupply**

The Company distributes products manufactured by a number of vendors,including Hioki, USF and Lachat, which are the Company’s primary suppliers, see“- Business Overview”. The Company has exclusivity agreements for specifiedgeographic areas with many of its suppliers for certain products. Thoseagreements do not encompass all products distributed by the Company or all ofthe market areas serviced by the Company. In addition, some of these agreementsare memorialized not as formal contracts but rather through otheracknowledgements or correspondence which may contain a vague, if any,description of the terms and conditions of such agreement or arrangement, andtherefore may be unenforceable. The Company has only a letter from Hiokiappointing the Company as Hioki’s sales representative in the PRC, Hong Kongand Macau. The Company’s agreement with USF continues in effect for successiverenewal terms of one year each, unless either party gives written notice ofnon-renewal at least 30 days prior to the end of any renewal term. The Company’sagreement with Lachat continues in effect for successive renewal terms of oneyear and is terminable on ninety days 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**

TheCompany continues to seek: development of manufacturing and engineeringoperations as part of its core business through (a) the development andassembly 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 airpollution business, and (d) potential acquisitions of engineeringcompanies to enhance our ability to bid for and take on larger engineeringprojects.

**RegulatoryEnvironment**

Concerns about and awareness of pollution problems and environmentalissues have grown at all levels of PRC government as the PRC experiencedeconomic growth. Environmental

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protectionlaws and strict regulations have been enacted and are buttressed by increasedbudget allocations for environmen­tal regulation, monitoring and enforcement.The PRC’s primary environmental protection agency is the State EnvironmentalProtection Agency (SEPA), under which there are Environment Protection Bureausin each city and county. According to oral information received by managementfrom SEPA, under bureau management, there are two environment monitoringsystems: one system consists of over 2,200 monitoring stations to collect andanalyze the environmental data of each city and county; another system consistsof over 2,500 stations to monitor specific industrial districts or factorieswhich have been identified as major pollution sources due to their non-compliancewith environmental regulations. The Company has supplied water and air qualitymonitoring and analytic instruments to these monitoring stations for severalyears. There can be no assurance that the agencies will continue to use theCompany’s products for these purposes, or that other market competitors willnot enter the market with superior products, distribution systems or morecompetitive prices. See “ — Competition.”

**Competition**

The Company faces competition from other distributorsof substantially similar products as well as the manufacturers of suchproducts, and in both foreign and Chinese markets. The Company faces itsprincipal competition from manufacturers and other distributors of its coreproducts located in Hong Kong and the PRC. Moreover, the Company hasimplemented plans to assemble products of the kind that it presentlydistributes (see “-Product Assembly Operations”). Assembly operations havedeveloped to the stage where some products have already been presented to themarket and the Company is in direct and unavoidable competition with certain ofits vendors. There can be no assurance that the existence of this directcompetition will not impair the Company’s ability or such competitor’swillingness to continue providing other products for continued distribution bythe Company and that such a development would not materially adversely effectthe Company’s core business.

DuringFiscal 2005, Fiscal 2004 and Fiscal 2003, the Company’s gross profit marginswere approximately 21%, 16.3% and 16.9%, respectively. The Company believesthat it competes with the PRC manufacturers on the basis of quality andtechnology. The Company believes it offers foreign-manufactured productswhich are of higher quality and use more advanced technology than 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.

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**B2B Website**

The Company,through its subsidiary, ChinaH2O.com Limited, a Hong Kong corporation, has abilingual Business-to-Business (“B2B”) internet platform. The website islocated at (http://www.chinah2o.com). The B2B website is directed atenvironmental businesses in China. The purpose of the B2B website is to connectmanufacturers, distributors and suppliers of environmental protection equipmentand related consultants and engineering firms in the West with potentialclients in China (i.e., water, wastewater treatment plants, environmentalprotection bureaus, environmental monitoring stations, and related industries).The website provides environmental news, directories of western suppliers,potential clients in China, advertisement space and 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**

TheCompany distributes products through its principal office located in Hong Kongand its representative PRC offices located in Beijing, Shanghai, Guangzhou,Chongqing, Xi ́An, Shenyang, Wuhan and Fuzhou. The Company has a marketing andsales force of 80 people who are paid a salary plus commission based on sales.The Company’s offices also coordinate the sales efforts of approximately fiftyother companies located in the PRC which act as sub-distributors. Thesesub-distributors are engaged on a non-exclusive basis to distributethe products of other distributors. Each of the fifty sub-distributorsaccounted for less than two percent of the Company’s sales during Fiscal 2005,Fiscal 2004 and Fiscal 2003.

Following the opening ofour first retail shop in Shanghai in 2001, Euro Tech retail outlets are nowfound in a number of major cities in the PRC, including Beijing and Guangzhou.Our staff at these shops assists customers in selecting the equipment,auxiliary parts and products to suit customer specifications. Equipment thatneeds to be repaired or provided with routine maintenance can be returned to usvia these shops, as our retail shops, except for the Beijing shop, are alsomaintenance centers. The Company has foundthe seven existing shops to be useful as demonstration locations easilyaccessed by local customers who can pay in local currency while “off the shelf”sales are made which move its inventory more readily. In addition to the shops,we also have four branches or representative offices of these shops. All of theforegoing are perceived by the Company to have had a positive impact on itsbusiness reputation while reducing the Company’s dependency on sub-distributorswho may not be loyal to the Company and distribute products of our competitors.As foreign entities are not generally permitted to own these facilities, theseshops are owned by non-officer/director, employees of the Company with fundsfrom the Company through non-fixed term loans aggregating approximatelyUS$388,000 bearing a nominal rate of interest. The shops do not have financingfrom other sources. There can be no assurance that these shops will continue tobe economically viable, that the Company will not sustain losses in connectionwith the loans to the shops; or the shops will result in any significantrevenues or profits for the Company. Also, similar shops may be established byour competitors and/or third parties. These shops (or their representativeoffices) were opened on the following dates:

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| 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 |
|                   |
| Dalian                 |   | November 2003 |
| Suzhou                 |   | July 2004 |
| Dongguan               |   | September 2004 |
| ChengDu                |   | February 2005 |
| Qingdao                |   | April 2005 |
| Urumqi                 |   | September 2005 |

###  

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

TheCompany presently wholly-owns Far East, a Hong Kong corporation, 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

**MajorityOwned**

·                  Yixing Pact Environmental Technology CompanyLimited — a PRC corporation

·                  Pact Asia Pacific Limited — a BVI corporation

TheCompany’s wholly-owned subsidiary and primary operational arm is FarEast, 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 and Equipment***

TheCompany maintains an executive office at 18/F Gee Chang Hong Centre, 65 WongChuk Hang Road, Hong Kong. The Company occupies approxi­mately 12,800 squarefeet of office and warehouse storage space under a two (2) year lease thatexpires in May 2007 for

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monthly rentalpayments of approximately US$7,050. The warehouse storage space is used to holdproducts for distribution to our customers via common carriers.

In August 1995,the Company purchased approximately 1,200 square feet of space in a building inHong Kong. This property is now used as ChinaH2O.com Limited’s office.

The Company alsomaintains representative offices within the PRC in the cities of Beijing,Shanghai, Guangzhou, Chongqing, Xi ́An, Wuhan, Shenyang and Fuzhou. The Beijingand Shanghai sales offices are owned by the Company. The Beijing and Shanghaisales offices are situated on Company owned property. The remaining salesoffices are rented pursuant to short-term leases aggregating approximatelyUS$3,000 per month**.**

Oneof Euro Tech Trading (Shanghai) Ltd.’s office is rented pursuant to a leaseexpiring in August 2006 that provides for a monthly rental ofapproximately US$237, with a second office rented pursuant to a lease expiringin July 2006 that provides for a monthly rental of approximately US$618. Shanghai Euro Tech Limited’s premisesare rented pursuant to a lease expiring in July 2006 with monthly rentalpayments of approximately US$2,800.

Pactoccupies a 700 square meter facility in Shanghai, pursuant to a 3 year leaseexpiring in March, 2008, providing for a monthly rental of approximatelyUS$5,136.

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

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

**Overview**

TheCompany is primarily a distributor of a wide range of advanced water treatmentequipment (including chlorination equipment), laboratory instruments,analyzers, test kits and related supplies and power generation equipment(including recorders and power quality analyzers).

TheCompany’s operations are located almost entirely within, and revenues arealmost entirely generated from Hong Kong and the PRC. The Company derivedapproximately 19% and approximately 80% of its revenue from Hong Kong and thePRC, respectively in Fiscal 2005. Net income increased approximatelyUS$457,000, or 76.9%, in Fiscal 2005 to US$1,051,000, compared to US$594,000 inFiscal 2004, primarily due to the Company’s diversification into engineeringand contributions from its engineering subsidiary, Yixing-Pact.

TheCompany continued to expand its trading business by expanding its regionalsales efforts in the PRC and using the retail shops and online ordering in thePRC to sell the Company’s products. The Company manufacturers and sells its owndeveloped products such as Infrared Photometric Oil Analyzer, turbidityinstruments and spectrophotometers and assembles and sells the Total OrganicAnalyzer of O.I. Corporation. The Company intends to assemble

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and/or manufactureadditional products in the future and seek opportunities with its suppliers toassemble their products, secure manufacturing and/or assembly facilities andseek another manufacturer of analytical instruments to acquire.

TheCompany continued to accept more engineering projects in water and wastewaterindustries and also in power generation industries. During 2005, the Companyacquired a majority interest in Yixing-Pact. The Company intends to continueits 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.******                              OperatingResults***

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

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** | ** ** |
|------------------|------------|---------|------------|--------------------|------------|
| 2003             |       | 74      | %          | 26                 | %          |
| 2004             |       | 78      | %          | 21                 | %          |
| 2005             |       | 80      | %          | 19                 | %          |

 

Salesto customers situated in Macau and elsewhere in Fiscal 2003 through Fiscal 2005were nominal. This makes the Company particularly susceptible to changes in thepolitical and economic climate of either Hong Kong or the PRC.

**Hong Kong.** Hong Kong has been one of the prime centers forcommercial activity and economic development recently in Southeast Asia. On July 1,1997, sovereignty over Hong Kong was transferred from the United Kingdom to thePRC. As provided in the Sino-British Joint Declaration and the Basic Law,the Hong Kong SAR is provided a high degree of autonomy except in foreign anddefense affairs. The Basic Law provides that the Hong Kong SAR is to have itsown legislature, legal and judicial system and full economic autonomy for 50years after the transfer of sovereignty. Based on the current political conditionsand the Company’s understanding of the Basic Law, the Company does not believethat the transfer of sovereignty over Hong Kong has had or will have an adverseimpact on its financial and operating environment. Although the Chinesegovernment has pledged to maintain the economic and political autonomy of HongKong over its internal affairs, there is no assurance that such pledge willcontinue to be honored if there are changes in the Chinese political oreconomic climate. See Item 3D. “Key Information — Risk Factors.”

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**PRC.** The PRC has been a socialist state since 1949.For more than forty years, the PRC’s economy has been, and presently continuesto be, a socialist economy operating under government controls promulgatedunder various State Plans adopted by central Chinese government authorities andimplemented, to a large extent, by provincial and local authorities which mayset production and development targets. However, since approximately the early1980s, the PRC’s national government has undertaken certain reforms to permitgreater provincial and local economic autonomy and private economic activities.Any change in political or economic conditions may substantially adverselyeffect these reform 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”).

Thefollowing table presents selected statement of operations data expressed inthousands of US$ and as a percentage of revenue for the Company’s fiscal****years indicated below:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **US$**                                    | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** |
| Revenue                                      |       | 31,250                                     |       | 100 | % | 32,282 |   | 100 | % | 27,442 |   | 100 | % | 23,497 |   | 100.0 | % |
| Cost of revenue                              |       | 24,681                                     |       | 79.0 | % | 27,033 |   | 83.7 | % | 22,805 |   | 83.1 | % | 18,735 |   | 79.7 | % |
| Gross Profit                                 |       | 6,569                                      |       | 21.0 | % | 5,249 |   | 16.3 | % | 4,637 |   | 16.9 | % | 4,762 |   | 20.3 | % |
| Selling and  administrative expenses         |       | 5,418                                      |       | 17.3 | % | 4,801 |   | 14.9 | % | 4,108 |   | 15.0 | % | 4,173 |   | 17.8 | % |
| Income before  income taxes                  |       | 1,358                                      |       | 4.3 | % | 569 |   | 1.8 | % | 548 |   | 2.0 | % | 616 |   | 2.6 | % |
| Income taxes                                 |       | 328                                        |       | 1.0 | % | 167 |   | 0.5 | % | 108 |   | 0.4 | % | 123 |   | 0.5 | % |
| Share of equity  in net income of affiliates |       | 21                                         |       | 0.0 | % | 192 |   | 0.6 | % | 91 |   | 0.3 | % | 7 |   | 0.0 | % |
| Net income                                   |       | 1,051                                      |       | 3.3 | % | 594 |   | 1.8 | % | 531 |   | 1.9 | % | 500 |   | 2.1 | % |

 
|                                         | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
|                                         |       |       |       |   |   | **2001** |   |   |   |   |   |   |   |
| Revenue                                      |       |       |       |   |   | 19,685 |   |   |   | 100.0 | % |   |   |   |   |   |   |
| Cost of revenue                              |       |       |       |   |   | 15,396 |   |   |   | 78.2 | % |   |   |   |   |   |   |
| Gross Profit                                 |       |       |       |   |   | 4,289 |   |   |   | 21.8 | % |   |   |   |   |   |   |
| Selling and  administrative expenses         |       |       |       |   |   | 3,734 |   |   |   | 19.0 | % |   |   |   |   |   |   |
| Income before  income taxes                  |       |       |       |   |   | 747 |   |   |   | 3.8 | % |   |   |   |   |   |   |
| Income taxes                                 |       |       |       |   |   | 163 |   |   |   | 0.8 | % |   |   |   |   |   |   |
| Share of equity  in net income of affiliates |       |       |       |   |   | 0 |   |   |   | 0.0 | % |   |   |   |   |   |   |
| Net income                                   |       |       |       |   |   | 584 |   |   |   | 3.0 | % |   |   |   |   |   |   |

 

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

*Revenue;Gross Profit and Cost of Revenue.* Revenue decreased by approximately US$1,032,000 or 3.2%to approximately US$31,250,000 in Fiscal 2005 from approximately US$32,282,000 inFiscal 2004. The decrease in revenues included adecrease of approximately US$4,694,000 in revenues from continuing operationsthat were primarily due to declining revenues from trading activities as a greaternumber of our key or exclusive suppliers have been marketing their products orselling into the China market, either directly or through otherdistributors, as well as the Company. This decrease was partially offset by the inclusion of revenues approximately US$3,662,000from Yixing-Pact for the period after the Company acquired its majorityinterest in October 2005 as their results were consolidated with theCompany’s.

Grossprofits 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’scost of revenue was approximately US$24,681,000, or 79% of revenue, in comparison to approximately US$27,033,000, or 83.7%of revenue for Fiscal 2004.Cost of revenue expressed as a percentage of revenue decreased by 4.7%in Fiscal 2005 as compared withFiscal 2004. Gross profits fromcontinuing operations increased by approximately US$310,000 or 5.9% toapproximately US$5,539,000 for Fiscal 2005 as compared to approximatelyUS$5,249,000 for Fiscal 2004. The gross profit margin percentage increase was due principally toan increase in revenues from our engineering solution business of approximatelyUS$1,113,000, representing an approximately 41% of our gross profit margin. Yixing-Pactcontributed approximately US$1,010,000 to our gross profit margin in Fiscal2005.

*Selling and Administrative Expenses.*Selling and administrative expenses were approximately US$5,418,000 in Fiscal 2005,an increase of approximately US$617,000or 12.9% from approximatelyUS$4,801,000 in Fiscal 2004. Expenses from continuingoperations increased approximately US$495,000 principally as a result ofemployee expenses increasing as a result of the hiring of additional personnel,incremental increases in the salaries of our employees and other expensesresulting from general inflation. Yixing-Pactexpenses of approximately $122,000 were included in our expenses for Fiscal2005.

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

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

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*Other Income.* Other income increasedby approximately US$68,000 or 65.4% to approximately US$172,000 in Fiscal 2005 from approximately US$104,000 in Fiscal 2004. The increase in other income wasprincipally due to increase in exchangegain of US$85,000 in Fiscal 2005.

*Income Taxes.* Taxes increased byUS$161,000 to approximately US$328,000 in Fiscal 2005 from approximately US$167,000 in Fiscal 2004. This increase was primarily theresult of increased taxable profits.

*NetIncome.* Income from continuing operations increased byapproximately US$457,000 or 76.9% to approximately US$1,051,000 in Fiscal 2005 from approximately US$594,000 in Fiscal 2004. The Company’s net income,excluding Yixing-Pact’s contribution, was approximately US$381,000 andUS$402,000 for Fiscal 2005 and Fiscal 2004, respectively. The slight decreaseof US$21,000 was primarily due to the decrease in revenues with the effect onthe Company being cushioned by the increase in revenues from our engineeringsolution business that has a higher gross profit margin. The net income fromYixing Pact was approximately US$670,000 for 2005. The Company recognizedequity in profit of Yixing-Pact of approximately US$192,000 for its 30% shareownership in Fiscal 2004. Net income attributable to the shareholders of theCompany, after deducting minority interest amounted to US$733,000 andUS$594,000 for Fiscal 2005 and Fiscal 2004, respectively.

**Fiscal YearEnded December 31, 2004 Compared to Fiscal Year Ended December 31,2003**

*Revenue; Gross Profit and Cost of Revenue.*Revenue increased by approximately US$4,840,000 or 17.6% to approximately US$32,282,000in Fiscal 2004 from approximately US$27,442,000 in Fiscal 2003. The increasewas primarily due to:  the inclusion of revenue of approximatelyUS$1,200,000, the retail shops as these shops are qualified as VariableInterest Entities (“VIE”) as the Company is subject to a majority of risk ofloss from the VIE activities and entitled to receive a majority of the VIEresidual returns, and their results were consolidated starting in Fiscal 2004; increasein revenues from specialproject and engineering departmentsales to water and power plants of approximately US$1,700,000 andincreased revenues from sales of Hioki products of approximately US$1,200,000 to powerindustries as a result of our expansion of the Company’s distributionand retail network. Revenueincreased from special projects and engineering department sales as a result of(a) increasing demand from water suppliers and waste water treatment plants, following increased PRCregulations governing pollution output and an overall increasing demands forclear water; and (b) the construction of new power generation plants tomeet the burgeoning demand for electricity in the PRC. The increased sales of Hioki products was the result of (a) theCompany establishing representative offices in Suzhou and Dongguan, (b) on-lineinternet ordering; (c) increasing our sales staff, (d) our enhancingHioki’s “brand name” in the PRC via promotional activities (i.e. seminars andattending/giving exhibitions) in pastyears, and (c) with Hioki’s assistance, a limitation on sales ofHioki’s products by other dealers.

Grossprofits increased by approximately US$612,000 or 13.2% to approximately US$5,249,000for Fiscal 2004 as compared to approximately US$4,637,000 for Fiscal 2003.During Fiscal 2004, the Company’s cost of revenue was approximately US$27,033,000,or

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83.7% of revenue,in comparison to approximately US$22,805,000, or 83.1% of revenue for Fiscal2003. Cost of revenue expressed as a percentage of revenue increased by 0.6% inFiscal 2004 as compared with Fiscal 2003. The gross profit margin percentagedecrease is attributed to the fact that the Company sold a greater amount oflow tech products through its retail shops. The weakening of US$ against other foreign currencies also hadan adverse impact on the gross margin percentage as the Company’s sales weremainly denominated in US$, HK$ and RMB while some of the Company’s cost ofrevenue were denominated in Japanese Yen, the Euro and Sterling Pound, such as cost of revenue for Hioki productswas denominated in Japanese Yen.

*Selling and Administrative Expenses.*Selling and administrative expenses were approximately US$4,801,000 in Fiscal2004, an increase of approximately US$693,000 or 16.87% from approximatelyUS$4,108,000 in Fiscal 2003. The increase was primarily due to inclusion of expenses of the retail shops ofapproximately US$417,000 as these shops are qualified as VIEs and its resultswere consolidated starting from Fiscal 2004, and the expense increaseresulted from increases in sales, general inflation and audit and consultingfees. Audit and consulting fee increases are the result of newly adoptedsecurities laws, rules and regulations that impose furtherresponsibilities and potential liabilities on companies and their officers,directors, auditors and attorneys that are publicly traded in the U.S.

*Equity in Profit of Affiliates.*Equityin profit of affiliates increased by approximately US$101,000 or 111%to approximately US$192,000 inFiscal 2004 from approximately US$91,000 in Fiscal 2003. The increase in equityin profit of affiliates was principally due to the increase in net profits ofYixing-Pact from approximately US$304,000 in Fiscal 2003 to approximately US$641,000 in Fiscal 2004.

*Interest Income.* Interest income increasedby approximately US$4,000 or 30.8% to approximately US$17,000 in Fiscal 2004from approximately US$13,000 for Fiscal 2003. The increase was primarily due tothe increase in bank deposits during the year. There was no interest expense inFiscal 2004 and Fiscal 2003 because the Company has not utilized any loan oroverdraft facilities under its banking arrangements.

*Other Income.* Other income increasedby approximately US$98,000 or 1,633.3% to approximately US$104,000 in Fiscal2004 from approximately US$6,000 in Fiscal 2003. The increase in other incomewas principally due to an exchange gain of US$73,000 in Fiscal 2004 comparedwith an exchange loss of approximately US$35,000 in Fiscal 2003.

*Income Taxes.* Taxes increased byUS$59,000 to approximately US$167,000 in Fiscal 2004 from approximately US$108,000in Fiscal 2003. This increase was primarily the result of increased taxable profits,and an increase of valuation allowances.

*NetIncome.* Income from continuing operations increased byapproximately US$63,000 or 11.9% to approximately US$594,000 in Fiscal 2004 fromapproximately US$531,000 in Fiscal 2003. The increase in net income resultedfrom an increases in gross profit.However, the general increase in selling and administrative expenses andinclusion of expenses of PRC retail shops resulted in a decrease of operatingprofit. Nevertheless, theCompany achieved an increase

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in net income for Fiscal2004 as a result of the exchange gain and the contributionfrom its share of the profits of approximately US$192,000 from Pact.

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

The Company has primarily used its funds to finance accounts receivable,inventories, and capital expenditures including purchases of property, officefurniture and equipment, computers and calibration equipment. The Company hashistorically met its cash requirements from cash flows from operations, short-termborrowings, bank lines of credit, and long-term mortgage bank loans. TheCompany expects, but can make no assurances that its present cash reserves,cash from operations, existing available bank credit facilities and proceedsfrom the issuance of our ordinary shares pursuant to stock option exerciseswould be sufficient to fund its future capital expenditure requirements.Working capital at the end of Fiscal 2005 and Fiscal 2004 was approximatelyUS$6,931,000 and US$5,457,000, respectively.

During Fiscal 2004, the Company generated net cash ofapproximately US$2,536,000 in its operating activities from net income,reduction in accounts receivable, increase in accounts payable while funding anincrease in inventories resulting from delays in shipments in customers. DuringFiscal 2005, the Company used approximately US$258,000 in its operatingactivities to fund the increase in accounts receivable, a reduction in theamounts due to related companies and other payables, that in total, exceededthe funds generated from net income and a decrease in inventory. At the end ofFiscal 2005 and Fiscal 2004, the Company’s accounts receivable wereapproximately US$5,467,000 and US$4,139,000, respectively.

The Company generated approximately US$72,000 from investing activities infiscal 2005 and used approximately US$46,000 for investing activities in Fiscal2004. The Company used approximately US$110,000 and US$101,000 to purchasefacilities and equipment in Fiscal 2005 and Fiscal 2004, respectively. DuringFiscal 2005, the Company derived approximately US$486,000 from its acquisitionof Yixing-Pact. Although the cash consideration, plus other costs paid by theCompany, was US$1,034,000 for****Yixing-Pact,Yixing-Pact had approximately US$1,520,000 in cash on hand at the time of theiracquisition** **During Fiscal2005, the Company used approximately US$304,000 as restricted cash to issueperformance guarantees to its customers through its banks. During Fiscal2004, the Company received a US$55,000 dividend from Pact.

The Company received approximately US$306,000 inFiscal 2005 from financing activities resulting from the issuance of itsordinary shares being issued on stock options that were exercised while in theprior two fiscal years no expenditures were needed for financing activities. TheCompany had various banking facilities available for overdraft, import andexport credits and foreign exchange contracts from which the Company can accessup to approximately US$4,167,000 at December 31, 2005. The aforementionedavailable credit facilities were obtained on the conditions that, among otherthings, the Company not create a charge or lien on its other assets in favor ofthird parties without such bank’s consent, and the Company maintaining acertain level of net worth.

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Cash increasedfrom approximately US$5,242,000 at the end of Fiscal 2004 to approximatelyUS$5,660,000 at the end of Fiscal 2005. The principal reasons for the increasein cash were the decreases in inventories of approximately US$2,387,000, a netcash inflow of approximately US$486,000 of Yixing-Pact’s cash on hand, proceedsof approximately US$306,000 from the exercise of stock options by Companymanagement and employees. However, the Company used cash to fund its increasesin accounts receivable of approximately US$1,237,000, decrease the amounts dueto related companies by approximately US$1,267,000 and decrease the otherpayables by approximately US$1,665,000. During Fiscal 2004, the Companyreceived a US$55,000 dividend from an affiliate, Pact. The Company plans to usecash on hand primarily to acquire a manufacturing plant and/or environmentalengineering company in the PRC and to expand its manufacturing plant andenvironmental engineering business.

The Company’s net accounts receivable increased fromapproximately US$4,139,000 at the end of Fiscal 2004 to approximatelyUS$5,467,000 at the end of Fiscal 2005. This increase is principallyattributable to the inclusion of Yixing-Pact’s accounts receivable ofapproximately US$1,028,000.

The Company’s inventory decreased from approximatelyUS$3,564,000 at the end of Fiscal 2004 to approximately US$2,732,000 at the endof Fiscal 2005. This decrease at the end of Fiscal 2005 was principally due toinventory of approximately US$835,000 for a SEPA contract not yet shipped atthe end of Fiscal 2004 that was shipped in 2005.

The Company’s capital expenditures were approximatelyUS$101,000 and US$110,000 in Fiscal 2004 and Fiscal 2005, respectively. Capitalexpenditures during Fiscal 2004 and Fiscal 2005 were incurred primarily in connectionwith the purchase of office equipment, furniture and fixtures. The Companycontinues to seek targets for acquisition, such as 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.

**AnticipatedFuture Resources and Uses of Cash**

The Company has historically funded its working capital and capitalexpenditure needs from operations, available bank credit facilities andproceeds from the issuances of our ordinary shares and expects to continuefunding its 2006 working capital requirements from operations, available bankcredit facilities and proceeds from the issuances of our ordinary shares. TheCompany may use its funds to acquire other businesses, form strategic allianceswith third parties, invest in product research and development, or expand itssales offices and retail shops or, with third parties, seek to acquire newproducts or businesses or form strategic alliances. The Company expects, butcan make no assurances that its present cash reserves, cash from operations andexisting available bank credit facilities would be sufficient to fund itsfuture cash requirements.

 

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**Inflation**

The Company believes generallydeclining rates of inflation in the PRC have had a positive effect on itsresults from operations. The Company believes, although no assurance can begiven, that as credit restrictions are gradually lifted, Far East will be ableto increase prices in the market for its products and thus realize increasedprofit margins.

**Critical Accounting Policies**

***Revenue Recognition***

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

Revenues and profits in long term fixed price contracts are recordedunder the percentage of completion method. This approach relies on estimates oftotal expected direct costs of completion, which are compared to actual directcosts incurred to date to arrive at an estimate of revenue and profit earned todate. Recognized revenue and profit are subject to revisions as the contractprogresses to completion. Revisions to profit estimate are reflected in incomein the period in which the facts that give rise to the revision become known.

***Inventory Valuation***

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

***Deferred Taxes***

As part of the process ofpreparing its consolidated financial statements, the Company is required toestimate its income taxes and tax bases of assets and liabilities in each ofthe jurisdictions in which it operates. This process involves the Companyestimating its current tax exposure together with assessing temporarydifferences resulting from its differing treatment of items for tax andaccounting purposes. These differences result in deferred tax assets and liabilities,which are included in the Company’s consolidated balance sheet. The Companymust then assess the likelihood that its deferred tax assets will be recoveredfrom future taxable income, and, to the extent the Company believes thatrecovery is more unlikely than likely, it must establish a valuation 

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allowance. To the extent the Companyestablishes a valuation allowance or increases this allowance in a period, itmust include an expense within the tax provision in the statement ofoperations.

*Recent Accounting Pronouncements*

In November 2004,the FASB issued SFAS N. 151, “Inventory Costs, an amendment of ARB No. 43,Chapter 4.”  SFAS No. 151 requiresthat abnormally high vacancy, wasted material, freight and processing costs notbe part of recognizable production costs. Such cost must instead be expensed asincurred. Accordingly fixed costs shall henceforth be allocated to inventorybased on normal production capacity. The standard is effective for the fiscalyear beginning January 1, 2006. It is not expected that SFAS No., 151 willhave a material effect on the Company’s consolidated financial statement.

In December 2004,the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” that will require theCompany to expense costs related to share-based payment transactions withemployees. With limited exception, SFAS No. 123 (R) requires that thefair value of share-based payments to employees be expensed over the periodservice is received. SFAS No. 123 (R) becomes mandatory effective forthe Company on July 1, 2005. The Company intends to adopt this standardusing the modified retrospective method of transition, effective as of January 1,2006.

SFAS No. 123 (R) allowsthe use of both closed form models (e.g., Black-Scholes Model) and open form models(e.g., lattice models) to measure the fair value of the share-based payment aslong as that model is capable of incorporating all of the substantivecharacteristics unique to share-based awards. In accordance with the transitionprovisions of SFAS No. 123 (R), the expense attributable to an award willbe measured in accordance with the Company’s measurement model at that award’sdate of grant.

The Companybelieves that the total expense recorded in future periods will depend onseveral variables, including the number of share-based awards that vest and thefair value of those vested awards.

In March 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” (“SFAS 154”), which was a replacement of APBOpinion No. 20 and FAS No. 3 effective for accounting changes made infiscal periods beginning after December 15, 2005. SFAS 154 requiresretrospective application to prior periods’ financial statements of changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. It alsorequires that retrospective application of a change in accounting principle belimited to the direct effects of the change. SFAS also requires that a changein depreciation, amortization, or depletion method for long-lived, nonfinancialassets be accounted for as a change in accounting estimate effected by a changein accounting principle. The Group is currently assessing the impact of thisstatement on our results of operations, financial position and cash flows uponadoption and has not yet completed that assessment.

In February 2006, FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments”. SFAS No. 155 amendsSFAS No 133, “Accounting for Derivative Instruments and

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Hedging Activities”, and SFAF No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities”. SFAS No. 155, permits fair value remeasurement for anyhybrid financial instrument that contains an embedded derivative that otherwisewould require bifurcation, clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of SFAS No. 133,establishes a requirement to evaluate interest in securitized financial assetsto identify interests that are freestanding derivatives or that are hybridfinancial instruments that contain an embedded derivative requiringbifurcation, clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives, and amends SFAS No. 140 toeliminate the prohibition on the qualifying special-purpose entity fromholding a derivative financial instrument that pertains to a beneficialinterest other than another derivative financial instrument. This statement iseffective for all financial instruments acquired or issued after the beginningof the Group’s first fiscal year that begins after September 15, 2006. TheGroup’ management has not evaluated the impact of this pronouncement on theGroup’s financial statements.

In March 2006 FASB issued SFAS 156 “Accountingfor Servicing of Financial Assets” this Statement amends FASB Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities, with respect to the accounting for separately recognizedservicing assets and servicing liabilities. This Statement:

Requires an entity to recognize a servicingasset or servicing liability each time it undertakes an obligation to service afinancial asset by entering into a servicing contract. Requires all separatelyrecognized servicing assets and servicing liabilities to be initially measuredat fair value, if practicable.

Permits an entity to choose ‘Amortizationmethod’ or Fair value measurement method’ for each class of separatelyrecognized servicing assets and servicing liabilities. At its initial adoption,permits a one-time reclassification of available-for-sale securities to tradingsecurities by entities with recognized servicing rights, without calling intoquestion the treatment of other available-for-sale securities under Statement115, provided that the available-for-sale securities are identified in somemanner as offsetting the entity’s exposure to changes in fair value ofservicing assets or servicing liabilities that a servicer elects tosubsequently measure at fair value. Requires separate presentation of servicingassets and servicing liabilities subsequently measured at fair value in thestatement of financial position and additional disclosures for all separatelyrecognized servicing assets and servicing liabilities. An entity should adoptthis Statement as of the beginning of its first fiscal year that begins after September 15,2006.

The Group’s management believes that thisstatement will not have a significant impact on the Group’s financial statement.

In June 2005, the FASB ratified the EmergingIssues Task Force (“EITF”) consensus to amend EITF No. 96-16, “Investor’sAccounting for an Investee When the Investor Has a Majority of the VotingInterest but the Minority Shareholders Have Certain Approval or Veto Rights”.The EITF agreed to amend the Protective Rights section of this consensus, aswell as Example of Exhibit 96-16A, to be consistent with theconsensus reached in Issue No. 04-5, “Determining Whether a GeneralPartner, or the General Partners as a Group, Controls a Limited Partnership or

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Similarly Entity When the Limited PartnersHave Certain Rights.” The provisions of this amendment should be appliedprospectively to new investments and to investment agreements that are modifiedafter June 29, 2005. The Group’s management believes the adoption of thispronouncement will not have a material effect on the Group’s consolidatedfinancial statements. In June 2005, the EITF reached consensus on Issue No. 05-6,Determining the Amortization Period for Leasehold Improvements (“EITF 05-6.”)EITF 05-6 provides guidance on determining the amortization period forleasehold improvements acquired in a business combination or acquiredsubsequent to lease inception. The guidance in EITF 05-6 will be appliedprospectively and is effective for periods beginning after June 29, 2005.EITF 05-6 is not expected to have a material effect on the Group’sconsolidated financial position or results of operations.

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

DuringFiscal 2005, Fiscal 2004 and Fiscal 2003, the Company expensed approximatelyUS$48,000, US$56,000 and US$12,000, respectively, on the development of itsproducts. See Item 4B. “Business Overview.” 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 2006.

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

There are increasingdemands in the PRC for clean water, greater industrial pollution controls,waste management and electricity. We also see additional distributors competingwith us. However, given the political situation in the PRC, trends couldquickly disappear and we do not know if they will continue in the future. Wenote that, as evidenced by our recent acquisition of Pact-Yixing, we areplacing greater emphasis on developing our engineering solution business in aneffort to capitalize on these increased demands (clean water, pollutioncontrols 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.******                               OffBalance Sheet Arrangements***

Notapplicable.

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

| **Contractual  Obligations**        | ** ** | **Total**  | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
|-------------------------------------|------------|------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------|------------|
| Operating Leases                    |       | US$423,000 |       | US$283,000                      |       | US$140,000         |       | —             |       | —                  |       |
| Total Contractual Cash  Obligations |       | US$423,000 |       | US$283,000                      |       | US$140,000         |       | —             |       | —                  |       |

 

## **ITEM6.  DIRECTORS, SENIOR MANAGEMENT ANDEMPLOYEES**

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

Information concerning the Directors and ExecutiveOfficers of the Company are as follows:
| **Name**        | ** ** | **Age** | ** ** | **Position**                          |   |
|-----------------|------------|---------|------------|---------------------------------------|--------|
| T.C. Leung      |       | 62      |       | Chairman  of the Board of Directors   |   |
|                 |       |    |       | and  Chief Executive Officer          |   |
| Jerry Wong      |       | 47      |       | Director  and Chief Financial Officer |   |
| Nancy Wong      |       | 57      |       | Director                              |   |
| C.P. Kwan       |       | 47      |       | Director                              |   |
| Alex Sham       |       | 42      |       | Director                              |   |
| Y.K. Liang      |       | 76      |       | Director                              |   |
| Ka Chong Cheang |       | 77      |       | Director                              |   |
| Xu Hong Wang    |       | 38      |       | Director                              |   |
| Li Da Weng      |       | 61      |       | Director                              |   |

 

Set forth below is a briefbackground of the executive officers and directors based upon the informationsupplied 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.

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between 1971 and 1992. Since 1988, Mr. Leung hasalso served as managing director of Eurotherm Hong Kong. Mr. Leungreceived a Masters degree in Business Administra­tion from the University ofEast Asia, Macau in 1986 and is a Chartered Engineer, a title bestowed upon amember of the Council of Engineering Institutions in the United Kingdom.

**Jerry Wong** has served as Director and Chief FinancialOfficer of Far East since 1994 and has been with Far East since 1987. Mr. Wonghas been the Chief Financial Officer and a Director of the Company since itsinception. From 1985 until 1987, Mr. Wong worked for MUA Agencies Ltd., asubsidiary of a Hong Kong publicly listed company engaged in the insurancebusiness, as deputy manager of its secretarial, legal and accountingdepartment. From 1981 until 1985, Mr. Wong served as a senior accountantin Price Waterhouse-Hong Kong. He is a Fellow of the Association 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. Wonghas been with Far East since 1971. Ms. Wong is also Far East’s ChiefRepresentative in China. Ms. Wong received a Bachelor of Science degree inBusiness Adminis­tration from the University of East Asia, Macau in 1989.

**C.P. Kwan** joined Far East in 1984 and has served as aDirector and Manager of its Process Equipment Department since 1991. Mr. Kwanhas been a Director of the Company since its inception. Before joining FarEast, he was employed by Haven Automation (H.K.) Ltd., a company involved inthe water treatment and process control business between 1981 and 1984.Mr. Kwan received a Masters Degree in Business Administration from theOpen 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’s Degree in Business Administration fromthe University of Adelaide in 2003.

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

**Ka Chong Cheang** has been a Director of the Company since December 2005.From 1952 until 1977, he had been shipping manager for John Swine &Sons (Hong Kong) Ltd., a firm engaged in the importing and exporting shippingindustry. 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 Chinasales manager of Euro Tech (Far East) Limited, a wholly-owned subsidiary of the

 

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Company, since mid 1994. From mid 1997 until joiningEuro Tech, he was employed as a Research Associate and Lecturer at the Analysisand Research Center of Shanghai’s Tongji University. Wang Xu Hong receivedBachelor’s and Master’s degrees in Science from Fudan University in 1984 and1988, respectively.

**Li Da Weng**, from 1993 until January 2005, wasthe General Director of the Yangtze Valley Water Resources Protection Bureau (“YVWRPB”).He was employed by the YVWRPB in various positions, for more than 25 years,before he became the General Director in 1993. 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 graduated from Hengyang Mining and MetallurgyCollege (now known as Nanhua University) in 1965 with a Bachelor’s Degree inAnalytical Chemistry. From December 1981 to December 1983, he was a visitingscholar at the Canada’s Centre for Inland Waters, National Water ResearchInstitute .

Directors of the Company serveuntil the next annual meeting of sharehold­ers of the Company and until theirsuccessors are elected and duly qualified. Officers of the Company are electedannually by the Board of Directors and serve at the discretion of the Board ofDirectors.

None of the Company’s directors,officers or beneficial owners of ten percent or more of its Common Stock arerequired to file any reports pursuant to Section 16(a) of theSecurities Exchange Act of 1934, as amended (the “1934 Act”).

The Company had two meetings ofits Board of Directors during Fiscal 2005, while its Audit  Committee had six meetings during Fiscal2005.

Mr. Choi Chiu Ho and Mr. SiuHung Lau resigned as directors in December 2005 and June 2006,respectively.

There are no material legalproceedings involving any director, officer or affiliate of the Company, ownerof record or beneficially of more than five percent of the Company’s CommonStock or any associate of any of the foregoing.

**KeyEmployees**

**GeorgeHayek**, Managing Director. He is the founder of Pact andYixing and is a civil engineer (1967) and post-graduate certificate holder insanitary engineering and environmental management from the American Universityof Beirut and the University of California at Irvine (in 1971 and 1988,respectively). Since 1971, he has occupied several key posts in water andwastewater treatment companies in the USA, the UK, Spain, Cyprus, The MiddleEast, Southeast Asia and the last 12 years in the PRC. From 1998 to date, hehas been the managing director of Pact. His international experience helpedPact in securing most of the contracts with European and American multinationalindustries in the PRC.

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**YvonneXia** manages Pact and Yixing’s Procurement Department, as wellas assisting the managing director in management of the various departments. Shejoined Pact-Yixing at the time of their formation in 1998. Ms. Xia is anenvironmental engineering graduate from Qing Hua University of Beijing (1989)and an EMBA graduate from the Olin School of Management of the WashingtonUniversity (2003). She has several positions of increasing responsibility,including management of engineering, sales, procurement and projects.

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

Thefollowing table sets forth certain summary information with respect to thecompensation paid by the Company and Far East and its subsidiaries, forservices rendered in all capacities to the Company and Far East during Fiscal2005, Fiscal 2004 and Fiscal 2003 to the Chairman of the Board and ChiefExecutive Officer and a key employee of the Company. No other executive officeror employee received in excess of US$100,000 as cash compensation during thosefiscal periods.

**Summary Compensation Table**
| ** **                                 | ** ** | ** ** | ** ** | ** **       | ** ** | ** **      | ** ** |
|--------------------------------------------|------------|------------|------------|------------------|------------|-----------------|------------|
| ** **

** **                     | ** ** | **Year**   | ** ** | **Salary (US$)** | ** ** | **Bonus (US$)** |       |
|                                       |       | 2005       |       | 162,000          |       | —          |       |
| T.C. Leung,  Chairman of the Board of |       | 2004       |       | 100,000          |       | 34,600          |       |
| Directors and  Chief Executive Officer     |       | 2003       |       | 100,000          |       | 18,449          |       |
| George Hayek                               |       | 2005       |       | 108,000          |       | —          |       |

 

Aspart of our agreements with Tamworth, Mr. Hayek is to continue hisemployment relationship with Pact and Yixing for a period of three years, witha salary of US$108,000 per year for 2005, with annual salary increments**.**For 2006, his salary 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 willbe reimbursed for their reasonable out-of-pocket expenses incurredin connection with their duties to the Company.

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

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With the introduction of the Mandatory ProvidentFund Scheme, a defined contribution scheme managed by an independent trustee onDecember 1, 2000, each of the Company and its employees who joined theCompany subsequently makes monthly contributions to the scheme at 5% of theemployee’s cash income as defined under the Mandatory Provident Fundlegislation. Contributions of both the Company and its employees are subject toa maximum of HK$1,000 per month and thereafter contributions are voluntary andare not subject to any limitation. The Company and its employees made theirfirst contributions in December 2000.

As stipulated by the rules and regulations inthe PRC, the Company contributes to state-sponsored retirement plans for itsemployees in the PRC. The Company contributes approximately 10% to 22% of thebasic salaries of its employees, and has no further obligations for the actualpayment of pension or post-retirement benefits beyond the annual contributions.The state-sponsored retirement plans are responsible for the entire pensionobligations payable to retired employees.

During the years ended December 31, 2005, 2004and 2003, the aggregate contributions of the Company to the aforementionedpension plans and retirement benefit schemes were approximately US$191,000,US$166,000 and US$137,000, 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 on March 14,1998 and will expire on March 14, 2007.

Theexercise price and the number of Ordinary Shares purchasable upon exercise ofany Management Options are subject to adjustment upon the occurrence of certainevents, including stock dividends, reclassification, reorganizations,consolidations, mergers, and certain issuances and redemptions of OrdinaryShares and securities convertible into or exchangeable for Ordinary Sharesexcluding certain issuances of shares. No adjustments in the exercise pricewill be required to be made with respect to the Management Options untilcumulative adjustments amount to US$0.05.

Inthe event of any capital reorganization, certain reclassifications of theOrdinary Shares, any consolidation or merger involving the Company (other than (i) aconsolidation or merger which does not result in any reclassification or changein the outstanding Ordinary Shares, or (ii) sale of the properties andassets of the Company, as, or substantially as, an entirety to any othercorporation), Management Options will thereupon become exercisable only for thenumber of shares of stock or other securities, assets, or cash to which aholder of the number of Ordinary Shares of the Company purchasable (at the timeof such reorganization, reclassification, consolidation, merger, or sale) uponexercise of such Management Options would have been entitled upon such reorganization,reclassification, consolidation, merger, or sale.

Thetable below shows, as to each of the executive officers and directors of theCompany and as to all executive officers and directors of the Company as agroup, the following

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information withrespect to Management Options: (i) the aggregate amounts of OrdinaryShares subject to Management Options; and (ii) the per share exerciseprice for the Management Options granted to these individuals at June 2,2006.

Eachof the following persons also received options under the Company’s 2000 and2002 Officers and Directors Plans.
| **Name of Executive  Officers and Directors**  | ** ** | ** ** | ** ** | **Shares Subject To  Remaining  (Unexercised)  Management  Options** | ** ** | **Per Share  Exercise Price** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **                                                                     | ** ** | **(US$)**                               | ** ** |
|  T.C. Leung                                                   |       | 2,350,000  |       | 1.6789                                                                         |       |
|  Alex Sham                                                    |       | 125,444    |       | 1.6789                                                                         |       |
|                                                               |       | 65,520     |       | 1.221                                                                          |       |
|  Jerry Wong                                                   |       | 124,064    |       | 1.6789                                                                         |       |
|  Nancy Wong                                                   |       | 92,820     |       | 1.6789                                                                         |       |
|                                                               |       | 24,570     |       | 1.221                                                                          |       |
|  C.P. Kwan                                                    |       | 73,710     |       | 1.6789                                                                         |       |
|                                                               |       | 24,570     |       | 1.221                                                                          |       |
|  Xu Hong Wang                                                 |       | 27,294     |       | 1.6789                                                                         |       |
|  All Executive Officers and Directors as a group  (9 persons) |       | 2,907,992  |       | 1.221–1.6789                                                              | (1)        |

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(1)             Pricerange.

Otherofficers and/or employees of the Company have been or will be grantedmanagement options to purchase an aggregate of 282,984 Management Options, allof which will be exercisable at US$1.6789 per share.

Asof June 2, 2006, Mr. Leung has exercised 1,253,600 Management Options(1,146,000 options at US$1.221 per share and 107,000 options at US$1.6789 pershare).

**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’s subsidiaries.The 2000 Employees Plan and 2002 Employees Plan (collectively referred to asthe “Employees Plan”) provides for the

 

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grant of optionsto acquire Ordinary Shares to key employees of the Company and itssubsidiaries. All four plans are collectively referred to as the “Plans”.

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

TheBoard of Directors or a committee (the “Committee”) appointed by the Board ofDirectors administers the Plans. The Board of Directors or the Committee hasthe authority to interpret the Plans, prescribe, amend and rescind rules andregulations relating to them, determine the terms and provisions of optionsgranted under the Plans (which need not be identical), and make otherdeterminations as it deems necessary and advisable for the administration ofthe Plans. The Board of Directors or the Committee also has the authority todelegate decisions with respect to Options granted to key employees under theEmployees Plan who are not elected officers or directors of the Company or itssubsidiaries and to delegate decisions with respect to key employees to theChief Executive Officer.

Anydecision by the Committee or the Chief Executive Officer to grant an awardunder the Plans is subject to ratification by the Board of Directors of theCompany. The Board is also to ratify any decision that effects the terms orconditions of options awarded to elected officers or directors of the Companyor its subsidiaries.

Inthe event that the Ordinary Shares of the Company are subdivided orconsolidated as a result of a reorganization, stock split, payment of a stockdividend, reverse stock split or other change in the Company’s capitalization,the Committee or the Board of Directors has the authority to make appropriateadjustments in the Ordinary Shares available for issuance under the Plans, thenumber of shares subject to options that may have been or may be awarded to anyparticipant in any 12 month period, the price, number of Ordinary Shares orkind of securities subject to outstanding options, or the terms of such optionsin order to prevent dilution or enlargement of rights under the options. Inaddition, the Board may also change the kind of securities available for grantunder the Plans to reflect any such corporate changes.

TheCommittee or the Chief Executive Officer has the discretion to determine whichemployees constitute key employees to whom options will be awarded under theEmployees Plan.

TheCommittee or Chief Executive Officer, as the case may be, determines the numberof Ordinary Shares subject to options to be granted.

Thepurchase price per share of the Ordinary Shares to be paid upon the exercise ofthe option must be at least 100% of the fair market value of an Ordinary Shareson the date on which the option was granted. Under the Plans, if the OrdinaryShares are principally traded on a national securities exchange or the NasdaqStock Market’s National Market or Small Cap Market at the time of grant, theCompany is required to use, as fair market value, the average of the closingprices of the Ordinary Shares for the ten consecutive trading days immediatelybefore the date of grant. If the Ordinary Shares are traded on a nationalsecurities exchange or the Nasdaq Stock Market’s National Market or Small CapMarket, but no closing prices are reported for such ten-day period, or if theOrdinary Shares are principally traded in the over-the-counter market, theCompany is required to use, as fair market value, the average of the meanbetween the bid and asked prices reported for the Company’s Ordinary Shares atthe close of trading during such

50

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ten-day periodbefore the date of grant. If the Ordinary Shares are traded neither on anational securities exchange, the Nasdaq Stock Market’s National Market, SmallCap Market 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.

TheBoard of Directors or the Committee, as the case may be, or, to the extent thatsuch authority has been delegated to the Chief Executive Officer, the ChiefExecutive Officer determines, at the time of grant, when each option grantedunder the Plans will become exercisable. Notwithstanding the foregoing, alloptions held by a key employee of the Company or its subsidiaries becomeimmediately exercisable, whether or not exercisable at the time, upon the deathor disability.

Nooption is to be exercisable more than ten years from the date the option isgranted.

Paymentof Exercise Price for Options. Under the Plans, payment forshares purchased upon exercise of an option may be made by any of the followingmethods, subject to certain requirements: (1) in cash, paid by either theoptionholder or a broker to whom the optionee has tendered the option; (2) inOrdinary Shares valued at the fair market value of such shares on the date ofexercise, provided that such shares were held by the optionholder for not lessthan six months prior to the date of exercise of the option; (3) by anyother medium of payment that the Board, Committee or the Chief ExecutiveOfficer, as applicable, has authorized at the time of grant (other than thewithholding of shares issuable upon the exercise of options); or (4) byany combination of the preceding methods.

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

·     the spouse or lineal descendant of a planparticipant;

·     the trustee of a trust for the primarybenefit of a plan participant’s spouse or lineal descendant;

 

·     a partnership of which a plan participantand lineal descendants are the only partners; or

 

·     a charitable organization.

Theseassignments are only permitted if the assigning optionee does not receive anycompensation in connection with the assignment and the assignment is expresslyapproved by the Board or Committee, as the case may be.

51

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TheCompany indemnifies the members of any Committee and its delegates and theChief Executive Officer against (1) reasonable expenses incurred inconnection with the defense of any action, suit or proceeding to which they maybe a party by reason of any action taken or failure to act in connection withthe Plans, and (2) all amounts paid by them in settlement of orsatisfaction of a judgment entered in any such action, suit or proceeding,except in cases where such a person is adjudged liable for gross negligence orgross misconduct in the performance of his or her duties.

TheBoard may terminate, suspend, or amend the Plans at any time without theauthorization of shareholders to the extent allowed by law or the rules ofany market on which the Company’s shares are then listed or quoted.

DuringFiscal 2000 and in January 2002, the Company granted options to certain ofits officers and directors pursuant to the 2000 Officers and Directors Planand, in November 2002, options were granted to certain of its officers anddirectors pursuant to the 2002 Officers and Directors Plan. The table belowshows, as to each of the executive officers and directors of the Company and asto all executive officers and directors of the Company as a group, theaggregate amounts of Ordinary Shares remaining (unexercised), subject to suchoptions.

 
| **Names of Executive  Officers and Directors** | ** ** | ** ** | ** ** | **Shares Subject  To the Officers  Plans Options** | ** ** | **Per Share  Exercise Price  (US$)** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| T.C. Leung                                                         |       | 567,000    | (1)        | 0.5857                                                                 |       |
|                                                               |       | 205,800    | (2)        | 0.8191                                                                 |       |
|                                                               |       |       |       |                                                                   |       |
| Alex Sham                                                          |       | 84,000     | (1)        | 0.5857                                                                 |       |
|                                                               |       | 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                                                       |       | 42,000     | (1)        | 0.5857                                                                 |       |
|                                                               |       | 10,920     | (3)        | 0.5787                                                                 |       |
|                                                               |       | 31,500     | (3)        | 0.8191                                                                 |       |
|                                                               |       |       |       |                                                                   |       |
| All executive  officers and Directors as a group                   |       | 1,203,720  |       | 0.5787                                                                 | —     |
|                                                               |       |       |       | 0.8191                                                                 | (4)        |

----

(1)             Grantedpursuant to the 2002 Officers and Directors Plan.

52

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

(3)             Granted pursuant tothe 2000 Employees Plan.

(4)             Pricerange.

Theforegoing options will expire in August 2010.

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

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

Asof June 2, 2006, 451,080 options had been exercised, including 300,300options exercised by Mr. Leung at a price of US$0.5857 per share.

TheCompany has set forth in this Report all required disclosure of additionalcompensation to its executive officers and directors including personalbenefits and securities or properties paid or distributed which was not offeredon the same terms to all full time employees during Fiscal 2005.

Changesin outstanding options under various plans mentioned above were as follows:
| ** **                      | ** ** | **As of December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **Number of  Options**           | ** ** | **Weighted  average  exercise  price** | ** ** | **Number of  options** | ** ** | **Weighted  average  exercise  price  US$** | ** ** | **Number of  Options** | ** ** | **Weighted  average  exercise  price  US$** | ** ** |
| ** **                      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding,  beginning of year |       | 6,724,042                             |       | 1.26 |   | 6,862,632 |   | 1.24 |   | 6,862,632 |   | 1.24 |   |
| Granted                         |       | —                                |       | — |   | 46,000 |   | 1.68 |   | — |   | — |   |
| Cancelled                       |       | (104,706                              | )          | (1.16 | ) | (184,590 | ) | (0.93 | ) | — |   | — |   |
| Exercised                       |       | (604,530                              | )          | (0.78 | ) | — |   | — |   | — |   | — |   |
| Outstanding, end  of year       |       | 5,978,806                             |       | 1.31 |   | 6,724,042 |   | 1.26 |   | 6,862,632 |   | 1.24 |   |
|                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable, end of  year       |       | 5,978,806                             |       | 1.31 |   | 6,724,042 |   | 1.26 |   | 6,862,632 |   | 1.24 |   |

 

53

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Asof December 31, 2005, the options outstanding and exercisable had exerciseprices in the range of US$0.5787 to US$1.6789 and a weighted average unexpiredlife of approximately 2.5 years.

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

Proforma information regarding net income and earnings per share is required bySFAS No. 123, and has been determined as if the Company had accounted forits employee stock options under the fair value method of SFAS No. 123. Theweighted average fair values of stock options at date of grant of US$1.44 peroption for the year ended December 31, 2004, were estimated using theBlack-Scholes option pricing model with the following assumptions. There wereno options granted during the years ended December 31, 2003 and 2005. 

|                                  | ** ** | **2005** | ** ** | **2004**  | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------|------------|-----------|------------|----------|------------|
| 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 inputassumptions can materially effect the fair value estimate, in directors’opinion, the existing model may not necessarily provide a realizable measure ofthe fair value of the stock options.

Hadcompensation expense for the Company’s stock-based compensation plan beenrecognized based on the fair value of the options on the grant date inaccordance with SFAS No. 123, the Company’s pro forma net income andearnings per common share would have been as follows:

 

 
|                                                                                 |   | **As of December 31,**                                                 |       |
|--------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|------------|
|                                                                                 |   | **2005**                                                               | ** ** | **2004** | ** ** | **2003** |   |
|                                                                                 |   | **US$**                                                                | ** ** | **US$** | ** ** | **US$** |   |
|                                                                                 |   | **(amounts expressed in thousands, except share  and per share data)** |       |
| Net income as  reported                                                              |   | 733                                                                    |       | 594 |   | 531 |   |
| Less: Stock  compensation expense determined under the fair value method, net of tax |   | (39                                                                    | )          | (27 | ) | (216 | ) |
|                                                                                 |   |                                                                   |       |   |   |   |   |
| Pro forma net  income/(loss)                                                         |   | 694                                                                    |       | 567 |   | 315 |   |
|                                                                                 |   |                                                                   |       |   |   |   |   |
| Income/(loss)  per share:                                                            |   |                                                                   |       |   |   |   |   |
|                                                                                 |   |                                                                   |       |   |   |   |   |
| Basic, as  reported                                                                  |   | US$0.11                                                                |       | US$0.09 |   | US$0.08 |   |
|                                                                                 |   |                                                                   |       |   |   |   |   |
| Diluted, as  reported                                                                |   | US$0.07                                                                |       | US$0.06 |   | US$0.08 |   |
|                                                                                 |   |                                                                   |       |   |   |   |   |
| Basic, pro forma                                                                     |   | US$0.11                                                                |       | US$0.09 |   | US$0.05 |   |
|                                                                                 |   |                                                                   |       |   |   |   |   |
| Diluted, pro forma                                                                   |   | US$0.07                                                                |       | US$0.06 |   | US$0.05 |   |

 

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

Theterm of each of the Company’s directors expires at the election andqualification of their successors at the next annual meeting of the Company’sshareholders, anticipated to be held in August of this year. Of theCompany’s nine directors, seven were elected at the Company’s last annualmeeting of shareholders in August 2005 and the eighth and ninth memberswere appointed to the Board in December 2005 and June 2006.

The Board has a standing Audit Committee to assistthe Board 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 2005, the Audit Committee met sixtimes, 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:

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

Ÿ                    reviews the adequacy of the Company’s internalcontrols;

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

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

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

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

55

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

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

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

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

The Audit Committee is currently composed of Y.K.Liang, Ka Chong Cheang and Li Da Weng. The Audit Committee’s “financial expert”is Y.K. Liang. The Board has determined that the membership of the AuditCommittee meets the current independence requirements of the NASDAQ listingstandards as same applies to private foreign issuers and the applicable rules andregulations of the SEC.

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

The Company (exclusive of Pact-Yixing) hasapproximately 180 full-time employees. At December 31, 2005, 2004and 2003, staffing levels were approximately as follows:

|                            | ** ** | **2005*** | ** ** | **2004*** | ** ** | **2003*** | ** ** |
|----------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Marketing and  sales       |       | 76        |       | 72        |       | 62        |       |
| Administrative             |       | 59        |       | 53        |       | 40        |       |
| Technical                  |       | 45        |       | 37        |       | 23        |       |
| Total full time  employees |       | 180       |       | 162       |       | 125       |       |

----

*                    For2003 does not include, but for 2004 and 2005 does include, employees situatedin our retail shops and their representative offices.

Pact and Yixing had approximately 30 full-time employees at December 31,2005, including 21 engineers and 9 administrative employees.

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

The Company is not subject to any collectivebargaining agreement and believes that its relations with its employees aregood.

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

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

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

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

Thefollowing table sets forth, as of June 1, 2006, certain informationconcerning beneficial ownership of the Company’s Ordinary Shares with respectto (i) each person known to the Company to own 5% or more of theoutstanding Ordinary Shares, (ii) each director and executive officer ofthe Company, and (iii) all officers and directors of the Company as agroup:

|                                                                                               | ** ** | **Amount and  Nature of  Beneficial  Ownership(3)** | ** ** | **Approximate  Percentage  Of Ordinary  Shares Owned** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| T.C. Leung  (1)(2)                                                                            |       | 7,222,645                                                     |       | 63.8                                                             | %          |
|  Pearl Venture Ltd.(1)(2)                                                                |       | 2,536,445                                                     |       | 30.9                                                             | %          |
|  Alex Sham(1)(3)                                                                         |       | 402,224                                                       |       | 4.7                                                              | %          |
|  Jerry Wong(1)(3)                                                                        |       | 297,704                                                       |       | 3.6                                                              | %          |
|  Nancy Wong(1)(3)                                                                        |       | 204,330                                                       |       | 2.4                                                              | %          |
|  C.P. Kwan(1)(3)                                                                         |       | 238,316                                                       |       | 2.8                                                              | %          |
|  Y.K. Liang(1)                                                                           |       | *                                                             |       | *                                                                |       |
|  Xu Hong Wang(1)(3)                                                                      |       | 111,714                                                       |       | 1.3                                                              | %          |
|  Ka Chong Cheang(1)                                                                      |       | *                                                             |       | *                                                                | %          |
|  Li Da Weng(1)                                                                           |       | *                                                             |       | *                                                                | %          |
|  All Executive Officers And Directors of the  Company as a group (9 persons)(2) (3) |       | 8,476,933                                                     |       | 68.9                                                             | %          |

----

*                    DenotesNil.

57

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(1)             The address for theCompany’s officers and directors is c/o Euro Tech (Far East) Ltd., 18/F GeeChang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The address for Pearl isColumbus Centre Building, Wichhams Cay, Road Town, Tortola, British VirginIslands.

(2)             Includes shares ofthe Company’s Common Stock owned of record by Pearl, which is a trustestablished for the benefit of Mr. Leung. Also includes those CompanyOrdinary Shares owned of record by Regent, of which Pearl is the majorityshareholder.

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

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

The related companies with whichthe Company has engaged in material transactions are Eurotherm and ArmtisonLimited (“Armtison”) and Patwin Inc. (“Patwin”).

During Fiscal 2005, 2004 and 2003, the Company made sales toEurotherm of approximately US$Nil, US$27,000and US$43,000, respectively. During Fiscal 2005, 2004 and 2003, the Companymade purchases from Armtison of approximately US$Nil, US$Nil and US$4,000,respectively. During Fiscal 2005, 2004 and 2003,the Company made purchases from Eurotherm of approximately US$242,000, US$7,503,000 and US$7,219,000, respectively.Additionally, during Fiscal 2005, 2004 and 2003, the Company paid approximatelyUS$11,000, US$25,000 and US$33,000, respectively to Armtison for office spacerentals, and for Fiscal 2005, 2004 and 2003, paidEurotherm approximately US$4,000, US$29,000 andUS$29,000 in management fees to assist in the management of some of the Company’sPRC offices while the Company earned approximately US$2,000, US$30,000 and US$34,000 from Eurotherm for officespace rentals during Fiscal 2005, 2004and 2003, 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 received management fees of US$2,000and US$9,000 from Armiston for accounting and administrative services. TheCompany also paid approximately US$18,000, US$30,000 and US$30,000 inmanagement fees to Patwin to represent the Company in the United States foreach of Fiscal 2005, 2004 and 2003, respectively. At the end of Fiscal 2004 and2003, the Company was obligated to Eurotherm for approximately US$1,265,000 andUS$1,330,000, respectively, for normal trade indebtedness. This indebtedness isrepayable on normal trading terms, is unsecured and does not bear interest.T.C. Leung, the Company’s Chairman of the Board and Chief Executive Officer wasalso a director of Eurotherm as at December 31, 2004 and 2003 and retired in February 2005. Patwin is beneficially owned by the brother ofT.C. Leung.

Asof December 31, 2003, approximately US$261,000 of other current assetsrepresent to certain PRC employees of the Company. The advances are provided tothose PRC employees in order for them to finance the operations of certainretail shops established in PRC by the employees to sell the Company’sproducts. The advances are unsecured, bear interest at a nominal rate and haveno fixed repayment terms. During Fiscal 2003, an allowance for doubtful debt inrespect of such advances of US$45,000 was made. The Company does not accountfor the related sales to these retail shops until the inventories are sold tothird parties. As at

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December 31,2005 and 2004, the Company has included the financial results of these retailshops with the application of FIN 46 “Consolidation of Variable InterestEntities”. All material intercompany balances and transactions have beeneliminated in consolidation.

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

Not applicable.

## **ITEM8.****                                   FINANCIALINFORMATION**

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

Item 8A.1      SeeItem 18.

Item 8A.2      SeeItem 18.

Item8A.3      See Reports of IndependentRegistered Public Accounting Firms, pages F-2 and F-3.

Item8A.4      We have complied with thisrequirement.

Item8A.5      Not applicable.

Item8A.6      Not applicable.

Item8A.7      Legal Proceedings.

TheCompany is not a party to any material legal proceedings.

Item8A.8      Dividend Policy.

TheCompany has not paid cash dividends to date. The payment of cash dividends, ifany, in the future is within the discretion of the Board of Directors. Thepayment of cash dividends, if any, in the future will depend upon the Company’searnings, capital requirements and financial conditions and other relevantfactors. The Company’s Board of Directors does not presently intend to declareany cash dividends in the foreseeable future, but instead intends to retain allearnings, if any, for use in the Company and Far East’s business operations.

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

Therehas not been any significant change since the date of the annual financialstatements included in this Report.

 

59

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## ** **

## **ITEM9.****                                THEOFFERING AND LISTING**

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

The Company has one class of securities presently registered: OrdinaryShares. These securities are presently traded on the NASDAQ SmallCap Marketunder the trading symbols “CLWT”, and have so traded since the Company’s PublicOffering in March 1997.

Thefollowing prices are not adjusted to reflect stock dividends of 20%, 30%, 40%and 50% issued in September 1999, August 2001, September 2003and August 2004, respectively.

The high and low prices forthe Ordinary Shares in the periods indicated, as reported by NASDAQ, are setforth below:

| Years Ended December 31, | ** ** | **Low** | ** ** | **High** | ** ** |
|-----------------------------------------|------------|---------|------------|----------|------------|
|                                    |       | **US$** | ** ** | **US$**  |       |
| 2001                                    |       | 0.4293  |       | 1.6857   |       |
| 2002                                    |       | 0.5786  |       | 1.3707   |       |
| 2003                                    |       | 0.650   |       | 3.7143   |       |
| 2004                                    |       | 0.933   |       | 7.327    |       |
| 2005                                    |       | 2.700   |       | 6.590    |       |

 

| Quarters Ended     | ** ** | **Low** | ** ** | **High** | ** ** |
|-------------------------|------------|---------|------------|----------|------------|
|                    |       | **US$** | ** ** | **US$**  |       |
| June 30, 2004      |       | 1.700   |       | 5.280    |       |
| September 30, 2004 |       | 2.074   |       | 5.447    |       |
| December 31, 2004  |       | 2.360   |       | 6.940    |       |
| March 31, 2005     |       | 3.000   |       | 4.680    |       |
| 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    |       |

 

| The Following Months | ** ** | **Low** | ** ** | **High** | ** ** |
|--------------------------------|------------|---------|------------|----------|------------|
|                           |       | **US$** | ** ** | **US$**  |       |
| January 2006              |       | 3.020   |       | 3.600    |       |
| February 2006             |       | 3.200   |       | 4.440    |       |
| March 2006                |       | 3.340   |       | 4.240    |       |
| April 2006                |       | 3.300   |       | 3.740    |       |
| May 2006                  |       | 3.250   |       | 3.460    |       |

 

TheOrdinary Shares were held by approximately 41 holders of record as of June 2,2006. Based upon information received from broker-dealers, clearing firms andothers, the Company believes that it has approximately at least 1,700beneficial shareholders of its Ordinary Shares.

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

Not Applicable.

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

See Item 9A. “Listing Details.”

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

NotApplicable.

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

NotApplicable.

### ***Item 9F.******                              ExpensesOf The Issue***

Not Applicable.

## **ITEM10.****                           ADDITIONALINFORMATION**

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

**Authorized Capital**. Theauthorized capital of the Company is US$250,000 comprised of 20,000,000Ordinary Shares and 5,000,000 shares of Preferred Stock. As of December 31,2005, there were 7,022,351 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.

Holdersof the Company’s Ordinary Shares are entitled to one vote for each whole shareon all matters to be voted upon by shareholders, including the election ofdirectors. Holders of Ordinary Shares do not have cumulative voting rights inthe election of directors. All shares of Ordinary Shares are equal to eachother with respect to liquidation and dividend rights. Holders of OrdinaryShares are entitled to receive dividends if and when declared by the Company’sBoard of Directors out of funds legally available under British Virgin Islandslaw. In the event of the liquidation of the Company, all assets available fordistribution to the holders of Ordinary Shares are distributable among them accordingto their respective share holdings. Holders of Ordinary Shares have nopreemptive rights to purchase any additional, unmissed shares of OrdinaryShares. All of the outstanding shares of Ordinary Shares of the Company areduly authorized, validly issued, fully paid and non-assessable.

Pursuantto the Company’s Memorandum and Articles of Association and pursuant to thelaws of the British Virgin Islands, the Company’s Memorandum and Articles ofAssociation may be amended by a resolution of the Board of Directors withoutshareholder approval. This includes amendments to increase or reduce theauthorized capital stock of the Company or to increase or reduce the par valueof its shares. The ability of the Company to amend its

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Memorandum andArticles of Association without shareholder approval could have the effect ofdelaying, deterring or preventing a change in control of the Company withoutany further action by the shareholders including but not limited to, a tenderoffer to purchase the Common Stock at a premium over then current marketprices.

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

TheBoard of Directors of the Company, without further shareholder action, mayissue shares of Preferred Stock in any number of series and may establish as toeach such series the designation and number of shares to be issued and therelative rights and preferences of the shares of each series, includingprovisions regarding voting powers, redemption, dividend rights, rights uponliquidation and conversion rights. The issuance of shares of Preferred Stock bythe Board of Directors could adversely effect the rights of holders of OrdinaryShares by, among other matters, establishing preferential dividends,liquidation rights and voting power. The Company has not issued any shares ofPreferred Stock and has no present intention to issue shares of PreferredStock. The issuance thereof could discourage or defeat efforts to acquirecontrol of the Company through acquisition of Ordinary Shares.

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

Set forth below is a summary ofthe material provisions of our Memorandum and Articles of Association (the “Articles)and the British Virgin Islands’ (“BVI”) International Business Companies Act of1984 relating to the shares. This description does not purport to be completeand is qualified in its entirety by reference to BVI statutory law and to theArticles.

**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 or limited,or no voting powers and such restrictions as may be stated and expressed in theresolution providing for the issuance of the Preferred Shares.

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**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 of meetings of shareholdersto those persons whose names on the date of the notice is given appear asshareholders in the share register of the Company and are entitled to vote atthe meeting. The directors may fix the date notice is given of a meeting ofshareholders as the record date for determining those shares that are entitledto vote at the meeting.

Theinadvertent failure of the directors to give notice of a meeting to ashareholder, or the fact that a shareholder has not received notice, does notinvalidate the meeting. A shareholder may be represented at a meeting ofshareholders by a proxy who may speak and vote on behalf of the shareholder.

Ashareholder may participate at a meeting of shareholders by telephone or otherelectronic means, as long as all shareholders participating in the meeting areable to hear each other.

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

If aquorum is not present, the meeting, if convened upon the requisition ofshareholders, shall be dissolved; in any other case it shall stand adjourned tothe next business day at the same time and place or to such other time andplace as the directors may determine, and if at the adjourned meeting there arepresent in person or by proxy not less than one third of the votes of theshares or each class or series of shares entitled to vote on the resolutions tobe considered by the meeting, those present shall constitute a quorum butotherwise the meeting shall be dissolved.

Atevery meeting of shareholders, the chairman of the board of directors shallpreside as chairman of the meeting.

Thechairman may, with the consent of the meeting, adjourn any meeting from time totime, and from place to place, but no business shall be transacted at anyadjourned meeting other than the business left unfinished at the meeting fromwhich the adjournment took place.

Atany meeting of the shareholders the chairman shall be responsible for decidingin such manner as he shall consider appropriate whether any resolution has beencarried or not ant the result of his decision shall be announced to the meetingand recorded in the minutes thereof.

Anyaction that may be taken by the shareholders at a meeting may also be taken bya resolution of shareholders consented to in writing or by written electroniccommunication, without the need for any notice, but if not a unanimous writing,a copy of such resolution shall be sent to all non-consenting shareholders.

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**Net Profits and Dividends.** Under BVI law, dividends may only be declaredand paid by an International Business Company (which the Company is classifiedas under BVI law) out of surplus, such that after payment of dividends suchcompany must be able to satisfy its liabilities as they become due in theordinary course of business and the realizable value of the assets of suchcompany must not be less than the sum of its liabilities (other than deferredtaxes and capital). There are no other BVI restrictions regarding dividends.

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

**Borrowing Power.** The directorsmay exercise all the powers of the Company to borrow money and to mortgage orcharge its undertakings and property or any part thereof, to issue debentures,debenture stock and other securities whenever money is borrowed or as securityfor any debt, liability or obligation of the Company or of any third party.

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

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

(a)            the designations,powers, preferences, rights, qualifications, limitations and restrictions withwhich the shares were issued; or

(b)           the subscriptionagreement for the issue of the shares,

the Company may not purchase, redeem or otherwiseacquire its own shares without the consent of shareholders whose shares are tobe purchased, redeemed or otherwise acquired.

Generally,no purchase, redemption or other acquisition of shares shall be made unless thedirectors determine that immediately after purchase, redemption or otheracquisition the Company will be able to satisfy its liabilities as they becomedue in the ordinary course of its business and the realizable value of theassets of the Company will not be less than the sum of its total liabilities,other than deferred taxes, as shown in the books of account, and its capitaland, in

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the absence offraud, the decision of the directors as to the realizable value of the assetsof the Company is conclusive, unless a question of law is involved.

**Notices.**Any notice, informationor written statement to be given by the Company to shareholders may be served,in the case of shareholders holding registered shares in any way by which itcan reasonably be expected to reach each shareholder or by mail addressed toeach shareholder at the address shown in the share register and in the case ofshareholders 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.**Under the laws of the BVI the identity of the shareholders of the Company isconfidential and is not disclosed in any public document.

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

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

DuringFiscal 2005, the Company agreed to and did acquire 21% of the capital stock ofeach 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.

FarEast also granted Tamworth a three-year put option requiring Far East toacquire part of all of the remaining shares of Pact owned by Tamworth. Theacquisition price for each remaining share is to be based on the followingformula:

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.

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As part of the foregoing agreements, Mr. GeorgeHayek is to continue his employment relationship with Pact and Yixing. See Item11, “Executive Compensation.”  Mr. Hayekis the majority shareholder of Tamworth. Also, as a substantial portion ofYixing’s income is derived from sales to a Middle East company that Mr. Hayekowns a beneficial interest in, Mr. Hayek is required to, and did, disclosethe pricing policy for sales to that Middle East company and this policy hasbeen adopted for future sales to the Middle East company.

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

Thereare no exchange control restrictions on payment of dividends on the Company’sOrdinary Shares or on the conduct of the Company’s operations either in HongKong, where the Company’s principal executive offices are located, or theBritish Virgin Islands, where the Company is incorporated. There are no BritishVirgin Islands laws which impose foreign exchange controls on the Company orthat effect the payment of dividends, interest, or other payments to non-residentholders of the Company’s securities. British Virgin Islands laws and theCompany’s Memorandum and Articles of Association impose no limitations on the rightof non-resident or foreign owners to hold the Company’s securities orvote the Company’s Ordinary Shares. The PRC government has established aunified exchange rate system and system of exchange controls to which theCompany is subject.

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

TheCompany is exempted from taxation in the British Virgin Islands.

TheCompany’s subsidiaries organized in Hong Kong, Far East, Euro Tech (China)Limited and ChinaH2O.com Limited, provide for Hong Kong profits tax at a rateof 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.

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

Inaccordance with the relevant income tax laws and regulations applicable toforeign 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, 2005, SET remained exempt from thePRC enterprise income tax.

VIEsof the Group provide for PRC Enterprise Income Tax at a rate of 33%, afteroffsetting losses brought forward, if any, on the basis of its income forfinancial reporting purposes, adjusting

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for income and expense itemswhich are not assessable or deductible for PRC Enterprise Income Tax purposes.

Asof December 31, 2005, certain VIEs had aggregated assessable lossescarried forward of US$128,591 as agreed by the local tax authority.

TheCompany’s effective tax rates for Fiscal 2005, Fiscal 2004 and Fiscal 2003 were24.2%, 29.3% and 19.7%, respectively. Weighted average statutory tax rates of23%, 20.8% and 20.1% were in effect for Fiscal 2005, Fiscal 2004 and Fiscal2003, respectively. Principal adjustments to this statutory tax rate werevaluation allowances of 0.3%, 7.0% and (0.8%) during Fiscal 2005, Fiscal 2004and Fiscal 2003, respectively.

In2003, Hong Kong changed the profits tax rate from 16% to 17.5% for the fiscalyear ended 2003/2004. PRC Enterprise Income Tax applied at 15% for Euro TechTrading (Shanghai) Limited, a subsidiary incorporated in the PRC, for the yearended December 31, 2005. Accumulated tax losses of Shanghai Euro TechLimited, another subsidiary incorporated in the PRC, available to offsetagainst future profit were US$208,525 and US$226,550, respectively, duringFiscal 2005 and 2004.

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

Not applicable.

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

Not applicable.

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

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

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

Not applicable.

## **ITEM 11.****                        QUANTITATIVEAND QUALI****TATIVEDISCLOSURES ABOUT MARKET RISK**

The Company’s primary risk exposures arise fromchanges in interest rates and foreign currency exchanges rates.

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*ForeignCurrency Risks*

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

*Inflation*

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

TheCompany is currently not exposed to material future earnings or cash flowexposures from changes in interest rates on debt obligations as the Company hadno bank indebtedness in Fiscal 2004. The Company does not currently anticipateentering into interest rate swaps and/or similar instruments.

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

Notapplicable

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**PART II**

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

None.

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

Not Applicable.

## **ITEM15.****                            CONTROLSAND PROCEDURES**

(a)              Evaluation of Disclosure Controlsand Procedures

Our Chief Executive Officer and Chief FinancialOfficer have evaluated the effectiveness of our disclosure controls andprocedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act, as of the end of the period covered by this report (the “EvaluationDate”). Based on such evaluation, such officers have concluded that, as of theEvaluation Date, our disclosure controls and procedures are effective inrelating to us, including our consolidated subsidiaries, that is required to beincluded in our reports filed or submitted under the Exchange Act.

TheCompany’s management, including the Chief Executive Executive Officer and Chief Financial Officer,does not expect that our disclosure controls and procedures or our internalcontrols will prevent all error and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts.

(b)  Changes inInternal Controls

Nosignificant changes in our internal controls or in other factors that couldsignificantly effect these controls subsequent to the date of the evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses, were made as a result of the evaluation.

## **ITEM16.               [RESERVED]**

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

TheCommittee includes one non-employee director who meets the independence and “financialexpert” requirements and two other members who meet the independencerequirements of the NASDAQ listing standards and the rules and regulationsof U.S. Securities

 

 

 

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and ExchangeCommission. The Committee includes Messrs. Y.K. Liang and****Ka Chong Cheang and Li Da Weng. Mr. Y.K. Liang is the “financialexpert” on that committee.

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

Ourboard of directors has adopted a code of business conduct and ethics thatapplies to our directors, officers and employees, including certain provisionsthat specifically apply to our chief executive officer, chief financial officerand any other persons who perform similar functions for us. The Company agreesto undertake 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.******                       PrincipalAccountant Fees And Services***

Thefollowing table sets forth the aggregate fees by categories specified below inconnection with certain professional services rendered byPricewaterhouseCoopers who were our principal external auditors for 2003 and2004 and BDO McCabe Lo Limited for 2005.

|                       | ** ** | **For the Year Ended December, 31** | ** ** |
|-----------------------|------------|--------------------------------------------------------------|------------|
| ** **            | ** ** | **2003**                                                     | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **            | ** ** | **US$ **                                                | ** ** | **US$ ** | ** ** | **US$ ** | ** ** |
| Audit fees(1)         |       | 88,000                                                       |       | 109,000 |   | 103,500 |   |
| Audit-related fees(2) |       | NIL                                                          |       | NIL |   | Nil |   |
| Tax fees(3)           |       | 3,800                                                        |       | 6,000 |   | 6,000 |   |
| All other fees        |       | NIL                                                          |       | NIL |   | NIL |   |
| ** **            | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |

 

OurAudit Committee has adopted a pre-approval policy for the engagement of ourindependent accountant to perform permitted audit and non-audit services. Underthis policy, which is designed to assure that such engagements do not impairthe independence of our auditors, the Audit Committee pre-approves annually arange of specific audit and non-audit services in the categories of AuditService, Audit-Related Services, Tax Services and other services that may beperformed by our independent accountants, and the maximum pre-approved feesthat may be paid as compensation for each pre-approved service in thosecategories. Any proposed services exceeding the maximum pre-approved feesrequire specific approval by the Audit Committee.

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(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

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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, 2003,2004 and 2005, respectively.

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

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

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

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

*[Remainderof Page Intentionally Left Blank]*

 

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# **PART III**

## **ITEM17.****                           FINANCIALSTATEMENTS**

Not applicable.

## **ITEM18.****                           FINANCIALSTATEMENTS**

The following financial statements are filed as part ofthis annual report on Form 20-F.
| Index to consolidated  financial statements                     |   |   |   |
|-----------------------------------------------------------------|--------|--------|--------|
|                                                            |   |   |   |
| Reports of  Independent Registered Public Accounting Firms      |   |   |   |
|                                                            |   |   |   |
| Consolidated  balance sheets                                    |   |   |   |
|                                                            |   |   |   |
| Consolidated  income statements                                 |   |   |   |
|                                                            |   |   |   |
| Consolidated  cash flow statements                              |   |   |   |
|                                                            |   |   |   |
| Consolidated  statement of changes in shareholders’ equity |   |   |   |
|                                                            |   |   |   |
| Notes to the  consolidated financial statements                 |   |   |   |

## ** **

## **ITEM19.****                           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) |   |   |
|                 |   |                                                                                                                |   |   |

 

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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 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) |   |   |
|   |   |                                                                                                                                                                  |   |   |

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

(2)             Incorporatedby reference, previously filed as an Exhibit to Registrant’s Report on Form 20-Ffor its year ended December 31, 1999.

(3)             Incorporatedby reference, previously filed as an Exhibit to Registrant’s Report on Form 20-Ffor its year ended December 31, 2000.

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

(5)             Incorporatedby reference, previously filed as an Exhibit to Registrant’s Report on Form 6-K,filed on December 8, 2005.

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

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

(8)             Filedherewith.

 

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**SIGNATURES**

Pursuantto the requirements of Section 12 of the Securities Exchange Act of 1934,the registrant certifies that it meets all of the requirements for filing on Form 20-Fand has duly caused this annual report to be signed on its behalf by 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 29, 2006 |                                              |   |

 

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**EURO TECH HOLDINGS COMPANYLIMITED**

**AUDITED CONSOLIDATED BALANCESHEETS**

**AS OF DECEMBER 31, 200****5 AND 200****4 AND**

**CONSOLIDATED STATEMENTS OFINCOME,**

**CASH FLOWS AND CHANGES INSHAREHOLDERS’ EQUITY**

**FOR THE YEARS ENDED DECEMBER 31,200****5,200****4 AND 200****3**

**TOGETHER WITH REPORT OFINDEPENDENT REGISTERED**

**PUBLIC ACCOUNTING FIRM**

 

F-1

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**Report of Independent Registered Public AccountingFirm**

To the Board of Directors and shareholders ofEuro Tech Holdings Company Limited

We have audited the accompanying consolidated balance sheet of Euro TechHoldings Company Limited as of December 31, 2005 and the relatedconsolidated statement of operations, shareholders’ equity and cash flows forthe year ended December 31, 2005. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audit.

We conducted our audit in accordance with standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. The audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides 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, 2005 and theresults of its consolidated operations and cash flows for the year ended December 31,2005, in conformity with generally accepted accounting principles in the UnitedStates of America.

 

/s/ BDO McCabe Lo Limited

HongKong,June 27, 2006

F-2

----

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

**TO THE SHAREHOLDERS AND DIRECTORSOFEURO TECH HOLDINGS COMPANY LIMITED**

In our opinion, the accompanying consolidated balance sheet as of December 31,2004 and the related consolidated statements of income, of shareholders’ equityand of cash flows for each of two years in the period ended 31 December2004 present fairly, in all material respects, the financial position of EuroTech Holdings Company Limited and its subsidiaries at 31 December 2004,and the results of their operations and their cash flows for each of the twoyears in the period ended 31 December 2004, in conformity with accountingprinciples generally accepted in the United States of America.  These financial statements are theresponsibility of the Company’s management.  Our responsibility is to express an opinion onthese financial statements based on our audits.  We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers

PricewaterhouseCoopers

HongKong,July 14, 2005

F-3

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

**CONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31**
| ** **                                                                                                                                           | ** ** | **Note**                 | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                                           | ** ** | ** **               | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Assets                                                                                                                                               |       |                     |       |             |       |             |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Current assets:                                                                                                                                      |       |                     |       |             |       |             |       |
| Cash and cash  equivalents                                                                                                                           |       |                     |       | 5,362            |       | 5,242            |       |
| Restricted cash                                                                                                                                      |       |                     |       | 304              |       | —           |       |
| Accounts  receivable, net                                                                                                                            |       | 6                        |       | 5,467            |       | 4,139            |       |
| Prepayments and  other current assets                                                                                                                |       |                     |       | 643              |       | 367              |       |
| Inventories, net                                                                                                                                     |       | 7                        |       | 2,732            |       | 3,564            |       |
| Taxation  recoverable                                                                                                                                |       |                     |       | 42               |       | 7                |       |
| Total current assets                                                                                                                                 |       |                     |       | 14,550           |       | 13,319           |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Property, plant and  equipment, net                                                                                                                  |       | 8 & 22(iii | )          | 1,735            |       | 1,766            |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Investments in  affiliates                                                                                                                           |       | 9                        |       | —           |       | 571              |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Goodwill                                                                                                                                             |       | 13                       |       | 1,060            |       | —           |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Deferred tax assets                                                                                                                                  |       | 4                        |       | 32               |       | 43               |       |
| Total assets                                                                                                                                         |       |                     |       | 17,377           |       | 15,699           |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Liabilities and  shareholders’ equity                                                                                                           |       |                     |       |             |       |             |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Current liabilities:                                                                                                                                 |       |                     |       |             |       |             |       |
| Accounts payable                                                                                                                                     |       | 10                       |       | 4,627            |       | 4,704            |       |
| Amounts due to  related companies                                                                                                                    |       | 19                       |       | —           |       | 1,266            |       |
| Other payables  and accrued expenses                                                                                                                 |       | 11                       |       | 2,570            |       | 1,791            |       |
| Taxation payable                                                                                                                                     |       |                     |       | 422              |       | 101              |       |
| Total current  liabilities                                                                                                                           |       |                     |       | 7,619            |       | 7,862            |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Deferred tax liabilities                                                                                                                             |       |                     |       | 4                |       | —           |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Commitments and  contingencies                                                                                                                       |       | 20                       |       | —           |       | —           |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Shareholders’ equity:                                                                                                                           |       |                     |       |             |       |             |       |
| Ordinary share,  par value US$0.01 each, 20,000,000 (2004: 20,000,000) shares authorized; 7,363,002 (2004: 6,775,318)  shares issued and outstanding |       | 12                       |       | 74               |       | 68               |       |
| Additional  paid-in capital                                                                                                                          |       |                     |       | 2,800            |       | 2,500            |       |
| Treasury stock,  340,651 (2004:  340,651) shares at cost                                                                                             |       | 14                       |       | (237             | )          | (237             | )          |
| PRC statutory  reserve                                                                                                                               |       | 15                       |       | 72               |       | 69               |       |
| Accumulated  other comprehensive losses                                                                                                              |       |                     |       | (10              | )          | (26              | )          |
| Retained  earnings                                                                                                                                   |       |                     |       | 6,193            |       | 5,463            |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Total shareholders’  equity                                                                                                                     |       |                     |       | 8,892            |       | 7,837            |       |
| Minority interest                                                                                                                                    |       |                     |       | 862              |       | —           |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Total equity                                                                                                                                         |       |                     |       | 9,754            |       | 7,837            |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |
| Total liabilities and  shareholders’ equity                                                                                                     |       |                     |       | 17,377           |       | 15,699           |       |
|                                                                                                                                                 |       |                     |       |             |       |             |       |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

F-4

----

**EURO TECH HOLDINGS COMPANYLIMITED**

**CONSOLIDATED STATEMENTS OF INCOMEFOR THE YEARS ENDED DECEMBER 31, 200****5, 200****4AND 200****3**
| ** **                                               | ** ** | **Note**             | ** ** | **200**5         | ** ** | **200**4         | ** ** | **200**3         | ** ** |
|----------------------------------------------------------|------------|----------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                               | ** ** | ** **           | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Revenue                                                  |       | 22(i) & (ii | )          | 31,250           |       | 32,282           |       | 27,442           |       |
| Cost of revenue                                          |       |                 |       | (24,681          | )          | (27,033          | )          | (22,805          | )          |
|                                                     |       |                 |       |             |       |             |       |             |       |
| Gross profit                                             |       |                 |       | 6,569            |       | 5,249            |       | 4,637            |       |
|                                                     |       |                 |       |             |       |             |       |             |       |
| Selling and  administrative expenses                     |       |                 |       | (5,418           | )          | (4,801           | )          | (4,108           | )          |
|                                                     |       |                 |       |             |       |             |       |             |       |
| Operating income                                         |       |                 |       | 1,151            |       | 448              |       | 529              |       |
| Interest income                                          |       |                 |       | 35               |       | 17               |       | 13               |       |
| Other income,  net                                       |       | 3                    |       | 172              |       | 104              |       | 6                |       |
|                                                     |       |                 |       |             |       |             |       |             |       |
| Income before  income taxes                              |       |                 |       | 1,358            |       | 569              |       | 548              |       |
|                                                     |       |                 |       |             |       |             |       |             |       |
| Income taxes                                             |       | 4                    |       | (328             | )          | (167             | )          | (108             | )          |
|                                                     |       |                 |       |             |       |             |       |             |       |
| Equity in profit  of affiliates, net of taxes            |       |                 |       | 21               |       | 192              |       | 91               |       |
|                                                     |       |                 |       |             |       |             |       |             |       |
| Net income                                               |       |                 |       | 1,051            |       | 594              |       | 531              |       |
| Minority interest                                        |       |                 |       | (318             | )          | —           |       | —           |       |
|                                                     |       |                 |       |             |       |             |       |             |       |
| Profit attributable to the shareholders of the company   |       |                 |       | 733              |       | 594              |       | 531              |       |
|                                                     |       |                 |       |             |       |             |       |             |       |
| Net income per  ordinary share                           |       |                 |       |             |       |             |       |             |       |
| — Basic                                             |       |                 |       | US$0.11          |       | US$0.09          |       | US$0.08          |       |
|                                                     |       |                 |       |             |       |             |       |             |       |
| — Diluted                                           |       |                 |       | US$0.07          |       | US$0.06          |       | US$0.08          |       |
|                                                     |       |                 |       |             |       |             |       |             |       |
| Weighted average  number of ordinary shares  outstanding |       |                 |       |             |       |             |       |             |       |
| — Basic                                             |       | 6                    |       | 6,598,201        |       | 6,434,667        |       | 6,434,667        |       |
|                                                     |       |                 |       |             |       |             |       |             |       |
| — Diluted                                           |       | 6                    |       | 10,689,482       |       | 10,034,687       |       | 6,434,667        |       |

 

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

F-5

----

**EURO TECH HOLDINGS COMPANY LIMITED**

**CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 200****5, 200****4AND 200****3**
| ** **                                                                                   | ** ** | **200**5         | ** ** | **200**4         | ** ** | **200**3         | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Cash flows from  operating activities:                                                       |       |             |       |             |       |             |       |
| Net income                                                                                   |       | 1,051            |       | 594              |       | 531              |       |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |             |       |             |       |             |       |
| Depreciation of property, plant and equipment                                                |       | 181              |       | 184              |       | 190              |       |
| (Gain) loss on disposal of property,  plant and equipment                                    |       | 1                |       | —           |       | (1               | )          |
| Equity in profit  of affiliates, net of taxes                                                |       | (21              | )          | (192             | )          | (91              | )          |
| Deferred tax  assets                                                                         |       | 11               |       | 3                |       | (3               | )          |
| Deferred tax liabilities                                                                     |       | 4                |       |             |       |             |       |
| Translation reserve                                                                          |       | 16               |       | —           |       | —           |       |
| (Increase)  decrease in current assets:                                                      |       |             |       |             |       |             |       |
| Accounts receivable, net                                                                     |       | (1,237           | )          | 1,212            |       | (573             | )          |
| Prepayments and other current assets                                                         |       | 327              |       | 248              |       | (153             | )          |
| Inventories, net                                                                             |       | 2,387            |       | (1,318           | )          | (282             | )          |
| Taxation recoverable                                                                         |       | (35              | )          | 8                |       | (15              | )          |
| Amount due from a related company                                                            |       | —           |       | —           |       | 2                |       |
| Increase  (decrease) in current liabilities:                                                 |       |             |       |             |       |             |       |
| Accounts payable                                                                             |       | (148             | )          | 1,170            |       | (1,143           | )          |
| Amounts due to related companies                                                             |       | (1,267           | )          | (64              | )          | 664              |       |
| Other payables and accrued expenses                                                          |       | (1,665           | )          | 618              |       | 534              |       |
| Taxation payable                                                                             |       | 137              |       | 73               |       | (7               | )          |
|                                                                                         |       |             |       |             |       |             |       |
| Net cash (used  in)/provided by  operating activities                                        |       | (258             | )          | 2,536            |       | (347             | )          |
|                                                                                         |       |             |       |             |       |             |       |
| Cash flows from  investing activities:                                                       |       |             |       |             |       |             |       |
| Sales proceeds on disposal of property, plant and  equipment                                 |       | —           |       | —           |       | 1                |       |
| Purchase of property, plant and equipment                                                    |       | (110             | )          | (101             | )          | (74              | )          |
| Cash flow on business  combination, net of cash acquired                                     |       | 486              |       | —           |       | —           |       |
| Restricted cash for  issuance of bank guarantees                                             |       | (304             | )          | —           |       | —           |       |
| Dividend income                                                                              |       | —           |       | 55               |       | —           |       |
|                                                                                         |       |             |       |             |       |             |       |
| Net cash provided by/(used) in investing activities                                          |       | 72               |       | (46              | )          | (73              | )          |
|                                                                                         |       |             |       |             |       |             |       |
| Cash flows from  financing activities:                                                       |       |             |       |             |       |             |       |
| Issuance of ordinary  shares on exercise of options                                          |       | 306              |       | —           |       | —           |       |
|                                                                                         |       |             |       |             |       |             |       |
| Net cash provided by financing activities                                                    |       | 306              |       | —           |       | —           |       |
|                                                                                         |       |             |       |             |       |             |       |
| Effect of  exchange rate changes on cash and cash equivalents                                |       | —           |       | —           |       | (1               | )          |
|                                                                                         |       |             |       |             |       |             |       |
| Net  increase/(decrease) in cash and cash equivalents                                        |       | 120              |       | 2,490            |       | (421             | )          |
| Cash and cash  equivalents, beginning of year                                                |       | 5,242            |       | 2,752            |       | 3,173            |       |
|                                                                                         |       |             |       |             |       |             |       |
| Cash and cash  equivalents, end of year                                                      |       | 5,362            |       | 5,242            |       | 2,752            |       |
|                                                                                         |       |             |       |             |       |             |       |
| Supplementary  information                                                                   |       | **US$**          | ** ** | **US$**          | ** ** | **US$**          |       |
| Interest received                                                                            |       | 35               |       | 17               |       | 13               |       |
| Interest paid                                                                                |       | —           |       | —           |       | —           |       |
| Income taxes paid                                                                            |       | 121              |       | 121              |       | 134              |       |
| Shares surrendered for exercise of stock options                                             |       | 195              |       | —           |       | —           |       |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

F-6

----

**EURO TECH HOLDINGS COMPANYLIMITED**

**CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 200****5, 200****4AND 200****3**
| ** **                                                            | ** ** | **Number of   **Ordinary  share | ** ** | **Ordinary  share** | ** ** | **Additional   paid-in   capital** | ** ** | **Warrants**     | ** ** | **Treasury   stock** | ** ** | **Accumulated   other  comprehensive   income  (loss)** | ** ** | **PRC  statutory  reserve** | ** ** | **Retained   earnings** | ** ** | **Total**        | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------|------------|---------------------|------------|----------------------------------------------|------------|------------------|------------|---------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|------------------|------------|
| ** **                                                            | ** ** | ** **                                | ** ** | **US$’000**    | ** ** | **US$’000**                             | ** ** | **US$’000** | ** ** | **US$’000**          | ** ** | **US$’000**                                                  | ** ** | **US$’000**            | ** ** | **US$’000**             | ** ** | **US$’000** | ** ** |
| Balance as of January 1,  2003                                   |       | 6,775,318                                 |       | 32                  |       | 2,370                                        |       | 166              |       | (237                      | )          | (24                                                               | )          | —                      |       | 4,407                        |       | 6,714            |       |
| Comprehensive income:                                                 |       |                                      |       |                |       |                                         |       |             |       |                      |       |                                                              |       |                        |       |                         |       |             |       |
| Net income                                                            |       | —                                    |       | —              |       | —                                       |       | —           |       | —                    |       | —                                                            |       | —                      |       | 531                          |       | 531              |       |
| Other comprehensive  income: Foreign  exchange translation adjustment |       | —                                    |       | —              |       | —                                       |       | —           |       | —                    |       | (2                                                                | )          | —                      |       | —                       |       | (2               | )          |
|                                                                  |       |                                      |       |                |       |                                         |       |             |       |                      |       |                                                              |       |                        |       |                         |       |             |       |
| Total comprehensive income                                            |       |                                      |       |                |       |                                         |       |             |       |                      |       |                                                              |       |                        |       |                         |       | 529              |       |
| Stock split effect  in the form of a dividend                         |       | —                                    |       | 13                  |       | (13                                          | )          | —           |       | —                    |       | —                                                            |       | —                      |       | —                       |       | —           |       |
| Expiration of  warrants                                               |       | —                                    |       | —              |       | 166                                          |       | (166             | )          | —                    |       | —                                                            |       | —                      |       | —                       |       | —           |       |
|                                                                  |       |                                      |       |                |       |                                         |       |             |       |                      |       |                                                              |       |                        |       |                         |       |             |       |
| Balance as of  December 31, 2003                                 |       | 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            |       |
| Comprehensive income:                                                 |       |                                      |       |                |       |                                         |       |             |       |                      |       |                                                              |       |                        |       |                         |       |             |       |
| 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            |       |

 

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

 

F-7

----

**EURO TECH HOLDINGS COMPANY LIMITED**

**NOTES 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 is principally engaged in the marketing andtrading of water and waste water related process control, analytical andtesting instruments, disinfection equipment, supplies and related automationsystems in Hong Kong and in the People’s Republic of China (the “PRC”).

Details of the Company’s subsidiaries andaffiliates are summarized as follows:

 

| Name                                          | ** ** | **Percentage of equity ownership** | ** ** | **Place of incorporation** | ** ** | **Principal activities**                                                                                                                                                      |
|-----------------------------------------------|------------|------------------------------------|------------|---------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          |       |                               |       |                            |       |                                                                                                                                                                          |
| Subsidiaries:                                 |       |                               |       |                            |       |                                                                                                                                                                          |
|                                          |       |                               |       |                            |       |                                                                                                                                                                          |
| Euro Tech (Far East) Limited                  |       | 100%                               |       | Hong Kong                       |       | Marketing and trading of water and waste water  related process control, analytical and testing instruments, disinfection  equipment, supplies and related automation systems |
|                                          |       |                               |       |                            |       |                                                                                                                                                                          |
| Euro Tech  (China) Limited                    |       | 100%                               |       | Hong Kong                       |       | Inactive                                                                                                                                                                      |
|                                          |       |                               |       |                            |       |                                                                                                                                                                          |
| ChinaH2O.com  Limited                         |       | 100%                               |       | Hong Kong                       |       | Internet content provider and provision of marketing  services for environmental industry to 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 are affiliates of the Company, with 30%of equity ownership by the Company. The Company acquired additional 21% ofequity interest of each of the affiliate in October 18, 2005. (See alsonote 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 financialstatements of variable interest entities (“VIEs”) as defined by the FinancialAccounting Standards Board (“FASB”) Interpretation No. 46 (R) (“FIN46(R)”),are included in the consolidated financial statements, if applicable. In January 2003,the FASB issued FASB Interpretation No. 46 (FIN46), “Consolidation ofVariable Interest Entities” and amended it by issuing FIN 46(R) in December 2003.FIN 46 (R) addresses consolidation by business enterprises of VIEs thateither: (1) do not have sufficient equity investment at risk to permit theentity to finance its activities without additional subordinated financialsupport, or (2) have equity investors that lack an essentialcharacteristic 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 retailshops are principally engaged in the retailing business of water and wastewater related process control, analytical and testing instruments, disinfectionequipment, supplies and related automation systems. The Company is the primarybeneficiary of these retail shops and, accordingly, consolidated theirfinancial statements effective December 31, 2004. The Company has acontrolling financial interest in these retail shops and is subject to a majorityof the risk of loss from the retailing activities, and is entitled to receive amajority of the retail shops’ residual returns. Total assets and liabilities ofthese consolidated VIEs total US$464,415 and US$151,217, respectively, as of December 31,2005. The cumulative losses onconsolidating these VIEs in the Group’s consolidated statement of income in 2005 were US$174,902, including taxes of US$658. The assets of the entities consist mainly of cash and bankbalances, trade and other receivables, inventories and property, plant andequipment.  The creditors of theseentities 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 accountedfor using the equity method of accounting. All material intercompany balancesand transactions have been eliminated on consolidation.

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

A subsidiary is a company in which the Companyholds, directly or indirectly, more than 50% of its outstanding voting sharecapital 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 recognizesrevenue when the product is delivered and the title is transferred. For certainproducts where installation is necessary, revenue is recognized upon completionof installation. Revenue earned from customer support services, whichrepresents a minor percentage of total revenues, is recognized when suchservices are provided.

F-9

----

 

Revenues and profits in long term fixed price contracts are recordedunder the percentage of completion method. This approach relies on estimates oftotal expected direct costs at completion, which are compared to actual directcosts incurred to date to arrive at an estimate of revenue and profit earned todate. Recognized revenue and profit are subject to revisions as the contractprogresses to completion. Revisions to profit estimates are reflected in incomein the period in which the facts that give rise to the revision become known.

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

Research and development costs (“R&D” costs) are expensed asincurred. The R&D costs amounted to approximately US$48,000, US$56,000 and US$12,000for the years December 31, 2005,2004 and 2003 respectively and were included in “Sellingand Administrative” expenses****in the Group’sconsolidated statement of income.

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

Advertising and promotional expenses (“A&P” expenses) are expensedas incurred. The A&P expenses amounted to approximately US$240,000, US$247,000 and US$260,000for the years December 31, 2005,2004 and 2003 respectively and were included in “Sellingand Administrative” expenses****in the Group’sconsolidated statement of income.

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

The Group accounts for income and deferred tax under the provision ofStatement of Financial Accounting Standards (“SFAS”) No. 109: “Accountingfor Income Taxes”, under which deferred taxes are recognized for all temporarydifferences between the applicable tax balance sheets and the consolidatedbalance sheet. Deferred tax assets and liabilities are recognized for theestimated future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. SFAS 109 also requires the recognition of thefuture tax benefits of net operating loss carry forwards. A valuation allowanceis established when the deferred tax assets are not expected to be realizedwithin a reasonable period of 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 ondeferred tax assets and liabilities of a change in tax rates is recognized inincome for the period that includes the enactment date.

Note 4 shows the 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. Valuationallowances are provided for identified individual risks for these line items. Ifthe loss of a certain part of the receivables is probable, valuation allowancesare provided to cover the expected loss.

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

Inventories are stated at the lower of cost, on the first-in, first-outmethod, or net realizable value. Costs include purchase and related costsincurred in bringing each product to its present 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 forobsolete, slow moving or 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 current operations. Majorexpenditures for betterments and renewals are capitalized. All ordinary repairand maintenance costs are expensed as incurred. Depreciation of property, plantand equipment is computed using the straight-line method over the assets’estimated useful lives as follows:

 

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

** **

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

The Group has adopted SFAS No. 144: “Accounting for Impairment 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 todetermine whether the carrying value of 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 by which the carrying amount of the assetexceeds the discounted estimated future cash flows. Assets to be disposed ofare reported at the lower of the carrying amount or fair value of such assetsless costs to sell. There were no impairment losses recorded during each of thethree years ended December 31, 2005.

F-11

----

 

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

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

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

The Group has adopted 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)****                              ForeignCurrency Translation**

The Company maintains its books and records in United States dollars. Itssubsidiaries and affiliates maintain their books and records either in HongKong dollars or Chinese Renminbi (“functional currencies”). Foreign currencytransactions during the year are translated into the respective functionalcurrencies at the applicable rates of exchange at the dates of the transactions.Monetary assets and liabilities denominated in foreign currencies are translatedinto the respective functional currencies using the exchange rates prevailingat the balance sheet dates. Gains or losses from foreign currency transactionsare recognized in the consolidated statements of income during the year inwhich they occur. Translation adjustments on subsidiaries’ equity are includedas cumulative translation adjustments.

** (o)****                               DerivativeInstruments 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 SFAS No. 138, “Accounting for Certain Derivative Instruments andCertain Hedging Activities — an amendment of FASB Statement No. 133”, aswell as the interpretations of the Derivatives Implementation Group (“DIG”),are applied as amended by SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities”. SFAS 133 contains accountingand reporting standards for hedging accounting and for derivative financialinstruments, including certain derivative financial instruments embedded inother contracts.

SFAS 133 requires that all derivatives be recognized as either assetsor liabilities in the consolidated balance sheet and measured at fair value. Dependingon the documented designation of a derivative instrument, any change in fairvalue is recognized either in net income or shareholders’ equity (as a componentof accumulated other comprehensive income).

Fair values of derivative instruments are classified as operatingassets or liabilities. Changes in fair value of derivative instrumentsaffecting income are classified as other operating income or expenses. Pleasesee note 18 foradditional information regarding the Company’s use of derivative instruments.

F-12

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

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

** (q)****                               Ordinaryshare**

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

** (r)****                               Netincome 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. The Company reports both basic earningsper share, which is based on the weighted average number of ordinary shares outstanding, anddiluted earnings per share, which is based on the weighted average number of ordinary shares outstanding and alldilutive potential ordinaryshares outstanding. Outstanding stock options are the only dilutive potentialshares of the Company. There was no difference between basic and dilutedearnings per share as the exercise prices of the stock options outstanding werehigher than the average market prices of the ordinary share for the year ended December 31,2003 and therefore the effectof including such items in the calculation of earnings per share would havebeen anti-dilutive.

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

In accordance with the provisions of SFAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure”, the Group has selectedthe disclosure only of provisions related to employee stock options and sharepurchases and follows the provisions of Accounting Principles Board Opinion No. 25:“Accounting for Stock Issued to Employees” (“APB 25”) and relatedinterpretations in accounting for stock options and shares issued to employees.Under APB 25, compensation expense, if any, is recognized as the excess of theestimated fair value of the ordinary shares over the exercise price on themeasurement date, which is typically the date of grant, and is expensed ratablyover the service period, which is typically the vesting period. The Companyaccounts for share-based compensation using the intrinsic value methodprescribed by APB Opinion No. 25, under which no compensation cost isrecognized as all stock options granted under the Management Options, the 2000Stock Options, the 2002 Employee Stock Options and the 2002 D&O StockOptions have exercise prices at or above the fair market value of theunderlying stock at the date of grant.

F-13

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

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

 

|                                                                                         | ** ** | **200**5         | ** ** | **200**4         | ** ** | **200**3         | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                              | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                                    |       |             |       |             |       |             |       |
| Net income as  reported                                                                 |       | 733              |       | 594              |       | 531              |       |
| Less: Stock  compensation expense determined under the fair value method, net of tax(1) |       | (39              | )          | (27              | )          | (216             | )          |
| Pro forma net  income                                                                   |       | 694              |       | 567              |       | 315              |       |
|                                                                                    |       |             |       |             |       |             |       |
| Income per  share:                                                                      |       |             |       |             |       |             |       |
|                                                                                    |       |             |       |             |       |             |       |
| Basic, as  reported                                                                     |       | US$0.11          |       | US$0.09          |       | US$0.08          |       |
|                                                                                    |       |             |       |             |       |             |       |
| Diluted, as reported                                                                    |       | US$0.07          |       | US$0.06          |       | US$0.08          |       |
|                                                                                    |       |             |       |             |       |             |       |
| Basic, pro forma                                                                        |       | US$0.11          |       | US$0.09          |       | US$0.05          |       |
|                                                                                    |       |             |       |             |       |             |       |
| Diluted, pro forma                                                                      |       | US$0.07          |       | US$0.06          |       | US$0.05          |       |

----

(1)             Forthe years ended December 31, 2003, the pro forma stock compensationexpense amounts have been adjusted to reflect lower calculated fair values foremployee stock options which resulted in a decrease of approximately US$116,000in the pro forma net income for the year ended December 31, 2003. Thisadjustment was required as the restrictions on the employee stock options werenot considered by the external valuer in prior years.

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

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America (“GAAP”)requires management to make estimates and assumptions that affect the amountsthat are reported in the consolidated financial statements and accompanyingdisclosures. Although these estimates are based on management’s best knowledgeof current events and actions that the Company may undertake in the future, actualresults may be different 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 alsoinclude principal owners of the Group, its management, members of the immediatefamilies of principal owners of the Group and its management and other partieswith which the Group may deal if one party controls or can significantlyinfluence the management or operating policies of the other to an extent thatone of the transacting parties might be prevented from fully pursuing its ownseparate interests. A party which can significantly influence the management oroperating policies of the transacting parties or if it has an ownershipinterest in one of the transacting parties and can significantly influence theother to an extent that one or more of the transacting parties might beprevented from fully pursuing its own separate interests is also a relatedparty.

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

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

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

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs, an amendment of APB No. 43, Chapter 4”.  SFAS No. 151 requires that abnormallyhigh vacancy, wasted material, freight and processing costs not be part ofrecognizable production costs.  Such costmust instead be expensed as incurred. Accordingly fixed costs shall henceforthbe allocated to inventory based on normal production capacity. The standard iseffective for the fiscal year beginning January 1, 2006. It is notexpected that SFAS No. 151 will have a material effect on the Company’sconsolidated financial statements.

In December 2004, the FASB issued SFAS No. 123(Revised 2004) “Share-Based Payment” that will require the Company to expensecosts related to share-based payment transactions with employees. With limitedexception, SFAS No. 123 (R) requires that the fair value ofshare-based payments to employees be expensed over the period service isreceived. SFAS No. 123 (R) becomes mandatory effective for theCompany on January 1, 2006. The Company intends to adopt thisstandard using the modified retrospective method of transition with effect from1 January 2006.

SFAS No. 123 (R) allows the use ofboth closed form models (e.g., Black-Scholes Model) and open form models (e.g.,lattice models) to measure the fair value of the share-based payment as long asthat model is capable of incorporating all of the substantive characteristicsunique to share-based awards. In accordance with the transition provisions ofSFAS No. 123 (R), the expense attributable to an award will be measured inaccordance with the Company’s measurement model at that award’s date of grant.

F-15

----

 

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

The Company believes that the total expenserecorded in future periods will depend on several variables, including thenumber of share-based awards that vest and the fair value of those vestedawards.

In March 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” (SFAS 154”), which was a replacement of APBOpinion No. 20 and FAS No. 3 effective for accounting changes made infiscal periods beginning after December 15, 2005. SFAS 154 requiresretrospective application to prior periods’ financial statements of changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. It alsorequires that retrospective application of a change in accounting principle belimited to the direct effects of the change. SFAS also requires that a change indepreciation, amortization, or depletion method for long-lived, nonfinancialassets be accounted for as a change in accounting estimate effected by a changein accounting principle. The Group is currently assessing the impact of thisstatement on our results of operations, financial position and cash flows uponadoption and has not yet completed that assessment.

In February 2006, FASB issued SFAS No. 155, “Accounting forCertain Hybrid Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accountingfor Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities”. SFAS No. 155, permits fair value remeasurement for anyhybrid financial instrument that contains an embedded derivative that otherwisewould require bifurcation, clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of SFAS No. 133,establishes a requirement to evaluate interest in securitized financial assetsto identify interests that are freestanding derivatives or that are hybridfinancial instruments that contain an embedded derivative requiringbifurcation, clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives, and amends SFAS No. 140 toeliminate the prohibition on thequalifyingspecial-purpose entity from holding a derivative financial instrument thatpertains to a beneficial interest other than another derivative financialinstrument. This statement is effective for all financial instruments acquiredor issued after the beginning of the Group’s first fiscal year that beginsafter September 15, 2006. The Group’ management has not evaluated theimpact of this pronouncement on the Group’s financial statements.

In March 2006 FASB issued SFAS 156 “Accounting for Servicing ofFinancial Assets” this Statement amends FASB Statement No. 140, Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities, with respect to the accounting for separately recognized servicingassets and servicing liabilities. This Statement:

Requires an entity to recognize a servicing asset or servicing liabilityeach time it undertakes an obligation to service a financial asset by enteringinto a servicing contract. Requires all separately recognized servicing assetsand servicing liabilities to be initially measured at fair value, ifpracticable.

F-16

----

 

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

Permits an entity to choose ‘Amortization method’ or Fair valuemeasurement method’ for each class of separately recognized servicing assetsand servicing liabilities.

At its initial adoption, permits a one-time reclassification ofavailable-for-sale securities to trading securities by entities with recognizedservicing rights, without calling into question the treatment of otheravailable-for-sale securities under Statement 115, provided that theavailable-for-sale securities are identified in some manner as offsetting theentity’s exposure to changes in fair value of servicing assets or servicingliabilities that a servicer elects to subsequently measure at fair value.

Requires separate presentation of servicing assets and servicingliabilities subsequently measured at fair value in the statement of financialposition and additional disclosures for all separately recognized servicingassets and servicing liabilities. An entity should adopt this Statement as ofthe beginning of its first fiscal year that begins after September 15,2006.

The Group’s management believes that this statement will not have asignificant impact on the Group’s financial statements.

In June 2005, the FASB ratified the Emerging Issues Task Force (“EITF”)consensus to amend EITF No. 96-16, “Investor’s Accounting for anInvestee When the Investor Has a Majority of the Voting Interest but theMinority Shareholders Have Certain Approval or Veto Rights”. The EITF agreed toamend the Protective Rights section of this consensus, as well as Example of Exhibit 96-16A,to be consistent with the consensus reached in Issue No. 04-5, “DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similarly Entity When the Limited Partners Have CertainRights.” The provisions of this amendment should be applied prospectively tonew investments and to investment agreements that are modified after June 29,2005. The Group’s management believes the adoption of this pronouncement willnot have a material effect on the Group’s consolidated financial statements. InJune 2005, the EITF reached consensus on Issue No. 05-6,Determining the Amortization Period for Leasehold Improvements (“EITF 05-6.”)EITF 05-6 provides guidance on determining the amortization period forleasehold improvements acquired in a business combination or acquiredsubsequent to lease inception. The guidance in EITF 05-6 will be appliedprospectively and is effective for periods beginning after June 29, 2005.EITF 05-6 is not expected to have a material effect on the Group’sconsolidated financial position or results of operations.

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

 

|                                                            | ** ** | **200**5         | ** ** | **200**4         | ** ** | **200**3         | ** ** |
|------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Gain /(loss) on disposal of property,  plant and equipment |       | (1               | )          | —           |       | 1                |       |
| Exchange  gain/(loss), net                                 |       | 158              |       | 73               |       | (35              | )          |
| Rental income                                              |       | 15               |       | 31               |       | 40               |       |
|                                                       |       | 172              |       | 104              |       | 6                |       |

 

 

F-17

----

**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 2005, 2004 and2003 on the basis of their income for financial reporting purposes, adjustingfor income and expense items which are not assessable or deductible for profitstax 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. As of December 31, 2005, SET is still exempt from the PRCenterprise income tax as it had an assessable loss brought forward of US$208,525 as agreed by the local tax authority tooffset its profit for the coming year (2004: US$226,550).

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, 2005, certain VIEs had aggregated assessable losses carried forwardof US$128,591 as agreed by thelocal tax authority (2004: US$107,726).

Income before income taxes:

 

|            | ** ** | **200**5         | ** ** | **200**4         | ** ** | **200**3         | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|       |       |             |       |             |       |             |       |
| Domestic   |       | —           |       | —           |       | —           |       |
| Foreign    |       | 1,358            |       | 569              |       | 548              |       |
|       |       | 1,358            |       | 569              |       | 548              |       |

 

F-18

----

 

The provision for income taxes consists of:

 

|                                   | ** ** | **200**5         | ** ** | **200**4         | ** ** | **200**3         | ** ** |
|-----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                        | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Current tax expenses:             |       |             |       |             |       |             |       |
| Domestic                          |       | —           |       | —           |       | —           |       |
| Foreign                           |       | 313              |       | 164              |       | 111              |       |
| Total current provision           |       | 313              |       | 164              |       | 111              |       |
|                              |       |             |       |             |       |             |       |
| Deferred tax expense / (benefit): |       |             |       |             |       |             |       |
| Domestic                          |       | —           |       | —           |       | —           |       |
| Foreign                           |       | 15               |       | 3                |       | (3               | )          |
| Total deferred provision          |       | 15               |       | 3                |       | (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**5 | ** ** | **200**4 | ** ** | **200**3 | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |     |       |
| Weighted average  statutory tax rate                  |       | 23.0     | %          | 20.8     | %          | 20.1     | %          |
| Change in  valuation allowances                       |       | 0.3      | %          | 7.0      | %          | (0.8     | %)         |
| Under/(Over)-provision  for income tax in prior years |       | (0.2     | %)         | 0.4      | %          | (1.7     | %)         |
| Others                                                |       | 1.1      | %          | 1.1      | %          | 2.1      | %          |
| Effective tax rate                                    |       | 24.2     | %          | 29.3     | %          | 19.7     | %          |

 

The components of deferred tax assets are as follows:

 

|                                                        | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|--------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                   |       |             |       |             |       |
| Deferred tax  assets arising from tax losses           |       | 74               |       | 183              |       |
| Deferred tax  assets arising from temporary difference |       | —           |       | 1                |       |
| Less: Valuation  allowances                            |       | (42              | )          | (141             | )          |
| Net deferred tax assets                                |       | 32               |       | 43               |       |

 

F-19

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**5****                                         Netincome per ordinary share**

The calculation ofthe basic and diluted net income per ordinary share is based on thefollowing  data:

 

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

 

**6****                                         Accountsreceivable**

** **

|                                     | ** ** | **200**5         | ** ** | **2004**         | ** ** |
|-------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                |       |             |       |             |       |
| Trade  receivables                  |       | 5,589            |       | 4,197            |       |
| Less: Allowance  for doubtful debts |       | (122             | )          | (58              | )          |
|                                |       | 5,467            |       | 4,139            |       |

 

 

|                                | ** ** | **200**5         | ** ** | **2004**         | ** ** |
|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Allowance for doubtful debts   |       |             |       |             |       |
| Balance at beginning           |       | 58               |       | 19               |       |
| Charged to costs  and expenses |       | 97               |       | 46               |       |
| Write off                      |       | (33              | )          | (7               | )          |
| Balance at end                 |       | 122              |       | 58               |       |

 

As of December 31, 2005, accountsreceivables in the form of bills receivable through banks amounted to US$242,000(2004: US$ 812,000).

F-20

----

 

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

** **

|                  | ** ** | **200**5         | ** ** | **2004**         | ** ** |
|------------------|------------|------------------|------------|------------------|------------|
| ** **       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|             |       |             |       |             |       |
| Raw materials    |       | 93               |       | 55               |       |
| Work in progress |       | 387              |       | 57               |       |
| Finished goods   |       | 2,252            |       | 3,452            |       |
|             |       | 2,732            |       | 3,564            |       |

 

Management continuously reviews obsolete and slow moving inventoriesand assesses the inventory valuation to determine if the provision is deemedappropriate. At December 31, 2005, 2004 and 2003, provision for obsolete and slowmoving inventories amounted to US$44,370, US$86,341 and US$10,171, respectively.

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

 

|                                           | ** ** | **200**5         | ** ** | **2004**         | ** ** |
|-------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                      |       |             |       |             |       |
| Office premises                           |       | 2,271            |       | 2,271            |       |
| Leasehold  improvements                   |       | 96               |       | 93               |       |
| Furniture,  fixtures and office equipment |       | 591              |       | 522              |       |
| Motor vehicles                            |       | 127              |       | 125              |       |
| Testing  equipment                        |       | 68               |       | 67               |       |
|                                      |       | 3,153            |       | 3,078            |       |
|                                      |       |             |       |             |       |
| Less:  Accumulated depreciation           |       | (1,418           | )          | (1,312           | )          |
|                                      |       | 1,735            |       | 1,766            |       |

 

 

|                      | ** ** | **200**5         | ** ** | **200**4         | ** ** | **2003**         | ** ** |
|----------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **           | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Depreciation  charge |       | 181              |       | 184              |       | 190              |       |

 

F-21

----

 

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

During the year ended December 31, 2002, the Group acquired 30%equity interests 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 Groupbelieves that the business of these two investments was complementary to theGroup’s business as the Group continued to focus on sales and marketing ofother products. The Group believes that by aligning itself with an engineeringfirm, such as these affiliates, it was able to gain a competitive advantage byoffering customers and potential customers not only hardware but solutions toengineering problems as well. Details of these affiliates are disclosedin Note 1. Investments in these affiliates are accounted for using the equitymethod 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 recognize any separately identifiable intangibleassets under the criteria prescribed in SFAS No. 141 “BusinessCombinations” pursuant to the acquisition. This equity method goodwill is notamortized, and the investment is tested annually for impairment. As of December 31,2004 and 2003, management does not believe the investments were impaired.

A summary of the combined financial information of the affiliates is setforth below:

 

|                                  | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Balance Sheet:              |       |             |       |             |       |
|                             |       |             |       |             |       |
| Current assets                   |       | 2,795            |       | 942              |       |
|                             |       |             |       |             |       |
| Non-current  assets              |       | 39               |       | 44               |       |
| Total assets                     |       | 2,834            |       | 986              |       |
|                             |       |             |       |             |       |
| Current and  total liabilities   |       | (1,804           | )          | (414             | )          |
|                             |       |             |       |             |       |
| Total shareholders’  equity |       | 1,030            |       | 572              |       |

 

 

|                     | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|---------------------|------------|------------------|------------|------------------|------------|
| ** **          | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Operating  results: |       |             |       |             |       |
|                |       |             |       |             |       |
| Net sales           |       | 3,674            |       | 1,995            |       |
|                |       |             |       |             |       |
| Operating  profits  |       | 893              |       | 348              |       |
|                |       |             |       |             |       |
| Net profits         |       | 641              |       | 304              |       |

 

F-22

----

 

The above table represents the combined financial information ofentities in which the Group has an investment accounted for using the equitymethod of accounting duringthe years ended December 31, 2004and 2003. These amounts are notthe amounts reflected on the Group’s accompanying consolidated financialstatements for the years ended December 31,2004 and 2003.

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:

 

|                                | ** ** | **US$’000** | ** ** |
|--------------------------------|------------|------------------|------------|
| Current assets                 |       | 1,922            |       |
| Property, plant  and equipment |       | 21               |       |
| Goodwill                       |       | 1,060            |       |
| Total assets                   |       | 3,003            |       |
|                           |       |             |       |
| Current liabilities            |       | (1,377           | )          |
| Total liabilities              |       | (1,377           | )          |
| Total consideration            |       | 1,626            |       |

 

F-23

----

 

The value was based on an 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 resultsthat would have actually been obtained if the acquisition occurred as of thebeginning of each of the periods presented or 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         ****Accounts payable**

As of December 31,2005, accounts payable in the form of bills payable through banks amounted toNil (2004: US$ 516,000).

**11          Other payables and accrued expenses**

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

**12****                                 ****Ordinary share**

In September 2003, the Company paid a dividend in the form of1,290,517 ordinary shares of ordinary share of US$0.01 each, payable at the ratioof four shares of stock per ten shares of stock of the Company.

In August 2004, the Company paid a dividend in the form of2,258,443 ordinary shares of ordinary share of US$0.01 each, payable at theratio of five shares 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.

F-24

----

 

**13****                                 ****Goodwill**

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

As of December 31,2005, the Company completed the annual impairment test. (i.e. comparing thecarrying amount of the net assets, including goodwill, with the fair value ofthe Company as of December 31,2005) Based on the result ofthe first step of the test, the Company believes that there was no furtherimpairment of goodwill as of December 31, 2005.

**1****4****                                  Treasurystock**

The Company authorizeda stock buyback program in December 2000 pursuant to which up to 341,250 shares, but not to exceedUS$281,250 in value, of the Company’s ordinary share could be purchased in theopen market from time to time as market and business conditions warrant. TheCompany repurchased a total of 36,445 shares and 304,206 shares of ordinaryshare during 2000 and 2001 for considerations of approximately US$16,000 andUS$221,000, respectively. There was no reissuance of treasury stock during eachof the three years ended December 31, 2005.

**1****5****                                  PRCstatutory reserve**

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

(i) Statutoryreserve funds

Pursuant toapplicable PRC laws and regulations, the PRC subsidiaries are required toallocate at least 10% of the companies’ net income to the statutory reserve fundsuntil such funds reaches 50% of the companies’ registered capital. 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) Statutorywelfare funds

Pursuant toapplicable PRC laws and regulations, the PRC subsidiaries are required toallocate certain amountof the companies’ net income tothe staff welfare funds determined bythe Company. The staff welfare funds can only be used to provide staffwelfare facilities and other collective benefits to the companies’ employees. Thisfund is non-distributable other than upon liquidation of the PRC subsidiaries.

(iii) Expansion funds

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

F-25

----

**EURO TECHHOLDINGS COMPANY LIMITED**

**NOTES TOTHE CONSOLIDATED ACCOUNTS**

**1****6****                                  Stockoptions**

(i)                                     ManagementOptions Plan

A total of 4,586,400 shares of ordinary sharehave been reserved for issuance under the Company’s management option plan (the“Management Options”). The Management Options provide for the grant of optionsto its officers, directors and employees as the Company’s Chairman of the Boardof Directors and Chief Executive Officer may direct. In 1997, the Companygranted its officers, directors and employees options under the ManagementOptions, which allow them to purchase up to 4,353,804 shares of ordinary share. The exercise price of theoptions granted was US$ 1.221per share for 1,310,400 of suchoptions and US$ 1.6789 pershare for the remaining 3,043,404.During the year ended December 31, 2000, 36,036 options with the exercise price of US$ 1.6789 were cancelled. During thesame year, the Company 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. Duringthe year ended December 31, 2002, 27,573 options with the exercise priceof US$1.6789 were cancelled. During the year ended December 31, 2003, nooptions were exercised, cancelled or granted.

In 2004, theCompany granted 46,000 shares with the exercise price of US$1.6789 per share toits offices, director and employees, which allowed them to purchase up to 46,000 shares of ordinary share. Theoptions have a vesting period of one year and will expire in March 2007. TheCompany further cancelled 32,760 options with 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 withthe exercise price of US$ 1.6789were cancelled. During the sameyear, 180,000 options under theManagement Options with the exercise price of US$ 1.221 per share wereexercised.

(ii)                                  2000Stock Option Plan

A total of 1,195,740 shares of ordinary sharehave been reserved for issuance under the Company’s 2000 Stock Option Plan (the“2000 Stock Options”). The 2000 Stock Options provide for the grant of optionsto its officers, directors and employees as the Company’s Chairman of the Boardof Directors and Chief Executive Officer may direct. During the year ended December 31,2000, the Company granted such options to its officers, directors and employeesunder the 2000 Stock Options, which allow them to purchase up to 742,560 shares of ordinary share. Theexercise price of all options granted is US$ 0.5787 per share. During the year ended December 31, 2002, 43,680 options with exercise price ofUS$0.5787 were cancelled. TheCompany further granted 477,750options and 19,110 optionsunder the 2000 Stock Options with an exercise price of US$0.8191 and US$0.6809 per share, respectively, to its officers, directors andemployees, which allow them to purchase up to 496,860 shares of ordinary share. The options vested within asix-month to one-year period and will expire in August 2010.

During the yearended December 31, 2004, 35,490 options with an exercise price ofUS$0.5787 per share and 23,940 options with exercise price of US$0.8191 yearshare were cancelled. Further, there were no options exercised or granted in2004.

During the year ended December 31, 2005, 35,490 options withthe exercise price of US$ 0.5787were cancelled. During the sameyear, 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.

F-26

----

 

(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 the2002 D&O Stock Options provide for the grant of options to its employees asthe Company’s Chairman of the Board of Directors and Chief Executive Officer maydirect. During the year ended December 31, 2002, the Company granted suchoptions to its employees, officers and directors under the 2002 Employee StockOptions and the 2002 D&O Stock Options, which allow them to purchase up to 294,000 and 840,000 shares of ordinary share at an exercise price of US$0.7618 and US$0.5857, respectively. The options vested for a period of asix-month period and will expire in April 2012 and November 2012,respectively. During the years ended December 31, 2004, 2003 and 2002, nooptions had been 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.

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

 

|                                 | ** ** | **200**5                    | ** ** | **200**4                               | ** ** | **200**3                    | ** ** |
|---------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|-----------------------------|------------|
|                                 | ** ** | **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 |       | 6,724,042                   |       | 1.24                                   |       | 6,862,632                   |       | 1.24 |   | 6,862,632 |   | 1.24 |   |
| Granted                         |       | —                      |       | —                                 |       | 46,000                      |       | 1.68 |   | — |   | — |   |
| Cancelled                       |       | (104,706                    | )          | (1.16                                  | )          | (184,590                    | )          | (0.93 | ) | — |   | — |   |
| Exercised                       |       | (640,530                    | )          | (0.78                                  | )          | —                      |       | — |   | — |   | — |   |
| Outstanding, end  of year       |       | 5,978,806                   |       | 1.31                                   |       | 6,724,042                   |       | 1.26 |   | 6,862,632 |   | 1.24 |   |
|                            |       |                        |       |                                   |       |                        |       |   |   |   |   |   |   |
| Exercisable, end of  year       |       | 5,978,806                   |       | 1.31                                   |       | 6,724,042                   |       | 1.26 |   | 6,862,632 |   | 1.24 |   |

 

As of December 31, 2005, the options outstanding and exercisable had exercise prices inthe range of US$0.5787 to US$1.6789 and a weighted average unexpired life ofapproximately 2.5 years.

 

F-27

----

Pro forma information regarding net income andearnings per share is required by SFAS No. 123, and has been determined asif the Company had accounted for its employee stock options under the fairvalue method of SFAS No. 123. The weighted average fair value of stockoptions at date of grant of $0.93 per option for the year ended December 31,2002, and $1.44per option for the year ended December 31, 2004, were estimated using theBlack-Scholes option pricing model with the following assumptions. There wereno options granted during the year ended December 31, 2003 and 2005.

 

|                                  | ** ** | **200**5 | ** ** | **2004**  | ** ** | **200**3 | ** ** |
|----------------------------------|------------|----------|------------|-----------|------------|----------|------------|
|                             |       |     |       |      |       |     |       |
| Risk-free  interest rate         |       | —   |       | 2.88      | %          | —   |       |
| Expected  dividend yield         |       | —   |       | 0         | %          | —   |       |
| Expected option  life            |       | —   |       | 2.3 years |       | —   |       |
| Expected stock price  volatility |       | —   |       | 208       | %          | —   |       |

 

The Black-Scholes option-pricing model requiresthe input of subjective assumptions, including the expected volatility of stockprice. 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.

**1****7          Pension plan**

Prior to December 1, 2000, the Group had only one definedcontribution pension plan for all its Hong Kong employees. Under this plan, allemployees were entitled to pension benefits equal to their own contributionsplus 50% to 100% of individual fund account balances contributed by the Group,depending on their years of service with the Group. The Group was required tomake specific 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,the Group 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 Groupand its employees are subject to a maximum of HK$1,000 per month and thereaftercontributions are voluntary and are not subject to any limitation. The Groupand 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 contributes approximately ranging from 10% to 22% of the basic salaries of itsemployees, and has no further obligations for the actual payment of pension orpost-retirement benefits beyond the annual contributions. The state-sponsoredretirement plans are responsible for the entire pension obligations payable toretired employees.

During the years ended December 31, 2005, 2004 and 2003, theaggregate contributions of the Group to the aforementioned pension plans andretirement benefit schemes were approximately US$191,000, US$166,000and US$137,000 respectively.

F-28

----

 

**1****8          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 ofcredit risk. The Group has policies in place to ensure that sales of productsare made to customers with an appropriate credit history. The Group haspolicies that limit the amount of credit exposure to any customers. Derivativecounterparties and cash transactions are limited to high credit quality banks.

 (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. Foreign exchange risk arises from committed andunmatched future commercial transactions, such as confirmed import purchaseorders and sales orders, recognized assets and liabilities, and net investmentin the PRC operations. The Group uses derivative financial instruments such asforeign exchange contracts 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, 2005, the Company has noforeign forward contract commitments (2004: US$468,000 and 2003:Nil). The fair value of this derivative instrument was expensed in theconsolidated statement of income as it is not qualified as hedge accountingtreatment.

**19          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 relatedparty may also be any party the entity deals with that can exercise thatcontrol.

F-29

----

 

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

 

|                                                                   | ** ** | **200**5         | ** ** | **200**4         | ** ** | **200**3         | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Sale of goods to                                                  |       |             |       |             |       |             |       |
| Eurotherm Limited                                                 |       | —           |       | 27               |       | 43               |       |
| Armtison Limited                                                  |       | —           |       | 1                |       | —           |       |
|                                                              |       |             |       |             |       |             |       |
| Purchase of goods from                                            |       |             |       |             |       |             |       |
| — Eurotherm Limited                                          |       | 242              |       | 7,503            |       | 7,219            |       |
| — Armtison Limited                                           |       | —           |       | —           |       | 4                |       |
| — Action Instruments  (China) Limited                        |       | —           |       | 5                |       | 10               |       |
| — Euro Electron (Far  East) Limited                          |       | —           |       | 4                |       | —           |       |
|                                                              |       |             |       |             |       |             |       |
| Interest income on trade receivables earned from Armtison Limited |       | —           |       | 2                |       | 3                |       |
|                                                              |       |             |       |             |       |             |       |
| Rental income of office premises earned from Eurotherm Limited    |       | 2                |       | 30               |       | 34               |       |
|                                                              |       |             |       |             |       |             |       |
| Rental expenses for office premises charged by Armtison Limited   |       | 11               |       | 25               |       | 33               |       |
|                                                              |       |             |       |             |       |             |       |
| Management fees charged by                                        |       |             |       |             |       |             |       |
| Eurotherm Limited                                                 |       | 4                |       | 29               |       | 29               |       |
| Patwin Inc.                                                       |       | 18               |       | 30               |       | 30               |       |
|                                                              |       |             |       |             |       |             |       |
| Management fees received from                                     |       |             |       |             |       |             |       |
| Pact Asia Pacific Ltd                                             |       | —           |       | —           |       | 9                |       |
| Armtison Limited                                                  |       | 2                |       | 9                |       | —           |       |

 

(ii)          Details of the amounts due to relatedcompanies are as follows:

 

|                                     | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|-------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                |       |             |       |             |       |
| Action  Instruments (China) Limited |       | —           |       | 1                |       |
| Eurotherm  Limited                  |       | —           |       | 1,265            |       |
|                                |       | —           |       | 1,266            |       |

 

F-30

----

 

Armtison Limited and Action Instruments (China) Limited arebeneficially owned by Mr. T. C. Leung, Chief Executive Officer and Chairmanof the Board of Directors.Patwin Inc. is beneficially owned by the brother of Mr. T.C. Leung. Mr. T.C. Leung is also a director of Eurotherm Limited as at December 31, 2004 and 2003 and retired in February 2005.

(iii)                               As of December 31, 2003, prepayments and other current assets includedadvances to certain PRC employees of the Group, net of provision, ofapproximately US$261,000.  The advancesare provided to those PRC employees in order for them to finance the operationsof certain retail shops established in the PRC by the employees to market theGroup’s products. The advances are unsecured, bear interest at a nominal rateand have no fixed repayment terms. During the years ended December 31, 2003, provisions in respect of the recoverability ofsuch advances of US$45,000 were made by the Group. The Group does not accountfor the related sales to these retail shops until the related inventories aresold to third parties.

As at December 31, 2005 and 2004, the Group has included the financial results of theseretail shops with the application of FIN 46 “Consolidation of Variable InterestEntities”. All material intercompany balances and transactions have beeneliminated in consolidation.

**20          Commitments and contingencies**

 (i)          Operatingleases

The Group has various operating lease agreementsfor office and industrial premises. Rental expenses for the years ended December 31,2005,2004and 2003were approximately US$321,000,US$257,000,and US$139,000, respectively. Future minimum rental paymentsas of December 31, 2005,under agreements classified as operating leases with non-cancellable termsamounted to US$423,000of which US$283,000are payable in the year 2006and US$140,000 are payable each year from 2007 to 2009.

 (ii)         Bankingfacilities

As at December 31, 2005, 2004 and 2003, the Group has various bankingfacilities available for overdraft, import and export credits and foreignexchange contracts from which the Group can access up to approximatelyUS$4,167,000, US$4,167,000and US$4,321,000respectively, of which approximately US$422,000, US$2,394,000and US$1,723,000 was utilized.

**21          Fair value of financial instruments**

The carrying values of financial instruments, which consist of cash andcash equivalents, accounts receivable and accounts payable, bills receivable,bills payable, other payables and balances with related companies approximatetheir fair values due to the short-term nature of these instruments.

F-31

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

(i)           TheGroup reports 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**5         | ** ** | **200**4         | ** ** | **200**3         | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Revenue                   |       |             |       |             |       |             |       |
| Trading and manufacturing |       | 26,348           |       | 32,155           |       | 27,332           |       |
| Engineering               |       | 4,902            |       | 127              |       | 110              |       |
|                      |       | 31,250           |       | 32,282           |       | 27,442           |       |
| Operating income          |       |             |       |             |       |             |       |
| Trading and manufacturing |       | (180             | )          | 462              |       | 517              |       |
| Engineering               |       | 1,331            |       | (14              | )          | 12               |       |
|                      |       | 1,151            |       | 448              |       | 529              |       |

 

|                              | ** ** | **200**5         | ** ** | **200**4         | ** ** | **200**3         | ** ** |
|------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Depreciation:                |       |             |       |             |       |             |       |
| Trading and manufacturing    |       | 178              |       | 184              |       | 190              |       |
| Engineering                  |       | 3                |       | —           |       | —           |       |
|                         |       | 181              |       | 184              |       | 190              |       |
| Capital  Expenditures, Gross |       |             |       |             |       |             |       |
| Trading and manufacturing    |       | 108              |       | 101              |       | 74               |       |
| Engineering                  |       | 2                |       | —           |       | —           |       |
|                         |       | 110              |       | 101              |       | 74               |       |

 

|                           | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|
| ** **                | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Assets                    |       |             |       |             |       |
| Trading and manufacturing |       | 11,623           |       | 15,018           |       |
| Engineering               |       | 5,754            |       | 110              |       |
| Investments in affiliates |       | —           |       | 571              |       |
|                      |       | 17,377           |       | 15,699           |       |
| Liabilities               |       |             |       |             |       |
| Trading and manufacturing |       | 5,731            |       | 7,861            |       |
| Engineering               |       | 1,892            |       | 1                |       |
|                      |       | 7,623            |       | 7,862            |       |

** **

F-32

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

 

|                | ** ** | **200**5         | ** ** | **200**4         | ** ** | **200**3         | ** ** |
|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **     | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Revenue — |       |             |       |             |       |             |       |
| The PRC        |       | 25,005           |       | 25,245           |       | 20,194           |       |
| Hong Kong      |       | 5,932            |       | 6,820            |       | 7,092            |       |
| Others         |       | 313              |       | 217              |       | 156              |       |
|           |       | 31,250           |       | 32,282           |       | 27,442           |       |

 

(iii)         Long-livedassets (1)

Geographical analysis of long-lived assets is as follows:

 

|            | ** ** | **200**5         | ** ** | **200**4         | ** ** |
|------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|       |       |             |       |             |       |
| Hong Kong  |       | 969              |       | 968              |       |
| The PRC    |       | 766              |       | 798              |       |
|       |       | 1,735            |       | 1,766            |       |

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(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**5 | ** ** | **200**4 | ** ** | **200**3 | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                           |       |     |       |     |       |     |       |
| Eurotherm  Limited                             |       | 3        | %          | 29       | %          | 31       | %          |
| Hioki E.E. Corp.                               |       | 29       | %          | 15       | %          | 12       | %          |
| Hach Company  Inc.                             |       | 4        | %          | 11       | %          | 8        | %          |
| Lachat  Instruments Inc.                       |       | 6        | %          | 7        | %          | 3        | %          |
| US Filter/Chemical Feed and Disinfection Group |       | 8        | %          | 4        | %          | 3        | %          |
| ThermoQuest  Corporation                       |       | 2        | %          | 5        | %          | 3        | %          |
| Calipers Life Sciences Inc.                    |       | 5        | %          | 2        | %          | 3        | %          |

 

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-33

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