**FORM 20-F**

 

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

 

**OR**

 

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

 

**For the fiscal year ended  December 31, 2004**

 

**OR**

 

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

 

**For the transition period from                                                         to                                                        **

 

**Commission file number  000-22113**

 

**EURO TECH HOLDINGS COMPANYLIMITED**

(Exact name of Registrantas specified in its charter)

 

**EURO TECH HOLDINGS COMPANYLIMITED**

(Translation of Registrant’s nameinto English)

 

**British Virgin Islands**

(Jurisdiction of incorporation ororganization)

 

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

(Address of principal executiveoffices)

 

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

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

 

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

 

**Ordinary Shares, $0.01 par value**

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section15(d) of the Act.

 

 

(Title of Class)

 

Indicate the number of issued and outstanding shares ofeach of the issuer’s classes of capital or common stock as of the close of theperiod covered by the annual report.

 

**6,434,667Ordinary Shares**

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

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

 

Indicate by check mark which financial statement item theregistrant has elected to follow.

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

 

 

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**TABLE OF CONTENTS**

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

 

i

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

 

ii

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**INTRODUCTION**

 

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

 

**Forward Looking Statements**

 

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

 

iii

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**GLOSSARY**

 

The following glossary of terms may be helpful inunderstanding the terminology used in this Annual Report.

 
| Ambient  Air:                         |   | Atmospheric  air (outdoor as opposed to indoor air).                                                                                                                                                                                                                                                                      |
|---------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                  |   |                                                                                                                                                                                                                                                                                                                      |
| Atomic  Spectrometer:                 |   | An  analytical instrument used to measure the presence of an element in a  substance by testing a sample which is aspirated into a flame and atomized.  The amount of light absorbed or emitted is measured. The amount of energy absorbed  or emitted is proportional to the concentration of the element in the sample. |
|                                  |   |                                                                                                                                                                                                                                                                                                                      |
| Colorimeter:                          |   | An  analytical instrument that measures substance concentration by color  intensity when the substance reacts to a chemical reagent.                                                                                                                                                                                      |
|                                  |   |                                                                                                                                                                                                                                                                                                                      |
| Flow  Injection Analyzer:             |   | An  analytical instrument with a special sampling system that uses a continuous  stream of reagent(s) into which fluid samples are injected.                                                                                                                                                                              |
|                                  |   |                                                                                                                                                                                                                                                                                                                      |
| Human  Machine Interface Software:    |   | A  type of software to interface (or coordinate) the interaction between machine  or equipment and a human being.                                                                                                                                                                                                         |
|                                  |   |                                                                                                                                                                                                                                                                                                                      |
| pH  Controller:                       |   | A  process instrument that measures and controls the acidity or alkalinity of a  fluid.                                                                                                                                                                                                                                   |
|                                  |   |                                                                                                                                                                                                                                                                                                                      |
| Reagent:                              |   | A  chemical substance used to cause a chemical reaction and detect another  substance.                                                                                                                                                                                                                                    |
|                                  |   |                                                                                                                                                                                                                                                                                                                      |
| Mass  Spectrometer:                   |   | An  analytical instrument that separates and identifies chemical constituents  according to their mass-to-charge ratios and is used to identify organic  compounds.                                                                                                                                                       |
|                                  |   |                                                                                                                                                                                                                                                                                                                      |
| Multi-Channel  Digital Recorder:      |   | A device that measures  and records more than one input of a digitized signal (signal in the form of  pulses).                                                                                                                                                                                                            |
|                                  |   |                                                                                                                                                                                                                                                                                                                      |
| Multi-Channel  and Analogue Recorder: |   | A  device that measures and records more than one input of a signal in multi-voltage  or milliampere (e.g. temperature in degrees Centigrade or degrees  Fahrenheit).                                                                                                                                                     |
|                                  |   |                                                                                                                                                                                                                                                                                                                      |
| Process  Analyzer:                    |   | An  analyzer that continuously samples, monitors and measures fluids or gases.                                                                                                                                                                                                                                            |

 

1

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| Process  Turbidimeter:          |   | An  analytical instrument that continually measures the clarity of water based on  light scattering or deflection.                                                                                     |
|---------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                            |   |                                                                                                                                                                                                   |
| Programmable  Logic Controller: |   | A  device used to automate the monitoring and control of an industrial plant.                                                                                                                          |
|                            |   |                                                                                                                                                                                                   |
| SCADA:                          |   | Supervisory  Control and Data Acquisition. An industrial device used to monitor and  control an industrial plant’s status and provide facilities to record the  progress of a machine or project. |
|                            |   |                                                                                                                                                                                                   |
| Sequential  Event Recorder:     |   | High-speed  instrumentation that can record a sequence of events in chronological order  in millisecond resolution.                                                                                    |
|                            |   |                                                                                                                                                                                                   |
| Telemetry:                      |   | The  science and technology of automatic measurement and transmission of data by  wire, radio or other means from remote sources.                                                                      |
|                            |   |                                                                                                                                                                                                   |
| Total Organic Carbon Analyzer:  |   | An analytical instrument that measures organic  contamination in water.                                                                                                                                |

 

2

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**PART I**

 

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

 

Not applicable.

 

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

 

Not applicable.

 

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

 

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

 

**SELECTEDFINANCIAL INFORMATION**

(Amounts expressedin thousands, except

share and pershare data and unless otherwise stated)

 

The selected consolidatedincome statement data for years ended December 31, 2004, 2003 and 2002,and the selected consolidated balance sheet data as of December 31, 2004and 2003 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, 2001 and 2000 and the selected consolidated balancesheet data as of December 31, 2002, 2001 and 2000 set forth below arederived from audited consolidated financial statements of the Company which arenot included herein.

 
| ** **                 | ** ** | **As of December 31,** | ** ** |
|----------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                 | ** ** | **US$**                | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** |
| **Balance Sheet Data:**    | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents |       | 5,242                  |       | 2,752 |   | 3,173 |   | 3,551 |   | 3,963 |   |
| Working capital(1)         |       | 5,457                  |       | 4,914 |   | 4,363 |   | 4,123 |   | 3,686 |   |
| Total assets               |       | 15,699                 |       | 13,308 |   | 12,716 |   | 11,379 |   | 10,092 |   |
| Short-term debt(2)         |       | 0                      |       | 0 |   | 0 |   | 90 |   | 94 |   |
| Long-term bank  loans      |       | 0                      |       | 0 |   | 0 |   | 0 |   | 92 |   |
| Net assets                 |       | 7,837                  |       | 7,243 |   | 6,714 |   | 6,206 |   | 5,878 |   |

 

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(1)          Current assets minus current liabilities.

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

 

3

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| ** **                                              | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                              | ** ** | **US$**                             | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** | **US$** | ** ** |
| **Income Statement Data:**                              | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                 |       | 32,282                              |       | 27,442 |   | 23,497 |   | 19,685 |   | 15,010 |   |
| Cost of revenue                                         |       | (27,033                             | )          | (22,805 | ) | (18,735 | ) | (15,396 | ) | (11,467 | ) |
|                                                    |       |                                |       |   |   |   |   |   |   |   |   |
| Gross profit                                            |       | 5,249                               |       | 4,637 |   | 4,762 |   | 4,289 |   | 3,543 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |   |   |
| Selling and  Administrative Expenses                    |       | (4,801                              | )          | (4,108 | ) | (4,173 | ) | (3,734 | ) | (3,301 | ) |
| Operating income                                        |       | 448                                 |       | 529 |   | 589 |   | 555 |   | 242 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |   |   |
| Interest Income                                         |       | 17                                  |       | 13 |   | 18 |   | 66 |   | 113 |   |
| Other income,  net                                      |       | 104                                 |       | 6 |   | 9 |   | 126 |   | 97 |   |
| Income before  taxes                                    |       | 569                                 |       | 548 |   | 616 |   | 747 |   | 452 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |   |   |
| Income taxes                                            |       | (167                                | )          | (108 | ) | (123 | ) | (163 | ) | (94 | ) |
| Share of equity  in net income of affiliates            |       | 192                                 |       | 91 |   | 7 |   | — |   | — |   |
| Net income                                              |       | 594                                 |       | 531 |   | 500 |   | 584 |   | 358 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |   |   |
| Net income per  Ordinary Share                          |       |                                |       |   |   |   |   |   |   |   |   |
| Basic                                                   |       | 0.09                                |       | 0.08 |   | 0.08 |   | 0.09 |   | 0.05 |   |
| Diluted                                                 |       | 0.06                                |       | 0.08 |   | 0.08 |   | 0.09 |   | 0.05 |   |
| Weighted average  Number of Ordinary Shares Outstanding |       |                                |       |   |   |   |   |   |   |   |   |
| Basic                                                   |       | 6,434,667                           |       | 6,434,667 |   | 6,434,667 |   | 6,434,667 |   | 6,434,667 |   |
| Diluted                                                 |       | 10,034,687                          |       | 6,434,667 |   | 6,434,667 |   | 6,434,667 |   | 6,434,667 |   |

 

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

 

The Hong Kong dollar is freelyconvertible into other currencies (including the US dollar). Since 1983, theHong Kong dollar has effectively been officially linked to the US dollar at therate of approximately HK$7.80 = US$1.00. However, the market exchange rate ofthe Hong Kong dollar against the US dollar continues to be influenced by theforces of supply and demand in the foreign exchange market. Exchange ratesbetween the Hong Kong dollar and other currencies are influenced by the ratebetween the US dollar and the Hong Kong dollar.

 

4

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Since 1994, the conversion ofRenminbi into foreign currencies, including U.S. dollars, has been based onrates set by the People’s Bank of China, which are set daily based on theprevious day’s interbank foreign exchange market rates. Since 1994, theofficial exchange rate for the conversion of Renminbi to U.S. dollars hasgenerally been stable and maintained at the rate of approximately RMB8.30 =US$1.00. The value of the Renminbi fluctuates and is subject to changes in PRCpolitical and economic conditions.

 

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

 

Not applicable.

 

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

 

Not applicable.

 

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

 

You should carefully considerall of the information set forth in this annual report and the following riskfactors. The risks below are not the only ones we face. Additional risks notcurrently known by us or that we deem immaterial may also impair our businessoperations. Our business, financial condition or results of operations could bematerially adversely effected by any of these risks. This annual report alsocontains forward looking statements that involve risks and uncertainties. Ourresults could materially differ from those anticipated in these forward lookingstatements as a result of certain factors, including the risks we face asdescribed below and elsewhere. See “Forward Looking Statements.”

 

**Certain Risks Relating to Doing Business in Hong Kong and the People’sRepublic of China (“PRC”).**

 

**PRC Sovereignty Over Hong Kong Still Developing**

 

•                                          The Company’s executive and principal offices arelocated in Hong Kong, a Special Administrative Region of China (or “SAR”; HongKong is sometimes herein referred to as the “Hong Kong SAR”).

 

•                                          As provided in the Sino-British JointDeclaration on the Question of Hong Kong (the ”Joint Declaration”) and theBasic Law of the Hong Kong SAR of China (the “Basic Law”), the Hong Kong SAR isprovided a high degree of autonomy except in foreign and defense affairs. China’spolitical system and policies are not practiced in Hong Kong. Under thisprinciple of “one country, two systems”, Hong Kong maintains a legal systemthat is based on common law and is different from that of China.

 

5

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•                                          The Company’s results of operations andfinancial condition may be influenced by the political situation in Hong Kongand by the general state of the Hong Kong economy. See “ – EconomicInstability; Currency Exchange Rate.”

 

•                                          There can be no assurance that these past or anyprospective future changes in political, economic or commercial conditions inHong Kong and China will not result in a material adverse effect upon theCompany.

 

**Economic Instability; Currency Exchange Rate**

 

•                                          Most economies in the Far East have suffered fromlarge debts, declining company earnings and economic growth, and significantcurrency devaluation. Although the region appears to be recovering, there canbe no assurance that the recovery will continue.

 

•                                          Issuer stock valuations also dropped sharply froma 1997 high on the main Hong Kong stock index (the Hang Seng)**.** On August 7, 1997, the Hang Seng Index was 16,673.27. On May24, 2005, that index stood at 13,719.32. There can be no assurance that these problems will not continue to abateor worsen or that recovery will continue in the near future in which event theCompany may likely be materially adversely effected.

 

**Economy May Be Unstable**

 

•                                          Unlike many other countries’ economies, the PRCgovernment’s economic philosophy is based upon a “planned” economy model asopposed to a “free enterprise” or “capitalist” model with moderate governmentregulation which is the typical model in most developed, Western nations. Formore than forty years, the PRC economy has been, and presently continues to be,a socialist economy operating under government controls promulgated undervarious one-, five- and ten-year plans (collectively, “State Plans”) adopted bycentral Chinese government authorities and implemented, to a large extent, byprovincial and local authorities which may set production and developmenttargets.

 

•                                          Since approximately the early 1980s the Chinesegovernment has implemented certain policies that emphasize decentralization ofdecision-making power and responsibility with respect to matters such asallocation of funds and the regionalization of economic development, reduce therole of

 

6

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government planning and permitsome utilization of market forces in the development of its economy. Sucheconomic reform measures or other policies, if continued, may be inconsistent,ineffectual, or discontinued at any time with or without notice, and theCompany may not be able to benefit from any or all such reforms or policies.

 

•                                          The success of the Company’s activities in thePRC depends on the Company’s continued ability to overcome circumstancesspecifically effecting the industrial sector, including the relatively poorinfrastructure, road transportation and communications network and an uncertainlegal and regulatory environment.

 

**Economic Reforms May Not Continue or Impact Positively On The Company;Changing Business Environment**

 

•                                          Over the past several years, the PRC’sgovernment has pursued economic reform policies including encouraging privateeconomic activities and decentralization of economic deregulation. The PRCgovernment may not continue to pursue these policies or may significantly alterthem to our detriment from time to time without notice. Changes in policies bythe PRC government resulting in changes in laws, regulations, or theirinterpretation, or the imposition of confiscatory taxes, restrictions oncurrency conversion and imports could materially and adversely effect ourbusiness and operating results. The nationalization or other expropriations ofprivate enterprises by the PRC government could result in a loss of ourinvestments in actual funds and time and effort, in China.

 

•                                          The Company’s results at times may also beadversely effected by:

 

•                                          changes in political, economic and socialconditions in the PRC;

•                                          by changes in government policies such as changesin laws and regulations (or their interpretation);

•                                          the introduction of additional measures tocontrol inflation;

•                                          changes in the rate or method of taxation;

•                                          imposition of additional restrictions on currencyconversion remittances abroad;

 

7

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•                                          reduction in tariff protection and other importrestrictions;

•                                          a return to the more centrally-planned economythat existed previously.

 

**We aresubject to international economic and political risks, over which we havelittle or no control.**

 

•                                          Doing business outside the United Statessubjects us to various risks, including changing economic and politicalconditions, exchange controls, currency fluctuations, armed conflicts andunexpected changes in United States and foreign laws relating to tariffs, traderestrictions, transportation regulations, foreign investments and taxation. Wehave no control over most of these risks and other unforeseeable risks and maybe unable to anticipate changes in international economic and politicalconditions and, therefore, unable to alter our business practice in time toavoid the adverse effect of any of these changes.

 

**Uneven Economic Growth**

 

•                                          The PRC’s economy has experienced significant growthin recent years, but that growth has been uneven among various geographicregions and economic sectors. Economic reforms and growth in the PRC have beenmore successful in certain provinces than in others, and the continuation orincrease of such disparities could adversely effect political or socialstability.

 

**PRCInflation**

 

•                                          In the past, the PRC has experienced substantialrates of inflation, although inflation has substantially declined in the mostrecent years. The PRC government’s measures to restrain inflation had asignificant adverse impact on the Company in the past and future measures inthis regard or other actions by the PRC government could materially andadversely effect the Company, its business and results of operations. See — “AdverseImpact upon Company of PRC’s Credit Restrictions.”

 

**Uncertain Legal System and Application of Laws**

 

•                                          The legislative trend in the PRC over the pastdecade has been to enhance the protection afforded to foreign investment andallow for more active control by foreign parties of foreign investedenterprises. There can be no assurance that this will continue. In addition, asthe PRC economy, business and commercial framework and legal system allcontinue to

 

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develop, that development mayadversely effect the Company’s activities in the PRC or the ability of theCompany to enter into Sino-foreign agreements.

 

**PRC Legal System Business Laws Developing**

 

•                                          The PRC does not yet possess a comprehensive bodyof business law or a consolidated body of laws governing foreign investmententerprises. As a result, the enforcement, interpretation and implementation ofexisting laws, regulations or agreements may be sporadic, inconsistent andsubject to considerable discretion. The PRC’s judiciary has not had sufficientopportunity to gain experience in enforcing laws that exist, leading to a higherthan usual degree of uncertainty as to the outcome of any litigation. As thelegal system develops, entities such as the Company may be adversely effectedby new laws, changes to existing laws (or interpretations thereof) andpreemption of provincial or local laws by national laws. Even when adequate lawexists in the PRC, it may not be possible to obtain speedy and equitable enforcementof the law.

 

**Government Currency Controls**

 

•                                          The PRC government imposes control over itsforeign currency reserves in part through direct regulation of the conversionof its currency, Renminbi (“RMB”) into foreign exchange and throughrestrictions on foreign imports. The conversion of RMB into Hong Kong andUnited States Dollars (“U.S. Dollars”) must be based on rates set by the People’sBank of China (“**PBOC**”), which rates are set dailybased on the previous day’s Chinese interbank foreign exchange market rate withreference to current exchange rates on the world financial markets.

 

•                                          Although the RMB to U.S. dollar exchange rate hasgenerally been stable since January 1, 1994 and the PRC government hasstated 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 orthat the RMB will not devalue further against the U.S. dollar or Hong Kongdollar. Exchange rate fluctuations may adversely effect the Company because offoreign currency denominated liabilities, and may materially adversely effectthe value, translated into U.S. dollars, of the Company’s net fixed assetssituated and to be situated in the PRC, earnings and dividends.

 

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**Turbulent Relations with the United States of America (“United States”)**

 

•                                          Differences between the United States andPRC governments on some political issues continue occasionally to color therelationship. These occasional controversies could materially and adversely effectour business and operations. Political or trade friction between the twocountries could also materially and adversely effect the market price of ourOrdinary Shares, whether or not they adversely effect our business.

 

**Certain Risks Relating to Company’s Business.**

 

**We MayMake Acquisitions Without Your Approval**

 

**•****                                         **Althoughwe endeavor to evaluate the risks inherent in any particular acquisition, therecan be no assurance that we will properly or accurately ascertain all suchrisks. We will have virtually unrestricted flexibility in identifying andselecting prospective acquisition candidates and in deciding if they should beacquired for cash, equity or debt, and in what combination of cash, equityand/or debt.

 

We will not seekstockholder approval for any acquisitions unless required by applicable law andregulations. Our stockholders will not have an opportunity to review financialand other information on acquisition candidates prior to consummation of anyacquisitions under almost all circumstances.

 

Investors will berelying upon our management, upon whose judgment the investor must depend, withonly limited information concerning management’s specific intentions.

 

There can be no assurance thatthe Company will locate any such additional acquisition candidate, successfullycomplete such additional acquisition, or any acquisition will perform asanticipated, will not result in significant unexpected liabilities or will evercontribute significant revenues or profits to the Company or that the Companywill not lose its entire investment in any acquisition candidate.

 

**Dependence uponManagement**

 

•                                          The Company is dependent upon the servicesof its executive officers, in particular Mr. T.C. Leung, the Chairman of the

 

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Company’s Board of Directors andits Chief Executive Officer. The business of the Company could be adversely effectedby the loss of services of, or a material reduction in the amount of timedevoted to the Company by its executive officers. The Company does not maintain“Key Man” life insurance on the lives of any of its officers anddirectors.  See Item 6. “Directors,Senior Management and Employees.”

 

**Adverse Impact upon Company of PRC’s Credit Restrictions**

 

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

 

**Competitionwith Vendors**

 

•                                          As the Company plans to assemble products of thekind that it presently distributes, the Company may directly compete withcertain of its vendors. Any such direct competition may adversely effect itsrelationship with its vendors. See Item 4. “Information on the Company.”

 

**Dependence on Vendors; Lack of Long Term Agreements**

 

•                                          The Company distributes supplies manufactured bya number of vendors, including Eurotherm, Ltd. (“**Eurotherm**”),Hioki E.E. Corp. (“**Hioki**”), HachCompany, Inc. (“**Hach**”), which are the Company’slargest suppliers. The Company has only a letter from Hioki appointing theCompany as Hioki’s sales representative in the PRC, Hong Kong and Macau. Purchasesfrom Eurotherm accounted for approximately 29% of our sales during Fiscal 2004.  Eurotherm is a significant vendor to theCompany.  Some of Eurotherm’s productsare readily saleable “over-the-counter” in our retail shops; while other Eurothermproducts are in demand by the PRC’s energy supply industry, with the demand forpower in the PRC outstripping supply. Although alternative sources of supplyexist, there can be no assurance that the termination of the Company’srelationship with any of the above or other vendors would not have a short-termadverse effect on the Company’s operations due to the Company’s dependence onthese vendors.

 

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**Risks Relating to the Company Itself.**

**Control by T.C. Leung; Potential Conflict of Interests**

 

•                                          T.C. Leung, the Company’s Chairman of the Boardand Chief Executive Officer, as a practical matter, is able to nominate andcause 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 andmanagement of the Company. As a consequence, Mr. Leung can have theCompany managed in a manner that would be in his own interests and not in theinterests of the other shareholders of the Company. See Item 7. “MajorShareholders and Related Party Transactions” and Item 6. “Directors, SeniorManagement 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 validityof the Company procedures, the fiduciary duties of management and the rights ofthe Company’s shareholders may differ from those that would apply if theCompany were incorporated in a jurisdiction within the United States.

 

•                                          The rights of shareholders under British VirginIslands law are not as extensive as the rights of shareholders under legislationor judicial precedent in many United States jurisdictions. Under United Stateslaw, majority and controlling shareholders generally have certain “fiduciary”responsibilities to the minority shareholders. United States shareholder actionmust be taken in good faith and actions by controlling shareholders in a UnitedStates jurisdiction and executive compensation which are obviously unreasonablemay be declared null and void.

 

•                                          The BVI law protecting the interests of theminority shareholders is not as protective in all circumstances as the lawprotecting minority shareholders in United States jurisdictions. Theshareholders of the Company may have more difficulty in protecting theirinterests in the face of actions by the Company’s Board of Directors, and mayhave more limited rights, than they might have as shareholders of a companyincorporated in many United States jurisdictions.

 

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**Anti-takeover Provisions**

 

**•**                                          The Company has5,000,000 shares of “blank check preferred stock” authorized. The “blank checkpreferred stock” is intended to strengthen the Company’s ability to resist anunsolicited takeover bid and may be deemed to have an anti-takeover effect. TheBoard of Directors has the right to fix the rights, terms and preferences atthe time of issue of “blank check preferred stock” without further action byour shareholders.

 

**Uncertainty of EnforcingUnited States Judgments**

 

•                                          There is some uncertainty whether BVI courtswould enforce judgments of the courts of the United States and of other foreignjurisdictions, or enforce actions brought in the BVI which are based upon thesecurities laws of the United States. A final monetary judgment obtained in theUnited States will be treated as a cause of action in itself by the BVI courtsso that no retrial of the issues would be necessary, provided that materialpreconditions are met and the proceedings pursuant to which judgment wasobtained were not contrary to the rules of natural justice.

 

•                                          All of the Company’s directors and executiveofficers reside outside of the United States, service of process upon theCompany and such persons may be difficult to effect in the United States uponall such directors and officers.

 

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

 

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**Being aForeign Private Issuer Exempts Us From Certain Securities and ExchangeCommission (“Commission”) and National Association of Securities Dealers AutomatedQuotation System (“NASDAQ”)Requirements**

 

Weare a foreign private issuer within the meaning of rules promulgated under theSecurities Exchange Act of 1934 (the “Exchange Act”). As such, we are exemptfrom certain provisions applicable to United States public companies including:

 

•                                          the rules under the Exchange Act requiring thefiling with the Commission of quarterly reports on Form 10-Q or current reportson Form 8-K;

 

•                                          the sections of the Exchange Act regulatingthe solicitation of proxies, consents or authorizations in respect of asecurity registered under the Exchange Act;

 

•                                          the provisions of Regulation FD aimed atpreventing issuers from making selective disclosures of material information;

 

•                                          the sections of the Exchange Act requiringinsiders to file public reports of their stock ownership and trading activitiesand establishing insider liability for profits realized from any “short-swing”trading transaction (i.e., a purchase and sale, or sale and purchase, of theissuer’s equity securities within less than six months);

 

Because of these exemptions, investors are not afforded the sameprotections or information generally available to investors holding shares inpublic companies organized in the United States.

 

**Our Securities Must Continue ToMeet Qualitative And Quantitative Listing Maintenance Criteria For The NASDAQ SmallCapMarket**

 

•                                          Oursecurities are quoted and traded on the NASDAQ SmallCap Market. There can be noassurance that we will

 

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continue to meetboth the qualitative and quantitative criteria for continued quotation andtrading of our securities on the NASDAQ SmallCap Market. That criteria, whichundergoes periodic NASDAQ review.

 

If we are unableto meet the continued quotation criteria of the NASDAQ SmallCap Market and aresuspended from trading on these markets, our securities could possibly betraded in the over-the-counter market and be quoted in the so-called “pinksheets” or, if then available, the OTC Bulletin Board. In such an event, aninvestor would likely find it more difficult to dispose of, or even obtainaccurate quotations of, our securities. See “- We Will Also Be Required To MeetAnticipated NASDAQ Corporate Governance Criteria.”

 

**We AreAlso Required To Meet Certain, But Not All, NASDAQ Corporate GovernanceCriteria**

 

•                                          Although,in the past, we have been able to satisfy NASDAQ’s SmallCap Market corporategovernance criteria, those criteria are difficult to comply with and include,among other things:

 

•                  aheightened degree of independence of members of the board of directors withindependent directors to, among other things: hold regular meetings amongthemselves only;

 

•                  establishmentof a code of conduct addressing compliance with laws; and

 

•                  alimit on payments to independent directors and their family members (other thanfor services on the board of directors).

 

These corporate governance requirements and a strict definition of “independentdirector” make it more difficult to find independent directors for our Board ofDirectors. There is intense competition for qualified independent directors,including those persons with accounting experience and financial statementacumen to serve on audit committees. We believe that continued compliance withNASDAQ’s corporate governance requirements may be difficult and increase ourcosts and expenses as the costs of finding and compensating independentdirectors escalate

 

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and the costs of administering their new powers and responsibilities isan added financial burden. If we are unable to attract and keep a sufficientnumber of independent directors willing to take on the responsibilities imposedby such rules on what we believe to be commercially reasonable terms, oursecurities may be delisted from NASDAQ. (See “-Being a ‘Controlled Company’ Exempts Us From Certain Other NASDAQCorporate Governance Criteria.”)

 

**Being a “Controlled Company”Exempts Us From Certain Other NASDAQ Corporate Governance Criteria**

 

As a result ofT.C. Leung, the Company’s Chairman of the Board and Chief Executive Officerbeneficially owning in excess of the majority voting power of our OrdinaryShares, we are a “controlled company” as that term is defined in NASDAQ’s rulesand regulations. As a “controlled company”, we are not required to comply withcertain NASDAQ corporate governance criteria, including, among other things,the requirements that the majority of our Board be independent directors, andtheir having the authority to approve director nominations and executiveofficer compensation.

 

**We Are Not Subject To Various Corporate GovernanceMeasures, Which May Result In Shareholders Having Limited Protections**

 

Recent Federallegislation, including the Sarbanes-Oxley Act of 2002 (“**SOX**”),has resulted in the adoption of various corporate governance measures bysecurities exchanges and NASDAQ designed to promote the integrity of thecorporate management and the securities markets.  Being a “controlled company,” we will beexempt from many, but not all, of those requirements.  Furthermore, the absence of such practiceswith respect to our Company may leave our shareholders without protectionsagainst interested director transactions, conflicts of interest and similar matters.  By July 31, 2005, we will be required to makechanges to our current corporate governance practices, which changes may becostly and time consuming.  As an exampleof one such NASDAQ requirement, currently only two of the members of our

 

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board of directorsare considered to be “independent” for the purposes of NASDAQ’s rules.  We may not be able to attract a requiredthird independent member of our Board of Directors in sufficient time tosatisfy this requirement.

 

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

 

•                                          Pursuantto Section 404 of SOX, the SEC adopted rules requiring public companies toinclude a report of management on the company’s internal controls overfinancial reporting in their annual reports, including Form 20-F.  In addition, the independent registeredpublic accounting firm auditing a company’s financial statements must alsoattest to and report on management’s assessment of the effectiveness of acompany’s internal controls over financial reporting as well as the operatingeffectiveness of a company’s internal controls. We were not subject to these requirements for the fiscal year endedDecember 31, 2004.  We are evaluating ourinternal control systems in order to allow our management to report on, and ourindependent auditors attest to, our internal controls, as a required part ofour Annual Report on Form 20-F beginning with our report for the fiscal year toend December 31, 2006.

 

While we expect to expend significant resources indeveloping 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 availablewith which to measure compliance adequacy. Accordingly, there can be no positive assurance that we will receive apositive attestation from our independent auditors.

 

In the event weidentify significant deficiencies or material weaknesses in our internalcontrols that we cannot remediate in a timely manner or we are unable toreceive a positive attestation from our independent auditors with respect toour internal controls, investors and others may lose confidence in thereliability of our financial statements,

 

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our ability toobtain equity or debt financing could suffer and the market price of our sharescould decline.

 

**The Market Price Of Our SecuritiesHas Been Fluctuating Widely**

 

•                                          Duringthe past five years, the market price of our Ordinary Shares has been subjectto wide fluctuations. Additionally, the Company knows of no reason for thesewide fluctuations. See Item 9A - “Markets”.

 

**There Are Risks In PurchasingLow-Priced Securities**

 

•                                          Ifour securities were to be suspended or delisted from the NASDAQ SmallCapMarket, they could be subject to rules under the Securities Exchange Act of1934 (“Exchange Act”) which impose additional sales practice requirements onbroker-dealers who sell such securities to persons other than establishedclients and “accredited investors” (for example, individuals with a net worthin excess of US$1,000,000 or an annual income exceeding US$200,000 orUS$300,000 together with their spouses). For transactions covered by suchrules, a broker-dealer must make a special suitability determination of thepurchaser and have received the purchaser’s written consent to the transactionprior to the sale. Consequently, such rules may affect the ability of broker-dealersto sell our securities and the ability to sell any of our securities in anysecondary market that may develop for such securities.

 

The SEC hasenacted rules that define a “penny stock” to be any equity security that has aprice (as therein defined) of less than US$5.00 per share or an exercise priceof less than US$5.00 per share, subject to certain exceptions, includingsecurities listed on the NASDAQ SmallCap Market or on designated exchanges. Forany transaction involving a penny stock, unless exempt, the rules require thedelivery, prior to any transaction in a penny stock, of a disclosure statementprepared by the SEC relating to the penny stock market. Disclosure also has tobe made about the risks of investing in penny stocks in both public offeringsand in secondary trading. In the event our securities are no longer listed onthe NASDAQ SmallCap Market or are not otherwise exempt from the provisions ofthe SEC’s “penny stock” rules, such rules may also affect the ability of broker-dealersand investors to sell our securities.

 

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**There Is No Assurance Of A ContinuedPublic Market For Our Securities**

 

•                                          Therecan be no assurance that a trading market for our Ordinary Shares will continue.

 

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

 

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

 

The Company was organizedunder the laws of the British Virgin Islands on September 30, 1996 for thepurposes of raising capital and for acquiring all the outstanding capital stockof Euro Tech (Far East) Limited, a Hong Kong corporation (“**Far East**”).The Company successfully completed a public offering (“**PublicOffering**”) receiving net proceeds of approximately US$1,817,000, inMarch 1997. Contemporaneously, the Company acquired all the issued andoutstanding capital stock of Far East and it became a wholly-owned subsidiaryand the primary operational entity of the Company. Far East was established in1971 and has been in continuous operation since that time. See Item 5. “Operatingand Financial 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.

 

Far East was established in 1971under the name of Eurotherm (Far East) Limited, to market and distribute itsparent’s (Eurotherm (Far East) Limited) industrial control equipment in HongKong and Southeast Asia, and expanded its activities into the PRC in 1973. Inthe early 1980’s, Far East began distributing high-tech equipment manufacturedin the United States, Europe and Japan within the PRC, in addition to itsdistribution of its parent’s products. In 1988, the activities of the parentand Far East were separated into Eurotherm International and Far East. In oraround 1994, all the capital stock of Far East was purchased by its management,principally T.C. Leung, the Company’s Chairman of the Board of Directorsand Chief Executive Officer. See Item 7. “Major Shareholders and Related Party Transactions.”

 

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

 

The Company is primarily adistributor of a wide range of advanced water treatment equipment (includingchlorination equipment), laboratory instruments, analyzers, test kits andrelated supplies and power generation equipment (including recorders and powerquality analyzers). The Company acts as an exclusive and non-exclusivedistributor for well-known manufacturers of such equipment, primarily tocommercial customers and governmental agencies or instrumentalities in HongKong and the PRC. During its fiscal year ended December 31, 2004 (“**Fiscal 2004**”) the Company distributed products to in excessof 1,000 customers, including the Hong Kong Environmental ProtectionDepartment, the Beijing Hydrology station, China Light & Power Co., Ltd.,Hong Kong Electric Co., Ltd., and the Kowloon-Canton Railway Corporation,****China’s National Environmental Protection Agency, a jointventure between the China Great Wall Industry I/E Corp. and Austria’s AquaEngineering to construct one of Beijing’s water treatment plants, and tosubdistributors located in Hong Kong, the PRC and Macau. These products aremanufactured by a substantial number of major American, European and Japanesecorporations, including

 

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Eurotherm, Hioki and Hach, which are the Company’s largest suppliers,with purchases from them accounting for approximately 31%, 12% and 8%,respectively, of the Company’s sales during Fiscal 2003 and approximately 29%, 15%and 11%, respectively, of the Company’s sales during Fiscal 2004.

 

The Company distributes productsthrough its Hong Kong headquarters, its representative offices located inBeijing, Shanghai, Guangzhou, Chongqing, Xi ́An, Shenyang, Wuhan and Fuzhou, andthrough non-exclusive arrangements with independent sub-distributors located inHong Kong, the PRC and Macau.

 

The Company believes that thecontinuing growth of industrial activity in particular, and overall businessactivity in general, in the PRC over the last five years has produced a strongand increasing demand for its products in the PRC. The Company further believesthat in the near future the need and demand for the products it distributeswill grow as a result of increased regulations governing the environment andindustrial pollution output, projected growing demands of the PRC’s populationfor clean water and a healthier and safer environment, the potential for thecontamination or depletion of existing clean fresh water sources and theburgeoning demand for power in the PRC.

 

The Company believes that byassembling the products it distributes, it may realize increased gross profitmargins and greater revenues and net income than if it remained only adistributor of such products with sales of the Company first product offering, anInfrared Photometric Oil Analyzer, commencing in 2003. Similarly, the Companybelieves that by expanding its regional sales efforts in the PRC, it mayrealize higher revenues and net income.

 

Also, during Fiscal 2004, ourSpecial Products and Engineering Department continued to take on a greaternumber of engineering projects in the wastewater treatment and power generationindustries.

 

**Expansion Plans for the Near Term**

 

Trading

 

Our expansion plans for the nearterm, include, but are not limited to the following:

 

•                  We plan to establish retail shops and/or officesin the Southwest and Northwest parts of the PRC as our current retail shops arelocated in the coastal areas and central PRC. We will continue to use of our retail shops to sell “low-tech” productssuch as those manufactured by Hioki and our own products.  We believe that these shops are operatingwith a lower overhead than the rest of the Company.

 

•                  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.

 

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Having “low-tech” productsoffered through our retail shops and the availability of “on-line” productoffering are anticipated to allow our sales force to focus on “high-tech” andother products requiring personal or telephone contact directly with customersand potential customers.

 

We continue our efforts toexpand by acquisitions and are seeking to acquire instrument manufacturing andengineering companies in Hong Kong and the PRC. We have engaged a business consultant to assist in this search.  The costs of any such acquisition weanticipate would be drawn from our general working capital and, possibly, byprivate sales of our securities that may include the exercise by officers anddirectors of their options.  We have nocommitments or indications of interest for the private sales of our securitiesand only a nominal number of our options have been exercised to date.

 

Additionally, we plan toestablish our own calibration laboratory by the end of Fiscal 2005.  A calibration laboratory will allow us tocalibrate and issue calibration certificates for all electrical products wesell.  The significance of calibratingequipment and issuing certificates is that it will enhance our ability to serveour customers and satisfy the growing demand of our customers for thisservice.  Calibration must be performedby our customers on their equipment to assure that the equipment continues tomeet the manufacturer’s specifications and is, therefore, a necessary elementin quality control and performance testing. Additionally, we believe that establishing a calibration laboratory willenhance our image in Hong Kong and the PRC. Ultimately, it will be our goal to receive accreditation from the HongKong Laboratory Accreditation Scheme of the Hong Kong SAR Innovation andTechnology Commission.

 

Our plans for the next twelve months also includenegotiating an increase in our equity stake in Yixing Pact EnvironmentalTechnology Company Limited and Pact Asia Pacific Limited (collectively, “Pact”)and attempting to have some of our current suppliers to enter into jointventures with the Company providing local expertise and a sales network whilethe partners provide the technical expertise to manufacture products in thePRC.

 

Manufacturing

 

Sales of the InfraredPhotometric Oil Analyzer commenced in 2003. During 2004, we began selling turbidity instruments and spectrometersthat we developed and manufactured ourselves and began assembling and sellingthe Total Organic Analyzer of O.I. Corporation. In 2005, the Company beganoffering to customers the design, build-out, installation and maintenance of aCompany produced Integrated Water Quality Monitoring system (“WQMS”)that incorporates, among other features: intake sampling, flow through testing with the ability to “auto clean”sensors with monitoring for ammonia, nitrate and organic pollution; electronicmeasurements, transmission (via telephone, radio data network, cellular orsimilar transmission for monitoring purposes) and recordation; and housing tocustomer’s specifications.

 

In 2005, the Company also beganoffering two new company manufactured turbidimeters.  One of the new turbidimeters is directed atwater treatment plans, environmental monitoring status, hydrological stationsand the second is directed at beer and other beverage processing facilities andit analyzes the particles contained in the beverage.  See “- Product Assembly Operations”. During thenext twelve months, we intend to assemble and/or manufacture additionalproducts in the future

 

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and seek opportunities with our suppliers to assemble their products,secure manufacturing and/or assembly facilities and seek another manufacturerof analytical instruments to acquire.

 

Engineering

 

To allow the Company to bid onlarger water, wastewater and power generation projects, we intend to seek theacquisition of an engineering company and/or a system integrator (a companythat provides hardware, software and solutions in the field of engineering) orenter into a joint venture with a third party to work in connection with ourprocess control and engineering department.

 

In January 2002, we acquired a30% equity interest in Pact.  Pact is aprivately owned engineering firm situated in Shanghai that specializes in thedesign, manufacture and operation of water and wastewater treatment plants inseveral industries situated in China. Pact, through associates and business alliances, also conducts similaroperations in the Middle East. The Company believes that Pact’s business iscomplementary to the Company’s business as the Company continues to focus onsales and marketing of products of others. The Company believes that byaligning itself with an engineering firm, such as Pact, it may be able to gaina competitive advantage by offering customers and potential customers not onlyhardware but solutions to engineering problems as well. Also, the Company believesthat its equity stake in Pact 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.

 

During Fiscal 2003 and Fiscal2004, our share of Pact’s net income represented 17% and 32%, respectively, ofour net income.

 

**Products, Services and Customers**

 

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

 

Laboratory and portableinstruments generally consist of analytical instruments including but notlimited to the following: spectrophotometers, colorimeters, turbidimeters, ion-selectiveelectrodes, chemical oxygen demand apparati, digestion apparati, and precisionre-agent dispensing devices which are used to test and monitor impurities andcontaminants in water systems. See “Glossary.”

 

The Company also distributescontinuous-reading process analyzers, process turbidimeters, pH controllers andanalyzer accessories. These products are generally used to monitor and control

 

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drinking water quality to ensure that water treatment procedures complywith regulatory standards. See “Glossary.”

 

**Scientific Instruments.** The Company distributes analytical instruments,environmental monitoring instruments and general purpose laboratoryinstruments. Analytical instruments include, but are not limited to, chromatographs,mass spectrometers, flow injector analyzers and atomic spectrometers.Environmental monitoring instruments include both air and water qualitymonitoring instruments. Air quality monitoring instruments are generallydivided into those which monitor ambient (i.e., atmospheric) air, and thosewhich monitor pollution sources. Additionally, the Company offers generalpurpose laboratory instruments including a variety of water quality monitoringand analysis equipment, such as continuous reading process analyzers, processturbidimeters, pH controllers, and test kits for monitoring chemical content inwater (i.e., chlorine, fluorides, etc.). See “Glossary.”

 

Customers for the analyticalinstruments include government agencies, academic and research institutions andmajor laboratories. The Company also distributes products to beverage producersand restaurants, including water quality test kits to more than twelve bottlingplants of a well known United States soft drink producer, which are located inthe PRC; total organic carbon analyzers to the People’s Liberation Army (thePRC armed forces), water quality monitoring instruments to well known UnitedStates fast food franchisor’s restaurants located in Hong Kong and the PRC, andto well known United States and European beer producers bottling plants locatedin Wuhan, PRC. Each such soda producer, restaurant and beer bottler and thePeople’s Liberation Army do not account for a significant portion of our sales.

 

Customers for air and waterquality monitoring instruments also include government agencies such as theHong Kong Environmental Protection Department, which uses a Company distributedwater quality monitoring system to monitor the water quality of Hong Kong’s VictoriaHarbor, more than ten water treatment plants located in the PRC (includingsites at Beijing, Tianjin, Guangzhou and Wuhan), and the Beijing EnvironmentalMonitoring Centre. The Company is also one of two distributors supplyingcontinuous water monitoring systems to Beijing’s Hydrology Station.

 

The Company derivedapproximately 37%, 41.3% and 58.7% of its revenues from the sale of ScientificInstruments during Fiscal 2004, Fiscal 2003 and Fiscal 2002, respectively.

 

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

 

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The Company derivedapproximately 21.8%, 21.6% and 18.6% of its revenues from the sale of ProcessControl and Engineering Products during Fiscal 2004, Fiscal 2003 and Fiscal 2002,respectively.

 

**Special Projects and EngineeringDepartment.** Inconjunction with the distribution of products such as programmable logiccontrollers, telemetry units and SCADA systems and software, the Company also providessystems engineering to government agencies, wastewater treatment and powergeneration plants and beverage producers.

 

The Company derivedapproximately 22.3%, 20.7% and 9.5% of its revenue from its Special ProjectOperation during Fiscal 2004, Fiscal 2003 and Fiscal 2002, respectively. Thisrevenue was derived primarily from sales of products and supply systems.

 

Our specialprojects and engineering department is believed by the Company to be the maincontractor and system integrator of a large number of industrial and municipalwastewater, water treatment and power generation plants in the PRC. Specificservices provided by this group include automated control system design, theoperation and management of various wastewater, water and power generationprojects. We also work with PACT which we believe to be the first whollyforeign owned engineering company in the PRC specializing in the design,manufacture and operation of industrial water and wastewater treatment plants,water purification/treatment stations and membrane separation equipment. Weendeavor to introduce, develop, and promote new and advanced technologies,products, and appropriate technical developments from abroad. We have also beencooperating with established technology companies and engage in systems andspecial projects in Programmable Logic Control, Telemetry unit, SCADA systems,Human Machine Interface Software and Sequential Event Recording.

 

**Other Products.** The Company distributes general testing andmeasuring equipment including multi-channel digital and analogue recorders,signal amplifiers and calibration equipment and power quality analyzers toindustries including power plants, railway and aero-space industries,utilities, educational institutions and telecommunications companies.

 

The Company derivedapproximately 17.6%, 14.8% and 11.9% of its revenues from the sale of theseOther Products during Fiscal 2004, Fiscal 2003 and Fiscal 2002, respectively.

 

**Technical Support.** The Company’s technical support staff providescustomers with maintenance, installation assistance, and calibration services,and assists sales personnel in giving technical advice to and performingproduct demonstrations for customers. The Company derived approximately 1.3%, 1.6%and 1.3% of its revenues from Technical Support Operations during Fiscal 2004,Fiscal 2003 and Fiscal 2002, respectively.

 

**Customers.** During Fiscal 2004, the Company distributedproducts to in excess of 1,000 customers, including sub-distributors, locatedin Hong Kong, the PRC and Macau. During Fiscal 2004, the Nanjing Keyuan ControlEngineering Co. Ltd. accounted for approximately 15% of the Company’s revenues.No other single customer accounted for more than 5% of the Company’s revenuesduring Fiscal 2004. The Company does not believe that any single customer orsub-distributor is material to its operations.

 

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**Product Assembly Operations**

 

The Company, through its PRCCorporation, Shanghai Euro Tech Limited established in 1999 in the Pudong JinQiao Export Processing Zone of Shanghai, engages in the development,production, sales and servicing of environmental equipment, including thedevelopment of modern laboratory analyzers, on-line measuring equipment andother analyzers for chemicals. Our products are “tailor-made” for thediversified needs of equipment users. Main products include InfraredPhotometric Oil Analyzer (IPOA), COD analyzers, Total Organic Carbon Analyzer,turbidity meters, total suspended solid analyzers, dissolved oxygen analyzers, varioustypes of spectrophotometers as well as a full spectrum of matching chemicalreagents. In 2005, we began offering two new turbidity meters, manufactured bythe Company and our own WQMS.

 

This facility produces the Infrared Photometric Oil Analyzer, together with the two types ofspecialized reagents have been the best customer accepted products from thisplant. Sale of the Infrared Photometric Oil Analyzer commenced in 2003. Thisplant also manufactures multi-function reactors, spectrophotometers, reagentsfor chemical oxygen demand and chlorine and silica measurement, used in water-relatedtesting, monitoring and treatment. The manufacturing plant moved to a largerfacility in 2003 under a lease that now expires in July 2006.** **It is contemplatedthat the Company will import components, assemble the finished products andthen distribute the products through its distribution network. The Companybelieves that by establishing product assembly operations in the PRC andexpanding the number of its regional sales offices in the PRC, it will not onlyincrease revenues by expanding its customer base and increasing distributioncapabilities, but also its net income since the Company believes it will enjoyhigher overall profit margins by assembling certain products which it nowdistributes rather than by only purchasing the finished product from vendors.

 

In June 2003, theCompany entered into an agreement with O.I. Corporation (“**O.I.**”)permitting the Company to assemble O.I.’s Total Organic Carbon Analyzer (“TOC”)at the Company’s manufacturing facility. The Company believes that O.I.’s TOCis more advanced than the products currently sold by the Company and that byassembling O.I.’s TOC, it may be able to increase its market share for advancedanalytical equipment at more competitive prices than it is now offering. Also,the Company anticipates that this agreement will trigger closer cooperationwith its vendors to develop other products. Although the Company had enteredinto assembly 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 believethat by producing products locally in the PRC, we can reduce our productioncosts and be able to compete better with lower costs to our customers whilemaintaining our profit margins.

 

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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.

 

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

 

**Sources of Supply**

 

The Company distributes productsmanufactured by a number of vendors, including Eurotherm, Hioki and Hach, whichare the Company’s primary suppliers, see “- Business Overview”. The Company hasexclusivity agreements for specified geographic areas with many of itssuppliers for certain products. Those agreements do not encompass all productsdistributed by the Company or all of the market areas serviced by the Company.In addition, some of these agreements are memorialized not as formal contracts butrather through other acknowledgements or correspondence which may contain avague, if any, description of the terms and conditions of such agreement orarrangement, and therefore may be unenforceable. The Company has writtenconfirmation from Hach that the Company is Hach’s non-exclusive representativein the PRC, Hong Kong and Macau authorized to supply, install and commissionHach’s products and accessories. 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 Hach is terminable on ninety daysnotice by either party. Although alternative sources of supply exist, there canbe no assurance that the termination of the Company’s relationship with any ofthe above or other vendors would not have a short-term adverse effect onoperations.

 

**Expansion**

 

The Company continues to seek:(1) development of manufacturing and engineering operations as part of its corebusiness through (a) the development and assembly of more of the Company’s ownenvironment-related equipment (see “ — Product Assembly Operations”), (b) theexpansion of its process engineering business through its own special projectsand engineering department and cooperation with Pact, (c) potential acquisitionsof manufacturing plants to expand our product-assembly operations and (d)potential acquisitions of engineering companies to enhance our ability to bidfor and take on larger engineering projects; and (2) the development of astrategic retail network to serve China (see “ – Sales and Marketing”).

 

**Regulatory Environment**

 

Concerns about and awareness ofpollution problems and environmental issues have grown at all levels of PRCgovernment as the PRC experienced economic growth. Environmental

 

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protection laws and strict regulations have been enacted and are buttressed byincreased budget allocations for environmental regulation, monitoring andenforcement. The PRC’s primary environmental protection agency is the StateEnvironmental Protection Agency (SEPA), under which there are EnvironmentProtection Bureaus in each city and county. According to oral informationreceived by management from SEPA, under bureau management, there are twoenvironment monitoring systems: one system consists of over 2,200 monitoringstations to collect and analyze the environmental data of each city and county;another system consists of over 2,500 stations to monitor specific industrialdistricts or factories which have been identified as major pollution sourcesdue to their non-compliance with environmental regulations. The Company hassupplied water and air quality monitoring and analytic instruments to thesemonitoring stations for several years. There can be no assurance that theagencies will continue to use the Company’s products for these purposes, or thatother market competitors will not enter the market with superior products,distribution systems or more competitive prices. See “ —Competition.”

 

**Competition**

 

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

 

During Fiscal 2004, Fiscal 2003and Fiscal 2002, the Company’s gross profit margins were approximately 16.3%, 16.9%and 20.3%, respectively. The Company believes that it competes with the PRCmanufacturers on the basis of quality and technology. The Company believes itoffers foreign-manufactured products which are of higher quality and use moreadvanced technology than products manufactured in the PRC. The Company believesthat it competes with foreign manufacturers and other distributors of theirproducts on the basis of the Company’s more extensive distribution network andan 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 businessopportunities.  The business and otheractivities generated by ChinaH2O.com Limited have had a synergisticeffect with those of the Company indirectly by feeding market information,sales leads and tender information to the Company.

 

**Sales and Marketing**

 

The Company distributes productsthrough its principal office located in Hong Kong and its representative PRCoffices located in Beijing, Shanghai, Guangzhou, Chongqing, Xi ́An, Shenyang,Wuhan and Fuzhou. The Company has a marketing and sales force of 72 people whoare paid a salary plus commission based on sales. The Company’s offices alsocoordinate the sales efforts of approximately fifty other companies located inthe PRC which act as sub-distributors. These sub-distributors are engaged on anon-exclusive basis to distribute the products of other distributors. Each ofthe fifty sub-distributors accounted for less than two percent of the Company’ssales during Fiscal 2004 and Fiscal 2003.

 

Following the opening of our first retail shop inShanghai in 2001, Euro Tech retail outlets are now found in a number of majorcities in the PRC, including Beijing and Guangzhou. Our staff at these shops assistscustomers in selecting the equipment, auxiliary parts and products to suit customerspecifications. Equipment that needs to be repaired or provided with routinemaintenance can be returned to us via these shops, as our retail shops, exceptfor the Beijing shop, are also maintenance centers. The Company has found the seven existing shops to be useful asdemonstration locations easily accessed by local customers who can pay in localcurrency while “off the shelf” sales are made which move its inventory more readily.In addition to the shops, we also have four branches or representative officesof these shops.  All of the foregoing are perceived by the Company to have had a positive impacton its business 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 of approximately US$388,000 bearinga nominal rate of interest. The shops do not have financing from other sources.There can be no assurance that these shops will continue to be economicallyviable, that the Company will not sustain losses in connection with the loansto the shops; or the shops will result in any significant revenues or profits forthe Company. Also, similar shops may be established by our competitors and/orthird parties. These shops (or their representative offices) were opened on thefollowing 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  |

 

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

 

The Company presently wholly-ownsFar East, a Hong Kong corporation, which, in turn, wholly owns the followingcorporations:

 

•                  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

 

The Company’s wholly-ownedsubsidiary and primary operational arm is Far East, which it acquired in March1997. Far East has engaged in the distribution of variousindustrial control equipment, which continues to be the core business of theCompany, since its inception in 1971.

 

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

 

The Companymaintains an executive office at 18/F Gee Chang Hong Centre, 65 Wong Chuk HangRoad, Hong Kong. The Company occupies approximately 12,800 square feet ofoffice and warehouse storage space under a two (2) year lease that expired inMay 2005 for monthly rental payments of approximately US$7,050. The Company ispresently seeking a renewal of that lease. The warehouse storage space is used to hold products for distribution toour customers via common carriers.

 

In August 1995, the Companypurchased approximately 1,200 square feet of space in a building in Hong 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

 

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situated on Company owned property. The remainingsales offices are rented pursuant to short-term leases aggregatingapproximately US$3,600 per month**.**

 

One of Euro Tech Trading(Shanghai) Ltd.’s office is rented pursuant to a leaseexpiring in July 2005 that provides for a monthly rental of approximatelyUS$230, with a second office rented pursuant to a lease expiring in July 2006that provides for a monthly rental of approximately US$618.  Shanghai Euro Tech Limited’s premises are rented pursuant to a lease expiringin July 2006 with monthly rental payments of approximately US$2,800.

 

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

 

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

 

**Overview**

 

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

 

The Company’soperations are located almost entirely within, and revenues are almost entirelygenerated from Hong Kong and the PRC. The Company derived approximately 21% andapproximately 78% of its revenue from Hong Kong and the PRC, respectively inFiscal 2004. Net income increased approximately US$63,000, or 12%, in Fiscal2004 to US$594,000, compared to US$531,000 in Fiscal 2003, primarily due todiversification into engineering and manufacturing and strengthening of theCompany’s distribution and retail network and contributions from itsengineering affiliate, Pact.

 

The Companycontinued to expand its trading business by expanding its regional salesefforts in the PRC and using the retail shops and online ordering in the PRC tosell 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 and/ormanufacture additional products in the future and seek opportunities with itssuppliers to assemble their products, secure manufacturing and/or assemblyfacilities and seek another manufacturer of analytical instruments to acquire.

 

The Companycontinued to accept more engineering projects in water and wastewaterindustries and also in power generation industries. The Company intends to seekthe acquisition of an engineering company and/or a system integrator or enterinto a joint venture with a third party to work in connection with its processcontrol and engineering department.

 

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

 

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

 

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

 
| **Fiscal Year** | ** ** | **PRC** | ** ** | **Hong Kong** | ** ** |
|-----------------|------------|---------|------------|---------------|------------|
| 2002            |       | 71      | %          | 29            | %          |
| 2003            |       | 74      | %          | 26            | %          |
| 2004            |       | 78      | %          | 21            | %          |

 

Sales to customers situated in Macauand elsewhere in Fiscal 2002 through Fiscal 2004 were nominal. This makes theCompany particularly susceptible to changes in the political and economicclimate 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. OnJuly 1, 1997, sovereignty over Hong Kong was transferred from the UnitedKingdom to the PRC. As provided in the Sino-British Joint Declaration and theBasic Law, the Hong Kong SAR is provided a high degree of autonomy except inforeign and defense affairs. The Basic Law provides that the Hong Kong SAR isto have its own legislature, legal and judicial system and full economicautonomy for 50 years after the transfer of sovereignty. Based on the currentpolitical conditions and the Company’s understanding of the Basic Law, theCompany does not believe that the transfer of sovereignty over Hong Kong hashad or will have an adverse impact on its financial and operating environment.Although the Chinese government has pledged to maintain the economic andpolitical autonomy of Hong Kong over its internal affairs, there is noassurance that such pledge will continue to be honored if there are changes inthe Chinese political or economic climate. See Item 3D.“Key Information – Risk Factors.”

 

**PRC.** The PRC has been a socialist state since 1949.For more than forty years, the PRC’s economy has been, and presently continuesto be, a socialist economy operating under government controls promulgatedunder various one-, five- and ten-year plans (collectively, “**State Plans**”) adopted by central Chinese governmentauthorities and implemented, to a large extent, by provincial and localauthorities which may set production and development targets. However, sinceapproximately the early 1980s, the PRC’s national government has undertakencertain reforms to permit greater provincial and local economic autonomy andprivate economic activities. Any change in political or economic conditions maysubstantially adversely effect these reform initiatives and, in turn, theCompany. See Item 3D.  “KeyInformation – Risk Factors.”

 

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**Results from Operations**

 

The following operatingand financial review should be read in conjunction with the ConsolidatedFinancial Statements and notes thereto appearing elsewhere in this AnnualReport. All financial data referred to in the following discussion has beenprepared in accordance with accounting principles generally accepted in theUnited States (“**US GAAP**”).

 

The following table presentsselected statement of operations data expressed in thousands of US$ and as apercentage of revenue for the Company’s fiscal****yearsindicated below:

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

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|------------|
| ** **                                   | ** ** | **2001**                    | ** ** | **2000**   | ** ** | ** ** |
| ** **                                   | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                      |       | 19,685                      |       | 100.0      | % | 15,010 |   | 100.0 | % |   |
| Cost of revenue                              |       | 15,396                      |       | 78.2       | % | 11,467 |   | 76.4 | % |   |
| Gross Profit                                 |       | 4,289                       |       | 21.8       | % | 3,543 |   | 23.6 | % |   |
| Selling and  administrative expenses         |       | 3,734                       |       | 19.0       | % | 3,301 |   | 22.0 | % |   |
| Income before  income taxes                  |       | 747                         |       | 3.8        | % | 452 |   | 3.0 | % |   |
| Income taxes                                 |       | 163                         |       | 0.8        | % | 94 |   | 0.6 | % |   |
| Share of equity  in net income of affiliates |       | 0                           |       | 0.0        | % | 0 |   | 0.0 | % |   |
| Net income                                   |       | 584                         |       | 3.0        | % | 358 |   | 2.4 | % |   |

 

**Results of Operations**

 

**Fiscal Year Ended December31, 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 theCompany is subject to a majority of risk of loss from the VIE activities andentitled to receive a majority of the VIE residual returns, and their resultswere consolidated starting in Fiscal 2004; increase in revenues from special project andengineering department

 

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salesto water and power plants of approximately US$1,700,000 and increased revenues from sales of Hioki products of approximately US$1,200,000 to power industries as a result ofour expansion of the Company’s distribution and retail network.

 

Gross profits increasedby approximately US$612,000 or 13.2% to approximately US$5,249,000 for Fiscal2004 as compared to approximately US$4,637,000 for Fiscal 2003. During Fiscal2004, the Company’s cost of revenue was approximately US$27,033,000,or 83.7% of revenue, in comparison to approximately US$22,805,000, or 83.1% ofrevenue for Fiscal 2003. Cost of revenue expressed as a percentage of revenueincreased by 0.6% in Fiscal 2004 as compared with Fiscal 2003. The gross profitmargin percentage decrease is attributed to the fact that the Company sold agreater amount of low tech products through its retail shops. The weakening of US$ against otherforeign currencies also had an adverse impact on the gross margin percentage asthe Company’s sales were mainly denominated in US$, HK$ and RMB while some ofthe Company’s cost of revenue were denominated in Japanese Yen, the Euro andSterling Pound, such as cost ofrevenue for Hioki products wasdenominated 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 $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 increasesare the result of newly adopted securities laws, rules and regulations thatimpose further responsibilities and potential liabilities on companies andtheir officers, directors, auditors and attorneys that are publicly traded inthe U.S.

 

*Equity in Profit of Affiliates.***Equity in profit of affiliates increasedby approximately US$101,000 or 111% to approximately US$192,000 in Fiscal 2004 fromapproximately US$91,000 in Fiscal 2003. The increase in equity in profitof affiliates was principally due to the increase in net profits of Pact fromapproximately US$304,000 in Fiscal 2003 to approximately US$641,000 in Fiscal 2004.

 

*Interest Income.*  Interest income increased by approximately US$4,000 or 30.8% toapproximately US$17,000 in Fiscal 2004 from approximately US$13,000 for Fiscal2003. The increase was primarily due to the increase in bank depositsduring the year. There was no interest expense in Fiscal 2004 and Fiscal 2003 becausethe Company has not utilized any loan or overdraft facilities under its bankingarrangements.

 

*Other Income.* Other incomeincreased by approximately US$98,000 or 1,633.3% to approximately US$104,000 inFiscal 2004 from approximately US$6,000 in Fiscal 2003. The increase in otherincome was principally due to an exchange gain of US$73,000 in Fiscal 2004compared with an exchange loss of approximately US$35,000 in Fiscal 2003.

 

*Income Taxes.* Taxes increasedby US$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 taxableprofits, and an increase of valuation allowances.

 

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*Net Income.*Income from continuing operations increased by approximately US$63,000 or 11.9% to approximately US$594,000in Fiscal 2004 from approximately US$531,000 in Fiscal 2003. The increase in netincome resulted from an increases in gross profit. However, the general increase in selling and administrative expensesand inclusion of expenses of PRC retail shops resulted in a decrease ofoperating profit. Nevertheless, theCompany achieved an increase in net income for Fiscal 2004 as a result of the exchange gain and the contribution from its share of theprofits of approximately US$192,000from Pact.

 

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

 

*Revenue; Gross Profit and Cost of Revenue.*Revenue increased by approximately US$3,945,000 or 16.8% to approximatelyUS$27,442,000 in Fiscal 2003 from approximately US$23,497,000 in Fiscal 2002.The increase was primarily due to the diversification into engineering andmanufacturing and strengthening of the Company’s distribution and retailnetwork and increase in PRC import business.

 

Gross profitsdecreased by approximately US$125,000 or 2.6% to approximately US$4,637,000 forFiscal 2003 as compared to approximately US$4,762,000 for Fiscal 2002. DuringFiscal 2003, the Company’s cost of revenue was approximately US$22,805,000,or 83.1% of revenue, in comparison to approximately US$18,735,000, or 79.7% ofrevenue for Fiscal 2002. Cost of revenue expressed as a percentage of revenueincreased by 3.4% in Fiscal 2003 as compared with Fiscal 2002. The gross profitmargin percentage decrease is attributed to the fact that the Company hadreduced the selling prices of some products to respond to increased competitionand sold more low tech products through its retail shops, and the Company hadan increase in import business and sales of non-exclusive distributed productsof approximately US$2,500,000, with a lower profit margin, during Fiscal 2003.The weakening of US$ against other foreign currencies also had an adverseimpact on the gross margin percentage as the Company’s sales were mainlydenominated in US$, HK$ and RMB while some of the Company’s cost of revenuewere denominated in Japanese Yen, the Euro and Sterling Pound.

 

*Selling and Administrative Expenses.*Selling and administrative expenses were approximately US$4,108,000 in Fiscal2003, a decrease of approximately US$65,000 or 1.6% from approximatelyUS$4,173,000 in Fiscal 2002. The decrease was primarily due to the decrease inprovisions for the recoverability of advances to finance the operations of PRCretail shops.

 

*Equity in Profit of Affiliates.***Equity in profit of affiliates increased by approximatelyUS$84,000 or 1200% to approximately US$91,000 in Fiscal 2003 from approximatelyUS$7,000 in Fiscal 2002. The increase in equity in profit of affiliates wasprincipally due to the increase in net profits of Pact from approximatelyUS$25,000 in Fiscal 2002 to approximately US$304,000 in Fiscal 2003.

 

*Interest Income.*  Net interest income decreased by approximately US$5,000 or 27.8% toapproximately US$13,000 in Fiscal 2003 from approximately US$18,000 for Fiscal2002. Interest income decreased by approximately US$9,000 or 40.9% toapproximately US$13,000 in

 

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Fiscal 2003 fromapproximately US$22,000 in Fiscal 2002. The decrease was primarilydue to the general decline in the interest rates for bank deposits during theyear. Interest expense decreased by approximately US$4,000 or 100% toapproximately US$Nil in Fiscal 2003 from approximately US$4,000 for Fiscal2002. The decrease was because the Company has utilized the credit facilitiesunder its banking arrangements during Fiscal 2002 but not during Fiscal 2003.

 

*Other Income.* Other incomedecreased by approximately US$3,000 or 33.3% to approximately US$6,000 inFiscal 2003 from approximately US$9,000 in Fiscal 2002. The decrease in otherincome was principally due to decrease in rental income of US$19,000 which wasoffset by a decrease in exchange loss of approximately US$18,000.

 

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

 

*Net Income.* Income from continuingoperations increased by approximately US$31,000 or 6.2% to approximatelyUS$531,000 in Fiscal 2003 from approximately US$500,000 in Fiscal 2002.Although revenues increased, sales price reductions of some non-exclusiveproducts and an increase in sales of low margin products resulted in a decreasein our gross profit of approximately US$125,000. However, the Company managedto minimize selling expenses and offset the lowered sale prices ofnon-exclusive products and sales of lower margin production by its share of theprofits of (approximately US$91,000) from Pact****andachieved an increase in net income for Fiscal 2003.

 

 

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

 

The Company has primarily usedits funds to finance accounts receivable, inventories, and capital expendituresincluding purchases of property, office furniture and equipment, computers andcalibration equipment. The Company has historically met its cash requirementsfrom cash flows from operations, short-term borrowings, bank lines of credit,and long-term mortgage bank loans. The Company expects, but can make noassurances that its present cash reserves, cash from operations and existingavailable bank credit facilities would be sufficient to fund its future capitalexpenditure requirements. Working capital at the end of Fiscal 2004 and Fiscal2003 was approximately US$5,457,000 and US$4,914,000, respectively.

 

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DuringFiscal 2003, the Company used approximately $347,000 in its operatingactivities from its net income, using approximately $666,000 in billsreceivable and fund an increase in inventories, resulting from the increase inrevenues and the need to meet a greater level of sales, respectively, than inFiscal 2002. 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.  At the end of Fiscal 2004 and Fiscal 2003, theCompany’s accounts receivable were approximately US$3,327,000 and US$4,283,000,respectively.

 

TheCompany used approximately US$46,000 and US$73,000 for investing activities inFiscal 2004 and Fiscal 2003, respectively. The Company used approximately US$101,000and US$74,000 to purchase facilities and equipment in Fiscal 2004 and Fiscal2003, respectively.  During Fiscal 2004,the Company received a US$55,000 dividend from an affiliate, Pact.

 

TheCompany used approximately US$90,000 in Fiscal 2002 for financing activities, whilein Fiscal 2004 and 2003, no expenditures were neededfor financing activities. The Company had various banking facilities available foroverdraft, import and export credits and foreign exchange contracts from whichthe Company can access up to approximately US$4,167,000 at December 31, 2004.The aforementioned available credit facilities were obtained on the conditionsthat, among other things, the Company not create a charge or lien on its otherassets in favor of third parties without such bank’s consent, and the Companymaintaining a certain level of net worth.

 

Cash increased from approximately US$2,752,000 at the end of Fiscal 2003to approximately US$5,242,000 at the end of Fiscal 2004. The principal reasonsfor the increase in cash were the decreases in accounts receivable ofapproximately US$956,000 and an increase of accounts payable of approximatelyUS$1,010,000. The Company plans to use cash on hand primarily to acquire amanufacturing plant and/or environmental engineering company in the PRC and toexpand its manufacturing plant and environmental engineering business.

 

TheCompany’s net accounts receivable decreased from approximately US$4,283,000 at theend of Fiscal 2003 to approximately US$3,327,000 at the end of Fiscal 2004. Thedecrease is attributed to more effective debt collection.

 

TheCompany’s inventory increased from approximately US$2,246,000 at the end of Fiscal2003 to approximately US$3,327,000 at the end of Fiscal 2004. The higher inventorylevel at the end of Fiscal 2004 was principally due to inventory of approximatelyUS$835,000 for a SEPA contract not yet shipped at the end of Fiscal 2004 andinventory maintained in our retail shops.

 

TheCompany’s capital expenditures were approximately US$74,000 and US$101,000 inFiscal 2003 and Fiscal 2004, respectively. Capital expenditures during Fiscal 2003were incurred primarily in connection with the purchase of office equipment,furniture and fixtures, while in Fiscal 2004, the expenditureswere primarily related to additions of the office equipment, furniture andfixtures of the Company’s PRC retail shops of approximately US$68,000 and other

 

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purchasesof the same assets, the Company continues to seek targets for acquisition, suchas facilities for assembly operations or engineering companies. If suchacquisitions are indeed made, the Company may expect to incur significantlylarger capital expenditures, for which the Company presently intends, but as towhich no assurance can be made, to use existing cash reserves, cash fromoperations and available bank credit facilities to fund such capitalexpenditures.

 

**Anticipated Future Resources and Uses of Cash**

 

The Company has historicallyfunded its working capital and capital expenditure needs from operations andavailable bank credit facilities, and expects to continue funding its 2005working capital requirements from operations and available bank creditfacilities. The Company may use its funds to acquire other businesses, formstrategic alliances with third parties, invest in product research anddevelopment, or expand its sales offices and retail shops or, with thirdparties, seek to acquire new products or businesses or form strategicalliances. The Company expects, but can make no assurances that its presentcash reserves, cash from operations and existing available bank creditfacilities would be sufficient to fund its future cash requirements.

 

**Inflation**

 

The annual rate of inflation inthe PRC has declined significantly in recent years. In calendar years 2002, 2003and 2004, the rates of inflation (deflation) were approximately (0.8%), 1.2%and 3.9%, respectively, in comparison to the preceding years, respectively. TheCompany believes this declining inflation rate has had a positive effect on itsresults from operations. The Company believes, although no assurance can begiven, that credit restrictions will be gradually lifted, and that as a resultFar East will be able to increase prices in the market for its products andthus realize increased profit margins.

 

**CriticalAccounting Policies**

 

***Revenue Recognition***

 

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

 

Revenues and profits in long term fixed price contracts are recordedunder the percentage of completion method. This approach relies on estimates of total expected direct costs ofcompletion, which are compared to actual direct costs incurred to date toarrive at an estimate of revenue and profit earned to date.  Recognized revenue and profit are subject torevisions as the contract progresses to completion.

 

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Revisionsto profit estimate are reflected in income in the period in which the factsthat 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***

 

Aspart of the process of preparing its consolidated financial statements, theCompany is required to estimate its income taxes and tax bases of assets andliabilities in each of the jurisdictions in which it operates. This processinvolves the Company estimating its current tax exposure together withassessing temporary differences resulting from its differing treatment of itemsfor tax and accounting purposes. These differences result in deferred taxassets and liabilities, which are included in the Company’s consolidatedbalance sheet. The Company must then assess the likelihood that its deferredtax assets will be recovered from future taxable income, and, to the extent theCompany believes that recovery is more unlikely than likely, it must establisha valuation allowance. To the extent the Company establishes a valuationallowance or increases this allowance in a period, it must include an expensewithin the tax provision in the statement of operations.

 

*Recent AccountingPronouncements*

 

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”, an amendmentof APB Opinion No. 29 effective for nonmonetary asset exchanges occurring infiscal periods beginning after July 15, 2005. SFAS No. 153 requires that exchange of productive assets be accountedfor at fair value unless fair value cannot be reasonably determined or thetransaction lacks commercial substance. SFAS No. 153 is not expected to have a material effect on the Company’sconsolidated financial statements.

 

In November 2004,the FASB issued SFAS N. 151, “Inventory Costs, an amendment of ARB No. 43,Chapter 4.”  SFAS No. 151 requires thatabnormally high vacancy, wasted material, freight and processing costs not bepart of recognizable production costs. Such cost must instead be expensed as incurred.  Accordingly fixed costs shall henceforth beallocated to inventory based on normal production capacity.  The standard is effective for the fiscal yearbeginning Januaary 1, 2006.  It is notexpected that SFAS No., 151 will have a material effect on the Company’sconsolidated financial statement.

 

In December 2004,the FASB issued SFAS No. 123 (Revised 2004) “Share-BasedPayment” that will require the Company toexpense costs related to share-based payment transactions with employees.  With limited exception, SFAS No. 123 (R)requires that the fair value of share-based payments to employees be expensedover the period service is received. SFAS No. 123 (R) becomes mandatory effective for the Company on July 1,2005.  The Company intends to adopt this standardusing the modified retrospective method of transition, effective as of January1, 2005.

 

SFAS No. 123 (R) allowsthe use of both closed form models (e.g., Black-Scholes Model) and open formmodels (e.g., lattice models) to measure the fair value of the share-basedpayment as

 

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long as that model is capable ofincorporating all of the substantive characteristics unique to share-basedawards.  In accordance with thetransition provisions of SFAS No. 123 (R), the expense attributable to an awardwill be measured in accordance with the Company’s measurement model at thataward’s date of grant.

 

The Company believes thatthe total expense recorded in future periods will depend on several variables,including the number of share-based awards that vest and the fair value ofthose vested awards.

 

In March 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections” (SFAS 154”),which was a replacement of APB Opinion No. 20 and FAS No. 3 effective foraccounting changes made in fiscal periods beginning after December 15,2005.  SFAS 154 requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. It also requires that retrospective application of a change inaccounting principle be limited 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 effectedby a change in accounting principle.  TheGroup is currently assessing the impact of this statement on our results ofoperations, financial position and cash flows upon adoption and has not yetcompleted that assessment.

 

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

 

During Fiscal 2004,Fiscal 2003 and Fiscal 2002, the Company expensed approximately US$56,000, US$12,000and US$10,000, respectively, on the development of its products. See Item 4B. “Business Overview.” It is anticipated that an additional US$200,000in research and development costs will be expended on similar projects andpotential research and development projects for the development of on linewater testing equipment during Fiscal 2005.

 

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

 

**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

 

Not applicable.

 

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

 
| **Contractual  Obligations**        | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
|-------------------------------------|------------|-----------|------------|-----------------------|------------|---------------|------------|---------------|------------|--------------------|------------|
| Operating Leases                    |       | US$       | 205,000    |                  | US$        | 158,000       |       | US$           | 47,000     |               | —     |   | — |   |
|                                |       |      |       |                  |       |          |       |          |       |               |       |   |   |   |
| Total  Contractual Cash Obligations |       | US$       | 205,000    |                  | US$        | 158,000       |       | US$           | 47,000     |               | —     |   | — |   |

 

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

 

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

 

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

 
| **Name**     | ** ** | **Age**    | ** ** | **Position**                                                    |
|--------------|------------|------------|------------|-----------------------------------------------------------------|
| ** **   | ** ** | ** ** | ** ** | ** **                                                      |
| T.C. Leung   |       | 61         |       | Chairman of the  Board of Directors and Chief Executive Officer |
|         |       |       |       |                                                            |
| Jerry Wong   |       | 46         |       | Director and Chief  Financial Officer                           |
|         |       |       |       |                                                            |
| Nancy Wong   |       | 56         |       | Director                                                        |
|         |       |       |       |                                                            |
| C.P. Kwan    |       | 46         |       | Director                                                        |
|         |       |       |       |                                                            |
| Alex Sham    |       | 41         |       | Director                                                        |
|         |       |       |       |                                                            |
| Y.K. Liang   |       | 75         |       | Director                                                        |
|         |       |       |       |                                                            |
| Choi Chiu Ho |       | 73         |       | Director                                                        |
|         |       |       |       |                                                            |
| Xu Hong Wang |       | 38         |       | Director                                                        |

 

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

 

**T.C. Leung** has been Chief Executive Officer and Chairman ofthe Board of Directors of both the Company and Far East since their inception.Before establishing Far East, Mr. Leung was an engineer for EnglishElectric in England, from 1965 to 1968, and Lockheed Aircraft in Hong Kong,from 1968 to 1970. Mr. Leung also served as managing director of Eurotherm(Far East) Ltd. between 1971 and 1992. Since 1988, Mr. Leung has also servedas managing director of Eurotherm Hong Kong. Mr. Leung received a Mastersdegree in Business Administration from the University of East Asia, Macau in1986 and is a Chartered Engineer, a title bestowed upon a member of the Councilof 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. Wong has been the Chief Financial Officer and a Director of theCompany since its inception. From 1985 until 1987, Mr. Wong worked for MUAAgencies Ltd., a subsidiary of a Hong Kong publicly listed company engaged inthe insurance business, as deputy manager of its secretarial, legal andaccounting department. From 1981 until 1985, Mr. Wong served as a senioraccountant in 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.

 

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**Nancy Wong** has been a Director of the Company since itsinception and a Director of Far East, and itsPersonnel Manager, since 1994. Ms. Wong has been with Far East since 1971.Ms. Wong is also Far East’s Chief Representative in China. During the lastseveral years, Ms. Wong has played a pivotal role in Far East’s businessexpansion 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 a Directorand Manager of its Process Equipment Department since 1991. Mr. Kwan hasbeen a Director of the Company since its inception. Before joining Far East, hewas employed by Haven Automation (H.K.) Ltd., a company involved in the watertreatment and process control business between 1981 and 1984.  Mr. Kwan received a Masters Degree inBusiness Administration from the Open University of Hong Kong in 2001.

 

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

 

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

 

**Choi Chiu****Ho** has been a Directorof the Company since October 2000. Mr. Ho is a certified public accountant, anda senior partner in the accounting firm of C.C. Ho & Company, a firm thathe has been associated with for more than the past five years.

 

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

 

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

 

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

 

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The Company had three meetings of its Board ofDirectors during Fiscal 2004, while its Audit  Committee had six meetings duringFiscal 2004.

 

The Company has not had any directorsresign or decline to stand for re-election.

 

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

 

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

 

The following table sets forth certain summaryinformation with respect to the compensation paid by the Company and Far Eastfor services rendered in all capacities to the Company and Far East during Fiscal2004, Fiscal 2003 and Fiscal 2002 to the Chairman of the Board and ChiefExecutive Officer.  No other executive officerreceived in excess of $100,000 as cash compensation during those fiscal periods.

 

**SummaryCompensation Table**

 

| **Name and Principal Position**            | ** ** | **Year** | ** ** | **Salary (US$)** | ** ** | **Bonus (US$)** | ** ** |
|--------------------------------------------|------------|----------|------------|------------------|------------|-----------------|------------|
|                                       |       |     |       |             |       |            |       |
| T.C. Leung,  Chairman of the Board of |       | 2004     |       | 100,000          |       | 34,600          |       |
| Directors and  Chief Executive Officer     |       | 2003     |       | 100,000          |       | 18,449          |       |
|                                       |       | 2002     |       | 100,000          |       | 45,000          |       |

 

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

 

**Pension Plan.********Prior to December 1, 2000, the Company had only one defined contributionpension plan for all its Hong Kong employees. Under this plan, all employeeswere entitled to pension benefits equal to their own contributions plus 50% to100% of individual fund account balances contributed by the Company, dependingon their years of service with the Company. The Company was required to makespecific contributions at approximately 10% of the basic salaries of theemployees to an independent fund management company.

 

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

 

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As stipulated by the rules and regulations in the PRC, the Companycontributes to state-sponsored retirement plans for its employees in MainlandChina. The Company contributes approximately 7% 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, 2004, 2003 and 2002, the aggregatecontributions of the Company to the aforementioned pension plans and retirementbenefit schemes were approximately US$166,000, US$137,000 and US$131,000,respectively.

 

**Management Option Plan.********The Company has authorized theissuance of Options to purchase up to an aggregate of 4,586,400 Ordinary Shares(the “Management Options”) to its officers, directors and employees as theCompany’s Chairman of the Board and Chief Executive Officer may direct. TheManagement Options became exercisable on March 14, 1998 and will expire onMarch 14, 2007.

 

The exercise priceand the number of Ordinary Shares purchasable upon exercise of any ManagementOptions are subject to adjustment upon the occurrence of certain events,including stock dividends, reclassification, reorganizations, consolidations,mergers, and certain issuances and redemptions of Ordinary Shares andsecurities convertible into or exchangeable for Ordinary Shares excludingcertain issuances of shares. No adjustments in the exercise price will be requiredto be made with respect to the Management Options until cumulative adjustmentsamount to US$0.05.

 

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

 

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

 

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

 

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| **Name  of Executive  Officers and Directors**               | ** ** | **Shares Subject  To Management Options** | ** ** | **Per Share  Exercise Price** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------|------------|
| ** **                                                   | ** ** | ** **                                | ** ** | **(US$)**                     | ** ** |
| ** **                                                   | ** ** | ** **                                | ** ** | ** **                    | ** ** |
| T.C. Leung                                                   |       | 2,457,000  1,146,600                      |       | 1.6789  1.221                 |       |
|                                                         |       |                                      |       |                          |       |
| Alex Sham                                                    |       | 125,444  65,520                           |       | 1.6789  1.221                 |       |
|                                                         |       |                                      |       |                          |       |
| Jerry Wong                                                   |       | 124,064  49,140                           |       | 1.6789  1.221                 |       |
|                                                         |       |                                      |       |                          |       |
| Nancy Wong                                                   |       | 92,820  24,570                            |       | 1.6789  1.221                 |       |
|                                                         |       |                                      |       |                          |       |
| C.P. Kwan                                                    |       | 73,710  24,570                            |       | 1.6789  1.221                 |       |
|                                                         |       |                                      |       |                          |       |
| Xu Hong Wang                                                 |       | 27,294                                    |       | 1.6789                        |       |
|                                                         |       |                                      |       |                          |       |
| All Executive  Officers and Directors as a group (8 persons) |       | 4,210,732                                 |       | 1.221 – 1.6789           | (1)        |

 

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(1)          Price range.

 

Other officersand/or employees of the Company have been or will be granted management optionsto purchase an aggregate of 335,400 Management Options, all of which will beexercisable at US$1.6789 per share.

 

As of December 31,2004, no Management Options had been exercised, although all of the optionswere “in the money” at that date.

 

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

 

692,580 and 1,637,160shares are authorized for issuance under the Employees Plan and the OfficersPlans, respectively.

 

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

 

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

 

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

 

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

 

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

 

The purchase priceper share of the Ordinary Shares to be paid upon the exercise of the optionmust be at least 100% of the fair market value of an Ordinary Shares on thedate on which the option was granted. Under the Plans, if the Ordinary Sharesare principally traded on a national securities exchange or the Nasdaq StockMarket’s National Market or Small Cap Market at the time of grant, the Companyis required to use, as fair market value, the average of the closing prices ofthe Ordinary Shares for the ten consecutive trading days immediately before thedate of grant. If the Ordinary Shares are traded on a national securitiesexchange or the Nasdaq Stock Market’s National Market or Small Cap Market, butno closing prices are reported for such ten-day period, or if the OrdinaryShares are principally traded in the over-the-counter market, the Company isrequired to use, as fair market value, the average of the mean between the bidand asked prices reported for the Company’s Ordinary Shares at the close oftrading during such ten-day period before the date of grant. If the OrdinaryShares are traded neither on a national securities exchange, the Nasdaq StockMarket’s National Market, Small Cap Market nor in the

 

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over-the-counter marketor if bid and asked prices are otherwise not available, the fair market valueof the Ordinary Shares on the date of grant will be determined in good faith bythe Committee or the Board of Directors, as the case may be.

 

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

 

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

 

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

 

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

 

•                                          the spouse or lineal descendant of a plan participant;

 

•                                          the trustee of a trust for the primary benefit of a planparticipant’s spouse or lineal descendant;

 

•                                          a partnership of which a plan participant and linealdescendants are the only partners; or

 

•                                          a charitable organization.

 

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

 

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

 

47

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isadjudged liable for gross negligence or gross misconduct in the performance ofhis or her duties.

 

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

 

During Fiscal 2000and in January 2002, the Company granted options to certain of its officers anddirectors pursuant to the 2000 Officers and Directors Plan and, in November2002, options were granted to certain of its officers and directors pursuant tothe 2002 Officers and Directors Plan. The table below shows, as to each of theexecutive officers and directors of the Company and as to all executiveofficers and directors of the Company as a group, the aggregate amounts ofOrdinary Shares subject to such options.

 
| **Names  of Executive  Officers and Directors**  | ** ** | **Shares Subject  To the Officers  Plans Options** | ** ** | **Per Share  Exercise Price** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                       | ** ** | ** **                                         | ** ** | **(US$)**                     | ** ** |
| ** **                                       | ** ** | ** **                                         | ** ** | ** **                    | ** ** |
| T.C. Leung                                       |       | 567,000                                            | (1)        | 0.5857                        |       |
|                                             |       | 300,300                                            | (2)        | 0.5787                        |       |
|                                             |       | 205,800                                            | (2)        | 0.8191                        |       |
|                                             |       |                                               |       |                          |       |
| Alex Sham                                        |       | 84,000                                             | (1)        | 0.5857                        |       |
|                                             |       | 32,760                                             | (2)        | 0.5787                        |       |
|                                             |       | 94,500                                             | (2)        | 0.8191                        |       |
|                                             |       |                                               |       |                          |       |
| Jerry Wong                                       |       | 63,000                                             | (1)        | 0.5857                        |       |
|                                             |       | 27,300                                             | (2)        | 0.5787                        |       |
|                                             |       | 52,500                                             | (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 |       | 1,679,580                                          |       | 0.5787 – 0.8191          | (4)        |

 

48

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----

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

(2)          Grantedpursuant to the 2000 Officers and Directors Plan.

(3)          Grantedpursuant to the 2000 Employees Plan.

(4)          Pricerange.

 

The foregoingoptions will expire in August 2010.

 

Pursuant to its2000 Employees Plan, the Company has also granted options to 32 of itsnon-officer/director employees to purchase an aggregate of 398,580 of itsOrdinary Shares exercisable at a price of US$0.5787 per share for a ten yearterm expiring in February 2011.

 

Pursuant to its2002 Employees Plan, the Company has also granted options to 32 of itsnon-officer/director employees to purchase an aggregate of 294,000 of itsOrdinary Shares exercisable at a price of US$0.7618 per share for a ten yearterm expiring in April 2012.

 

At December 31,2004, no options had been exercised.

 

The Company hasset forth in this Report all required disclosure of additional compensation toits executive officers and directors including personal benefits and securitiesor properties paid or distributed which was not offered on the same terms toall full time employees during Fiscal 2004.

 

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

 
| ** **                      | ** ** | **As of December 31,** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                      | ** ** | **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 |       | 6,862,632              |       | 1.24 |   | 6,862,632 |   | 1.24 |   | 5,303,025 |   | 1.41 |   |
| Granted                         |       | 46,000                 |       | 1.68 |   | — |   | — |   | 1,630,860 |   | 0.69 |   |
| Cancelled                       |       | (184,590               | )          | (0.93 | ) | — |   | — |   | (71,253 | ) | (1.01 | ) |
|                            |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding, end  of year       |       | 6,724,042              |       | 1.26 |   | 6,862,632 |   | 1.24 |   | 6,862,632 |   | 1.24 |   |
|                            |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable, end  of year       |       | 6,724,042              |       | 1.26 |   | 6,862,632 |   | 1.24 |   | 6,002,892 |   | 1.34 |   |

 

49

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As of December 31, 2004, the options outstanding and exercisable hadexercise prices in the range of US$0.5787 to US$1.6789 and a weighted averageunexpired life of approximately 3.7 years.

 

The Company accounts for stock-based compensation using the intrinsicvalue method prescribed by APB Opinion No. 25, under which no compensation costis recognized as all stock options granted under the Management Options, the2000 Stock 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.

 

Pro forma information regarding net income and earnings per share isrequired by SFAS No. 123, and has been determined as if the Company hadaccounted for its employee stock options under the fair value method of SFASNo. 123.  The weighted average fairvalues of stock options at date of grant of $2.34 per option for the year endedDecember 31,  2002,and $1.69 per option for the year ended December 31, 2004, were estimated usingthe Black-Scholes option pricing model with the following assumptions. Therewere no options granted during the years ended December 31, 2003.

 
| ** **                      | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free interest rate         |       | 2.88       | %          | —     |       | 4.48       | %          |
| Expected dividend yield         |       | 0          | %          | —     |       | 0          | %          |
| Expected option life            |       | 2.3 yea    | rs         | —     |       | 5.7 yea    | rs         |
| Expected stock price volatility |       | 208        | %          | —     |       | 177        | %          |

 

The Black-Scholes option-pricing model requires the input of subjectiveassumptions, including the expected volatility of stock price.  Because changes in subjective inputassumptions can materially effect the fair valueestimate, in directors’ opinion, the existing model may not necessarily providea realizable measure of the fair value of the stock options.

 

Had compensation expense for the Company’s stock-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 common share would have been as follows:

 
| ** **                                                                           | ** ** | **As of December 31,**                                                | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                                                              | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                           | ** ** | **US$**                                                               | ** ** | **US$** | ** ** | **US$** | ** ** |
| ** **                                                                           | ** ** | **{amounts expressed in thousands, except share and per share data}** | ** ** |
|                                                                                 |       |                                                                  |       |   |   |   |   |
| Net income as reported                                                               |       | 594                                                                   |       | 531 |   | 500 |   |
| Less: Stock compensation expense determined under  the fair value method, net of tax |       | (27                                                                   | )          | (216 | ) | (507 | ) |
| Pro forma net income/(loss)                                                          |       | 567                                                                   |       | 315 |   | (7 | ) |
| Income/(loss) per share:                                                             |       |                                                                  |       |   |   |   |   |
|                                                                                 |       |                                                                  |       |   |   |   |   |
| Basic as reported                                                                    |       | US$                                                                   | 0.09       |   | US$ | 0.08 |   | US$ | 0.08 |   |
| Diluted, as reported                                                                 |       | US$                                                                   | 0.06       |   | US$ | 0.08 |   | US$ | 0.08 |   |
| Basic, pro forma                                                                     |       | US$                                                                   | 0.09       |   | US$ | 0.05 |   | US$ | (0.00 | ) |
| Diluted, pro forma                                                                   |       | US$                                                                   | 0.06       |   | US$ | 0.05 |   | US$ | (0.00 | ) |

 

50

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

 

The term of eachof the Company’s directors expires at the election and qualification of theirsuccessors at the next annual meeting of the Company’s shareholders,anticipated to be held in August of this year. Of the Company’s nine directors,eight were elected at the Company’s last annual meeting of shareholders inAugust 2004 and the ninth member was appointed to the Board in June 2005.

 

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

 

During Fiscal 2004, the Audit Committee met six (6) times, beingattended by all members.

 

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

 

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

 

•                                          reviews the adequacy of the Company’s internalcontrols;

 

Ÿ                                          reviews the independence, fee arrangements, auditscope, and performance of the Company’s independent auditors, and recommendsthe appointment or replacement of independent auditors to the Board ofDirectors;

 

Ÿ                                          reviews and approves all non-audit work, if any, tobe performed by the auditors;

 

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

 

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

 

51

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Ÿ                                          provide an open avenue of communication among theCompany’s independent auditors, financial and senior management, the internalaudit function and the Board of Directors;

 

Ÿ                                          review and update the Company’s Code of BusinessConduct and Ethics and ensure that there is a system to enforce same and thatthis Code complies with all applicable rules and regulations;

 

Ÿ                                          ensure that the Company’s management and auditors assesscurrent financial reporting issues and practices; and

 

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

 

The Audit Committee is currently composed of Y.K. Liang, and Ho ChoiChiu.  The Audit Committee’s “financialexperts” are Y.K. Liang and Choi Chiu Ho. The Board has determined that the membership of the Audit Committeemeets the current independence requirements of the NASDAQ listing standards assame applies to private foreign issuers and the applicable rules andregulations of the SEC.  In order tomaintain compliance with said standards and rules and regulations by not laterthan July 31, 2005, the Company will be required to have an Audit Committeeconsisting of three members, all of whom must be independent and as a result,T.C. Leung will be required to resign from the Audit Committee and a thirdindependent director will be required to join that committee.  Currently, the Company does not have a thirdmember of its Board of Directors that is “independent” as defined by applicablelaws, rules and regulations.

 

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

 

The Company hasapproximately 162 full-time employees. At December 31, 2004, 2003 and 2002,staffing levels were approximately as follows:

 
| ** **                 | ** ** | **2004***  | ** ** | **2003***  | ** ** | **2002***  | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marketing and  sales       |       | 72         |       | 62         |       | 54         |       |
| Administrative             |       | 53         |       | 40         |       | 36         |       |
| Technical                  |       | 37         |       | 23         |       | 20         |       |
| Total full time  employees |       | 162        |       | 125        |       | 110        |       |

 

----

*                                         For 2002 and 2003 does not include, but for 2004does include, employees situated in our retail shops and their representativeoffices.

 

The Company’s managementconsists of its officers and directors.

 

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

 

52

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

 

With respect to the share ownership of the directors and seniormanagement of the Company, reference is made to Item 7. “Major Shareholders andRelated Party Transactions.”

 

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

 

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

 

                                                Thefollowing table sets forth, as of June 1, 2005, 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 the outstandingOrdinary Shares, (ii) each director and executive officer of the Company,and (iii) all officers and directors of the Company as a group:

 
| ** **                                                                              | ** ** | **Amount  and  Nature of  Beneficial  Ownership(3)** | ** ** | **Approximate  Percentage  Of Ordinary  Shares Owned** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                              | ** ** | ** **                                           | ** ** | ** **                                             | ** ** |
| T.C. Leung  (1)(2)                                                                 |       | 8,124,669                                            |       | 73.1                                                   | %          |
|                                                                                    |       |                                                 |       |                                                   |       |
| Pearl Venture Ltd.(1)(2)                                                                |       | 3,039,073                                            |       | 47.2                                                   | %          |
|                                                                                    |       |                                                 |       |                                                   |       |
| Alex Sham(3)                                                                            |       | 439,224                                              |       | 6.4                                                    | %          |
|                                                                                    |       |                                                 |       |                                                   |       |
| Jerry Wong(3)                                                                           |       | 320,804                                              |       | 4.8                                                    | %          |
|                                                                                    |       |                                                 |       |                                                   |       |
| Nancy Wong(3)                                                                           |       | 204,330                                              |       | 3.1                                                    | %          |
|                                                                                    |       |                                                 |       |                                                   |       |
| C.P. Kwan(3)                                                                            |       | 310,662                                              |       | 4.7                                                    | %          |
|                                                                                    |       |                                                 |       |                                                   |       |
| Y.K. Liang                                                                              |       | —                                               |       | —                                                 |       |
|                                                                                    |       |                                                 |       |                                                   |       |
| Xu Hong Wang(3)                                                                         |       | 111,714                                              |       | 1.7                                                    | %          |
|                                                                                    |       |                                                 |       |                                                   |       |
| Choi Chiu Ho                                                                            |       | —                                               |       | —                                                 |       |
|                                                                                    |       |                                                 |       |                                                   |       |
| All Executive Officers And Directors of the Company as a group (8  persons)(2) (1) |       | 9,511,402                                            |       | 77.6                                                   | %          |

 

53

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----

(1)           The Address for Mr. Leung is c/oEuro Tech (Far East) Ltd., 18/F Gee Chang 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 of the Company’s CommonStock owned of record by Pearl, which is a trust established for the benefit ofMr. Leung.  Also includes thoseCompany Ordinary 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) months of the date of this Report. See Item 6B. “Compensation.”

 

### ***Item7B***.          RelatedParty Transactions

 

All outstanding balances with related partiesare unsecured, non-interest bearing and are repayable in 2005. The relatedcompanies with which the Company has engaged in material transactions are Eurothermand Armtison Limited (“**Armtison**”) andPatwin Inc. (“Patwin”). During Fiscal 2004, 2003 and 2002, the Company madesales to Eurotherm of approximately US$27,000, US$43,000 and US$33,000,respectively. During Fiscal 2004, 2003 and 2002, the Company made purchasesfrom Armtison of approximately US$Nil, US$4,000 and US$33,000, respectively andfrom Eurotherm of approximately US$7,503,000, US$7,219,000 and US$2,800,000respectively. Additionally, during Fiscal 2004, 2003 and 2002, the Company paidapproximately US$25,000, US$33,000 and US$45,000, respectively to Armtison foroffice space rentals, and approximately US$29,000, US$29,000 and US$27,000 inmanagement fees to Eurotherm to assist in the management of some of theCompany’s PRC offices while the Company earned approximately US$30,000, US$34,000and US$34,000 from Eurotherm for office space rentals during Fiscal 2004, 2003and 2002, respectively. The payments to Armtison and Eurotherm were based onactual office space usage and the time cost of personnel used, respectively.During Fiscal 2004, the Company received management fees of US$9,000 fromArmiston for accounting and administrative services.  The Company also paid approximately US$30,000 in management fees to Patwin to represent the Company in the UnitedStates, for each of Fiscal 2004, 2003 and 2002.At the end of Fiscal 2004 andFiscal 2003, the Company was obligated to Eurotherm for approximatelyUS$1,265,000 and US$1,330,000, respectively, for normal trade indebtedness.This indebtedness is repayable on normal trading terms, is unsecured and doesnot bear interest. T.C. Leung, the Company’s Chairman of the Board and ChiefExecutive Officer is also a director of Eurotherm as at December 31, 2004, 2003and 2002.  During Fiscal 2005, theCompany has continued and expects to continue to:

 

•              make sales to Eurotherm;

•              make purchases from Armtison and Eurotherm;

•              lease facilities from Armtison;

•              pay management fees to Eurotherm; and

•              lease facilities to Eurotherm.

 

As of December 31, 2003, approximately US$261,000 of other currentassets represent advances to certain PRC employees of the Company. The advancesare provided to those PRC employees in order for them to finance the operationsof certain retail shops established in PRC by the employees to sell theCompany’s products. The advances are unsecured, bear interest at a nominal rateand have no fixed repayment terms. During Fiscal 2003, an allowance fordoubtful debt in respect of such advances of US$45,000 was made. The Companydoes not account for the related sales to these retail shops until theinventories are sold to third parties.

 

54

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As at December31, 2004, the Group has included the financial results of these retail shopswith the application of FIN 46 “Consolidation of Variable Interest Entities”.All material intercompany balances and transactions have been eliminated inconsolidation.

 

### ***Item7C***.          Interest ofExperts and Counsel

 

Not applicable.

 

## **ITEM 8**.           FINANCIALINFORMATION

 

### ***Item8A***.          ConsolidatedStatements and Other Financial Information

 

Item 8A.1                                             SeeItem 18.

 

Item 8A.2                                             SeeItem 18.

 

Item 8A.3                                             SeeReport of Independent Registered Public Accounting Firm, page F-1.

 

Item 8A.4                                             Wehave complied with this requirement.

 

Item 8A.5                                             Notapplicable.

 

Item 8A.6                                             Notapplicable.

 

Item 8A.7                                             LegalProceedings.

 

The Company is not a party to any material legal proceedings.

 

Item 8A.8                                             DividendPolicy.

 

The Company has not paid cash dividends to date. The payment of cashdividends, if any, in the future is within the discretion of the Board ofDirectors. The payment of cash dividends, if any, in the future will dependupon the Company’s earnings, capital requirements and financial conditions andother relevant factors. The Company’s Board of Directors does not presentlyintend to declare any cash dividends in the foreseeable future, but insteadintends to retain all earnings, if any, for use in the Company and Far East’sbusiness operations.

 

***Item8B****.**                             **Significant Changes*

 

There has not been any significant change since the date of the annualfinancial statements included in this Report.

 

55

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

 

### ***Item9A***.          ListingDetails and 9.C Markets

 

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

 

The following prices are not adjusted toreflect stock dividends of 20%, 30% and 50% issued in September 1999,August 2001 and August 2004, respectively.

 

The high and low prices for the OrdinaryShares in the periods indicated, as reported by NASDAQ, are set forth below:

 
| **Years Ended December 31,**             | ** ** | **Low** | ** ** | **High** | ** ** |
|-----------------------------------------------|------------|---------|------------|----------|------------|
| ** **                                    | ** ** | **US$** | ** ** | **US$**  | ** ** |
| 2000                                          |       |    | 0.3777     |     | 8.3791     |   |
| 2001                                          |       |    | 0.4293     |     | 1.6857     |   |
| 2002                                          |       |    | 0.5786     |     | 1.3707     |   |
| 2003                                          |       |    | 0.6500     |     | 3.7143     |   |
| 2004                                          |       |    | 0.9330     |     | 7.3270     |   |
|                                          |       |    |       |     |       |
| **Quarters Ended**                            | ** ** | **Low** | ** ** | **High** | ** ** |
| ** **                                    | ** ** | **US$** | ** ** | **US$**  | ** ** |
| June 30, 2003                            |       | 0.7571  |       | 1.2714   |       |
| September 30, 2003                       |       | 0.7857  |       | 3.7143   |       |
| December 31, 2003                        |       | 1.4000  |       | 2.1000   |       |
| March 31, 2004                           |       | 1.4000  |       | 10.9900  |       |
| 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    |       |
|                                          |       |    |       |     |       |
| **The Following Months**                      | ** ** | **Low** | ** ** | **High** | ** ** |
| ** **                                    | ** ** | **US$** | ** ** | **US$**  | ** ** |
| January 2005                             |       | 3.280   |       | 4.680    |       |
| February 2005                            |       | 3.000   |       | 3.870    |       |
| March 2005                               |       | 3.000   |       | 4.380    |       |
| April 2005                               |       | 2.730   |       | 3.170    |       |
| May 2005                                 |       | 2.700   |       | 3.230    |       |
|                                          |       |    |       |     |       |
| **Period**                                    | ** ** | **Low** | ** ** | **High** | ** ** |
| ** **                                    | ** ** | **US$** | ** ** | **US$**  | ** ** |
|                                          |       |    |       |     |       |
| From April 1, 2005 to June 21, 2005 |       | 2.700   |       | 3.710    |       |

 

56

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

 

### ***Item9B***.          Plan ofDistribution

 

Not Applicable.

 

### ***Item9C***.          SellingShareholders

 

Not Applicable.

 

### ***Item9D***.          Dilution

 

Not Applicable.

 

### ***Item 9E***.          Expenses Of The Issue

 

Not Applicable.

 

## **ITEM 10**.         ADDITIONALINFORMATION

 

### ***Item10A***.        Share Capital

 

**Authorized Capital**.The authorized capital of the Company is US$250,000 comprised of 20,000,000Ordinary Shares and 5,000,000 shares of Preferred Stock. As ofDecember 31, 2004, there were 6,434,667 Ordinary Shares and no shares ofPreferred Stock, issued and outstanding. An additional 340,651 Ordinary Shareswere repurchased by the company as treasury stock. All of the Company’s sharesof capital stock have a par value of US$0.01 per share.

 

Holders of the Company’s Ordinary Shares are entitled to one vote foreach whole share on all matters to be voted upon by shareholders, including theelection of directors. Holders of Ordinary Shares do not have cumulative votingrights in the election of directors. All shares of Ordinary Shares are equal toeach other with respect to liquidation and dividend rights. Holders of OrdinaryShares are entitled to receive dividends if and when declared by the Company’sBoard of Directors out of funds legally available under British Virgin Islandslaw. In the event of the liquidation of the Company, all assets available fordistribution to the holders of Ordinary Shares are distributable among themaccording to their respective share holdings. Holders of Ordinary Shares haveno preemptive rights to purchase any additional, unissued shares of OrdinaryShares. All of the outstanding shares of Ordinary Shares of the Company areduly authorized, validly issued, fully paid and non-assessable.

 

Pursuant to the Company’s Memorandum and Articles of Association andpursuant to the laws of the British Virgin Islands, the Company’s Memorandumand Articles of Association may be amended by a resolution of the Board ofDirectors without shareholder approval.  This

 

57

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includes amendments to increase or reduce the authorized capital stockof the Company or to increase or reduce the par value of its shares. Theability of the Company to amend its Memorandum and Articles of Associationwithout shareholder approval could have the effect of delaying, deterring orpreventing a change in control of the Company without any further action by theshareholders including but not limited to, a tender offer to purchase theCommon Stock at a premium over then current market prices.

 

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

 

The Board of Directors of the Company, without further shareholderaction, may issue shares of Preferred Stock in any number of series and may establishas to each such series the designation and number of shares to be issued andthe relative 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.

### *** ***

### ***Item10B***.                       Memorandum and Articles of Association

 

Set forth below is a summary of the materialprovisions of our Memorandum and Articles of Association (the “Articles) andthe 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.**  The Company maintains a share register at itsregistered office in the BVI. The Company’s registered number is 200960. Theobjects of the Company are to engage in any act or activity that is notprohibited under any law of the BVI. See Regulation 4(1) of the Articles.Under the Articles, the Company is not required to treat the holder of aregistered share in the Company as a shareholder until that person’s name hasbeen entered in the share register. The holders of Ordinary Shares have onevote for each Ordinary Share held of record. The holders of Preferred Shareshave such voting powers, full or limited, or

 

58

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no voting powers and such restrictions as may be stated and expressedin the resolution providing for the issuance of the Preferred Shares.

 

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

 

The inadvertent failure of the directors to give notice of a meeting toa shareholder, 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.

 

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

 

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

 

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

 

At every meeting of shareholders, the chairman of the board ofdirectors shall preside as chairman of the meeting.

 

The chairman may, with the consent of the meeting, adjourn any meetingfrom time to time, and from place to place, but no business shall be transactedat any adjourned meeting other than the business left unfinished at the meetingfrom which the adjournment took place.

 

At any meeting of the shareholders the chairman shall be responsiblefor deciding in such manner as he shall consider appropriate whether anyresolution has been carried or not ant the result of his decision shall beannounced to the meeting and recorded in the minutes thereof.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(b)                                 thesubscription agreement for the issue of the shares,

 

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

 

Generally, no purchase, redemption or other acquisition of shares shallbe made unless the directors determine that immediately after purchase,redemption or other acquisition the Company will be able to satisfy itsliabilities as they become due in the ordinary course of its

 

60

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business and the realizable value of the assets of the Company will notbe less than the sum of its total liabilities, other than deferred taxes, asshown in the books of account, and its capital and, in the absence of fraud,the decision of the directors as to the realizable value of the assets of theCompany is conclusive, unless a question of law is involved.

 

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

 

**Purpose, Duration, Liquidation, Merger.**  The Company is empowered under BVI law andits Memorandum of Association to engage in any act or activity that is notprohibited under any law in the BVI. The Company shall continue until wound-upand dissolved by a resolution of shareholders, or under the terms of anyinsolvency or liquidation laws in force in the BVI. Under BVI law the Companymay merge with another company, including a parent company or subsidiary,incorporated in the BVI, or in a jurisdiction outside of the BVI where the lawsof that jurisdiction permit the merger. A merger must be authorized by thedirectors of the Company and approved by the shareholders.

 

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

 

**Board of Directors.**The business and affairs of the Company are managed by the directors who mayexercise all such powers of the Company as are not by BVI law or by theCompany’s Articles reserved to the shareholders of the Company.

 

### ***Item10C***.                       Material Contracts

 

During Fiscal 2004, the Company’s contract with O.I. Corporation(“O.I.”) permitting the Company to assemble O.I.’s Total Organic Analyzerremained in effect. See Item 4B. “Business Overview – Product AssemblyOperations.”  We plan to market a TotalOrganic Analyzer under our own brand name in the third quarter of 2005.

### *** ***

### ***Item10D***.                       Exchange Controls

 

There are no exchange control restrictions onpayment of dividends on the Company’s Ordinary Shares or on the conduct of theCompany’s operations either in Hong Kong, where the Company’s principalexecutive offices are located, or the British Virgin Islands, where the Companyis incorporated. There are no British Virgin Islands laws which impose foreignexchange controls on the Company or that effect the payment of dividends,interest, or other payments to non-resident holders of the Company’ssecurities. British Virgin Islands laws and the Company’s Memorandum andArticles of Association impose no limitations on the right of non-resident orforeign owners to hold the Company’s securities or vote the Company’s OrdinaryShares. The PRC government has established a unified exchange rate system andsystem of exchange controls to which the Company is subject.

 

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

 

The Company is exempted from taxation in theBritish Virgin Islands.

 

The Company’s subsidiaries organized in HongKong, Far East, Euro Tech (China) Limited and ChinaH2O.com Limited, provide forHong Kong profits tax at a rate of 17.5% on the basis of their income forfinancial reporting purposes, adjusting for income and expense items which arenot assessable or deductible for profits tax purposes. Hong Kong levies nocapital gains or dividends tax.

 

Euro Tech Trading (Shanghai) Limited, asubsidiary of the Company, provides for PRC Enterprise Income Tax at a rate of15%, after offsetting losses brought forward, if any, on the basis of itsincome for financing reporting purposes, adjusting for income and expense itemswhich are not assessable or deductible for PRC Enterprise Income Tax purposes.

 

In accordance with the relevant income taxlaws and regulations applicable to foreign investment enterprises in the PRC,Shanghai Euro Tech Limited (“SET”), a subsidiary of the Company, is exempt fromPRC Enterprise Income Tax of 15% for two years starting from its firstprofit-making year, after offsetting losses brought forward, if any, followedby a 50% reduction for the next three years thereafter. As of December 31,2004, SET is still exempt from the PRC enterprise income tax as it had anassessable loss of US$81,155 for the current year.

 

VIEs of the Group provide for PRC EnterpriseIncome Tax at a rate of 33%, after offsetting losses brought forward, if any,on the basis of its income for financial reporting purposes, adjusting forincome and expense items which are not assessable or deductible for PRC EnterpriseIncome Tax purposes.

 

As of December 31, 2004, certain VIEs hadaggregated assessable losses carried forward of US$107,726 agreed by the localtax authority.

 

The Company’s effective tax rates for Fiscal2004, Fiscal 2003 and Fiscal 2002 were 29.3%, 19.7% and 19.7%, respectively.Weighted average statutory tax rates of 20.8%, 20.1% and 15.7% were in effectfor Fiscal 2004, Fiscal 2003 and Fiscal 2002, respectively. Principaladjustments to this statutory tax rate were valuation allowances of 7.0%,(0.8%) and 2.1% during Fiscal 2004, Fiscal 2003 and Fiscal 2002, respectively.  The increase in valuation allowances forFiscal 2004 was primarily due to inclusion of VIEs.

 

Income taxes represent current Hong Kongprofits tax applied at 16% for subsidiaries incorporated in Hong Kong for the yearsended December 31, 2002. In 2003, Hong Kong changed the profits tax ratefrom 16% to 17.5% for the fiscal year ended 2003/2004.  PRC Enterprise Income Tax applied at 15% forEuro Tech Trading (Shanghai) Limited, a subsidiary incorporated in the PRC, forthe year ended December 31, 2004. Accumulated tax losses of Shanghai EuroTech Limited, another subsidiary incorporated in the PRC, available to offsetagainst future profit were US$226,550 and US$145,395, respectively, duringFiscal 2004 and 2003.

 

### ***Item10F***.                       Dividends And Paying Agents

 

Not applicable.

 

### ***Item10G***.                       Statement By Experts

 

Not applicable.

 

62

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### ***Item10H***.       Documents onDisplay

 

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

 

### ***Item10I***.         SubsidiaryInformation

 

Not applicable.

 

## **ITEM 11**.         QUANTITATIVEAND QUALIFICATION DISCLOSURES ABOUT MARKET RISK

 

The Company’s primary risk exposures arise from changes in interestrates and foreign currency exchanges rates.

 

*Foreign Currency Risks*

 

The Company is exposed to risk from changing foreign currency exchangerates. The Company’s sales are denominated either in HK dollar or RMB. Themajority of the Company’s expenses and cost of revenue are denominated in HKdollars, followed by RMB, US dollars, Japanese yen and the Euro. The Company issubject to a variety of risks associated with changes among the relative valueof the US dollar, HK dollar, RMB, Japanese yen and the Euro. The Company doesnot 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 cannot accurately determine the precise effect of inflationon its operations, it does not believe inflation has had a material effect onsales or results of operations during the past several years.

 

The Company is currently not exposed to material future earnings orcash flow exposures from changes in interest rates on debt obligations as theCompany had no bank indebtedness in Fiscal 2004.**** The Company does not currently anticipateentering into interest rate swaps and/or similar instruments.

## ** **

## **ITEM 12**.         DESCRIPTIONOF SECURITIES OTHER THAN EQUITY SECURITIES

 

Not applicable

 

63

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**PART II**

 

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

 

None.

 

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

 

Not Applicable.

## ** **

## **ITEM 15**.         CONTROLSAND PROCEDURES

 

(a)           Evaluation of Disclosure Controls andProcedures

 

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

 

(b)                                 Changes in Internal Controls

 

No significant changes in our internal controls or in other factorsthat could significantly effect these controls subsequent to the date of theevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses, were made as a result of the evaluation.

## ** **

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

 

### ***Item16A***.                       Audit Committee Financial Expert

 

The Committee includes two non-employee directors who meet theindependence and financial expert requirements of the NASDAQ listing standardsand the rules and regulations of U.S. Securities and ExchangeCommission.  They are Messrs. Y.K.Liang and****Choi Chiu Ho.

 

### ***Item16B***.                       Code Of Ethics

 

Our board of directors has adopted a code of business conduct andethics that applies to our directors, officers and employees, including certainprovisions that specifically apply to our chief executive officer, chieffinancial officer and any other persons who perform similar functions forus.  The Company agrees to undertake toprovide to any person without charge, a

 

64

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copy of our code of business conduct and ethics within ten working daysafter we receive such person’s written request.

 

### ***Item16C***.                       Principal Accountant Fees And Services

 

The following table sets forth the aggregate fees by categoriesspecified below in connection with certain professional services rendered byPricewaterhouseCoopers our principal external auditors. For the periodsindicated.

 
| ** **            | ** ** | **For  the Year Ended December, 31** | ** ** |
|-----------------------|------------|--------------------------------------|------------|
| ** **            | ** ** | **2002**                             | ** ** | **2003** | ** ** | **2004** | ** ** |
|                  |       |                                 |       |   |   |   |   |   |   |   |
| Audit fees(1)         |       | US$                                  | 66,300     |   | US$ | 63,500 |   | US$ | 109,000 |   |
|                  |       |                                 |       |   |   |   |   |   |   |   |
| Audit-related fees(2) |       | US$                                  | NIL        |   | US$ | NIL |   | US$ | NIL |   |
|                  |       |                                 |       |   |   |   |   |   |   |   |
| Tax fees(3)           |       | US$                                  | 3,800      |   | US$ | 3,800 |   | US$ | 6,000 |   |
|                  |       |                                 |       |   |   |   |   |   |   |   |
| All other fees        |       | US$                                  | NIL        |   | US$ | NIL |   | US$ | NIL |   |

 

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

 

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**Table of Contents**

 

(1)   “Audit fees” means the aggregate fees billed in eachof the fiscal years listed for professional services rendered by our principalauditors for the audit of our annual financial statements.

 

(2)   “Audit-related fees” means the aggregate fees billedin each of the fiscal years listed for assurance and related services by ourprincipal auditors that are reasonably related to the performance of the auditor review of our financial statements and are not reported under “Audit fees.”Services comprising the fees disclosed under the category of “Audit-relatedfees” involve principally the performance of certain agreed upon procedures forthe years ended December 31, 2002, 2003 and 2004, respectively.

 

(3)   “Tax fees” means the aggregatedfees billed in each of the years listed for professional services rendered byour principal auditors for tax compliance, tax advice and tax planning.

 

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### ***Item16D***.                       Exemptions From Listing Standards

 

In November of 2003, NASDAQ adopted amendments to its corporategovernance rules. For foreign private issuers, such as the Company, fullcompliance with those rules is not required until July 31, 2005 anddisclosures are required to be made in the Company’s annual reports, to befiled for its fiscal year ending December 31, 2005 and for subsequentyears.

 

The Company is a “Controlled Company” as defined in NASDAQ’s corporategovernance rules as a majority of our shares are owned by a “controlgroup” consisting of T.C. Leung, Pearl Venture Ltd. and Regent EarningsLimited, who have disclosed their “control group” status in their filings withthe Commission.  So long as that“controlled company” status remains in effect, the Company will be exempt fromcertain of NASDAQ corporate governance rules that, including among otherthings, would require: (a) a majority of our directors be independent;(b) the compensation of our chief executive officer be determined orrecommended by independent directors; and (c) director nominations bedetermined or recommended by independent directors.

 

The Company believes it is in compliance with NASDAQ’s corporategovernance rules as in effect and intends to comply with the changes tosaid rules no later than the date that they become effective.

 

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# **PART III**

## **ITEM 17**.                           FINANCIALSTATEMENTS

 

Not applicable.

 

## **ITEM18.**                           FINANCIALSTATEMENTS

 

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

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

 

## **ITEM 19**.                           EXHIBITS

 

Lists of Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                                |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                           |
| 1.1                  |       | Amended and Restated Memorandum and  Articles of Association (1)                                               |
|                 |       |                                                                                                           |
| 1.2                  |       | Amendments to Exhibit 3.1 adopted by  shareholders on August 15, 2000 (3)                            |
|                 |       |                                                                                                           |
| 4.2                  |       | 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) |

 

67

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| 4.8    |   | Equity Interest Transfer and Shareholders’  Agreement among Tamworth, Registrant and Pact Asia Pacific Limited (4)                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                  |
| 4.9    |   | Letters to the Securities and Exchange  Commission pursuant to Temporary Note 3T 60 Article 3 of Regulation S-X  (5)                                             |
|   |   |                                                                                                                                                                  |
| 4.10   |   | 2002 Officers and Directors Stock Option  Plan (6)                                                                                                                    |
|   |   |                                                                                                                                                                  |
| 4.11   |   | Registrant’s Audit Committee Charter (7)                                                                                                                         |
|   |   |                                                                                                                                                                  |
| 8.1    |   | List of Subsidiaries (3)                                                                                                                                              |
|   |   |                                                                                                                                                                  |
| 12.1   |   | Certification of Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (8)                                                          |
|   |   |                                                                                                                                                                  |
| 12.2   |   | Certification of Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (8)                                                          |
|   |   |                                                                                                                                                                  |
| 13.1   |   | Certification of the Chief Executive  Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (8)  |
|   |   |                                                                                                                                                                  |
| 13.2   |   | Certification of the Chief Financial  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (8) |

 

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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 onForm 20-F for its year ended December 31, 1999.

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

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

(5)           Incorporatedby reference, previously filed as an Exhibit to Registrant’s Report onForm 20-F for its year ended December 31, 2001.

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

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

(8)           Filed herewith.

 

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**SIGNATURES**

 

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

 

 
| ** **                 | ** ** | **EURO  TECH HOLDINGS COMPANY LIMITED**            |
|----------------------------|------------|----------------------------------------------------|
|                       |       | (Registrant)                                       |
|                       |       |                                               |
|                       |       | /s/ T.C. Leung                                     |
|                       |       | T.C. Leung,                                        |
|                       |       | Chief Executive Officer and Chairman of the  Board |
|                       |       |                                               |
|                       |       |                                               |
| Dated:  July 14, 2005 |       |                                               |

 

69

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| **EURO TECH HOLDINGS  COMPANY LIMITED**                        |   |
|----------------------------------------------------------------|--------|
|                                                           |   |
| **AUDITED  CONSOLIDATED BALANCE SHEETS**                       |   |
|                                                           |   |
| **AS OF  DECEMBER 31, 2004 AND 2003 AND**                 |   |
|                                                           |   |
| **CONSOLIDATED  STATEMENTS OF INCOME,**                        |   |
|                                                           |   |
| **CASH FLOWS AND  CHANGES IN SHAREHOLDERS’ EQUITY**       |   |
|                                                           |   |
| **FOR THE YEARS ENDED  DECEMBER 31, 2004, 2003 AND 2002** |   |
|                                                           |   |
| **TOGETHER WITH  REPORT OF INDEPENDENT REGISTERED**            |   |
|                                                           |   |
| **PUBLIC ACCOUNTING  FIRM**                                    |   |

 

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

**TO THE SHAREHOLDERSAND THE DIRECTORS OFEURO TECH HOLDINGS COMPANY LIMITED**

 

We have audited the accompanying consolidated balance sheets of Euro Tech Holdings Company Limitedand its subsidiaries as of December 31, 2004 and 2003, and the relatedconsolidated statements of income, of shareholders’ equity and cash flows foreach of the three years in the period ended December 31, 2004.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures 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 believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Euro TechHoldings Company Limited and its subsidiaries at December 31, 2004 and2003, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2004 in conformity withaccounting principles generally accepted in the United States of America.

 

 
| **/s/PricewaterhouseCoopers**  |
|--------------------------------|
|                           |
|                           |
| Hong Kong,  July 14, 2005 |

 

F-2

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**EURO TECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATEDBALANCE SHEETS****AS OF DECEMBER 31**

 
| ** **                                                                                                                                       | ** ** | **Note**        | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                                       | ** ** | ** **      | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                                                                                             |       |            |       |             |       |             |       |
| Assets                                                                                                                                           |       |            |       |             |       |             |       |
|                                                                                                                                             |       |            |       |             |       |             |       |
| Current assets:                                                                                                                                  |       |            |       |             |       |             |       |
| Cash and cash equivalents                                                                                                                        |       |            |       | 5,242            |       | 2,752            |       |
| Accounts receivable, net                                                                                                                         |       | 5               |       | 3,327            |       | 4,283            |       |
| Bills receivable                                                                                                                                 |       |            |       | 812              |       | 1,068            |       |
| Prepayments and other current assets                                                                                                             |       | 17              | (iii)      | 367              |       | 615              |       |
| Inventories, net                                                                                                                                 |       | 6               |       | 3,564            |       | 2,246            |       |
| Taxation recoverable                                                                                                                             |       |            |       | 7                |       | 15               |       |
| Total current assets                                                                                                                             |       |            |       | 13,319           |       | 10,979           |       |
|                                                                                                                                             |       |            |       |             |       |             |       |
| Property, plant and equipment, net                                                                                                               |       | 7 & 20 | (ii)       | 1,766            |       | 1,849            |       |
|                                                                                                                                             |       |            |       |             |       |             |       |
| Investments in affiliates                                                                                                                        |       | 8               |       | 571              |       | 434              |       |
|                                                                                                                                             |       |            |       |             |       |             |       |
| Deferred tax assets                                                                                                                              |       | 4               |       | 43               |       | 46               |       |
|                                                                                                                                             |       |            |       |             |       |             |       |
| Total assets                                                                                                                                     |       |            |       | 15,699           |       | 13,308           |       |
|                                                                                                                                             |       |            |       |             |       |             |       |
| Liabilities and shareholders’ equity                                                                                                        |       |            |       |             |       |             |       |
|                                                                                                                                             |       |            |       |             |       |             |       |
| Current liabilities:                                                                                                                             |       |            |       |             |       |             |       |
| Accounts payable                                                                                                                                 |       |            |       | 4,188            |       | 3,178            |       |
| Bills payable                                                                                                                                    |       |            |       | 516              |       | 356              |       |
| Amounts due to related companies                                                                                                                 |       | 17              |       | 1,266            |       | 1,330            |       |
| Other payables and accrued expenses                                                                                                              |       | 9               |       | 1,791            |       | 1,173            |       |
| Taxation payable                                                                                                                                 |       |            |       | 101              |       | 28               |       |
| Total current liabilities                                                                                                                        |       |            |       | 7,862            |       | 6,065            |       |
|                                                                                                                                             |       |            |       |             |       |             |       |
| Commitments and contingencies                                                                                                                    |       | 18              |       | —           |       | —           |       |
| Shareholders’ equity:                                                                                                                       |       |            |       |             |       |             |       |
| Common stock, par value US$0.01 each,20,000,000 (2003: 20,000,000)  shares authorized; 6,775,318 (2003: 6,775,318) shares issued and outstanding |       | 10              |       | 68               |       | 45               |       |
| Additional paid-in capital                                                                                                                       |       |            |       | 2,500            |       | 2,523            |       |
| Warrants                                                                                                                                         |       | 11              |       | —           |       | —           |       |
| Treasury stock, 340,651 (2003: 340,651) shares at cost                                                                                           |       | 12              |       | (237             | )          | (237             | )          |
| PRC statutory reserve                                                                                                                            |       | 13              |       | 69               |       | —           |       |
| Accumulated other comprehensive loss                                                                                                             |       |            |       | (26              | )          | (26              | )          |
| Retained earnings                                                                                                                                |       |            |       | 5,463            |       | 4,938            |       |
| Total shareholders’ equity                                                                                                                  |       |            |       | 7,837            |       | 7,243            |       |
|                                                                                                                                             |       |            |       |             |       |             |       |
| Total liabilities and shareholders’ equity                                                                                                  |       |            |       | 15,699           |       | 13,308           |       |

 

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

 

F-3

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME**

**FOR THE YEARS ENDED DECEMBER 31, 2004,2003 AND 2002**

 
| ** **                                           | ** ** | **Note**   | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                 |       |       |       |             |       |             |       |             |       |
| Revenue                                              |       | 20         | (i)        | 32,282           |       | 27,442           |       | 23,497           |       |
| Cost of revenue                                      |       |       |       | (27,033          | )          | (22,805          | )          | (18,735          | )          |
| Gross profit                                         |       |       |       | 5,249            |       | 4,637            |       | 4,762            |       |
|                                                 |       |       |       |             |       |             |       |             |       |
| Selling and administrative expenses                  |       |       |       | (4,801           | )          | (4,108           | )          | (4,173           | )          |
| Operating income                                     |       |       |       | 448              |       | 529              |       | 589              |       |
| Interest income                                      |       |       |       | 17               |       | 13               |       | 18               |       |
| Other income, net                                    |       | 3          |       | 104              |       | 6                |       | 9                |       |
| Income before income taxes                           |       |       |       | 569              |       | 548              |       | 616              |       |
|                                                 |       |       |       |             |       |             |       |             |       |
| Income taxes                                         |       | 4          |       | (167             | )          | (108             | )          | (123             | )          |
|                                                 |       |       |       |             |       |             |       |             |       |
| Equity in profit of affiliates, net of taxes         |       |       |       | 192              |       | 91               |       | 7                |       |
| Net income                                           |       |       |       | 594              |       | 531              |       | 500              |       |
|                                                 |       |       |       |             |       |             |       |             |       |
| Net income per common stock                          |       |       |       |             |       |             |       |             |       |
| - Basic                                              |       |       |       | US$              | 0.09       |             | US$        | 0.08             |       | US$ | 0.08 |   |
|                                                 |       |       |       |             |       |             |       |             |       |   |   |   |
| - Diluted                                            |       |       |       | US$              | 0.06       |             | US$        | 0.08             |       | US$ | 0.08 |   |
| Weighted average number of common shares outstanding |       |       |       |             |       |             |       |             |       |
| - Basic                                              |       |       |       | 6,434,667        |       | 6,434,667        |       | 6,434,667        |       |
|                                                 |       |       |       |             |       |             |       |             |       |
| - Diluted                                            |       |       |       | 10,034,687       |       | 6,434,667        |       | 6,434,667        |       |

 

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

 

F-4

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 2004,2003 AND 2002**

 
| ** **                                                                                   | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Cash flows from operating activities:                                                        |       |             |       |             |       |             |       |
| Net income                                                                                   |       | 594              |       | 531              |       | 500              |       |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |       |             |       |             |       |             |       |
| Depreciation of property, plant and equipment                                                |       | 184              |       | 190              |       | 163              |       |
| Gain on disposal of property, plant and equipment                                            |       | —           |       | (1               | )          | (3               | )          |
| Equity in profit of affiliates, net of taxes                                                 |       | (192             | )          | (91              | )          | (7               | )          |
| (Increase) decrease in current assets:                                                       |       |             |       |             |       |             |       |
| Accounts receivable, net                                                                     |       | 956              |       | 93               |       | (1,659           | )          |
| Bills receivable                                                                             |       | 256              |       | (666             | )          | 267              |       |
| Prepayments and other current assets                                                         |       | 248              |       | (153             | )          | (92              | )          |
| Inventories, net                                                                             |       | (1,318           | )          | (282             | )          | 39               |       |
| Taxation recoverable                                                                         |       | 8                |       | (15              | )          | —           |       |
| Amount due from a related company                                                            |       | —           |       | 2                |       | (2               | )          |
| Deferred tax assets                                                                          |       | 3                |       | (3               | )          | (43              | )          |
| Increase (decrease) in current liabilities:                                                  |       |             |       |             |       |             |       |
| Accounts payable                                                                             |       | 1,010            |       | (1,352           | )          | 1,172            |       |
| Bills payable                                                                                |       | 160              |       | 209              |       | 10               |       |
| Amounts due to related companies                                                             |       | (64              | )          | 664              |       | 326              |       |
| Other payables and accrued expenses                                                          |       | 618              |       | 534              |       | (526             | )          |
| Taxation payable                                                                             |       | 73               |       | (7               | )          | (63              | )          |
| Net cash provided by/(used in) operating activities                                          |       | 2,536            |       | (347             | )          | 82               |       |
| Cash flows from investing activities:                                                        |       |             |       |             |       |             |       |
| Sales proceeds on disposal of property, plant and equipment                                  |       | —           |       | 1                |       | 3                |       |
| Purchase of property, plant and equipment                                                    |       | (101             | )          | (74              | )          | (84              | )          |
| Investments in affiliates                                                                    |       | —           |       | —           |       | (335             | )          |
| Dividend income                                                                              |       | 55               |       | —           |       | —           |       |
| Net cash used in investing activities                                                        |       | (46              | )          | (73              | )          | (416             | )          |
| Cash flows from financing activities:                                                        |       |             |       |             |       |             |       |
| Repayment of long-term bank loan                                                             |       | —           |       | —           |       | (90              | )          |
| Net cash used in financing activities                                                        |       | —           |       | —           |       | (90              | )          |
| Effect of exchange rate changes on cash and cash equivalents                                 |       | —           |       | (1               | )          | 46               |       |
| Net increase/(decrease) in cash and cash equivalents                                         |       | 2,490            |       | (421             | )          | (378             | )          |
| Cash and cash equivalents, beginning of year                                                 |       | 2,752            |       | 3,173            |       | 3,551            |       |
| Cash and cash equivalents, end of year                                                       |       | 5,242            |       | 2,752            |       | 3,173            |       |
| Supplementary information                                                                    |       | US$              |       | US$              |       | US$              |       |
| Interest received                                                                            |       | 17               |       | 13               |       | 22               |       |
| Interest paid                                                                                |       | —           |       | —           |       | 4                |       |
| Income taxes paid                                                                            |       | 121              |       | 134              |       | 229              |       |

 

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

 

F-5

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2004,2003 AND 2002**

 
| ** **                                                  | ** ** | **Number of  common  stock** | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Warrants**     | ** ** | **Treasury****s****tock** | ** ** | **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, 2002, as previously reported |       | 6,775,318                    |       | 32                |       | 2,043                            |       | 172              |       | (237                      | )          | (32                                                   | )          | —                     |       | 4,228                  |       | 6,206            |       |
| Stock compensation cost(1)                                  |       | —                       |       | —            |       | 321                              |       | —           |       | —                    |       | —                                                |       | —                     |       | (321                   | )          | —           |       |
|                                                        |       |                         |       |              |       |                             |       |             |       |                      |       |                                                  |       |                       |       |                   |       |             |       |
| Balance as of  January 1, 2002, as revised             |       | 6,775,318                    |       | 32                |       | 2,364                            |       | 172              |       | (237                      | )          | (32                                                   | )          | —                     |       | 3,907                  |       | 6,206            |       |
| Net income                                                  |       | —                       |       | —            |       | —                           |       | —           |       | —                    |       | —                                                |       | —                     |       | 500                    |       | 500              |       |
| Foreign exchange  translation adjustment                    |       | —                       |       | —            |       | —                           |       | —           |       | —                    |       | 8                                                     |       | —                     |       | —                 |       | 8                |       |
| Expiration of warrants                                      |       | —                       |       | —            |       | 6                                |       | (6               | )          | —                    |       | —                                                |       | —                     |       | —                 |       | —           |       |
| Balance as of  December 31, 2002                       |       | 6,775,318                    |       | 32                |       | 2,370                            |       | 166              |       | (237                      | )          | (24                                                   | )          | —                     |       | 4,407                  |       | 6,714            |       |
|                                                        |       |                         |       |              |       |                             |       |             |       |                      |       |                                                  |       |                       |       |                   |       |             |       |
| Net income                                                  |       | —                       |       | —            |       | —                           |       | —           |       | —                    |       | —                                                |       | —                     |       | 531                    |       | 531              |       |
| Stock split effect in  the form of a dividend               |       | —                       |       | 13                |       | (13                              | )          | —           |       | —                    |       | —                                                |       | —                     |       | —                 |       | —           |       |
| Foreign exchange  translation adjustment                    |       | —                       |       | —            |       | —                           |       | —           |       | —                    |       | (2                                                    | )          | —                     |       | —                 |       | (2               | )          |
| Expiration of warrants                                      |       | —                       |       | —            |       | 166                              |       | (166             | )          | —                    |       | —                                                |       | —                     |       | —                 |       | —           |       |
| Balance as of  December 31, 2003                       |       | 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            |       |

 

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

 

----

(1) We did not account forstock options for 100,000 shares granted to an external consultant in March1997.  These options had an exerciseprice of US$5.5.  These have now beenaccounted for and an amount of US$320,925 being the fair value of such optionson the date of grant has been transferred from retained earnings to additionalpaid-in capital as at January 1, 2002. This change does not have any impact on the results of operations,cashflows and total shareholders’ equity for the years presented.  These options expired unexercised in 2003.

 

F-6

----

 

**EURO TECH HOLDINGS COMPANY LIMITED**

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

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

 

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

 

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

 

Details of the Company’s subsidiaries and affiliates are summarized asfollows:

 
| **Name**                                       | ** ** | **Percentage of  equity  ownership** | ** ** | **Place of  incorporation** | ** ** | **Principal activities**                                                                                                                                                       |
|------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Subsidiaries:                                  |       |                                 |       |                        |       |                                                                                                                                                                           |
|                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Euro Tech  (Far East) Limited                  |       | 100                                  | %          | Hong Kong                   |       | Marketing  and trading of water and waste water related process control, analytical and  testing instruments, disinfection equipment, supplies and related automation  systems |
|                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Euro Tech  (China) Limited                     |       | 100                                  | %          | Hong Kong                   |       | Inactive                                                                                                                                                                       |
|                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| ChinaH2O.com  Limited                          |       | 100                                  | %          | Hong Kong                   |       | Internet  content provider and provision of marketing services for environmental  industry to group companies                                                                  |
|                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Euro Tech Trading (Shanghai)  Limited          |       | 100                                  | %          | The PRC                     |       | Marketing  and trading of water and waste water related process control, analytical and  testing instruments, disinfection equipment, supplies and related automation  systems |
|                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Shanghai  Euro Tech Limited                    |       | 100                                  | %          | The PRC                     |       | Manufacturing  of analytical and testing equipment                                                                                                                             |
|                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Affiliates:                                    |       |                                 |       |                        |       |                                                                                                                                                                           |
|                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Yixing Pact Environmental  Technology Co., Ltd |       | 30                                   | %          | The PRC                     |       | Design,  manufacturing and operation of water and waste water treatment machinery and  equipment                                                                               |
|                                           |       |                                 |       |                        |       |                                                                                                                                                                           |
| Pact Asia  Pacific Limited                     |       | 30                                   | %          | The British Virgin Islands  |       | Producing  and selling of environment protection equipment, undertaking environment  protection projects and providing relevant technology advice, training and  services      |

 

F-7

----

 

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

 

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

 

The consolidated financial statements includethe accounts of Euro Tech Holdings Company Limited and its subsidiaries (the “Group”).  The financial statements of variable interestentities (“VIEs”) as defined by the Financial Accounting Standards Board(“FASB”) Interpretation No. 46 (R) (“FIN46(R)”), are included in theconsolidated financial statements, if applicable.  In January 2003, the FASB issued FASBInterpretation No. 46 (FIN46), “Consolidation of Variable InterestEntities” and amended it by issuing FIN 46(R) in December 2003.  FIN 46 (R) addresses consolidation bybusiness enterprises VIEs that either: (1) do not have sufficient equityinvestment at risk to permit the entity to finance its activities withoutadditional subordinated financial support, or (2) have equity investorsthat lack an essential characteristic of a controlling financial interest.

 

The Group identified that the retail shopsestablished in the PRC qualified as variable interest entities as defined inFIN46(R).  The retail shops areprincipally engaged in the retailing business of water and waste water relatedprocess control, analytical and testing instruments, disinfection equipment,supplies and related automation systems. The Company is the primary beneficiary of these retail shops and,accordingly, consolidated their financial statements effectiveDecember 31, 2004.  The Company hasa controlling financial interest in these retail shops and is subject to amajority of the risk of loss from the retailing activities, and entitled toreceive a majority of the retail shops’ residual returns.  Total assets and liabilities of theseconsolidated VIEs total US$ 963,103 and US$ 303,106, respectively, as ofDecember 31, 2004.  The cumulativelosses of consolidating these VIEs on the Group’s consolidated statement ofincome in 2004 were US$41,947, including taxes of US$23,538.  The assets 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 theCompany does not have control, but has the ability to exercise significantinfluence over operating and financial policies (generally 20-50 percentownership), are accounted for using the equity method of accounting.  All material intercompany balances andtransactions have been eliminated in consolidation.

 

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

 

A subsidiary is a company in which theCompany holds, directly or indirectly, more than 50% of its outstanding votingshare capital and over which it is able to exercise control.

 

F-8

----

 

**(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 certain products where installation isnecessary, revenue is recognized upon completion of installation. Revenueearned from customer support services, which represents a minor percentage oftotal revenues, is recognized when such services are provided.

 

Revenues and profits in long term fixed price contracts are recordedunder the percentage of completion method. This approach relies on estimates of total expected direct costs atcompletion, which are compared to actual direct costs incurred to date toarrive at an estimate of revenue and profit earned to date.  Recognized revenue and profit are subject torevisions as the contract progresses to completion.  Revisions to profit estimate are reflected inincome in the period in which the facts that give rise to the revision becomeknown.

 

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

 

Research and development costs(“R&D” costs) are expensed as incurred. The R&D costs amounted to approximatelyUS$56,000, US$12,000 and US$10,000 for the years December 31, 2004, 2003 and2002 respectively and were included in “Selling and Administrative” expenses inthe Group’s consolidated 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$247,000,US$260,000 and US$230,000 forthe years December 31, 2004, 2003 and 2002 respectively and were included in “Sellingand Administrative” expenses in the Group’s consolidated statement of income.

 

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

 

The Group accounts for income and deferred taxunder the provision of Statement of Financial Accounting Standards (“SFAS”)No. 109: “Accounting for Income Taxes”, under which deferred taxes arerecognized for all temporary differences between the applicable tax balancesheets and the consolidated balance sheet. Deferred tax assets and liabilities are recognized for the estimatedfuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases.  SFAS 109 alsorequires the recognition of the future tax benefits of net operating loss carryforwards.  A valuation allowance isestablished when the deferred tax assets are not expected to be realized withina reasonable period of time.

 

Deferred tax assets and liabilities aremeasured using the enacted tax rates expected to be applicable for taxableincome in the years in which temporary differences are expected to be recoveredor settled.  The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income for theperiod that includes the enactment date.

 

Note 4 shows the applicable tax rates forindividual subsidiary and variable interest entities, as well as the majortemporary differences so recorded.

 

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

 

Cash and cash equivalents include cash onhand and demand deposits with banks.

 

F-9

----

 

**(h)****                                 Receivablesand Other Assets**

 

Receivables and other assets are recorded attheir nominal values.  Valuationallowances are provided for identified individual risks for these lineitems.  If the loss of a certain part ofthe receivables is probable, valuation allowances are provided to cover theexpected loss.

 

F-10

----

 

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

 

Inventories are stated at the lower of cost,on the first-in, first-out method, or net realizable value.  Costs include purchase and related costsincurred in bringing each product to its present location and condition.  Net realizable value is calculated based onthe estimated normal selling price, less further costs expected to be incurredfor disposal.  Provision is made forobsolete, slow moving or defective items, where appropriate.

 

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

 

Property, plant and equipment are stated atcost less accumulated depreciation. Gains or losses on disposal are reflectedin current operations.  Majorexpenditures for betterments and renewals are capitalized.  All ordinary repair and maintenance costs areexpensed as incurred.  Depreciation ofproperty, plant and equipment is computed using the straight-line method over theassets’ estimated useful lives as follows:

 
| Office  premises                          |   | 47 to 51  years           |
|-------------------------------------------|--------|---------------------------|
| Leasehold  improvements                   |   | over terms  of the leases |
| 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 or Disposal of Long-Lived Assets” whichrequires impairment losses to berecorded for property, plant and equipment to be held and used inoperations when indicators of impairment are present.  Reviews are regularlyperformed to determine whether the carrying value of assets is impaired.  The Group determines the existence of suchimpairment by measuring the expected future cash flows (undiscounted and withoutinterest charges) and comparing such amount to the carrying amount of theassets.  An impairment loss, if oneexists, is then measured as the amount by which the carrying amount of theasset exceeds the discounted estimated future cash flows. Assets to be disposed of are reported at thelower of the carrying amount or fair value of such assets less costs tosell.  There were no impairment lossesrecorded during each of the three years ended December 31, 2004.

 

F-11

----

 

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

 

Leases where substantially all the risks andrewards of ownership of the leased assets remain with the lessors are accountedfor as operating leases.  Rental paymentsunder operating leases are charged to expense on the straight-line basis overthe period of the relevant leases.

 

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

 

The Group has adopted SFAS No.142: “Goodwilland other intangible assets” which requires the Group to cease amortizinggoodwill, assess the possible impairment of goodwill existing at the date ofadoption and perform a subsequent impairment test on an annual basis.

 

**(n)****                                 ForeignCurrency Translation**

 

The Company maintains its books and recordsin United States dollars.  Itssubsidiaries and affiliates maintain their books and records either in HongKong dollars or Chinese Renminbi (“functional currencies”).  Foreign currency transactions during the yearare translated into the respective functional currencies at the applicablerates of exchange at the dates of the transactions.  Monetary assets and liabilities denominatedin foreign

 

F-12

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currencies are translated into the respectivefunctional currencies using the exchange rates prevailing at the balance sheetdates.  Gains or losses from foreigncurrency transactions are recognized in the consolidated statements of incomeduring the year in which they occur. Translation adjustments on subsidiaries’ equity are included ascumulative translation adjustments.

 

F-13

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**(o)****           Derivative Instruments and HedgingActivities**

 

SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS133”), as amended by SFAS No. 137, “Accounting for Derivative Instrumentsand Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133— an amendment of FASB Statement No. 133”, and SFAS No. 138, “Accountingfor Certain Derivative Instruments and Certain Hedging Activities — anamendment of FASB Statement No. 133”, as well as the interpretations ofthe Derivatives Implementation Group (“DIG”), are applied as amended by SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS133 contains accounting and reporting standards for hedging accounting and forderivative financial instruments, including certain derivative financialinstruments embedded in order contracts.

 

SFAS133 requires that all derivatives be recognized as either assets or liabilitiesin the consolidated balance sheet and measured at fair value. Depending on thedocumented designation of a derivative instrument, any change in fair value isrecognized either in net income or shareholders’ equity (as a component ofaccumulated other comprehensive income).

 

Fairvalues of derivative instruments are classified as operating assets orliabilities. Changes in fair value of derivative instruments affecting incomeare classified as other operating income or expenses. Please see note 16 foradditional information regarding the Company’s use of derivative instruments.

 

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

 

TheGroup has adopted SFAS No. 130:  “ReportingComprehensive Income,” which requires the Group to report all changes in equityduring a period, except for those resulting from investment by owners anddistribution to owners, in the financial statements for the period in whichthey are recognized. The Group has presented comprehensive income, whichencompasses net income and foreign currency translation adjustments, in theconsolidated statement of changes in shareholders’ equity.

 

** (q)****          CommonStock**

 

Commonstock refers to the $0.01par value capital stock as designated in the Company’s Certificate ofIncorporation. Treasury stock is accounted for using the cost method. Whentreasury stock is reissued, the value is computed and recorded using aweighted-

 

F - 14

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averagebasis.

 

F - 15

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** (r)****          Netincome per Common Share**

 

Netincome per common share is computed in accordance with SFAS No. 128 “EarningsPer Share”, by dividing the net income by the weighted average number of sharesof common stock outstanding during the period. The Company reports bothbasic earnings per share, which is based on the weighted average number ofcommon shares outstanding, and diluted earnings per share, which is based onthe weighted average number of common shares outstanding and all dilutivepotential common shares outstanding. Outstanding stock options are the only dilutive potential shares of theCompany. There was no differencebetween basic and diluted earnings per share as the exercise prices of theredeemable warrants and stock options outstanding were higher than the averagemarket prices of the common stock for the years ended December 31, 2003and 2002 and therefore the effect of including such items in the calculation ofearnings per share would have been anti-dilutive.

 

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

 

Inaccordance with the provisions of SFAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure”, the Group has selectedthe disclosure only provisions related to employee stock options and sharepurchases and follows the provisions of Accounting Principles Board Opinion No. 25:“Accounting for Stock Issued to Employees” (“APB 25”) and relatedinterpretations in accounting for stock options and shares issued 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 the measurementdate, which is typically the date of grant, and is expensed ratably over theservice period, which is typically the vesting period. The Groupdiscloses the effect on net income and earnings per share as if the Group hadapplied the fair value recognition provision in accordance with SFAS No. 123in Note 14.

 

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

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”) requiresmanagement to make estimates and assumptions that affect the amounts that arereported in the consolidated financial statements and accompanying disclosures.Although these estimates are based on management’s best knowledge of currentevents and actions that the Company may undertake in the future, actual resultsmay be different from the estimates.

 

F - 16

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** (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)**           **SegmentInformation**

 

TheCompany’s segment reporting is prepared in accordance with SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information”. The managementapproach required by SFAS 131 designates that the internal reporting structure thatis used by management for making operating decisions and assessing performanceshould be used as the source for presenting the Company’s reportable segments.

 

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

 

In December 2004, theFASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”, an amendment ofAPB Opinion No. 29 effective for nonmonetary asset exchanges occurring infiscal periods beginning after June 15, 2005. SFAS No. 153 requires thatexchange of productive assets be accounted for at fair value unless fair valuecannot be reasonably determined or the transaction lacks commercialsubstance.  SFAS No. 153 is not expectedto have a material effect on the Company’s consolidated financial statements.

 

In November 2004, the FASBissued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43,Chapter 4”. SFAS No. 151 requires that abnormally high vacancy, wastedmaterial, freight and processing costs not be part of recognizable productioncosts. Such cost must instead be expensed as incurred. Accordingly fixed costsshall henceforth be allocated to inventory based on normal production capacity.The standard is effective for the fiscal year beginning January 1, 2006. Itis not expected that SFAS No. 151 will have a material effect on theCompany’s consolidated financial statements.

 

In December 2004, the FASBissued SFAS No. 123 (Revised 2004) “Share-Based Payment” that will requirethe Company to expense costs related to share-based payment transactions withemployees. With limited 

 

F - 17

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exception, SFAS No. 123 (R)requires that the fair value of share-based payments to employees be expensedover the period service is received. SFAS No. 123 (R) becomes mandatoryeffective for the Company on July 1, 2005. The Company intends to adoptthis standard using the modified retrospective method of transition with effectfrom 1 January 2005.

 

SFAS No. 123 (R) allows theuse 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.

 

F - 18

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The Company believes that the totalexpense recorded in future periods will depend on several variables, includingthe number 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 in fiscal periodsbeginning after December 15, 2005.  SFAS154 requires retrospective application to prior periods’ financial statementsof changes in accounting principle, unless it is impracticable to determineeither the period-specific effects or the cumulative effect of the change.  It also requires that retrospectiveapplication of a change in accounting principle be limited to the directeffects of the change.  SFAS alsorequires that a change in depreciation, amortization, or depletion method forlong-lived, nonfinancial assets be accounted for as a change in accountingestimate effected by a change in accounting principle.  The Group is currently assessing the impactof this statement on our results of operations, financial position and cashflows upon adoption and has not yet completed that assessment.

 

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

 
| ** **                                        | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|---------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                        | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| ** **                                        | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Gain on disposal of property, plant and equipment |       | —           |       | 1                |       | 3                |       |
| Exchange gain/(loss), net                         |       | 73               |       | (35              | )          | (53              | )          |
| Rental income                                     |       | 31               |       | 40               |       | 59               |       |
|                                              |       | 104              |       | 6                |       | 9                |       |

 

**4****              Income taxes**

 

The Company is exemptedfrom taxation in the British Virgin Islands.

 

Euro Tech (Far East)Limited, Euro Tech (China) Limited and ChinaH2O.com Limited provide for HongKong profits tax at a rate of 17.5% in the year of 2004 and 2003 (2002: 16%) onthe basis of their income for financial reporting purposes, adjusting forincome and expense items which are not assessable or deductible for profits taxpurposes. In 2003, the government enacted a change in the profits tax rate from16% to 17.5% for the fiscal year ended 2003/2004.

 

Euro Tech Trading(Shanghai) Limited, a subsidiary of the Company, provides for PRC

 

F - 19

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Enterprise Income Tax ata rate of 15%, after offsetting losses brought forward, if any, on the basis ofits income for financial reporting purposes, adjusting for income and expenseitems which are not assessable or deductible for PRC Enterprise Income Taxpurposes.

 

In accordance with therelevant income tax laws and regulations applicable to foreign investmententerprises in the PRC, Shanghai Euro Tech Limited (“SET”), a subsidiary of theCompany, is exempted from the PRC Enterprise Income Tax of 15% for two yearsstarting from its first profit-making year, after offsetting losses broughtforward, if any, followed by a 50% reduction for the next three yearsthereafter. As of December 31, 2004, SET is still exempted from the PRCenterprise income tax as it had an assessable loss carried forward of US$226,550 as agreed by the local tax authority(2003: US$145,395).

 

F - 20

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

 

As of December 31,2004, certain VIEs had aggregated assessable losses carried forward of US$107,726as agreed by the local tax authority.

 

The provision for income taxes consists of:

 
| ** **                         | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
|                               |       | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** |       |
| Current tax  expenses:             |       |             |       |             |       |             |       |
| Domestic                           |       | —           |       | —           |       | —           |       |
| Foreign                            |       | 164              |       | 111              |       | 166              |       |
|                               |       |             |       |             |       |             |       |
| Total current  provision           |       | 164              |       | 111              |       | 166              |       |
|                               |       |             |       |             |       |             |       |
| Deferred tax  expense / (benefit): |       |             |       |             |       |             |       |
| Domestic                           |       | —           |       | —           |       | —           |       |
| Foreign                            |       | 3                |       | (3               | )          | (43              | )          |
|                               |       |             |       |             |       |             |       |
| Total deferred  provision          |       | 3                |       | (3               | )          | (43              | )          |

 

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

 
| ** **                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |     |       |
| Weighted average statutory tax rate                  |       | 20.8     | %          | 20.1     | %          | 15.7     | %          |
| Change in valuation allowances                       |       | 7.0      | %          | (0.8     | )%         | 2.1      | %          |
| Under/(Over)-provision for income tax in prior years |       | 0.4      | %          | (1.7     | )%         | —   |       |
| Others                                               |       | 1.1      | %          | 2.1      | %          | 1.9      | %          |
| Effective tax rate                                   |       | 29.3     | %          | 19.7     | %          | 19.7     | %          |

 

The components ofdeferred tax assets are as follows:

 
| ** **                                                           | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                           | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                 |       |             |       |             |       |
| Deferred tax  assets arising from tax losses                         |       | 183              |       | 71               |       |
| Deferred tax  assets/(liabilities) arising from temporary difference |       | 1                |       | (3               | )          |
| Less: Valuation  allowances                                          |       | (141             | )          | (22              | )          |
| Net deferred tax  assets                                             |       | 43               |       | 46               |       |

 

F - 21

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**5****              Accounts receivable**

** **
| ** **                         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                         | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                               |       |             |       |             |       |
| Trade receivables                  |       | 3,385            |       | 4,302            |       |
| Less: Allowance for doubtful debts |       | (58              | )          | (19              | )          |
|                               |       | 3,327            |       | 4,283            |       |

 

F - 22

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

 
| ** **     | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|----------------|------------|------------------|------------|------------------|------------|
| ** **     | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|           |       |             |       |             |       |
| Raw materials  |       | 55               |       | 28               |       |
| Finished goods |       | 3,509            |       | 2,218            |       |
|           |       | 3,564            |       | 2,246            |       |

 

Management continuously reviews obsolete and slow moving inventories andassesses the inventory valuation to determine if the provision is deemedappropriate. At December 31, 2004, 2003 and 2002, provision for obsoleteand slow moving inventories amounted to US$86,341, US$10,171 and US$25,445, respectively.

 

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

 
| ** **                               | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                               | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                     |       |             |       |             |       |
| Office premises                          |       | 2,271            |       | 2,271            |       |
| Leasehold improvements                   |       | 93               |       | 63               |       |
| Furniture, fixtures and office equipment |       | 522              |       | 488              |       |
| Motor vehicles                           |       | 125              |       | 126              |       |
| Testing equipment                        |       | 67               |       | 54               |       |
|                                     |       | 3,078            |       | 3,002            |       |
|                                     |       |             |       |             |       |
| Less: Accumulated depreciation           |       | (1,312           | )          | (1,153           | )          |
|                                     |       | 1,766            |       | 1,849            |       |

 
| ** **          | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|---------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **          | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| ** **          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Depreciation charge |       | 184              |       | 190              |       | 163              |       |

 

F - 23

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**EUROTECH HOLDINGS COMPANY LIMITED**

 

**NOTESTO THE CONSOLIDATED ACCOUNTS**

 

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

 

During the year ended December 31,2002, the Group acquired 30% equity interests in Yixing Pact EnvironmentalTechnology Co., Ltd, a company incorporated in the PRC, and Pact Asia PacificLimited, a company incorporated in the British Virgin Islands, from an independentthird party for a total consideration of US$335,000. The Group believed thatthe business of these two investments was complementary to the Group’s businessas the Group continued to focus on sales and marketing of other products. TheGroup believed that by aligning itself with an engineering firm, such as theseaffiliates, it was able to gain a competitive advantage by offering customersand potential customers not only hardware but solutions to engineering problemsas well. Details of these affiliates are disclosed in Note 1. Investments inthese affiliates are accounted for using the equity method of accounting.

 

The excess of purchaseprice over the underlying fair value of equity in net assets of the investeeswas considered goodwill and amounted to US$215,000. The Group did not recognizeany separately identifiable intangible assets under the criteria prescribed inSFAS No. 141 “Business Combinations” pursuant to the acquisition. Thisequity method goodwill is not amortized, and the investment is tested annuallyfor impairment. As of December 31, 2004 and 2003, management does notbelieve the investments were impaired.

 

A summary of the combinedfinancial information of the affiliates is set forth 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              |       |

 

F - 24

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

 

F - 25

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The above tablerepresents the combined financial information of entities in which the Grouphas an investment accounted for using the equity method of accounting. Theseamounts are not the amounts reflected on the Group’s accompanying consolidatedfinancial statements. Consistent with the Group’s accounting policy forinvestments accounted for using the equity method of accounting, as describedin Note 2 (a), the Group has recorded approximately US$192,000 of equity inprofit of affiliates, net of taxes, in the accompanying consolidated statementsof income, representing the Group’s share in the affiliates. Similarly, theGroup has included approximately US$571,000 in “Investments in affiliates” onthe accompanying consolidated balance sheet, representing the Group’sinvestments in the affiliates.

 

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

 

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

 

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

 

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

 

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

 

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

 

**11****           Warrants**

 

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

 

Each public and privatewarrant entitles the holder thereof to acquire one share of the Company’scommon stock at the exercise price of US$3.52 during the period from March 14,1998 to March 14, 2003. Each underwriter warrant entitles the holderthereof to acquire one share of the Company’s common stock at the exerciseprice of US$5.29 during the period from March 14 1998 to March 14,2002. If the closing bid price of the

 

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Company’s common stock isabove US$5.4487 for twenty consecutive days, the Company has the right toredeem the warrants at the price of US$0.10 each. For the year ended December 31,2003, no warrants were exercised or redeemed and all the remaining unexercisedwarrants expired on March 14, 2003.

 

F - 27

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**12****           Treasury stock**

 

The Company authorized astock 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 common stock could be purchased in the openmarket from time to time as market and business conditions warrant. The Companyrepurchased a total of 36,445 shares and 304,206 shares of common stock during2000 and 2001 for considerations ofapproximately US$16,000 and US$221,000, respectively. There was no reissuanceof treasury stock during each of the three years ended December 31, 2004.

 

**13****           PRC statutory reserve**

 

Underthe relevant PRC laws and regulations, the PRC subsidiaries are required toappropriate certain percentage of their respective net profit to two statutory funds i.e. the statutory reservefund and the statutory staff welfare fund. The PRC subsidiaries also appropriated certainamount of their net profit to the expansion funds.

 

(i) Statutoryreserve funds

 

Pursuantto applicable PRC laws and regulations, the PRC subsidiaries are required toallocate at least 10% of the companies’ net profit to the statutory reservefunds until 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

 

Pursuantto applicable PRC laws and regulations, the PRC subsidiaries are required toallocate certain amount of thecompanies’ net profit to the staff welfare funds determined by the Company. The staff welfare funds can only be used toprovide staff welfare facilities and other collective benefits to the companies’employees. This fund is non-distributable other than upon liquidation of thePRC subsidiaries.

 

(iii) Expansion funds

 

Theexpansion reserve shallonly be used to make up losses, expand the PRC subsidiaries’ productionoperations, or increase the capital of the subsidiaries. The expansion fund canbe utilized upon approval by relevant authorities, to convert into registeredcapital and issue bonus capital to existing investors, provided that such fundsbe maintained at a minimum of 25% of the companies’ registered capital.

 

F - 28

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**14****           Stock options**

 

(i)            ManagementOptions Plan

 

A total of 4,586,400 shares of common stock havebeen reserved for issuance under the Company’s management option plan (the “ManagementOptions”). The Management Options provide for the grant of options to itsofficers, directors and employees as the Company’s Chairman of the Board ofDirectors and Chief Executive Officer may direct. In 1997, the Company grantedits officers, directors and employees options under the Management Options,which allow them to purchase up to 4,353,804shares of common stock. The exercise price of the options granted was US$ 1.221 per share for 1,310,400 of such options and US$ 1.6789 per share for the remaining 3,043,404. During the year ended December 31,2000, 36,036 options with theexercise price of US$ 1.6789were cancelled. During the same year, the Company further granted 242,697 options under the ManagementOptions with the exercise price of US$ 1.6789per share to its officers, directors and employees, which allowed them topurchase up to 242,697 sharesof common stock. The options vested for a period of one year and will expire inMarch 2007. During the year ended December 31, 2002, 27,573 options withthe exercise price of US$1.6789 were cancelled. During the year ended December 31,2003, no options were exercised, cancelled or granted.

 

In 2004, the Companygranted 46,000 shares with the exercise price of US$1.6789 per share to itsoffices, director and employees, which allowed them to purchase up to 46,000 shares of common stock. 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.

 

(ii)           2000Stock Option Plan

 

Atotal of 1,195,740 shares of commonstock have been reserved for issuance under the Company’s 2000 Stock OptionPlan (the “2000 Stock Options”). The 2000 Stock Options provide for the grantof options to its officers, directors and employees as the Company’s Chairman of the Board of Directors and ChiefExecutive Officer may direct. During the year ended December 31, 2000, theCompany granted such options to its officers, directors and employees under the2000 Stock Options, which allow them to purchase up to 742,560 shares of common stock. The exercise priceof all options granted is US$ 0.5787per share. During the year ended December 31, 2002, 43,680 options with exercise price of US$0.5787 were cancelled. The Company further granted 477,750 options and 19,110 options under the 2000 Stock Options with an exercise price of US$0.8191 and US$0.6809 per share, respectively, to its officers, directors and employees, whichallow them to purchase up to 496,860 shares of common stock. The options vested within a six-month toone-year period and will expire in August 2010.

 

Duringthe year ended December 31, 2004, 35,490 options with exercise price of US$0.5787 per share and 23,940 options with exercise price of US$0.8191 year sharewere cancelled. Further, there wereno options exercised or granted in 2004.

 

F - 29

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

 

A total of 294,000 shares and 840,000 shares of common stock havebeen reserved for issuance under the Company’s 2002 Employees’ Stock Option andIncentive Plan (the “2002 Employee Stock Options”) and 2002 Officers’ andDirectors’ Stock Option and Incentive Plan (the “2002 D&O Stock Options”),respectively. Both 2002 Employee Stock Options and the 2002 D&O StockOptions provide for the grant of options to its employees as the Company’sChairman of the Board of Directors and Chief Executive Officer may direct. Duringthe year ended December 31, 2002, the Company granted such options to itsemployees, officers and directors under the 2002 Employee Stock Options and the2002 D&O Stock Options, which allow them to purchase up to 294,000 and 840,000 shares of common stock 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 optionswith an exercise price of US$0.7618 per share were cancelled and no furtheroptions were granted.

 

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

 
| ** **                      | ** ** | **2004**               | ** ** | **2003**                               | ** ** | **2002**               | ** ** |
|---------------------------------|------------|------------------------|------------|----------------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **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 |       | 6,862,632              |       | 1.24                                   |       | 6,862,632              |       | 1.24 |   | 5,303,025 |   | 1.41 |   |
| Granted                         |       | 46,000                 |       | 1.68                                   |       | —                 |       | — |   | 1,630,860 |   | 0.69 |   |
| Cancelled                       |       | (184,590               | )          | (0.93                                  | )          | —                 |       | — |   | (71,253 | ) | (1.00 | ) |
| Outstanding, end  of year       |       | 6,724,042              |       | 1.26                                   |       | 6,862,632              |       | 1.24 |   | 6,862,632 |   | 1.25 |   |
|                            |       |                   |       |                                   |       |                   |       |   |   |   |   |   |   |
| Exercisable, end  of year       |       | 6,724,042              |       | 1.26                                   |       | 6,862,632              |       | 1.24 |   | 6,002,892 |   | 1.34 |   |

 

As of December 31,2004, the options outstanding and exercisable had exercise prices in the rangeof US$0.5787 to US$1.6789 and a weighted average unexpired life ofapproximately 3.7 years.

 

F - 30

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The Company accounts forshare-based compensation using the intrinsic value method prescribed by APBOpinion No. 25, under which no compensation cost is recognized as allstock options granted under the Management Options, the 2000 Stock Options, the2002 Employee Stock Options and the 2002 D&O Stock Options have exerciseprices at or above the fair market value of the underlying stock at the date ofgrant.

 

Pro forma informationregarding net income and earnings per share is required by SFAS No. 123,and has been determined as if the Company had accounted for its employee stockoptions under the fair value method of SFAS No. 123. The weighted averagefair value of stock options at date of grant of $0.93 per option for the yearended December 31, 2002, and $1.44 per option for the year ended December 31, 2004, wereestimated using the Black-Scholes option pricing model with the followingassumptions. There were no options granted during the year ended December 31,2003.

 
| ** **                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |     |       |
| Risk-free interest rate         |       | 2.88     | %          | —   |       | 4.48     | %          |
| Expected dividend yield         |       | 0        | %          | —   |       | 0        | %          |
| Expected option life            |       | 2.3 yea  | rs         | —   |       | 5.7 yea  | rs         |
| Expected stock price volatility |       | 208      | %          | —   |       | 177      | %          |

 

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

 

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

 

F - 31

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| ** **                                                                              | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                              | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                                    |       |             |       |             |       |             |       |
| Net income as reported                                                                  |       | 594              |       | 531              |       | 500              |       |
| Less: Stock compensation expense determined under  the fair value method, net of tax(1) |       | (27              | )          | (216             | )          | (507             | )          |
| Pro forma net income/(loss)                                                             |       | 567              |       | 315              |       | (7               | )          |
|                                                                                    |       |             |       |             |       |             |       |
| Income per share:                                                                       |       |             |       |             |       |             |       |
|                                                                                    |       |             |       |             |       |             |       |
| Basic, as reported                                                                      |       | US$              | 0.09       |             | US$        | 0.08             |       | US$ | 0.08 |   |
|                                                                                    |       |             |       |             |       |             |       |
| Diluted, as reported                                                                    |       | US$              | 0.06       |             | US$        | 0.08             |       | US$ | 0.08 |   |
|                                                                                    |       |             |       |             |       |             |       |   |   |   |
| Basic, pro forma                                                                        |       | US$              | 0.09       |             | US$        | 0.05             |       | US$ | (0.00 | ) |
|                                                                                    |       |             |       |             |       |             |       |   |   |   |
| Diluted, pro forma                                                                      |       | US$              | 0.06       |             | US$        | 0.05             |       | US$ | (0.00 | ) |

 

----

(1) For the years ended December 31, 2002 and 2003, the proforma stock compensation expense amounts have been adjusted to reflect lowercalculated fair values for employee stock options which resulted in a decreaseof approximately US$272,000 in the pro forma net loss for the year ended December 31,2002 and a decrease of approximately US$116,000 in the pro forma net income forthe year ended December 31, 2003. These adjustments were required as the restrictions on the employeestock options were not considered by the external valuer in prior years.

 

F - 32

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**15****           Pension plan**

 

Priorto December 1, 2000, the Group had only one defined contribution pensionplan for all its Hong Kong employees. Under this plan, all employees wereentitled to pension benefits equal to their own contributions plus 50% to 100%of individual fund account balances contributed by the Group, depending ontheir years of service with the Group. The Group was required to make specificcontributions at approximately 10% of the basic salaries of the employees to anindependent fund management company.

 

Withthe introduction of the Mandatory Provident Fund Scheme, a defined contributionscheme managed by an independent trustee on December 1, 2000, the Groupand its employees who joined the Group subsequently make monthly contributionsto the scheme at 5% of the employee’s cash income as defined under theMandatory Provident Fund legislation. Contributions of both the Group and itsemployees 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.

 

Asstipulated by the rules and regulations in the PRC, the Group contributesto state-sponsored retirement plans for its employees in Mainland China. TheGroup contributes approximately 7% (2003 and 2002 - 7%) of the basic salariesof its employees, and has no further obligations for the actual payment ofpension or post-retirement benefits beyond the annual contributions. Thestate-sponsored retirement plans are responsible for the entire pensionobligations payable to retired employees.

 

Duringthe years ended December 31, 2004, 2003 and 2002, the aggregatecontributions of the Group to the aforementioned pension plans and retirementbenefit schemes were approximately US$166,000, US$137,000 and US$131,000 respectively.

 

**16.          Riskfactor and Derivative Instruments**

 

Financial risk factors

 

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

 

(i)            Creditrisk

 

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

 

(ii)           Foreignexchange risk

 

The Group operates in Hong Kong, the PRC and tradeswith both local and overseas customers, and is exposed to foreign exchange riskarising from various currency exposures, primarily with respect to purchases in,Hong Kong dollar, Reminbi and Euro. Foreign exchange risk arises form committed and unmatched futurecommercial transactions, such as confirmed import purchase orders and salesorders, recognized assets and liabilities, and net investment in the PRC operations.  The Group uses derivative financialinstruments such as foreign exchange contracts to hedge certain foreigncurrency exposures.

 

The Group’s prevailing risk management policy is tohedge the net committed transactions (mainly sales and import purchases) ineach major currency.

 

F - 33

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F - 34

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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, 2004, the Company has foreign forward contractcommitments of approximately US$468,000 (2003 & 2002: Nil). The fair valueof this derivative instrument was approximately US$6,000 which was expensed inthe consolidated statement of income as it is not qualified as hedge accountingtreatment.

 

**17****           Relatedparty transactions**

 

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

 
| ** **                                                         | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|--------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                               |       |             |       |             |       |             |       |
| Sale of goods to                                                   |       |             |       |             |       |             |       |
| Eurotherm Limited                                                  |       | 27               |       | 43               |       | 33               |       |
| Armtison Limited                                                   |       | 1                |       | —           |       | —           |       |
|                                                               |       |             |       |             |       |             |       |
| Purchase of goods from                                             |       |             |       |             |       |             |       |
| - Eurotherm Limited                                                |       | 7,503            |       | 7,219            |       | 2,800            |       |
| - Armtison Limited                                                 |       | —           |       | 4                |       | 33               |       |
| - Action Instruments (China) Limited                               |       | 5                |       | 10               |       | 9                |       |
| - Euro Electron (Far East) Limited                                 |       | 4                |       | —           |       | —           |       |
|                                                               |       |             |       |             |       |             |       |
| Interest income on trade receivables earned from  Armtison Limited |       | 2                |       | 3                |       | 5                |       |
|                                                               |       |             |       |             |       |             |       |
| Rental income of office premises earned from  Eurotherm Limited    |       | 30               |       | 34               |       | 34               |       |
|                                                               |       |             |       |             |       |             |       |
| Rental expenses for office premises charged by  Armtison Limited   |       | 25               |       | 33               |       | 45               |       |
|                                                               |       |             |       |             |       |             |       |
|                                                               |       |             |       |             |       |             |       |
| Management fees charged by                                         |       |             |       |             |       |             |       |
| Eurotherm Limited                                                  |       | 29               |       | 29               |       | 27               |       |
| Patwin Inc.                                                        |       | 30               |       | 30               |       | 30               |       |
|                                                               |       |             |       |             |       |             |       |
| Management fees received from                                      |       |             |       |             |       |             |       |
| Pact Asia Pacific Ltd                                              |       | —           |       | 9                |       | 2                |       |
| Armtison Limited                                                   |       | 9                |       | —           |       | —           |       |

 

F - 35

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 (ii)                               Detailsof the amounts due to related companies are as follows:

 
| ** **                         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                         | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                               |       |             |       |             |       |
| Action Instruments (China) Limited |       | 1                |       | —           |       |
| Eurotherm Limited                  |       | 1,265            |       | 1,330            |       |
|                               |       | 1,266            |       | 1,330            |       |

 

The amounts due to related companies are trade innature, unsecured, non-interest bearing and are repayable in 2005.

 

Armtison Limited andAction Instruments (China) Limited are beneficially owned by Mr. T. C.Leung, Chief Executive Officer and Chairman of the Board of Directors. PatwinInc. 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, 2004,2003 and 2002.

 

(iii)          Asof December 31, 2003, prepayments and other current assets includedadvances to certain PRC employees of the Group, net of provision, ofapproximately US$261,000. The advances are provided to those PRC employees inorder for them to finance the operations of certain retail shops established inthe PRC by the employees to market the Group’s products. The advances areunsecured, bear interest at a nominal rate and have no fixed repayment terms. Duringthe years ended December 31, 2003, provisions in respect of therecoverability of such advances of US$45,000 were made by the Group. The Groupdoes not account for the related sales to these retail shops until the relatedinventories are sold to third parties.

 

Asat December 31, 2004, the Group has included the financial results of these retailshops with the application of FIN 46 “Consolidationof Variable Interest Entities”. All material intercompany balances andtransactions have been eliminated in consolidation.

 

F - 36

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**1****8****           Commitments and contingencies**

 

 (i)           Operatingleases

 

The Group has various operating lease agreements for office and industrialpremises. Rental expenses for the years ended December 31, 2004, 2003 and2002 were approximately US$257,000, US$139,000, and US$210,000, respectively. Future minimum rental payments as of December 31,2004, under agreements classified as operating leases with non-cancellableterms amounted to US$205,000 of which US$158,000 are payable in the year 2005and US$47,000 are payable in the year from 2006 to 2008.

 

 (ii)          Bankingfacilities

 

As of December 31, 2004, 2003 and 2002, 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$4,321,000 and US$4,320,000 respectively, of whichapproximately US$2,394,000, US$1,723,000 and US$762,000 was utilized.

 

**19.          Fairvalue of financial instruments**

 

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

 

**20           Segment information**

 

Thereis only one reporting segment in the Group and accordingly, no segmentinformation is presented in accordance with SFAS 131. The geographical analysisis as follows:

 

 (i)           Revenue

 

Geographical analysis of revenue by customer location is as follows:

 
| ** ** | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|       |       |             |       |             |       |             |       |
| Revenue -  |       |             |       |             |       |             |       |
| The PRC    |       | 25,245           |       | 20,194           |       | 16,635           |       |
| Hong Kong  |       | 6,820            |       | 7,092            |       | 6,787            |       |
| Others     |       | 217              |       | 156              |       | 75               |       |
|       |       | 32,282           |       | 27,442           |       | 23,497           |       |

 

F - 37

----

 

 (ii)          Long-livedassets (1)

 

Geographical analysis oflong-lived assets is as follows:

 
| ** ** | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|       |       |             |       |             |       |
| Hong Kong  |       | 968              |       | 1,107            |       |
| The PRC    |       | 798              |       | 742              |       |
|       |       | 1,766            |       | 1,849            |       |

 

----

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

 

F - 38

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 (iii)         Majorsuppliers

 

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

 
| ** **                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Eurotherm Limited                            |       | 29       | %          | 31       | %          | 15       | %          |
| Hioki E.E. Corp.                             |       | 15       | %          | 12       | %          | 15       | %          |
| Hach Company Inc.                            |       | 11       | %          | 8        | %          | 19       | %          |
| Lachat Instruments Inc.                      |       | 7        | %          | 3        | %          | 6        | %          |
| Wallace & Tiernan Pacific Pty. Ltd. |       | 4        | %          | 3        | %          | 7        | %          |
| ThermoQuest Corporation                      |       | 5        | %          | 3        | %          | 5        | %          |

 

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

 

F - 39

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