##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SMALL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report ............
 For the transition period from to
 Commission file number 000-29008
 CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION
  
  
  
  th
  Title of each class
    
    Name of each exchange on which registeredNone
    
    Not Applicable
  
  
   o þ
  o þ
   þ o
  o o þ
  o þ
  o þ




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##### Table of Contents



Introduction
    
    
    CTDC, Company, us or we refer to China Technology Development Group Corporation.
The term you refers to holders of our common stock.
    
    Hong Kong and the Government refer to the Hong Kong Special Administrative Region of
the Peoples Republic of China and its government, respectively.
    
    China and the Chinese government refer to the Peoples Republic of China and its government.
 
    
    All references to Renminbi, or Rmb
are to the legal currency of China, all references to
U.S. dollars, dollars, $ or US are to the legal currency of the United States and
all references to Hong Kong dollars or HK$ are to the legal currency of Hong Kong.
Any discrepancies in any table between totals and sums of the amounts listed are due to
rounding.
 Description of Business
  Recent major events
     1




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TABLE OF CONTENTS  PART IItem 1. Identity of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on the CompanyItem 4A. Unsolved Staff CommentsItem 5 Operating and Financial Review and ProspectsItem 6 Directors, Senior Management and EmployeesItem 7 Major Shareholders and Related Party TransactionsItem 8 Financial InformationItem 9 The Offer and ListingItem 10 Additional InformationItem 11 Quantitative and Qualitative Disclosures About Market RiskItem 12 Description of Securities Other than Equity SecuritiesPART IIItem 13 Default, Dividend Arrearages and DelinquenciesItem 14 Material Modifications to the Rights of Security Holders and Use of ProceedsItem 15 Controls and ProceduresItem 16A Audit Committee Financial ExpertItem 16B. Code of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions from the Listing Standards for Audit CommitteeItem 16E. Purchase of Equity Securities by the Issuer and Affiliated PurchasersItem 17 Financial StatementsItem 18 Financial StatementsItem 19 ExhibitsSIGNATURESEX-3.1 AMENDED MEMORANDUM AND ARTICLES OF ASSOCIATIONEX-10.1 AGREEMENT WITH IVORY CAPITAL ASIA LTD.EX-10.2 AGREEMENT WITH BEIJING HOLDINGS LTD.EX-10.3 OPTION AGREEMENTEX-10.4 SUPPLY OF GOODS AGREEMENT WITH CHINA NEW ERAEX-10.5 FRAMEWORK AGREEMENT WITH LEGENDEX-10.6 FRAMEWORK AGREEMENT WITH LEGENDSECEX-10.7 FRAMEWORK AGREEMENT WITH MR. HU LINFUEX-14.1 CODE OF ETHICSEX-21.1 LIST OF THE COMPANY'S SIGNIFICANT SUBSIDIARIESEX-31.1 CERTIFICATION OF CEO REQUIRED BY SEC. 302EX-31.2 CERTIFICATION OF CEO REQUIRED BY SEC. 302EX-31.3 CERTIFICATION OF CFO REQUIRED BY SEC. 302EX-32.1 CERTIFICATION OF CEO AND CFO REQUIRED BY SEC. 906    Table of Contents  
 PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 A. Selected financial data.
    2




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(Amounts in thousands, except per share data)Year
    
    Year
    
    Year
    
    Year
    
    Year
    
    YearEnded
    
    Ended
    
    Ended
    
    Ended
    
    Ended
    
    EndedDecember
    
    December
    
    December
    
    December
    
    December
    
    December31,
    
    31,
    
    31,
    
    31,
    
    31,
    
    31,2001
    
    2002
    
    2003
    
    2004
    
    2005
    
    2005Rmb(1)
    
    Rmb(1)
    
    Rmb(1)
    
    Rmb(1)
    
    Rmb(1)
    

US$(2)Consolidated Statement
of Operations Data:Operating
Loss
    
    
    (12,751
    )
    
    
    (15,105
    )
    
    
    (4,378
    )
    
    
    (10,779
    )
    
    
    (17,886
    )
    
    
    (2,215
    )Non-operating income
    
    
    2,555
    
    
    
    2,456
    
    
    
    2,310
    
    
    
    167
    
    
    
    276
    
    
    
    34Non-operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,628
    )
    
    
    (325
    )Loss from continuing
operations before
minority interests
    
    
    (10,196
    )
    
    
    (12,790
    )
    
    
    (2,198
    )
    
    
    (10,369
    )
    
    
    (19,956
    )
    
    
    (2,472
    )Discontinued operationsIncome/(loss) from
discontinued
operations before
income tax
    
    
    (610
    )
    
    
    (4,805
    )
    
    
    366
    
    
    
    254
    
    
    
    (288
    )
    
    
    (36
    )Net loss for the year
    
    
    (9,141
    )
    
    
    (15,446
    )
    
    
    (942
    )
    
    
    (10,115
    )
    
    
    (19,532
    )
    
    
    (2,420
    )Loss per share
    
    
    (1.32
    )
    
    
    (2.24
    )
    
    
    (0.14
    )
    
    
    (1.47
    )
    
    
    (2.67
    )
    
    
    (0.32
    )Loss per share from
continuing operations
    
    
    (1.23
    )
    
    
    (1.54
    )
    
    
    (0.19
    )
    
    
    (1.51
    )
    
    
    (2.63
    )
    
    
    (0.31
    )(Loss)/earnings per
share from
discontinued
operations
    
    
    (0.09
    )
    
    
    (0.70
    )
    
    
    0.05
    
    
    
    0.04
    
    
    
    (0.04
    )
    
    
    (0.01
    )
 3




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(Amounts in thousands, except per share data)Year
    
    Year
    
    Year
    
    Year
    
    Year
    
    YearEnded
    
    Ended
    
    Ended
    
    Ended
    
    Ended
    
    EndedDecember
    
    December
    
    December
    
    December
    
    December
    
    December31,
    
    31,
    
    31,
    
    31,
    
    31,
    
    31,2001
    
    2002
    
    2003
    
    2004
    
    2005
    
    2005Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    US$(2)Supplemental data
to Consolidated
Statements of
OperationsRevenues
    
    
    707
    
    
    
    5,658
    
    
    
    8,405
    
    
    
    2,720
    
    
    
    7,503
    
    
    
    930Cost of sales
    
    
    508
    
    
    
    2,986
    
    
    
    4,421
    
    
    
    1,394
    
    
    
    3,290
    
    
    
    408Gross Profit
    
    
    199
    
    
    
    2,672
    
    
    
    3,984
    
    
    
    1,326
    
    
    
    4,213
    
    
    
    522Consolidated
Balance Sheet Data:Total assets
    
    
    93,407
    
    
    
    55,208
    
    
    
    51,582
    
    
    
    39,355
    
    
    
    117,849
    
    
    
    15,273Total liabilities
    
    
    27,846
    
    
    
    7,818
    
    
    
    5,391
    
    
    
    6,501
    
    
    
    13,626
    
    
    
    1,689Shareholders equity
    
    
    62,522
    
    
    
    46,500
    
    
    
    46,191
    
    
    
    32,854
    
    
    
    98,708
    
    
    
    12,902
 
 (1)
    
    During the fiscal year ended December 31, 2005, we disposed
the service rendering operating segment. The operating result up to
the date of this disposal and the loss resulted from the disposal
were reported as discontinued operations. To conform with the
presentation of this year, the comparative operating results of the
disposed segment for the years ended December 31, 2001, 2002, 2003
and 2004 were consistently summarized into discontinued operations.(2)
    
    For the convenience of the reader, translation of amounts from Renminbi into United States
Dollars has been made at the noon buying rate in New York City for cable transfer in
foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York
on December 31, 2005 of Rmb 8.0702 = US$1.00. Exchange Rate Information
    4




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Average
    
    High
    
    Low
    
    Period-end(Rmb per U.S. $1.00)2001 (1)
    
    
    8.2770
    
    
    
    8.2786
    
    
    
    8.2676
    
    
    
    8.27662002 (1)
    
    
    8.2770
    
    
    
    8.2800
    
    
    
    8.2669
    
    
    
    8.28002003 (1)
    
    
    8.2770
    
    
    
    8.2800
    
    
    
    8.2765
    
    
    
    8.27692004 (1)
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.2764
    
    
    
    8.27652005 (1)
    
    
    8.1472
    
    
    
    8.2765
    
    
    
    8.0702
    
    
    
    8.0702November 2005
    
    
    8.0839
    
    
    
    8.0877
    
    
    
    8.0796
    
    
    
    8.0796December 2005
    
    
    8.0764
    
    
    
    8.0808
    
    
    
    8.0709
    
    
    
    8.0709January 2006 (2)
    
    
    8.0668
    
    
    
    8.0705
    
    
    
    8.0608
    
    
    
    8.0608February 2006 (2)
    
    
    8.0500
    
    
    
    8.0608
    
    
    
    8.0420
    
    
    
    8.0420March 2006 (2)
    
    
    8.0345
    
    
    
    8.0503
    
    
    
    8.0170
    
    
    
    8.0170April 2006 (2)
    
    
    8.0155
    
    
    
    8.0248
    
    
    
    8.0040
    
    
    
    8.0165May 2006 (2)
    
    
    8.0131
    
    
    
    8.0300
    
    
    
    8.0005
    
    
    
    8.0215June 30, 2006 (2)
    
    
    8.0042
    
    
    
    8.0225
    
    
    
    7.9943
    
    
    
    7.9943July 2006 (2)
    
    
    7.9897
    
    
    
    8.0018
    
    
    
    7.9690
    
    
    
    7.9690August 2006 (2)
    
    
    7.9722
    
    
    
    7.9538
    
    
    
    8.0000
    
    
    
    7.9538
 
 (1)
    
    Annual averages are calculated by averaging the rates on the last business day of each month
during the relevant period.(2)
    
    Monthly average are calculated by averaging the daily rates during the relevant period. B. Capitalization and indebtedness.
  C. Reasons for the offer and use of proceeds.
  D. Risk factors.
   5




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Forward Looking Statements
 Private Securities Litigation Reform Act of 1995
 
    
    our ability to achieve or sustain profitability in the rapidly changing Internet and nutraceutical market in which we
operate;
 
    
    our ability to successfully integrate acquired businesses, products and technologies;
 
    
    our ability to keep pace with the rapidly changing technology and products in the market we operate;
 
    
    our ability to achieve our future pricing strategies or policies;
 
    
    our ability to achieve our plans to expand our sales;
 
    
    our ability to achieve our plans to diversify our sources of revenues industry;
 
    
    our ability to respond to competition in the China market;
 
    
    our ability to maintain and protect our intellectual property.
  (a) Risks Associated with Our Business
 (1) We have limited operating history and evolving business model and strategy.
      6




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(2) We
have continued to incur operating losses and we cannot provide assurance that we can achieve or
sustain profitability.
  Year
    
    Operating loss(in thousands of Rmb)2001
    
    
    (12,751
    )2002
    
    
    (15,105
    )2003
    
    
    (4,378
    )2004
    
    
    (10,779
    )2005
    
    
    (17,886
    )
  -
    
    our ability to obtain timely and accurate user sales information;-
    
    the effectiveness of our distribution channel;-
    
    product upgrading or updating progress by us or our competitors;-
    
    the mix of products sold;-
    
    our competitors price changes;-
    
    our research and development and marketing abilities;-
    
    our acquisition costs of new technology or businesses;-
    
    employee wage pressure arising from increased competition for skilled employees and increased
governmental staff welfare regulations;-
    
    extraordinary costs incurred for acquisitions or any reductions in work force, if any;
  (3) We may not be competitive and increased competition could seriously harm our business.
  
    
    Longer operating history;
    
    Greater financial, technical, marketing, sales and other resources;
    
    Greater profitability in their operations;
    
    Superior product functionality in certain areas;
 7




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
    
    Greater name recognition;
    
    A broader range of products to offer; and
    
    A larger base of customers.
  (4) We may not successfully integrate acquired businesses, products and technologies.
   
    
    the difficulties of integrating, assimilating and managing the operations, technologies, intellectual property,
products and personnel of the acquired business; including the implementation of controls, procedures, and policies
appropriate for a listed company at the acquired business that prior to acquisition had lacked such controls, policies
and procedures, particularly if the acquired business will exist as a separate line of business of us or as a
subsidiary not wholly owned by us.
 
    
    the diversion of management attention to business concerns of the acquired business from that of our existing operation.
 
    
    declining employee morale and retention issues for employees in the acquired business.
 
    
    the risk of litigation by terminated employees and contractors.
 
    
    our lack of familiarly with other conditions and business practices of the acquired business.
  (5) We
have experienced deficiencies in our ability to integrate a newly
acquired business.
  PricewaterhouseCoopers,
 8




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(6) We may face risks in retaining current employees.
  (7) We are subject to risks of excessive reliance on certain significant customers and risks of
non-recurring contracts and cost controls.
    9




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(b)
    
    On February 10, 2005, we had entered into a two years
contract with the Legendsec (Beijing) Limited (Legendsec)
at exactly the same terms of the Legend Group;
 (c)
    
    We acquired Zhejiang Innoessen,
a 71.43% subsidiary of CNT in October 2005 which had an existing long term contract with the
China New Era Health Industry Group Limited (New Era).
The sales made by our Nutraceutical Operations to New Era in the
2004 and 2005 Period amounted to Rmb1.32 million and Rmb2.86 million,
representing respectively 42.1% and 54.7% of the total revenues of our
Nutraceutical Operations.
  10




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(8) We may not be able to keep pace with the rapid technological changes in the market, new
competition, and new product developments.
  -
    
    provide a broad range of network security, network management software products and
nutraceutical products;
 -
    
    timely develop and introduce new products with technological advances;
 -
    
    respond promptly to new customer requirements;-
    
    comply promptly with evolving industry standards;-
    
    provide upgrades and updates to users frequently at the lowest costs; and
 -
    
    maintain compatibility of our products with popular operating systems and develop products
that are compatible with new or otherwise emerging operating systems.
    (9) We do not intend to pay dividends.
  (10) We are subject to risk of computer hackers attacks.
  11




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(11) Our
subsidiaries are subject to termination.
  (12) We
may not be able to adequately control the business of our
subsidiaries. We have experienced integration issues with one of our
subsidiaries.
   (13) We
may fail to consummate the settlement with the Anji Buyers.
  (14) We may not be able to successfully implement our growth strategies.
  12




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(15) We may face difficulties in implementing our acquisition strategy, including identifying
suitable opportunities and integrating them with our existing operations.
   (16) Unauthorized use of our intellectual property by third parties, and the expenses incurred in
protecting our intellectual property rights, may adversely affect our business.
   (17) Because there is limited business insurance coverage in China, any business disruption or
litigation we experience might result in our incurring substantial costs and the diversion of
resources.
 13




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(18) We are subject to risks of acquisition of new business, products and technologies.
    (19) We may need additional financing.
  (b) Risks Associated with China
  (1) We are subject to risks relating to operating a business in China.
 We may face foreign competition as a result of Chinas entry into the WTO.
 We may experience foreign currency losses due to fluctuations in exchange rates.
    Our operations and assets in China are subject to significant political and economic uncertainties.
 We may have limited legal recourse under Chinese law if disputes arise under our contracts with
third parties.
 The recurrence of Severe Acute Respiratory Syndrome (SARS) in China, or similar adverse public
health developments, such as Bird Flu (Avian Influenza), may materially and adversely affect our
business and operating results.
 14




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(2) Our business may be adversely affected by Chinese government regulations.
 Internet Security
    Nutraceutical Business
     -
    
    levying fines;-
    
    revoking our business license;-
    
    requiring us to restructure our ownership structure or operations; and-
    
    requiring us to discontinue any portion or all of our business.
 15




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(c) Risks Related to Our Technology and Product Research and Development
 (1) Inspection of Manufacturing Facilities
  16




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(2) Possible Claims Relating to Products
  (3) We must respond quickly and effectively to new research and developments.
  (d) Risks Associated with Investing in our common stock.
  (1) Our stock price has been and may continue to be volatile.
    (2) Our stock may be delisted from trading on the NASDAQ Stock Market
   17




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(3) The sale or availability for sale of substantial amounts of our common stock could adversely
affect their market price.
  (4) Rights of Shareholders under British Virgin Islands Law May Be Less Than Those of Shareholders
in U.S. Jurisdictions.
    (5) Compliance with requirements under Section 404 of the Sarbanes-Oxley Act of 2002
    
 Item 4. Information on the Company
 A. History and development of the Company.
  18




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19




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B. Business overview.
  Market Overview
 Network Security Business:
  Nutraceutical Business:
    Company Overview
  20




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,
 Capital Expenditures
  Seasonal sales
  21




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Source of raw materials
   Description of Products and Services
 Network Security Business:
 We focus on network security solutions and related products
   Nutraceutical Business:
    Business Strategy
  Expanding distribution channels by cooperating with market leaders
 22




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Strengthen the management team
  Acquiring
companies with potential and expansion of product applicability
  .
 C. Organizational structure.
   Country of
    
    
    OwnershipsName
    
    Incorporation
    
    
    Interests
    
    Direct ParentBHL Networks
Technology Co Ltd
(BHLHK)
    
    Hong Kong
    
    
    100
    %
    
    China Technology
Development Group
CorporationJingle Technology
Co Ltd (Jingle)
    
    BVI
    
    
    100
    %
    
    China Technology
Development Group
CorporationBHL Networks
Technology Co Ltd
(BHLNet)
    
    Cayman Islands
    
    
    100
    %
    
    JingleBeijing BHL
Networks Technology
Co Ltd (BBHL)
    
    China
    
    
    76
    %
    
    BHLNetChina Natures
Technology Inc.
(CNT)
    
    BVI
    
    
    100
    %
    
    China Technology
Development Group
Corporation
 23




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Country of
    
    
    OwnershipsName
    
    Incorporation
    
    
    Interests
    
    Direct ParentZhejiang University
(Hangzhou)
Innoessen
Bio-technology Inc.
(Zhejiang
Innoessen)
    
    China
    
    
    71.43
    %
    
    CNTShenzhen Innoessen
Bio-Tech Inc.
(Shenzhen
Innoessen)
    
    China
    
    
    100
    %
    
    CNTAnji Science
Bio-Product Inc.
(Anji Bio)
    
    China
    
    
    93.67
    %
    
    Zhejiang InnoessenJianou Yingshi
Food Technology Ltd
(Jianou)
    
    China
    
    
    51
    %
    
    Zhejiang Innoessen
 24




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25




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D. Property, plant and equipment.
         
 Item 4A. Unsolved Staff Comments
  
 Item 5 Operating and Financial Review and Prospects
 MANAGEMENTS DISCUSSION AND ANALYSIS
    26




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Revenue
recognition.
 Impairment.
   27




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Recent accounting pronouncements.
     28




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A. Results of Operations
  (Amounts in thousands, Rmb)2003
    
    2004
    
    2005(Note 1)Percentage
    
    
    
    
    
    Percentage
    
    
    
    
    
    Percentageof Net
    
    
    
    
    
    of Net
    
    
    
    
    
    of NetAmount
    
    sales
    
    Amount
    
    sales
    
    Amount
    
    salesNet sales
    
    
    8,405
    
    
    
    100
    %
    
    
    2,720
    
    
    
    100
    %
    
    
    7,503
    
    
    
    100
    %Cost of sales
    
    
    4,421
    
    
    
    52.6
    %
    
    
    1,394
    
    
    
    51.3
    %
    
    
    3,290
    
    
    
    43.8
    %Gross profit
    
    
    3,984
    
    
    
    47.4
    %
    
    
    1,326
    
    
    
    48.7
    %
    
    
    4,213
    
    
    
    56.2
    %Selling, general and
administrative
expenses
    
    
    8,362
    
    
    
    99.5
    %
    
    
    7,768
    
    
    
    285.6
    %
    
    
    21,971
    
    
    
    292.8
    %Impairment of
goodwill
    
    
    
    
    
    
    
    
    
    
    4,337
    
    
    
    159.4
    %
    
    
    
    
    
    
    Bad debt expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (128
    )
    
    
    1.8
    %Operating loss
    
    
    (4,378
    )
    
    
    
    
    
    
    (10,779
    )
    
    
    
    
    
    
    (17,886
    )Interest income
    
    
    119
    
    
    
    
    
    
    
    243
    
    
    
    
    
    
    
    302Finance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )Non-operating income
    
    
    2,310
    
    
    
    
    
    
    
    167
    
    
    
    
    
    
    
    276Non-operating
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income tax provision
    
    
    (249
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )Minority interests 
continuing
operations
    
    
    890
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    712Loss from continuing
operations
    
    
    (1,308
    )
    
    
    
    
    
    
    (10,369
    )
    
    
    
    
    
    
    (19,244
    )Discontinued
operations
Income/(loss) from
discontinued
operations
    
    
    366
    
    
    
    
    
    
    
    254
    
    
    
    
    
    
    
    (288
    )Net loss for the year
    
    
    (942
    )
    
    
    
    
    
    
    (10,115
    )
    
    
    
    
    
    
    (19,532
    )
       29




---



##### Table of Contents



Year ended December 31, 2005 compared to year ended December 31, 2004.
 Revenues.
 Cost
of sales.
 Gross
profit.
 Selling, general and administrative expenses.
  (1)
    
    salaries and benefits increased by Rmb6.75 million, or
215.1%, from Rmb3.14 million of the
2004 Period to Rmb9.89 million of the 2005 Period. The salaries
and benefits of the CNT group incurred since acquired amounted to
Rmb0.19 million. Excluding this, the salaries
and benefits of our IT operations and Corporate Office were increased
by Rmb6.56 million, or
208.9%, from Rmb3.14 million of the 2004 Period to Rmb9.70 million of the 2005 Period. The
increase was due primarily to significant increase in headcounts during the 2005 Period.
The increase could be further segmented as follows:
   30




---



##### Table of Contents



(2)
    
    Rental charges increased by Rmb0.65 million, or 160.4%,
from Rmb0.40 million of the 2004
Period to Rmb1.05 million of the 2005 Period. The rental charges incurred by the CNT group in
the 2005 Period amounted to Rmb0.10 million. Excluding this, the rental charge was increased
by Rmb0.55 million, or 136.4%, from Rmb0.41 million of the
2004 Period to Rmb0.95 million of
the 2005 Period. The increase was mainly caused by:
 (a)
    
    a new office was rented in May 2005 in Hong Kong to accommodate the increase in
headcount of our Corporate Office, thus leading to additional rental charges equal to Rmb0.3 million
during the 2005 Period, compared to free use of office of the Beijing Holdings by
the Company in the 2004 Period.; and(b)
    
    additional office space was rented for our IT Operations in June 2006,
leading to increased rental expenses of Rmb0.25 million in the 2005 Period.
 (3)
    
    Audit fees increased by Rmb1.16 million, or 190.0%, from Rmb0.61 million of the 2004
Period to Rmb1.77 million of the 2005 Period, due primarily to increased audit work caused
by increased activities of the Company.
 (4)
    
    Legal and professional fees increased by
Rmb3.58 million, or 334.6%, from Rmb1.07
million of the 2004 Period to Rmb4.65 million of the 2005 Period. The significant increase
was mainly due to:
 (a)
    
    Fees of Rmb0.84 million were incurred in the 2005
Period in connection with the Companys pre-acquisition
assessment of the CNT group. These fees included Rmb0.52 million for valuation,
Rmb0.5 million for legal issues and Rmb0.34 million for independent audit;(b)
    
    A retainer fee of Rmb1.94 million was incurred in the
2005 Period in consideration for the non-exclusive advisory services performed by Ivory Capital Asia
Pte. Ltd. to assist the Company in raising up to US$20 million;(c)
    
    A fee of Rmb0.69 million was accounted for in the 2005
Period as the fair value of the
options granted to certain consultants recruited by the Company to provide
capital market advisory services to the Company;(d)
    
    A consultants fee of Rmb0.60 million was incurred by BBHL relating
to various sub-contractors for testing and post-sale maintenance services of the
Security Gate.
 (5)
    
    Traveling and entertainment expenses increased by
Rmb0.40 million, or 95.3%, from Rmb
0.43 million of the 2004 Period to Rmb0.83 million of the 2005 Period. The CNT group
contributed Rmb0.11 million of the traveling and entertainment expenses of the 2005 Period.
Excluding this, traveling expenses of our IT Operations and Corporate
Office were increased
by Rmb0.29 million, or 68.5%, from Rmb 0.43 million of the
2004 Period to Rmb0.72 million of
the 2005 Period, due primarily to more frequent travel for acquisition of the CNT group and
promotion of our business;
 (6)
    
    Amortization charge of intangible assets of Rmb0.22 million was incurred in the 2005
Period, being the amortization of the extraction of bamboo flavonoids and its application
patents of the CNT group incurred for the period from November 1 to December 31, 2005.
 (7)
    
    Depreciation charge was increased by Rmb0.3 million, or
375.0%, from Rmb0.08 million of the
2004 Period to Rmb0.38 million of the 2005 Period, due primarily to increased fixed assets as
a result of the acquisition of the CNT group.
 31




---



##### Table of Contents



Bad
debt.
 Non-operating
income.
 Non-operating
expense.
 Loss from discontinued operations.
 Net
loss.
 Year ended December 31, 2004 compared to year ended December 31, 2003.
 Revenues.
 Cost of sales.
 Gross
profit.
 Selling, general and administrative expenses.
  (1)
    
    Amortization of intangible assets and software development costs of our IT Operations
decreased by Rmb1.09 million, or 100%. No amortization of intangible assets and capitalized
software development cost were made for the 2004 Period as it had been fully amortized in the
2003 Period.(2)
    
    Depreciation charge decreased by Rmb0.4 million, or 84.2% from Rmb0.48 million of the 2003
Period to Rmb 0.08 million of the 2004 Period because most of the fixed assets had been fully
depreciated in prior year.
 32




---



##### Table of Contents



(3)
    
    Legal and professional fee increased by Rmb0.3 million, or 38.2%, from Rmb0.77 million of the
2003 Period to Rmb1.07 million of the 2004 Period, which was mainly due to increase in legal
services incurred by our Corporate Office for our proposed registration of the Companys 2000
stock option plan with the SEC and providing advice in respect of restrictions applicable to
exercise of options.
 (4)
    
    Insurance expenses of our Corporate Office increased by Rmb 0.42 million, or 165.7, from Rmb
0.25 million of the 2003 Period to Rmb0.67 million of the 2004 Period. The increase was mainly
due to the increased amount of our directors and officers insurance.
 (5)
    
    Audit fee increased by Rmb0.13 million, or 27.9%, from Rmb0.48 million of the 2003 Period to
Rmb0.61 million of the 2004 Period, due primarily to the increased workloads of our
independent registered public accounting firm.
 Impairment
of goodwill.
 Non-operating income.
 (1)
    
    decrease of Rmb1.9 million, or 95%, from Rmb2 million of the 2003 Period to Rmb0.1 million of
the 2004 Period, of realized gain on available-for-sale securities;
 (2)
    
    decrease of Rmb0.23 million, or 77.3%, from Rmb0.30 million of the 2003 Period to Rmb 0.07
million of the 2004 Period, of dividend income from marketable securities.
 Income from
discontinued operations
  Taxation
   33




---



##### Table of Contents



B. Liquidity and capital resources
 Cash flows and working capital
      Capital resources
    34




---



##### Table of Contents



C. Research and development, patents and licenses, etc.
 Network Security Business:
  Nutraceutical Business:
     Preparation method of flavonoid concentrate and powder from bamboo leaves.
  A health beer fortified with bamboo leaf flavonoids.
  35




---



##### Table of Contents



The composition, preparation and application of total triterpenoid sapogenins isolated from bamboo.
  Application of total flavonoids of bamboo leaf as an anti-aging and skin-care factor in cosmetics.
  Application of total flavonoids of bamboo leaf as preventive medicine and functional foods against
prostate disease.
  Bamboo leaf antioxidant and its use.
  Application of bamboo leaf extract as acrylamide inhibitor in heat-treated foods.
  Preparation method and application of phytosterols extracted from bamboo shoot.
  36




---



##### Table of Contents



Preparation method and application of amino acids and peptides extracted from bamboo shoots.
  Preparation method and application of high quality non-soluble plant dietary fiber micro powder
extracted from bamboo shoots.
  D. Trend Information
  E. Off-balance Sheet Arrangements
  F. Tabular disclosure of contractual obligations.
  Payments
due by periodLess than
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1 to 3 years
    
    
    3-5 years
    
    
    5 yearsRmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    RmbShort-term
borrowings
    
    
    3,569
    
    
    
    3,569
    
    
    
    
    
    
    
    
    
    
    
    Operating
leases
    
    
    948
    
    
    
    615
    
    
    
    333
    
    
    
    
    
    
    
    Total
contractual cash obligations
    
    
    4,517
    
    
    
    4,184
    
    
    
    333
    
    
    
    
    
    
    
    
  37




---



##### Table of Contents



(a)
    
    The lease agreement of our Corporate Office (situated in Hong
Kong) commenced on May 27, 2005, and shall continue for a period of two
years, at a monthly rent of Rmb 33,000 As of December 31, 2005, the future minimum lease payments
under this non-cancelable operating lease amounted to Rmb 358,000 and
Rmb 158,000 for years ended
December 31, 2006 and 2007 respectively.
 (b)
    
    The lease agreement of staff quarters (situated in Hong Kong)
for managers of our Corporate Office commenced on
December 11, 2005, and shall continue for a period of two years, at a monthly rent
of Rmb 7,000. As of December 31,
2005, the future minimum lease payments under this non-cancelable operating lease amounted
to Rmb 86,000 and Rmb 81,000 for years ended December 31, 2006 and 2007 respectively.
 (c)
    
    The lease agreement of staff quarters (situated in Hong Kong) for Alan Li, the executive director and Co-Chief
Executive Officer of the Company, commenced on December 8, 2005,
and shall continue for a period of two years,
at a monthly rent of Rmb 8,000. As of December 31, 2005, the future minimum lease payments under
this non-cancelable operating lease amounted to Rmb 100,000 and Rmb
93,000 for years ended December
31, 2006 and 2007 respectively.
 (d)
    
    The lease agreement for the office of Shenzhen Innoessen
(situated in Shenzhen, China) commenced on March 23, 2005, and
shall continue for
a period of one year, at a monthly rent of Rmb 24,000. As of December 31, 2005, the future minimum
lease payments under this non-cancelable operating lease amounted to
Rmb 71,000 for year ended
December 31, 2006.
   Contingencies
 G. Safe Harbor.
   
 Item 6 Directors, Senior Management and Employees
 A. Directors and senior management.
  38




---



##### Table of Contents



Name
    
    Age
    
    Positions with the CompanyChangshan Zhao
    
    41
    
    Chairman of the Board and Executive DirectorXu Qian
    
    42
    
    Chief Executive Officer and Executive DirectorAlan Li
    
    38
    
    Co-Chief Executive Officer (Greater China) and Executive DirectorJu Zhang
    
    44
    
    Executive DirectorMichael Siu
    
    37
    
    Executive Director, Chief Financial Officer and SecretaryPeter Fu (1)(2)
    
    51
    
    Independent DirectorL C Wan (1)(2)
    
    45
    
    Independent DirectorMeng Wan (3)
    
    42
    
    Independent DirectorYezhong Ni (1)(2)
    
    36
    
    Independent DirectorWeidong Wang (3)
    
    39
    
    Independent DirectorXinping Shi (3)
    
    48
    
    Independent DirectorAaron Zhu *
    
    38
    
    Co-Chief Executive Officer (International)Zhenwei Lu
    
    35
    
    Chief Investment Officer
 
 (1)
    
    Member of the Audit Committee(2)
    
    Member of the Compensation Committee(3)
    
    Member of the Nominating Committee*
    
    Ceased to be Co-Chief Executive Officer on February 21, 2006 Information about Directors and Officers
  Mr. Changshan Zhao
 Mr. Xu Qian
 39




---



##### Table of Contents



Mr. Alan Li
 Mr. Ju Zhang
 Michael Siu
 Peter Fu
 L C Wan
 Meng Wan
 40




---



##### Table of Contents



Yezhong Ni
 Weidong Wang
 Xinping Shi
 Zhenwei Lu .
   41




---



##### Table of Contents



Audit Committee.
   Compensation Committee.
 Nominating Committee.
 B. Compensation.
   Compensation paid(Amounts in thousand, Rmb)Name
    
    Management position held
    
    2005
    
    2004Changshan Zhao
    
    Chairman
    
    
    405
    
    
    Xu Qian
    
    Chief Executive Officer
    
    
    315
    
    
    Alan Li
    
    Co-Chief Executive
Officer (Greater China)
    
    
    303
    
    
    Michael Siu
    
    Chief Financial Officer
and Secretary
    
    
    487
    
    
    
    270
 42




---



##### Table of Contents



C. Board practices.
   D. Employees.
   2005
    
    2004Corporate administration
    
    
    18
    
    
    
    9Finance
    
    
    8
    
    
    
    3Research and developments
    
    
    7
    
    
    
    Technology
    
    
    43
    
    
    
    46Sales and services
    
    
    24
    
    
    
    8Workers
    
    
    30
    
    
    
    Total
    
    
    130
    
    
    
    66
  E. Share ownership.
  43




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##### Table of Contents



ExerciseNumber
    
    per optionName
    
    Title/Office
    
    of options
    
    (US$)
    
    Expiration DateChangshan Zhao
    
    Chairman and
Executive Director
    
    
    50,000
    
    
    
    1.15
    
    
    December 28, 2009 (1)45,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)Xu Qian
    
    Chief Executive
Officer and
Executive Director
    
    
    50,000
    
    
    
    1.15
    
    
    December 28, 2009 (1)25,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)Alan Li
    
    Co-Chief Executive
Officer and
Executive Director
    
    
    75,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)Michael Siu
    
    Chief Financial
Officer, Secretary
and Executive
Director
    
    
    40,000
    
    
    
    1.15
    
    
    December 28, 2009 (1)15,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)Ju Zhang
    
    Executive Director
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)Peter Fu
    
    Independent Director
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)L C Wan
    
    Independent Director
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)Meng Wan
    
    Independent Director
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)Yezhong Ni
    
    Independent Director
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)Weidong Wang
    
    Independent Director
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)Xinping Shi
    
    Independent Director
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)Zhenwei Lu
    
    Chief Investment
Officer
    
    
    40,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)
 
 (1)
    
    These options were granted under the Companys 1996 Stock Option Plan. These options were
granted pursuant to a board resolution passed on December 28, 1999 (the Resolution) and are
fully vested as of December 31, 2005. Pursuant to the Resolution, the persons holding the
position of Chairman and Chief Executive Officer were each granted 50,000 options. Unless the
options were exercised during their service period with the Company, the remaining unexercised
options can be succeeded by the newly appointed persons holding these positions. Mr. Xiaohong
Li and Mr. Xinhao Jiang had resigned on February 8, 2005 and March 9, 2005 respectively. They
had not exercised any of the above options granted and so Mr. Zhao Changshan and Mr. Jeff
Qian, respectively the newly appointed Chairman and Chief Executive Officer, succeeded all
granted options of their respective positions.(2)
    
    These options were granted under the Companys 2000 Stock Option Plan. These options were
granted pursuant to a board resolution passed on September 21, 2005 and are fully vested as of
December 31, 2005. 44




---



##### Table of Contents



Stock Option Plans
   1996 Stock Option Plan
 45




---



##### Table of Contents



provided
  provided
  provided, however,
    provided, however,
  provided, however,
 46




---



##### Table of Contents



provided, however,
 47




---



##### Table of Contents



ab
initio
  2000 Stock Option Plan
        48




---



##### Table of Contents



49




---



##### Table of Contents



2005 Stock Option Plan
        50




---



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51




---



##### Table of Contents



Item 7 Major Shareholders and Related Party Transactions
 A. Major shareholders.
  52




---



##### Table of Contents



Shares of common stockPrincipal Stockholder
    
    beneficially owned (1)
    
    Percent of classBeijing Holdings of Room 4301,
Central Plaza, 18 Harbour Road,
Wanchai, Hong Kong
    
    
    7,072,882
    (2)
    
    
    62.73
    %China Internet Technology Co.,
Ltd. of c/o Room 2413-18, 24/F.,
Shui On Centre, 8 Harbour Road,
Wanchai, Hong Kong
    
    
    1,186,441
    
    
    
    10.52
    %Great Legend Internet
Technology and Service Co., Ltd.
of c/o Room 2413-18, 24/F., Shui
On Centre, 8 Harbour Road,
Wanchai, Hong Kong
    
    
    508,474
    
    
    
    4.51
    %Changshan Zhao of c/o Room
4301, Central Plaza, 18 Harbour
Road, Wanchai, Hong Kong
    
    
    0(3)(4
    )(5)
    
    
    *Xu Qian of c/o Room
4301, Central Plaza, 18 Harbour Road,
Wanchai, Hong Kong
    
    
    0(3)(4
    )(5)
    
    
    *Ju Zhang of c/o Room 2413,
Shui On Centre, 8 Harbour Road, 
Wanchai, Hong Kong
    
    
    0(4
    )(5)
    
    
    *Michael Siu of c/o Room 2413,
Shui On Centre, 8 Harbour Road,
Wanchai, Hong Kong
    
    
    0(4
    )(5)
    
    
    *Peter Fu of c/o Room 2413, Shui
On Centre, 8 Harbour Road,
Wanchai, Hong Kong
    
    
    0(4
    )(5)
    
    
    *L C Wan of c/o Room 2413, 
Shui On Centre, 8 Harbour Road, 
Wanchai, Hong Kong
    
    
    0(4
    )(5)
    
    
    *Meng Wan of c/o Room 2413,
Shui On Centre, 8 Harbour Road,
Wanchai, Hong Kong
    
    
    0(4
    )(5)
    
    
    *Yezhong Ni of c/o Room
2413, Shui On Centre, 8 Harbour Road,
 Wanchai,
Hong Kong
    
    
    0(4
    )(5)
    
    
    *Weidong Wang of c/o Room 
2413, Shui On Centre, 8 Harbour Road,
Wanchai, Hong Kong
    
    
    0(4
    )(5)
    
    
    *Xinping Shi c/o Room 2413, Shui
On Centre, 8 Harbour Road,
Wanchai, Hong Kong
    
    
    0(4
    )(5)
    
    
    *Zhenwei Lu of c/o Room 2413,
Shui On Centre, 8 Harbour Road,
Wanchai, Hong Kong
    
    
    0(4
    )(5)
    
    
    *All officers and directors as a
group (twelve persons)
    
    
    8,767,797(2)(3)(4
    )(5)
    
    
    77.76
    %
 53




---



##### Table of Contents



*
    
    less than 1%.(1)
    
    Unless otherwise noted, all persons named in the table have sole voting and investment power
with respect to all shares of common stock beneficially owned by them.(2)
    
    Included in the 7,072,882 shares owned by Beijing Holdings are 974,576 shares and 849,576
shares owned by CMEC Ceramics Holdings Limited (CMEC) and Perfect Capital Holdings Limited
(Perfect Capital) respectively. CMEC was previously owned by CMEC-GE Capital China
Industrial Holding Limited. Pursuant to a sale and purchase agreement date June 30, 2000,
Beijing Holdings acquired the entire interest of CMEC. Pursuant to another sale and purchase
agreement dated May 30, 2002, Beijing Holdings, through Perfect capital, a 100% subsidiary,
acquired the entire shares of the Company held by Oriental Patron China Investment Limited, an
initial shareholder of the Company.(3)
    
    Mr. Changshan Zhao, Chairman of the Board, and
Mr. Xu Qian, our Chief Executive Officer, are respectively, the General Manager and Assistant General Manager of Beijing Holdings and
therefore they may be deemed to beneficially own the shares of Common Stock owned by Beijing
Holdings. In addition to them, the Beijing Enterprises Group Corporation Limited, the sole
shareholder of Beijing Holdings, may be deemed to beneficially own the shares of Common Stock
owned by Beijing Holdings.(4)
    
    Prior to the establishment of the Companys nominating committee on July 28, 2005, it is our
practice to include two candidates recommended by Beijing Holdings in the list of candidates
of directors eligible for election in the our annual shareholders
meeting, as the Companys intention to capitalize on the specific
position of our major shareholder in promoting our business in China. In the Companys 2005
Annual Shareholders Meeting, however, all qualified candidates were selected by our nominating
committee based on the candidates experience and capability and this practice no longer
existed. Mr. Changshan Zhao and Mr. Xu Qian were selected by the nominating committee as
candidates as their senior positions in Beijing Holdings will enhance closer
involvement of Beijing Holdings in the future development of the Company.(5)
    
    Holds options which are not currently exercisable or which
vest within 60 days of the August 31,
2006.  B. Related party transactions.
  (a)
    
    Transactions with related parties
 Year ended December 31,2003
    
    2004
    
    2005Rmb
    
    Rmb
    
    RmbTransactions
with related partiesDisposal
of Zhuhai branch of BBHL to BEDC (Note a)
    
    
    
    
    
    
    
    1,300Net operating cash outflows of Zhuhai branch reimbursed. (Note a)
    
    
    
    
    
    
    
    (1,300
    )Acquisition
of CNT from Beijing Holdings by issuance of 2,233,800 new shares at US$2.41 per share and     2,146,200 new shares at US$2.1 per share respectively (Note b)
    
    
    
    
    
    
    
    79,928Disposal
of available-for-sale securities to Beijing Holdings (Note c)
    
    
    
    
    
    
    
    2,167
 54




---



##### Table of Contents



Note(a)
    
    On March 31, 2005 BBHL entered into an agreement with BEDC, the sole shareholder of China Internet Technology Company
Limited (China Internet), the then 17.21% shareholder of the Company, to sell its Zhuhai branch for a consideration of Rmb 1.3 million.
The consideration was determined based on the operating cashflow generated by Zhuhai branch from May 1, 2002 to March 31, 2005, the period of which
Zhuhai branch was managed and controlled by the Company. Upon disposal, the Company agreed to reimburse the same aggregated net operating cash outflows of
Rmb 1.3 million to the Zhuhai branch as part of the conditions of disposal. The consideration of the transaction is zero as the Company received Rmb1.3 million
from BEDC and at the same time the Company transferred Rmb1.3 million to Zhuhai branch. The transaction was closed on March 31, 2005 and resulted in a disposal loss of Rmb0.51 million.(b)
    
    On September 13, 2005, the Company entered into agreements with Beijing Holdings, the then 47.18% shareholder
 of the Company, to (i) Acquire a 51% equity interest in CNT in
exchange for 2,233,800 shares of the Company and (ii) obtain an
option to acquire the remaining 49% equity interest in CNT in
exchange for 2,146,200 shares of the Company. Effective October 31,
2005, the acquisition of 51% of CNT was completed and effective
December 22, 2005, the option was also exercised to acquire the
remaining 49% equity interest in CNT.(c)
    
    On November 17 2005, the Company entered into a sale and purchase agreement with Beijing Holding
to dispose of all of the 6,312,000 shares invested in Xian
Haitian Antenna Company Limited (Xian Haitian) then
holding the Company for a
cash consideration of Rmb 2.17 million. These shares were
previously held as available-for-sale securities by the Company and
represented less than 1% of the total outstanding shares of
Xian Haitian (approximately 0.975%). The sale consideration was determined by the quoted closing stock
price of Xian Haitian at HK$0.33 per share at the date of the agreement. Xian Haitian is a
company engaged in research, development, production, sales, installation, services and
wireless communication network optimization of base station antennas and is also listed on the
Growth Enterprise Market of the Hong Kong Stock Exchange. The shares were acquired upon the
initial public offering (IPO) of Xian Haitian. Its stock price dropped continuously after
the IPO due to poorer operating results as a result of the keen competition in the market.
Beijing Holdings is also a passive investor of Xian Haitian who owns approximately 8% equity
interest of Xian Haitian after its IPO. Beijing Holdings
currently nominates one non-executive director to the board of
Xian Haitian. The Company does not currently participate in the
management or operations of Xian Haitian.
 (b)
    
    Balances with related partiesAs of December 31, 2004 and 2005, the balances with related parties were as follows:-
 December 312004
    
    2005(Amounts in thousand, Rmb)Balances with related partiesFunds held
by Beijing Holdings, the ultimate holding company, for security
investment purposes (Note d)
    
    
    6,529
    
    
    
    Proceeds receivable from Beijing Holdings, the ultimate holding company, in
respect of sale of shares of Xian Haitian Antenna
(Note e)
    
    
    
    
    
    
    2,167Funds held by Beijing Holdings Investment
Management Center, a fellow subsidiary, for security investment purposes
(Note f)
    
    
    3,388
    
    
    
    Funds held
by China Biotech Holdings Limited, a related company with common
director, for potential
acquisition of technology and business in China
(Note g)
    
    
    
    
    
    
    6,262Due from
Beijing Investments (BVI) Limited, a fellow subsidiary, for
security investment purposes (Note h)
    
    
    164
    
    
    
    Due from
Great Legend Internet Technology and Service Co. Ltd., a shareholder,
for expenses paid on behalf
    
    
    30
    
    
    
    Due to BEDC,
the holding company of a shareholder
(Note i)
    
    
    
    
    
    
    645Due to China
Biotech Holdings Limited, a related company with common director (Note j)
    
    
    
    
    
    
    244
 
 (d)
    
    Due to Beijing Holdings good relationships with leading
investment banks and the Companys desire to access potential investment
opportunities as a result of these relationships, the Company previously deposited funds
with Beijing Holdings (since 2002) to invest on its behalf in Hong Kong. Nevertheless, due
to the poor performance of the Hong Kong Stock market in the last two
years, the Company withdrew its entire deposit of Rmb 6.53 million in May 2005. There was no agreement signed with Beijing Holdings
for the deposit.(e)
    
    On November 17, 2005 the Company entered into a sale and purchase agreement with Beijing Holding
to dispose of all of the shares it held in Xian Haitian for a cash
consideration of Rmb 2.17 million. The
value of the consideration was determined by the quoted closing stock price of Xian Haitian
at HK$0.33 per share at the date of the agreement.
 55




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##### Table of Contents



(f)
    
    Due to its good relationship with leading investment banks and potential investment
opportunities to be gained from those relationships, the Company previously deposited funds
with Beijing Holdings Investment Management Center (BHIMC)
to invest on our behalf in China. Again, due to the poor performance of the China
Stock market, we withdrew the entire funds of Rmb 3.39 million in December 2005. There was no agreement signed with
BHIMC for the deposit.(g)
    
    China Biotech Technology Inc. (China Biotech), is a
company incorporated in BVI in which Mr. Alan Li, the executive director and Co-Chief Executive
Officer of the Company, is also an executive director. China
Biotech has experience in the nutraceutical business in China, China
Biotechs experience includes making investments in companies and
technologies involved in this industry. In view of China Biotechs
experience, the Company deposited Rmb6.26 million with China Biotech for
purpose of making (with the assistance of China Biotech) a potential
acquisition of technology and
businesses in the nutraceutical industry in China. There was no agreement
 signed for the funds deposited with China Biotech and the Company
can withdraw the funds without any restrictions.(h)
    
    The amount represented the advance of funds for the purchase on
behalf of the Company of trading securities in Hong Kong by Beijing Investments (BVI) Limited, a wholly
owned subsidiary of Beijing Holdings. This amount was wholly
withdrawn by the Company in March
2005.(i)
    
    The amount represented the contract sums received on behalf
of BEDC by BHLHK in Hong Kong as the customer of BEDC paid in Hong
Kong dollars, whereas BEDC did not maintain a Hong Kong dollar bank account in Hong Kong.
 (j)
    
    The amount represented administrative expenses paid on behalf
of CNT by China
Biotech in China.
 (k)
    
    Other than information already disclosed elsewhere in this Form 20-F, no person who has been
an insider of the Company since January 1, 2004 or any associate or affiliate of such insider
has had any material direct or indirect interest in any transaction with our Company since
January 1, 2004 or in any proposed transaction of our company.
 C. Interests of experts and counsel.
  56




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Item 8 Financial Information
 A. Consolidated Statements and Other Financial Information.
      57




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B. Significant Changes.
 Item 9 The Offer and Listing.
 A. Offer and listing details.
   NASDAQ Capital Market
    
    Common Stock(Year Ending)
    
    High
    
    LowDecember 31, 2005
    
    
    8.800
    
    
    
    1.530December 31, 2004
    
    
    5.600
    
    
    
    0.350December 31, 2003
    
    
    0.700
    
    
    
    0.030December 31, 2002
    
    
    0.430
    
    
    
    0.010December 31, 2001
    
    
    0.444
    
    
    
    0.090
  58




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##### Table of Contents



NASDAQ Capital Market
    
    Common Stock(Quarter Ending)
    
    High
    
    LowDecember 31, 2005
    
    
    3.600
    
    
    
    1.560September, 2005
    
    
    4.650
    
    
    
    1.530June 30, 2005
    
    
    4.940
    
    
    
    3.240March 31, 2005
    
    
    8.800
    
    
    
    3.030December 31, 2004
    
    
    5.600
    
    
    
    1.400September 30, 2004
    
    
    3.171
    
    
    
    1.320June 30, 2004
    
    
    4.200
    
    
    
    0.550March 31, 2004
    
    
    6.530
    
    
    
    0.350
  NASDAQ Capital Market
    
    Common Stock(Month Ending)
    
    High
    
    LowAugust 31, 2006
    
    
    5.62
    
    
    
    3.02July 31, 2006
    
    
    3.970
    
    
    
    1.200June 30, 2006
    
    
    3.580
    
    
    
    3.280May 31, 2006
    
    
    6.150
    
    
    
    4.400April 30, 2006
    
    
    7.800
    
    
    
    6.300March 31, 2006
    
    
    8.950
    
    
    
    6.500February 28, 2006
    
    
    14.50
    
    
    
    3.420January 31, 2006
    
    
    4.540
    
    
    
    2.010
 B.
  C. Markets.
  59




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D. Selling Shareholders.
  E. Dilution.
 (a)
    
    The Company had authorized the issuance, pursuant to the 1996 Stock Option Plan, 2000 Stock
Option Plan and 2005 Stock Option Plan, of options to purchase respectively 200,000 shares,
400,000 shares and 1,000,000 shares of Common Stock to the Companys existing shareholders,
employees, officers, directors and consultants.(b)
    
    Pursuant to a board resolution passed on December 28, 1999, options to purchase 140,000
shares of Common Stock were granted, for an exercise period of ten years, to certain directors
and officers at an exercise price of US$1.15 per share.(c)
    
    Pursuant to a board resolution passed on September 20, 2005, options to purchase the
remaining 60,000 shares of Common Stock under the 1996 Stock Option Plan were granted and
pursuant to the same board resolution, options to purchase 370,000 shares of Common Stock were
granted under the 2000 Stock Option Plan, for an exercise period of ten years, to a director
at an exercise price of US$1.85 per share and.(d)
    
    As at August 31, 2006, no options granted under the 1996 Stock Option Plan and 2000 Stock
Option Plan were exercised.(e)
    
    The Company entered into an agreement dated July 12,
2005 with Ivory Capital Asia Pte, Ltd (the Ivory
Capital)(filed as Exhibit 10.1 hereto) on an non-exclusive
basis to raise at least US$20 million in new capital for the
Company and its subsidiaries and to provide financial advisory
services to the Company concerning the strategic development of the
Companys business for a period of six months, unless the
extension was mutually agreed. Pursuant to the agreement, retainer
fee of US$ 40,000 per month was payable 50% in cash and 50% in the
Companys shares at average price of last 30 days prior to
date of the signing of the agreement. Besides, a success fee of 3% on
the initial US$20 million of capital commitments received from
investors and 4% on the amount of capital commitments in excess of
US$20 million received from investors was payable in cash if any.
Accordingly, an aggregate
of 34,488 shares of our Common Stock shall be issued to Ivory
Capital as part of the retainer fee charged. Ivory Capital finally failed to raise any
funds for the Company during the six month contract term and the
services of Ivory Capital were terminated by
the Company. The 34,488 shares of common stock were not issued to
Ivory Capital. The Company, however, is currently under negotiation with
Ivory Capital for the resumption of the contract at the same terms as
previously signed as substantial pre-funding work has been done even
though no
funds were finally raised. As of date, no agreement, memorandum
or letter of intent has been signed in respect of resuming the
contract but a provision of the unpaid retainer fee was made in the
financial statements for the fiscal year ended December 31, 2005.
 F. Expenses of the issue.
  
 Item 10 Additional Information.
 A. Share capital.
  B . Memorandum and articles of association.
 60




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##### Table of Contents



C. Material contracts.
 1.
    
    On July 12, 2005, an agreement was entered into between the Company and Ivory Capital whereas
the Company engaged Ivory Capital on an non-exclusive basis to provide financial advisory services
to the Company concerning the strategic development of the Companys business, including
assisting in the development of a business strategy to maximize international investor interest and
to raise at least US$20 million in new capital for the Company.
 2.
    
    On September 13, 2005, the Company entered into a sale and purchase agreement with Beijing
Holdings, its then 47.18% shareholder, pursuant to which the Company
acquired 51% of the issued
and outstanding stock of CNT.
 3.
    
    On September 13, 2005, the Company also entered into an option agreement with Beijing
Holdings to acquire the remaining issued and outstanding stock of CNT. At the Annual Meeting
of Stockholders of the Company held on October 21, 2005, the special resolutions to approve
the acquisition by the Company of the 51% equity interest in CNT and the option to acquire the
remaining 49% equity interest in CNT, were passed.
 4.
    
    On March 14, 2003, BBHL entered into a framework
purchase agreement with the Legend (Beijing) Limited for three years. Under which BBHL agreed to provide
the network security products and its maintenance works based on the actual quantities ordered
through purchase orders issued by the Legend Group.
  5.
    
    On February 10, 2006, BBHL had entered into a supply contract for a term of two years with the
Legendsec Ltd. at exactly the same terms of that of the Legend Group. Legendsec was a new
company formed in 2004 by a group of experienced salesmen left the Legend Group after the
restructuring of the Legend Group in 2004.
 61




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##### Table of Contents



6.
    
    On March 20, 2004, Zhejiang Innoessen entered into a
contract with the China New Era Health Industry Group Limited for the purchase of EOB-f02 and
EOB-f04.
 7.
    
    On July 27, 2006, Zhejiang Innoessen had entered into
the Anji Memorandum with the Anji
Buyers to, among other things, dispose of its entire 93.67% ownership interest in Anji Bio.
 D. Exchange controls.
     62




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##### Table of Contents



E. Taxation.
  British Virgin Islands Taxation
    Hong Kong Taxation
  China Taxation
  Cayman Island Taxation
  63




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##### Table of Contents



F. Dividends and paying agents.
  G. Statement by experts.
  H. Documents on display.
       Subsidiary Information.
  
 Item 11 Quantitative and Qualitative Disclosures About Market Risk.
 Foreign exchange risk
    64




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Interest rate risk
  Inflation
  65




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Item 12 Description of Securities Other than Equity Securities.
  66




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PART II
 
 Item 13 Default, Dividend Arrearages and Delinquencies.
  
 Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds.
  
 Item 15 Controls and Procedures
      
 Item 16A Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
  
 Item 16C. Principal Accountant Fees and Services
 Audit Fees
 67




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##### Table of Contents



Audit-Related Fees
  Tax Fees
 .
 All Other Fees
  Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
  Audit of Financial Statements
  
 Item 16D. Exemptions from the Listing Standards for Audit Committee.
  
 Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers.
 1.
    
    On October 31, 2005, the transaction to acquire from Beijing Holdings the 51% equity
interest of the issued and outstanding stock of CNT was closed and as a result of the closing
of the transaction, the Company , issued 2,233,800 shares of the Companys common stock of
US$0.01 each to Beijing Holdings. After the closing of the transaction, Beijing Holdings
ownership in the Company increased from 47.18% to 60.11% and the
Company had total outstanding shares of 9,128,297 shares.
 2.
    
    On December 22, 2005, the Company exercised the option to acquire from Beijing Holdings the
remaining 49% equity interest of CNT and closed the transaction on the same day. As a result
of the closing of the transaction, the Company became the shareholder of 100% equity interest
in CNT and, in return, issued 2,146,200 new shares of the Companys common stock of US$0.01
each to Beijing Holdings. Beijing Holdings ownership increased to 62.73% of the total issued
and outstanding shares of 11,274,497 shares.
 68




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##### Table of Contents



3.
    
    On December 22, 2005, Beijing Holdings entered into a Placing Agreement with Best Scene
Management Limited (Best Scene), a company in which Mr. Alan Li, our the executive director
and Co-Chief Executive Officer, had an equity interest. Pursuant to the Placing Agreement,
Best Scene was appointed the placing agent, on a fully underwritten
basis, to sell, on behalf of Beijing Holdings, up to
1,100,000 shares of the Companys common stock (the Placing Shares) to certain placees at a
fixed price of US$2.15 per Placing Share. As of January 9, 2006, an aggregate of 560,000
Placing Shares had been successfully sold to certain placees who were not connected parties of
the Company.
 
 Item 17 Financial Statements.
  
 Item 18 Financial Statements.
         
 Item 19 Exhibits.
  3.1
    
    Amended Memorandum and Articles of Association of China Technology Development Group
Corporation.10.1
    
    Agreement with Ivory Capital Asia Pte Ltd. dated July 12, 2005.10.2
    
    Agreement with Beijing Holdings Limited to acquire 51% of CNT dated September 13, 2005.10.3
    
    Option Agreement with Beijing Holdings Limited to acquire 49% of CNT dated September 13, 2005.10.4
    
    Supply of Goods Agreement with New Era Health Industry Group
Limited dated March 22, 2004 (translated version).10.5
    
    Framework Agreement with the Legend (Beijing) Limited dated
March 14, 2003 (translated version).10.6
    
    Framework Agreement with Legendsec (Beijing) Limited dated
February 10, 2006 (translated version).10.7
    
    Memorandum Agreement with Mr. Hu Linfu and Madam Chen Shuizhen for termination of the
co-operation in Anji Bio dated July 27, 2006 (translated version).14.1
    
    Code of Ethics for CEO and Senior Financial Officers.21.1
    
    List of the companys significant subsidiaries, their jurisdiction of incorporation and the
names under which they operate business, if different from their name.
 69




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##### Table of Contents



31.1
    
    Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of
2002 (by Xu Qian).31.2
    
    Certification of Co-Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of
2002 (by Alan Li).31.3
    
    Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of Chief Executive Officer, Co-Chief Executive Officer and Chief Financial Officer required by Section 906
of the Sarbanes-Oxley Act of 2002.
 70




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##### Table of Contents



SIGNATURES
  CHINA TECHNOLOGY DEVELOPMENTGROUP CORPORATIONDate:
September 19,2006
    
    
    
    /s/ Michael SiuName:
    
    Michael SiuTitle:
    
    Executive Director, Chief Financial
Officer and Secretary
 73




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION
 INDEX TO FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F  2Consolidated Statements of Operations for
each of the three years ended December 31, 2003, 2004 and 2005
    
    
    F  3Consolidated Balance Sheets as of December 31, 2004 and 2005
    
    
    F - 4Consolidated Statements of Cash Flows for each of the three years
ended December 31, 2003, 2004 and 2005
    
    
    F - 5Consolidated Statements of Changes in Shareholders Equity for each
of the three years ended December 31, 2003, 2004 and 2005
    
    
    F - 8Notes to Consolidated Financial Statements
    
    
    F - 9
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    PricewaterhouseCoopers
 F-2




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
for the years ended December 31, 2003, 2004 and 2005
 Note
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$(Note 2(e))Continuing operations:Revenues
    
    
    22
    
    
    
    8,405
    
    
    
    2,720
    
    
    
    7,503
    
    
    
    930Cost of sales
    
    
    
    
    
    
    (4,421
    )
    
    
    (1,394
    )
    
    
    (3,290
    )
    
    
    (408
    )Gross profit
    
    
    
    
    
    
    3,984
    
    
    
    1,326
    
    
    
    4,213
    
    
    
    522Selling, general and
administrative expenses
    
    
    
    
    
    
    (8,362
    )
    
    
    (7,768
    )
    
    
    (21,971
    )
    
    
    (2,721
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (4,337
    )
    
    
    
    
    
    
    Bad debt expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (128
    )
    
    
    (16
    )Operating loss
    
    
    22
    
    
    
    (4,378
    )
    
    
    (10,779
    )
    
    
    (17,886
    )
    
    
    (2,215
    )Interest income
    
    
    
    
    
    
    119
    
    
    
    243
    
    
    
    302
    
    
    
    37Finance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    (1
    )Non-operating income
    
    
    4
    
    
    
    2,310
    
    
    
    167
    
    
    
    276
    
    
    
    34Non-operating expenses
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    (2,628
    )
    
    
    (326
    )Loss before income tax provision
    
    
    
    
    
    
    (1,949
    )
    
    
    (10,369
    )
    
    
    (19,947
    )
    
    
    (2,471
    )Income tax provision
    
    
    6
    
    
    
    (249
    )
    
    
    
    
    
    
    (9
    )
    
    
    (1
    )Loss from continuing operations
before minority interests
    
    
    
    
    
    
    (2,198
    )
    
    
    (10,369
    )
    
    
    (19,956
    )
    
    
    (2,472
    )Minority interests  continuing
operations
    
    
    
    
    
    
    890
    
    
    
    
    
    
    
    712
    
    
    
    88Loss from continuing operations
    
    
    
    
    
    
    (1,308
    )
    
    
    (10,369
    )
    
    
    (19,244
    )
    
    
    (2,384
    )Discontinued operations:
    
    
    7Income/(loss) from discontinued
operations including loss on
disposal of Rmb 509 on March
31, 2005
    
    
    
    
    
    
    366
    
    
    
    254
    
    
    
    (288
    )
    
    
    (36
    )Net loss for the year
    
    
    
    
    
    
    (942
    )
    
    
    (10,115
    )
    
    
    19,532
    
    
    
    (2,420
    )Loss per share
    
    
    17- Basic and dilutive
    
    
    
    
    
    
    (0.14
    )
    
    
    (1.47
    )
    
    
    (2.67
    )
    
    
    (0.33
    )Loss per share from continuing
operations- Basic and dilutive
    
    
    
    
    
    
    (0.19
    )
    
    
    (1.51
    )
    
    
    (2.63
    )
    
    
    (0.33
    )Income/(loss) per share from
discontinued operations- Basic and dilutive
    
    
    
    
    
    
    0.05
    
    
    
    0.04
    
    
    
    (0.04
    )
    
    
    (0.00
    )Weighted-average ordinary shares
    
    
    17- Basic and dilutive
    
    
    
    
    
    
    6,894
    
    
    
    6,894
    
    
    
    7,327
    
    
    
    7,327
  F-3




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
at December 31, 2004 and 2005
 Note
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    US$(Note 2(e))ASSETSCURRENT ASSETSCash and cash equivalents
    
    
    
    
    
    
    5,255
    
    
    
    18,324
    
    
    
    2,271Short-term investments  security trust account
    
    
    
    
    
    
    6,872
    
    
    
    109
    
    
    
    13Available-for-sale securities
    
    
    
    
    
    
    12,730
    
    
    
    366
    
    
    
    45Trade accounts receivable, net
    
    
    
    
    
    
    1,060
    
    
    
    791
    
    
    
    98Inventories
    
    
    
    
    
    
    1,192
    
    
    
    2,586
    
    
    
    320Due from related parties
    
    
    18
    
    
    
    10,111
    
    
    
    8,447
    
    
    
    1,047Other assets
    
    
    8
    
    
    
    1,087
    
    
    
    1,462
    
    
    
    181TOTAL CURRENT ASSETS
    
    
    
    
    
    
    38,307
    
    
    
    32,085
    
    
    
    3,975Long-term prepayment for rental of land
    
    
    9
    
    
    
    
    
    
    
    528
    
    
    
    65Property, plant and equipment, net
    
    
    10
    
    
    
    49
    
    
    
    9,169
    
    
    
    1,136Intangible assets
    
    
    11
    
    
    
    
    
    
    
    6,541
    
    
    
    811Goodwill
    
    
    12
    
    
    
    999
    
    
    
    69,526
    
    
    
    8,615TOTAL ASSETS
    
    
    
    
    
    
    39,355
    
    
    
    117,849
    
    
    
    14,602LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESTrade accounts payable
    
    
    
    
    
    
    175
    
    
    
    572
    
    
    
    71Consideration payable on the acquisition of an
operating unit
    
    
    
    
    
    
    1,950
    
    
    
    
    
    
    
    Accrued professional fees
    
    
    
    
    
    
    888
    
    
    
    3,869
    
    
    
    480Income tax payable
    
    
    
    
    
    
    249
    
    
    
    245
    
    
    
    30Value added tax and business tax payable
    
    
    
    
    
    
    781
    
    
    
    41
    
    
    
    5Deferred government grants
    
    
    13
    
    
    
    
    
    
    
    230
    
    
    
    28Short term borrowings
    
    
    14
    
    
    
    
    
    
    
    3,569
    
    
    
    442Due to related parties
    
    
    18
    
    
    
    
    
    
    
    889
    
    
    
    110Deferred tax liabilities






    



    492



    61Other liabilities and accrued expenses
    
    
    15
    
    
    
    2,458
    
    
    
    3,719
    
    
    
    461TOTAL CURRENT LIABILITIES
    
    
    
    
    
    
    6,501
    
    
    
    13,626
    
    
    
    1,688Contingencies and commitments
    
    
    21Minority interests
    
    
    
    
    
    
    
    
    
    
    5,515
    
    
    
    683SHAREHOLDERS EQUITYCommon stock (US$0.01 par value; 2,500,000,000
shares authorized; shares issued and
outstanding 9,044,888 in 2004 and 11,274,497
in 2005)
    
    
    20
    
    
    
    749
    
    
    
    910
    
    
    
    113Additional paid-in capital
    
    
    20
    
    
    
    187,159
    
    
    
    269,924
    
    
    
    33,447Accumulated deficit
    
    
    
    
    
    
    (151,644
    )
    
    
    (171,176
    )
    
    
    (21,211
    )Accumulated other comprehensive losses
    
    
    
    
    
    
    (3,232
    )
    
    
    (950
    )
    
    
    (118
    )Treasury stock, at cost (2,150,391 shares in
2004 and Nil shares in 2005)
    
    
    20
    
    
    
    (178
    )
    
    
    
    
    
    
    TOTAL SHAREHOLDERS EQUITY
    
    
    
    
    
    
    32,854
    
    
    
    98,708
    
    
    
    12,231TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    39,355
    
    
    
    117,849
    
    
    
    14,602
  F-4




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
for the years ended December 31, 2003, 2004 and 2005
 2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$(Note 2(e))Cash flows from operating activitiesNet loss
    
    
    (942
    )
    
    
    (10,115
    )
    
    
    (19,532
    )
    
    
    (2,420
    )Adjustments to reconcile net loss to net cash
used in operating activitiesMinority interests in loss of consolidated
subsidiaries
    
    
    (890
    )
    
    
    
    
    
    
    (712
    )
    
    
    (88
    )Amortization/written off of intangible asset and
software development costs
    
    
    1,085
    
    
    
    
    
    
    
    692
    
    
    
    86Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    3,176
    
    
    
    394Impairment of goodwill
    
    
    
    
    
    
    4,748
    
    
    
    
    
    
    
    Amortization of long-term prepayment for rental of land
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    1Depreciation
    
    
    475
    
    
    
    76
    
    
    
    376
    
    
    
    47Dividend income
    
    
    (295
    )
    
    
    (67
    )
    
    
    (115
    )
    
    
    (14
    )Profit on disposal of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )(Gain)/ loss on disposal of available-for-sale
securities
    
    
    (2,005
    )
    
    
    (100
    )
    
    
    2,596
    
    
    
    322Loss on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    509
    
    
    
    63Bad debt expense
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    16Changes in assets and liabilities:(Increase)/ in trade accounts receivable
    
    
    (66
    )
    
    
    1,595
    
    
    
    321
    
    
    
    40Decrease in trading securities
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    Decrease/(increase) in inventories
    
    
    512
    
    
    
    (485
    )
    
    
    79
    
    
    
    10(Increase)/decrease in due from related parties
and other assets
    
    
    (263
    )
    
    
    228
    
    
    
    (7.621
    )
    
    
    (946
    )(Decrease)/increase in trade accounts payable,
amount due to a related party and other current
liabilities
    
    
    (2,676
    )
    
    
    1,110
    
    
    
    1,904
    
    
    
    236Increase/(decrease)
in income taxes payables
    
    
    249
    
    
    
    
    
    
    
    (4
    )
    
    
    (1
    )Decrease in income tax recoverable
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    4Net cash used in operating activities
    
    
    (4,767
    )
    
    
    (3,010
    )
    
    
    (18,167
    )
    
    
    (2,251
    )Cash flows from investing activitiesSecurity trust account
    
    
    2,275
    
    
    
    4,393
    
    
    
    6,763
    
    
    
    838Dividend income
    
    
    295
    
    
    
    67
    
    
    
    115
    
    
    
    14(Increase)/decrease
in funds held by related parties
for security investment purposes (Note 18)
    
    
    (2,578
    )
    
    
    1,097
    
    
    
    10,081
    
    
    
    1,249Acquisition
of subsidiaries, net of cash acquired (Note (a))
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    (4
    )Net cash and
cash equivalents disposed of upon disposal of discontinued operations
(Note (b))
    
    
    
    
    
    
    
    
    
    
    (350
    )
    
    
    (44
    )Proceeds from disposal of available-for-sale
securities
    
    
    11,810
    
    
    
    4,788
    
    
    
    12,511
    
    
    
    1,550Purchase of available-for-sales securities
    
    
    (11,454
    )
    
    
    (9,443
    )
    
    
    
    
    
    
    Purchases of property, plant and equipment
    
    
    (29
    )
    
    
    (37
    )
    
    
    (879
    )
    
    
    (109
    )Proceeds
on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Net cash provided by investing activities
    
    
    319
    
    
    
    865
    
    
    
    28,207
    
    
    
    3,495
 (Continued)
 F-5




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
for the years ended December 31, 2003, 2004 and 2005
 (Continued)
 2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$(Note 2(e))Cash flows from financing activitiesProceeds from borrowings
    
    
    
    
    
    
    
    
    
    
    3,500
    
    
    
    434Repayments of borrowings
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (1
    )Net cash provided by financing activities
    
    
    
    
    
    
    
    
    
    
    3,490
    
    
    
    433Effect of exchange rate changes on cash and cash
equivalents
    
    
    (355
    )
    
    
    
    
    
    
    (461
    )
    
    
    (57
    )Net
(decrease)/increase in cash and cash equivalents
    
    
    (4,803
    )
    
    
    (2,145
    )
    
    
    13,069
    
    
    
    1,620Cash and cash equivalents at beginning of year
    
    
    12,203
    
    
    
    7,400
    
    
    
    5,255
    
    
    
    651Cash and cash equivalents at end of year
    
    
    7,400
    
    
    
    5,255
    
    
    
    18,324
    
    
    
    2,271Supplemental
disclosure of cash flow informationIncome taxes
paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest
paid
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    1Supplemental
disclosure non-financing activitiesIssue of new
shares for business combination (Note 3)
    
    
    
    
    
    
    
    
    
    
    79,928
    
    
    
    9,904Stock
options granted (Note 16)
    
    
    
    
    
    
    
    
    
    
    3,176
    
    
    
    393
 F-6




---



##### Table of Contents



Note(a)
Purchase of China Nature Technology Inc. (Refer to Note 3 for details)
 2005RmbNet assets acquired (excluding cash & cash equivalents):Trade accounts receivable, net
    
    
    108Inventories
    
    
    1,473Due from related parties
    
    
    21Income tax recoverable
    
    
    35Other assets
    
    
    1,638Long-term prepayment for rental of land
    
    
    530Property, plant and equipment, net
    
    
    8,617Intangible asset
    
    
    6,891Goodwill
    
    
    38,457Trade accounts payable
    
    
    (271
    )Deferred government grants
    
    
    (273
    )Due to a related party
    
    
    (204
    )Short term borrowings
    
    
    (79
    )Deferred tax liabilities
    
    
    (251
    )Other liabilities and accrued expenses
    
    
    (913
    )Minority interests
    
    
    (11,804
    )43,975
    )Discharged by:Issuance of
shares at fair value
    
    
    43,523Capitalized
expenses directly incurred in acquisition of CNT*
    
    
    936Less: Cash
and cash equivalents acquired from CNT
    
    
    (484
    )Total net consideration
    
    
    43,975
 
  Note(b)
Disposal of discontinued operations (Refer to Note 7 for details)
 2005RmbNet assets disposed of (excluding cash & cash equivalents):Trade accounts receivable, net
    
    
    56Other assets
    
    
    18Goodwill
    
    
    999Income tax payables
    
    
    (753
    )Other liabilities and accrued expenses
    
    
    (161
    )159Loss on disposal of discontinued operations
    
    
    (509
    )(350
    )Discharged by:Cash
and cash equivalents disposed
    
    
    (350
    )
  F-7




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Amounts in thousands)
for the years ended December 31, 2003, 2004 and 2005
 AccumulatedStock
    
    
    
    
    
    
    other
    
    
    TotalOptions
    
    
    Accumulated
    
    
    comprehensive
    
    
    shareholdersNo. of
    
    
    Equity
    
    
    Granted
    
    
    losses
    
    
    losses
    
    
    equityshares
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    RmbBalance at December
31, 2002
    
    
    6,894,497
    
    
    
    187,730
    
    
    
    
    
    
    
    (140,587
    )
    
    
    (643
    )
    
    
    46,500Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (942
    )
    
    
    
    
    
    
    (942
    )Net unrealized gain
on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    401
    
    
    
    401Less: Reclassification
adjustment for loss
realized on sale (Note (a))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    587
    
    
    
    587Translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (355
    )
    
    
    (355
    )Total comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (633
    )Balance at December
31, 2003
    
    
    6,894,497
    
    
    
    187,730
    
    
    
    
    
    
    
    (141,529
    )
    
    
    (10
    )
    
    
    46,191Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,115
    )
    
    
    
    
    
    
    (10,115
    )Net unrealized loss
on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,222
    )
    
    
    (3,222
    )Total comprehensive loss for
the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,222
    )Balance at December
31, 2004
    
    
    6,894,497
    
    
    
    187,730
    
    
    
    
    
    
    
    (151,644
    )
    
    
    (3,232
    )
    
    
    32,854Issue of shares
    
    
    4,380,000
    
    
    
    79,928
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,928Stock options
granted
    
    
    
    
    
    
    
    
    
    
    3,176
    
    
    
    
    
    
    
    
    
    
    
    3,176Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,532
    )
    
    
    
    
    
    
    (19,532
    )Net unrealized loss
on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (147
    )
    
    
    (147
    )Less: Reclassification
adjustment for loss
realized on sale (Note (a))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,890
    
    
    
    2,890Translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (461
    )
    
    
    (461
    )Total comprehensive loss for
the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,282
    )Balance at December
31, 2005
    
    
    11,274,497
    
    
    
    267,658
    
    
    
    3,176
    
    
    
    (171,176
    )
    
    
    (950
    )
    
    
    98,708US$
    
    US$
    
    US$
    
    US$
    
    US$Balance at December
31, 2005(Note 2(e))
    
    
    
    
    
    
    33,166
    
    
    
    394
    
    
    
    (21,211
    )
    
    
    (118
    )
    
    
    12,231
 
  F-8




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 1
    
    Nature of operations and basis of presentation
          Effective percentageName of Company
    
    Jurisdiction
    
    ShareholdingBHLHK
    
    Hong Kong
    
    
    100
    %JTL
    
    BVI
    
    
    100
    %BHLNet
    
    Cayman Islands
    
    
    100
    %BBHL
    
    China
    
    
    76
    %CNT
    
    BVI
    
    
    100
    %Zhejiang Innoessen
    
    China
    
    
    71.43
    %Anji Bio.
    
    China
    
    
    66.91
    %Shenzhen Innoessen
    
    China
    
    
    100
    %
 F-9




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 2
    
    Summary of significant accounting policies
  (a) Consolidation
      (b) Revenues
  (c) Taxation
  (d) Concentration of credit risk and major customers
  F-10




---



##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 2
    
    Summary of significant accounting policies (continued)
 (e) Foreign currency transaction gains and losses and translation of foreign currencies
     (f) Property, plant and equipment
  Building
    
    20 yearsPlant and machineries
    
    10 yearsMotor vehicles
    
    5 yearsFurniture, fixtures, office and computer equipment
    
    3 years
 (g) Prepayment for rental of land
  (h) Intangible assets
  (i) Goodwill
 Goodwill and Other Intangible Assets,
 F-11




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 2
    
    Summary of significant accounting policies (continued)
 (j) Impairment
    (k) Inventories
  (l) Cash and cash equivalents
  (m) Investment in securities
  (n) Earnings per share
  F-12




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 2
    
    Summary of significant accounting policies (continued)
 (o) Deferred government grants
  (p) Stock-based compensation
    F-13




---



##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 (p)       Stock-based
compensation (continued)
 Stock-based compensation to employees
  December 31,2003
    
    2004
    
    2005Rmb
    
    Rmb
    
    RmbNet loss for the year, as reported
    
    
    (942
    )
    
    
    (10,115
    )
    
    
    (19,532
    )Add:
stock-based compensation as reported
    
    
    
    
    
    
    
    
    
    
    2,475Less: Stock-based compensation
determined using the fair value method
    
    
    
    
    
    
    
    
    
    
    (7,791
    )Pro forma loss for the year
    
    
    (942
    )
    
    
    (10,115
    )
    
    
    (24,848
    ))Basic and diluted loss
per share (in Rmb)- As reported
    
    
    (0.14
    )
    
    
    (1.47
    )
    
    
    (2.67
    )- Pro forma
    
    
    (0.14
    )
    
    
    (1.47
    )
    
    
    (3.39
    )
  OptionsOptions
    
    
    

granted
todeemed
    

Options
deemed
    

othergranted
to
    

granted
to the
    

employeesthe
chairman
    

chief
executive
    

onon
February
    

officer
on March
    

September8,
2005
    

29,
2005
    

20,
2005Average risk-free rate of return*

    
    3.313%
    
    
    
    
    3.861%
    
    
    
    4.050%Weighted average expected option life
    
    2 years
    
    
    
    
    2 years
    
    
    
    5 yearsVolatility rate
    
    197.2%
    
    
    
    
    158.2%
    
    
    
    133.8%Dividend yield
    
    
    
    
    
    
    
    
    
    
    
 
 * Risk-free rate represents the yields to maturity of respective US Government
STRIPS (Source: Bloomberg)  (q) Operating
leases
  (r) Recent accounting pronouncements
  F-14




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 2
    
    Summary of significant accounting policies (continued)
 (r) Recent accounting pronouncements (continued)
       F-15




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 3
    
    Business combination
   Acquisition of51%Rmb
    
    
    49%RmbConsideration Paid:Shares of
common stock issued at fair value
    
    
    43,523
    
    
    
    36,405Direct cost
related to the acquisition capitalized
    
    
    936
    
    
    
    Subtotal
    
    
    44,459
    
    
    
    36,405Less Net
assets acquiredCash and cash equivalents
    
    
    247
    
    
    
    2,387Trade accounts receivable, net
    
    
    56
    
    
    
    166Inventories
    
    
    751
    
    
    
    748Due from related parties


11



19Income taxes recoverable


18



Other assets
    
    
    835
    
    
    
    307Property, plant and equipment, net
    
    
    4,665
    
    
    
    4,487Intangible assets
    
    
    3,514
    
    
    
    3,205Trade accounts payable
    
    
    (138
    )
    
    
    (148
    )Income taxes
payable
    
    
    
    
    
    
    (2
    )Deferred government grants
    
    
    (139
    )
    
    
    (113
    )Due to a related party


(104
)


(119
)Short term borrowings


(40
)


(1,749
)Deferred tax
liabilities
    
    
    (251
    )
    
    
    (241
    )Other liabilities and accrued expenses
    
    
    (466
    )
    
    
    (909
    )Minority interests


(2,957
)


(2,702
)Subtotal


6,002



5,336Goodwill
arising from acquisition of Nutraceutical Operations
    
    
    38,457
    
    
    
    31,069
    UnauditedYears ended December 31,2004
    
    
    2005Rmb
    
    
    RmbRevenue from continuing operations
    
    
    6,854
    
    
    
    11,698Net loss for the year from continuing operations
    
    
    (11,623
    )
    
    
    (20,064
    )Loss per share from continuing operations
    
    
    (1.69
    )
    
    
    (2.74
    )
   F-16




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 4
    
    Non-operating income
  Year ended December 31,2003
    
    
    2004
    
    
    2005Rmb
    
    
    Rmb
    
    
    RmbRealized gains on trading securities
    
    
    8
    
    
    
    
    
    
    
    Realized gains on available-for-sale securities
    
    
    2,005
    
    
    
    100
    
    
    
    Dividend income from available-for-sale securities
    
    
    295
    
    
    
    67
    
    
    
    115Subsidies
from government
    
    
    
    
    
    
    
    
    
    
    161Others
    
    
    2
    
    
    
    
    
    
    
    2,310
    
    
    
    167
    
    
    
    276
 5
    
    Non-operating expenses
  Year ended December 31,2003
    
    
    2004
    
    
    2005Rmb
    
    
    Rmb
    
    
    RmbRealized loss on available-for-sale
securities  transferred from
comprehensive loss
    
    
    
    
    
    
    
    
    
    
    2,596Others
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    2,628
 6
    
    Income tax provision
  Composition of income tax expense
  2003
    
    
    2004
    
    
    2005Rmb
    
    
    Rmb
    
    
    RmbCurrent income tax expenses
    
    
    249
    
    
    
    
    
    
    
    9Recognition of deferred tax assets
    
    
    1,531
    
    
    
    2,927
    
    
    
    5,943Change in valuation allowance
    
    
    (1,531
    )
    
    
    (2,927
    )
    
    
    (5,943
    )Income tax expenses
    
    
    249
    
    
    
    
    
    
    
    9
 F-17




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 6
    
    Income tax provision (continued)
 Reconciliation of income tax expense by applying PRC statutory Enterprise Income Tax rate
  2003
    
    
    2004
    
    
    2005Rmb
    
    
    Rmb
    
    
    RmbIncome tax credit at PRC statutory EIT rate
    
    
    (522
    )
    
    
    (3,338
    )
    
    
    (6,446
    )Effect of different taxation rate in Hong Kong
    
    
    (474
    )
    
    
    465
    
    
    
    572Income not subject to taxation
    
    
    (76
    )
    
    
    (53
    )
    
    
    (60
    )Expenses not deductible for taxation purpose
    
    
    
    
    
    
    
    
    
    
    Utilization of previously unrecognized tax losses
    
    
    (192
    )
    
    
    
    
    
    
    Increase in previously recognized tax loss
resulting from an increase in tax rate
    
    
    (18
    )
    
    
    
    
    
    
    Change in valuation allowance
    
    
    1,531
    
    
    
    2,926
    
    
    
    5,943Total income tax expense
    
    
    249
    
    
    
    
    
    
    
    9
 Significant components of deferred tax assets
 December 31,
    
    
    December 31,2004
    
    
    2005Rmb
    
    
    RmbTax loss carryforwards
    
    
    11,464
    
    
    
    17,407Less: valuation allowance
    
    
    (11,464
    )
    
    
    (17,407
    )Deferred tax assets
    
    
    
    
    
    
    
  7
    
    Discontinued operations
   Year ended
    
    
    Year ended
    
    
    Period endedDecember
    
    
    December
    
    
    March 31,31, 2003
    
    
    31, 2004
    
    
    2005Rmb
    
    
    Rmb
    
    
    RmbRevenues
    
    
    3,337
    
    
    
    3,949
    
    
    
    1,040Cost of sales
    
    
    (2,204
    )
    
    
    (2,755
    )
    
    
    (678
    )Gross profit
    
    
    1,133
    
    
    
    1,194
    
    
    
    362Selling, general and administrative expenses
    
    
    (767
    )
    
    
    (529
    )
    
    
    (141
    )Impairment of goodwill
    
    
    
    
    
    
    (411
    )
    
    
    Profit from discontinued operations
    
    
    366
    
    
    
    254
    
    
    
    221Loss on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (509
    )Profit/(loss) from discontinued operations
    
    
    366
    
    
    
    254
    
    
    
    (288
    )
  F-18




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 8
    
    Other assets
  December 31,
    
    
    December 31,2004
    
    
    2005Rmb
    
    
    RmbRental and utility deposits
    
    
    129
    
    
    
    408Advance to staff
    
    
    74
    
    
    
    207Prepayment for insurance
    
    
    379
    
    
    
    305Prepayment for consultancy fee
    
    
    11
    
    
    
    80Prepayment for raw materials
    
    
    100
    
    
    
    83Others
    
    
    394
    
    
    
    3191,087
    
    
    
    1,462
 9
    
    Long term prepayment for rental of land
 December 31,
    
    
    December 31,2004
    
    
    2005Rmb
    
    
    RmbAcquisition of subsidiaries
    
    
    
    
    
    
    530Amortisation
    
    
    
    
    
    
    (2
    )
    
    
    
    528
  10
    
    Property, plant and equipment, net
 December 31,
    
    
    December 31,2004
    
    
    2005Rmb
    
    
    RmbBuilding
    
    
    
    
    
    
    2,475Plant and machineries
    
    
    
    
    
    
    5,170Computer equipments
    
    
    1,972
    
    
    
    1,678Furniture, fixtures and office equipments
    
    
    581
    
    
    
    1,099Motor vehicles
    
    
    108
    
    
    
    830Less: accumulated depreciation
    
    
    (2,612
    )
    
    
    (2,083
    )49
    
    
    
    9,169
  11 Intangible assets
  F-19




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 11 Intangible assets (continued)
    AccumulatedFair
    
    Acquired
    
    amortization/value
    
    during
    
    write off
    
    Balance as ofupon
    
    the
    
    during the
    
    December 31,acquisition
    
    year
    
    year
    
    2005Rmb
    
    Rmb
    
    Rmb
    
    RmbCore technology
    
    
    624
    
    
    
    
    
    
    
    (13
    )
    
    
    611Completed technologyBamboo leaf extract for prostate disease
    
    
    209
    
    
    
    
    
    
    
    (7
    )
    
    
    202AoB antioxidant from bamboo leaf extract
    
    
    1,726
    
    
    
    
    
    
    
    (58
    )
    
    
    1,668ZoB from
bamboo leaf extract
    
    
    1,964
    
    
    
    
    
    
    
    (65
    )
    
    
    1,899Bamboo shoot
extractive for
dietary supplements and fertilizer
    
    
    1,892
    
    
    
    
    
    
    
    (63
    )
    
    
    1,829Zhukangning capsule from bamboo leaf extract
    
    
    
    
    
    
    343
    
    
    
    (11
    )
    
    
    3325,791
    
    
    
    343
    
    
    
    (204
    )
    
    
    5,930In-Process
Research and Development technologyBamboo shoot
extractive for calories control
    
    
    448
    
    
    
    
    
    
    
    (448
    )
    
    
    Bamboo shoot
extractive for hair loss prevention
    
    
    27
    
    
    
    
    
    
    
    (27
    )
    
    
    475
    
    
    
    
    
    
    
    (475
    )
    
    
    Total
    
    
    6,890
    
    
    
    343
    
    
    
    (692
    )
    
    
    6,541
   12 Goodwill
  Network
    
    Information
    
    Nutraceuticalsecurity
    
    Technology
    
    operations
    
    TotalRmb
    
    Rmb
    
    Rmb
    
    RmbBalance as of December 31, 2003
    
    
    4,337
    
    
    
    1,410
    
    
    
    
    
    
    
    5,747Impairment loss for 2004
    
    
    (4,337
    )
    
    
    (411
    )
    
    
    
    
    
    
    (4,748
    )Balance as of December 31, 2004
    
    
    
    
    
    
    999
    
    
    
    
    
    
    
    999Goodwill
arising from business combination (Note 3)
    
    
    
    
    
    
    
    
    
    
    69,526
    
    
    
    69,526Goodwill
relating to discontinued operations disposed
    
    
    
    
    
    
    (999
    )
    
    
    
    
    
    
    (999
    )Balance as of December 31, 2005
    
    
    
    
    
    
    
    
    
    
    69,526
    
    
    
    69,526




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 12 Goodwill (continued)
  13 Deferred government grants
 RmbBalance as at December 31, 2004
    
    
    Addition upon acquisition of the Nutraceutical Operations on October 31, 2005
    
    
    273Amounts
utilized during the year:- Research and development costs
    
    
    (43
    )Balance as at December 31, 2005
    
    
    230
   14
Short term borrowings
  December 31,
    
    
    December 31,2004
    
    
    2005Rmb
    
    
    RmbUnsecured
bank loans repayable within one year
    
    
    
    
    
    
    3,069A secured
revolving banking facility
    
    
    
    
    
    
    500Total
    
    
    
    
    
    
    3,569
  15 Other liabilities and accrued expenses
 December 31,
    
    
    December 31,2004
    
    
    2005Rmb
    
    
    RmbDeposits received
    
    
    1,373
    
    
    
    934Accrued salaries and staff benefits
    
    
    1,007
    
    
    
    2,021Others
    
    
    78
    
    
    
    7642,458
    
    
    
    3,719
 F-21




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 16 Stock-based compensation
        Year ended December 31,2003
    
    2004
    
    2005Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    average
    
    
    
    
    
    averageexercise
    
    
    
    
    
    exercise
    
    
    
    
    
    exerciseNumber
    
    price
    
    Number
    
    price
    
    Number
    
    priceof
    
    (US$ per
    
    of
    
    (US$ per
    
    of
    
    (US$ peroptions
    
    share)
    
    options
    
    share)
    
    options
    
    share)Outstanding at beginning of year
    
    
    140,000
    
    
    
    1.15
    
    
    
    140,000
    
    
    
    1.15
    
    
    
    140,000
    
    
    
    1.15Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    430,000
    
    
    
    1.85Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    140,000
    
    
    
    1.15
    
    
    
    140,000
    
    
    
    1.15
    
    
    
    570,000
    
    
    
    1.68
 F-22




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 16 Stock-based compensation (continued)
  Options outstandingWeighted
    
    
    
    
    
    Options exercisableaverage
    
    Weighted
    
    
    
    
    
    Weightedremaining
    
    average
    
    
    
    
    
    averageNumber
    
    contractual
    
    exercise
    
    Number
    
    exerciseDate of grant
    
    outstanding
    
    life
    
    price
    
    exercisable
    
    price(US$ per share)
    
    
    
    (US$ per share)December 28, 1999
    
    
    140,000
    
    
    4 years
    
    
    1.15
    
    
    
    140,000
    
    
    
    1.15September 20, 2005
    
    
    430,000
    
    
    9.72 years
    
    
    1.85
    
    
    
    430,000
    
    
    
    1.85570,000
    
    
    
    
    
    
    
    
    
    
    
    570,000
   Stock-based compensation to non-employees
   Average risk-free rate of return*
    
    
    3.983
    %Weighted average expected option life
    
    2.5 yearsVolatility rate
    
    
    133.18
    %Dividend yield
    
    
    
 
 * Risk-free rate represents the yields to maturity of respective US Government
STRIPS (Source: Bloomberg) 17 Loss per share
   F-23




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 17  (continued)
 Year ended December 31,2003
    
    
    2004
    
    
    2005Rmb
    
    
    Rmb
    
    
    RmbNet loss for the year
    
    
    (942
    )
    
    
    (10,115
    )
    
    
    (19,532
    )Net loss from continuing operations attributable to
holders of common stock, basic and diluted shares
    
    
    (1,308
    )
    
    
    (10,369
    )
    
    
    (19,244
    )Net income/(loss) from discontinued operations
attributable to holders of common stock, basic and
dilutive shares
    
    
    366
    
    
    
    254
    
    
    
    (288
    )Weighted-average shares used in computing basic and
diluted loss per share
    
    
    6,894
    
    
    
    6,894
    
    
    
    7,327Incremental shares from assumed conversions of
stock options
    
    
    
    
    
    
    55
    
    
    
    274Weighted-average shares used in computing diluted
loss per share
    
    
    6,894
    
    
    
    6,949
    
    
    
    7,601Loss per
share (in Rmb)- Basic and dilutive
    
    
    (0.14
    )
    
    
    (1.47
    )
    
    
    (2.67
    )Loss per
share from continuing operations (in Rmb)- Basic and dilutive
    
    
    (0.19
    )
    
    
    (1.51
    )
    
    
    (2.63
    )Income/(loss) per share from discontinued operations (in Rmb)- Basic and dilutive
    
    
    0.05
    
    
    
    0.04
    
    
    
    (0.04
    )
   18 Related party transactions
  Year ended December 31,2003
    
    
    2004
    
    
    2005Rmb
    
    
    Rmb
    
    
    RmbTransactions with related partiesDisposal of Zhuhai
branch of BBHL to BEDC
(Note a)
    
    
    
    
    
    
    
    
    
    
    1,300Net
operating cash outflows of Zhuhai branch reimbursed (Note a)
    
    
    
    
    
    
    
    
    
    
    (1,300
    )Acquisition
of CNT from Beijing Holdings by
issuance of 2,233,800
new shares at US$2.41
per share and 2,146,200 new shares at US$2.1 per share respectively (Note b)
    
    
    
    
    
    
    
    
    
    
    79,928Disposal of
available-for-sale
securities to Beijing
Holdings (Note c)
    
    
    
    
    
    
    
    
    
    
    2,167
 F-24




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 18
Related party transactions (continued)
 (a)
    
    On March 31, 2005 BBHL entered into an agreement with BEDC, the sole shareholder of China Internet Technology Company
Limited (China Internet), the then 17.21% shareholder of the Company, to sell its Zhuhai branch for a consideration of Rmb 1.3 million.
The consideration was determined based on the operating cashflow generated by Zhuhai branch from May 1, 2002 to March 31, 2005, the period of which
Zhuhai branch was managed and controlled by the Company. Upon disposal, the Company agreed to reimburse the same aggregated net operating cash outflows of
Rmb 1.3 million to the Zhuhai branch as part of the conditions of disposal. The consideration of the transaction is zero as the Company received Rmb1.3 million
from BEDC and at the same time the Company transferred Rmb1.3 million to Zhuhai branch. The transaction was closed on March 31, 2005 and resulted in a disposal loss of Rmb0.51 million.(b)
    
    On September 13, 2005, the Company entered into agreements with Beijing
Holdings, the then 47.18% shareholder of the Company, to (i) acquire a 51% equity interest in
CNT in exchange for 2,233,800 shares of the Company and (ii) obtain an option to acquire the remaining
49% equity interest in CNT in exchange for 2,146,200 shares of the Company. Effective October 31, 2005,
the acquisition of 51% of CNT was completed and effective December 22, 2005, the option was also exercised
to acquire the remaining 49% equity interest in CNT.(c)
    
    On November 17, 2005, the Company entered into a sale and purchase
agreement with Beijing Holding to dispose of all of the 6,312,000 shares invested in Xian Haitian Antenna Company Limited
(Xian Haitian) then held by the Company for  a cash consideration of Rmb 2.17 million.
These shares were previously held as available-for-sale securities by the
Company and it represented less than one percent of the outstanding shares of Xian Haitian (approximately
0.975%). The sale consideration was determined by the quoted closing stock price of Xian Haitian at HK$0.33
per share at the date of the agreement. Xian Haitian is a company engaged in research, development,
production, sales, installation, services and wireless communication network optimization of base station
antennas and is also listed on the Growth Enterprise Market of the Hong Kong Stock Exchange. The shares were
acquired upon the initial public offering (IPO) of Xian Haitian. Its stock price dropped
continuously after the IPO due to poorer operating results as a result of the keen competition in the market.
Beijing Holdings is also a passive investor of Xian Haitian who owns approximately 8% equity interest of Xian Haitian after
its IPO. Beijing Holdings currently nominates one non-executive
director to the board of Xian Haitian. The Company
dose not currently participate in the management or operations
of Xian Haitian.As of December 31, 2004 and 2005, the balances with related parties were as follows:-
 December 31,
    
    
    December 31,2004
    
    
    2005Rmb
    
    
    RmbBalances with related partiesFunds held
by Beijing Holdings, the ultimate holding company, for security
investment purposes (Note d)
    
    
    6,529
    
    
    
    Proceeds
receivable from Beijing Holdings, the ultimate holding company, in respect of sale
of shares of Xian Haitian Antenna (Note e)
    
    
    
    
    
    
    2,167Funds held
by Beijing Holdings Investment Management Center, a fellow subsidiary
for security investment purposes (Note f)
    
    
    3,388
    
    
    
    Funds held
by China Biotech Holdings Limited, a related company with common
director, for potential
acquisition of technology and business in China (Note g)
    
    
    
    
    
    
    6,262Due from
Beijing Investments (BVI) Limited, a fellow subsidiary, for
security investment purposes (Note h)
    
    
    164
    
    
    
    Due from
Great Legend Internet Technology and Service Co. Ltd., a shareholder, for expenses paid on behalf
    
    
    30
    
    
    
    Due to BEDC,
the holding company of a shareholder (Note i)
    
    
    
    
    
    
    645Due to China Biotech
Holdings Limited, a related company with common director,
 (Note j)
    
    
    
    
    
    
    244
 F-25




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 18 Related party transactions (continued)
  (d)
    
    Due to Beijing Holdings  good relationship with leading
investment banks and the Companys desire to access potential investment
opportunities as a result of these relationships, the Company previously deposited funds
with Beijing Holdings (since 2002) to invest on its  behalf  in Hong Kong. Nevertheless, due
to the poor performance of the Hong Kong Stock market in the last two
years, the Company withdrew its
entire funds of Rmb 6.53 million in May 2005. There was no agreement signed with Beijing
Holdings for the deposit.(e)
    
    On November 17, 2005 the Company entered into a sale and purchase agreement with Beijing Holding
to dispose of all of the shares it held in Xian Haitian for
cash consideration of Rmb2.17 million.
The value of the consideration was determined by the quoted closing
stock price of Xian Haitian at HK$0.33
per share at the date of the agreement.(f)
    
    Due to its good relationship with leading investment banks and potential investment
opportunities to be gained from those relationships, the Company previously deposited funds with Beijing
Holdings Investment Management Center (BHIMC) to invest
our behalf in China. Again, due to the poor
performance of the China Stock market, we withdrew the entire funds of Rmb 3.39 million in December
2005. There was no agreement signed with BHIMC for the deposit.(g)
    
    China Biotech Holdings Limited (China Biotech),
is a company incorporated in BVI in  which Mr. Alan
Li, the executive director and Co-Chief Executive Officer of the Company, is also an executive
director. China Biotech has experience in nutraceutical business in China. China Biotechs experience
includes making investments in companies and technologies involved in this industry. In view of China
Biotechs experience, the Company deposited  Rmb 6.26 million  with China Biotech for the purpose of making
(with the assistance of China Biotech) potential acquisitions of technology and businesses in the
nutraceutical industry in China. There was no agreement signed for the funds deposited with China Biotech
and the Company can withdraw the funds without any restrictions.(h)
    
    The amount represented the advance of funds for the purchase on behalf of the Company of
trading securities in Hong Kong by Beijing Investments (BVI) Limited, a wholly owned
subsidiary of Beijing Holdings. This amount was wholly withdrawn by the Company in March
2005.(i)
    
    The amount represented the contract sums received on behalf of BEDC by BHLHK in Hong Kong
as the customer of BEDC paid in Hong Kong dollars whereas BEDC did not maintain a Hong Kong
dollar bank account in Hong Kong.(j)
    
    The amount represented administrative expenses paid on behalf
of CNT by
China Biotech in China.
 19
Retirement benefits
  F-26




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 20
Common Stock
  Ordinary sharesCommon
    
    
    Treasury
    
    
    with par value
    
    
    Additional paid-instock
    
    
    stock
    
    
    US$0.01 each
    
    
    capital
    
    
    TotalRmb
    
    
    Rmb
    
    
    RmbDecember 31, 2004
    
    
    6,894,497
    
    
    
    2,150,391
    
    
    
    571
    
    
    
    187,159
    
    
    
    187,730Issues of shares for
acquisition during the year
    
    
    4,380,000
    
    
    
    
    
    
    
    339
    
    
    
    79,589
    
    
    
    79,928Stock
options granted to certain consultants (Note (a))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    701
    
    
    
    701Stock
options granted to officers (Note (b))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,475
    
    
    
    2,475Cancellation of treasury stocks
    
    
    
    
    
    
    (2,150,391
    )
    
    
    
    
    
    
    
    
    
    
    December 31, 2005
    
    
    11,274,497
    
    
    
    
    
    
    
    910
    
    
    
    269,924
    
    
    
    270,834
 
 (a)
    
    This represented the fair value of the stock options granted
to certain consultants.(b)
    
    This represented the expenses of the stock options granted to
the Companys chairman and chief executive officer. Details of
which is discussed in Note 2(p)(c)
    
    The entire treasury stocks of 2,150,391 shares of the Company had been cancelled during the
year ended December 31, 2005. 21 Contingencies and commitments
 Operating lease commitments
  December 31,2004
    
    
    2005Rmb
    
    
    RmbIn respect of land and buildingsNot later than one year
    
    
    477
    
    
    
    615Later than one year and not later than five years
    
    
    
    
    
    
    332Later than five years
    
    
    
    
    
    
    Total
    
    
    477
    
    
    
    947
  F-27




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 21 Contingencies and commitments (continued)
 Operating lease commitments (continued)(a)
    
    The lease agreement of our Corporate Office (situated in Hong
Kong) commenced on May 27, 2005, and shall continue for a period of two
years, at a monthly rent of Rmb 33. As of December 31, 2005, the future minimum lease payments
under this non-cancelable operating lease amounted to Rmb 358 and Rmb 158 for years ended
December 31, 2006 and 2007 respectively.(b)
    
    The lease agreement of staff quarters (situated in Hong Kong)
for managers of our Corporate Office commenced on
December 11, 2005, and shall continue for a period of two years, at a monthly rent of Rmb 7. As of December 31,
2005, the future minimum lease payments under this non-cancelable operating lease amounted to
Rmb 86 and Rmb 81 for years ended December 31, 2006 and 2007 respectively.(c)
    
    The lease agreement of staff quarters (situated in Hong Kong) for Alan Li, the executive director and Co-Chief
Executive Officer of the Company, commenced on December 8, 2005,
and shall continue for a period of two years,
at a monthly rent of Rmb 8. As of December 31, 2005, the future minimum lease payments under
this non-cancelable operating lease amounted to Rmb 100 and Rmb 93 for years ended December
31, 2006 and 2007 respectively.(d)
    
    The lease agreement for the office of Shenzhen Innoessen
(situated in Shenghen, PRC)
commenced on March 23, 2005, and shall continue for
a period of one year, at a monthly rent of Rmb 24. As of December 31, 2005, the future minimum
lease payments under this non-cancelable operating lease amounted to Rmb 71 for year ended
December 31, 2006.
  Contingencies
  F-28




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 22 Segment information
    Net identifiable
    
    
    DepreciationOperating
    
    
    assets/
    
    
    and
    
    
    CapitalRevenues
    
    
    loss
    
    
    (liabilities)
    
    
    amortization
    
    
    expendituresRmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    RmbYear 2005IT Operations
    
    
    6,468
    
    
    
    (3,269
    )
    
    
    2,579
    
    
    
    67
    
    
    
    221Nutraceutical Operations
    
    
    1,035
    
    
    
    (1,343
    )
    
    
    11,890
    
    
    
    410
    
    
    
    16,584Total operating segments
    
    
    7,503
    
    
    
    (4,612
    )
    
    
    14,469
    
    
    
    477
    
    
    
    16,805Corporate
    
    
    
    
    
    
    (13,274
    )
    
    
    14,713
    
    
    
    118
    
    
    
    454Group
    
    
    7,503
    
    
    
    (17,886
    )
    
    
    29,182
    
    
    
    595
    
    
    
    17,259Year 2004IT Operations
    
    
    2,720
    
    
    
    (7,798
    )
    
    
    (1,920
    )
    
    
    76
    
    
    
    Total operating segments
    
    
    2,720
    
    
    
    (7,798
    )
    
    
    (1,920
    )
    
    
    76
    
    
    
    Corporate
    
    
    
    
    
    
    (2,981
    )
    
    
    33,473
    
    
    
    
    
    
    
    Group
    
    
    2,720
    
    
    
    (10,779
    )
    
    
    31,553
    
    
    
    76
    
    
    
    Year 2003IT Operations
    
    
    8,405
    
    
    
    (2,102
    )
    
    
    3,581
    
    
    
    1,560
    
    
    
    29Total operating segments
    
    
    8,405
    
    
    
    (2,102
    )
    
    
    3,581
    
    
    
    1,560
    
    
    
    29Corporate
    
    
    
    
    
    
    (2,276
    )
    
    
    36,161
    
    
    
    
    
    
    
    Group
    
    
    8,405
    
    
    
    (4,378
    )
    
    
    39,742
    
    
    
    1,560
    
    
    
    29
     F-29




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 23 Subsequent events
 Investment In Fujian Jianou Yingshi Food Technology Limited (Fujian Jianou)
   Disposal
of Anji Bio
  F-30