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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 20-F (Mark One) 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, 2003
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission file number TRAMFORD INTERNATIONAL LIMITED 
 (Translation of Registrants name into English)British Virgin Islands
(Jurisdiction of incorporation or organisation)34th Floor, West Tower, Shun Tak Centre, Hong Kong
(Address of principal executive offices)
 Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class
    
    Name of each exchange on which registeredNone
    
    Not Applicable
 Securities registered or to be registered pursuant to Section 12(g) of the Act. Common Stock, Par Value US$0.01 each(Title of Class)




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-2- Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act. None(Title of Class)
 As of June 20, 2004, there were 6,894,497 shares of Common Stock outstanding,
with par value of US$0.01 each. Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. þ
    
    Yes            o   No
 Indicate by check mark which financial statement item the registrant has
elected to follow o
    
    Item 17            þ    Item 18




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TABLE OF CONTENTS  IntroductionPART IEXHIBITS INDEXSIGNATURESLIST OF COMPANY'S SIGNIFICANT SUBSIDIARIESCERTIFICATION OF CEO & CFO (SECTION 302)CERTIFICATION OF CEO & CFO (SECTION 906)    Table of Contents  -3- 
 Introduction This annual report on Form 20F includes our audited consolidated financial
statements as of December 31, 2002 and 2003, and for each of the three years in
the period ended December 31, 2001, 2002 and 2003. We listed our common stock, par value of US$0.01 each, on the Nasdaq Small
Capital Market, or Nasdaq, under the symbol TRFDF. Except as otherwise required by the context, references in this Annual
Report to Tramford, Company, us or we refer to Tramford International
Limited. The term you refers to holders of Common Stocks. The terms Hong
Kong and the Government refer to the Hong Kong Special Administration Region
of the Peoples Republic of China and its government, respectively. The term
PRC, China and The PRC government refers to the Peoples Republic of
China and its government. Forward Looking Statements Some of the statements contained in this annual report contain
forward-looking information within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are found in Item 3, this Item
4, Item 5 and other sections in which the future prospects of the Company are
discussed. These statements include information concerning:  
    
    growth and operating strategy,  
    
    liquidity and capital expenditures,  
    
    the Companys financing plans,  
    
    industry trends, and  
    
    payment of dividends. You can identify these statements by forward-looking terminology such as
anticipate, expect, believe, goal, plan, intend, estimate, may,
can, could, will and would or similar words. These forward-looking
statements involve known and unknown risks, uncertainties and other factors,
including those described in this Item 4 and elsewhere in this annual report
that could cause our actual results to differ materially from those anticipated
in these forward-looking statements. For a further discussion of such risks
and uncertainties, see Item 3 Key Information  Risk Factors. You should
consider these factors carefully in evaluating any forward-looking statements
and should not place any undue reliance on any forward-looking statement. You
should keep in mind that any forward-looking statement made by us in this
Annual Report or elsewhere speaks only as of the date on which we made it. New
risks and uncertainties come up from time to time, and it is impossible for us
to predict these events or how they may affect us. We are under no obligation
to, and do not intend, to update or revise our forward-looking statements made
herein to reflect actual results or changes in assumptions or other factors
that could affect those statements.




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-4- 
 PART I  Item 1.
    Identity of Directors, Senior Management and Advisers Not Applicable.  Item 2.
    Offer Statistics and Expected Timetable Not Applicable.  Item 3.
    Key Information  A.
    Selected financial data The following selected financial date should be read in conjunction with
the Managements Discussion and Analysis of Financial and Results of
Operations, and the Financial Statements and Notes thereto included elsewhere
in this Annual Report. The selected financial data at December 31, 2002 and 2003 and years ended
December 31, 2001, 2002 and 2003 have been derived from and should be read with
our audited consolidated financial statements, including notes to the
consolidated financial statements, included in this Annual Report beginning on
page F-1. We derived the selected financial data at December 31, 2001, 2000 and
1999 and for the years ended December 31, 2000 and 1999 from our consolidated
financial statements, which have been prepared in according with U. S. GAAP,
but have not been included in this Annual Report. All financial data included elsewhere in the Annual Report are expressed,
unless otherwise stated, in the nearest thousand of Renminbi (Rmb). In this
Annual Report, references to Renminbi or Rmb are to the currency of Peoples
Republic of China, and references to U.S. dollars or US$ are to the
currency of United States of America. This Annual Report contains translations
of Renminbi amounts into U.S. dollar amounts, solely for your convenience.
Unless otherwise indicated, the translations have been made at Rmb8.2767 =
US$1.00, which was the noon buying rate in The City of New York for cable
transfers in Renminbi as certified for customs purposes by the Federal Reserve
Bank of New York on December 31, 2003. See Item Key Information  Selected
Financial Data  Exchange Rate Information for historical information
regarding this noon buying rate. You should not construe these translations as
representations that the Renminbi actually represents such U.S. dollar amounts
or could have been or could be converted into U.S. dollars at the rate
indicated or at any other rates.




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-5- (Amounts in thousands, except per share data)Year Ended
    
    Year Ended
    
    Year Ended
    
    Year Ended
    
    Year Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    US$(1)Statement of Operations
Data:Operating loss
    
    
    (4,717
    )
    
    
    (2,029
    )
    
    
    (13,361
    )
    
    
    (19,910
    )
    
    
    (4,012
    )
    
    
    (484
    )Non-operating income
    
    
    2,862
    
    
    
    3,373
    
    
    
    2,555
    
    
    
    2,456
    
    
    
    2,429
    
    
    
    293Income/(loss) from continuing
operations before income
tax provision and minority interests
    
    
    (1,855
    )
    
    
    1,344
    
    
    
    (10,806
    )
    
    
    (17,595
    )
    
    
    (1,583
    )
    
    
    (191
    )Discontinued operationsProfits/(Loss) from operations
of disposed subsidiaries
    
    
    (14,875
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on disposal of subsidiaries
    
    
    20,011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income/(loss) for the year
    
    
    3,281
    
    
    
    1,440
    
    
    
    (9,141
    )
    
    
    (15,446
    )
    
    
    (942
    )
    
    
    (114
    )Earnings/(loss) per share
    
    
    0.42
    
    
    
    0.21
    
    
    
    (1.32
    )
    
    
    (2.24
    )
    
    
    (0.14
    )
    
    
    (0.01
    )Earnings/(loss) per share from
continuing operations
    
    
    (0.23
    )
    
    
    0.21
    
    
    
    (1.32
    )
    
    
    (2.24
    )
    
    
    (0.14
    )
    
    
    (0.01
    )Earnings per share from discontinued
operations
    
    
    0.65
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ASupplemental data to Statements
of OperationsRevenues (2)
    
    
    19,226
    
    
    
    15,727
    
    
    
    7,305
    
    
    
    8,283
    
    
    
    11,742
    
    
    
    1,418Cost of sales (2)
    
    
    17,680
    
    
    
    12,612
    
    
    
    5,203
    
    
    
    4,825
    
    
    
    6,625
    
    
    
    800Gross Profit(2)
    
    
    1,545
    
    
    
    3,115
    
    
    
    2,102
    
    
    
    3,458
    
    
    
    5,117
    
    
    
    618Balance Sheet Data:Total assets
    
    
    74,803
    
    
    
    104,128
    
    
    
    93,407
    
    
    
    55,208
    
    
    
    51,582
    
    
    
    6,229Total liabilities
    
    
    4,562
    
    
    
    27,743
    
    
    
    27,846
    
    
    
    7,818
    
    
    
    5,391
    
    
    
    650Shareholders equity
    
    
    70,241
    
    
    
    71,681
    
    
    
    62,522
    
    
    
    46,500
    
    
    
    46,191
    
    
    
    5,579




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-6-  (1)
    
    For the convenience of the reader, translation of amounts from Renminbi
(Rmb) into United States Dollars (US$) 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, 2003 of Rmb 8.2767 = $1.00. No representation is made that
the Renminbi amounts could have been, or could be, converted into United
States Dollars at that rate or at any other certain rate. The table set
forth the average, high, low and period-end noon buying rate between the
Rmb and the U.S. dollar (in Rmb per U.S.dollar) is set out in Item 10 (D).
The Renminbi is not freely convertible into foreign currencies. The China
government has instituted a single regulated floating exchange rate system
principally based on market supply and demand. Under this system, a
nationwide inter-bank foreign exchange banks where Renminbi can be
converted into foreign currencies subject to prior approval from the China
State Administration of Exchange Control.(2)
    
    Revenues, cost of sales and gross profit for the period ended December
31, 1999 refers to that of Linyi Baoquan Bathtub Company Limited
(Baoquan) and Linyi Xinhua Building Ceramics Company Limited (Xinhua)
disposed of in July 2, 1999. Baoquan and Xinhua are hereinafter referred
to, collectively, as the Disposed Operations. Net sales, cost of goods
and gross profit for each of the four years in the period ended December
31, 2000, 2001, 2002 and 2003 refers to that of the BHL Networks
Technology Co. Ltd. (BHLNet) and Beijing BHL Networks Technology Co.
Ltd. (BBHL) acquired in June 30, 2000. BHLNet and BBHL are hereinafter
referred to, collectively, as the New Operations.  B.
    Capitalization and indebtedness. Not Applicable.  C.
    Reasons for the offer and use of proceeds. Not Applicable.  D.
    Risk factors. Certain risks associated with your investment in our common stock are
described below. These risks and other additional risks not presently known to
us or that we deem immaterial may impair our business operations and could
materially adversely affect our business, operating results and financial
condition and could result in a complete loss of your investment. You should
carefully consider the risks described below and other information in this
annual report before deciding to invest in the Company. We have limited operating history and evolving business model and
strategy. The Company was originally engaged in sanitary wares and ceramic tiles
manufacturing business and was changed to internet related business since June
2000, with focus on system integration services (SI). In 2001, SI was
terminated due to very keen competition and low profit margin. Then we
positioned ourselves as a network security services provider and started
developing on own products. Major developments of our existing products were
completed in 2002 and certificates on these products were obtained from the
Police Bureau, Security Bureau, etc in subsequent months. The network security market of China is rapidly evolving. We lack
experience in managing this new market. Accordingly, we cannot assure that we
will succeed in meeting customers needs in these markets. If we fail to
modify our business model or strategy to adapt to these market changes, our
business may suffer. We have continued operating losses and we cannot provide assurance that we
can achieve or sustain profitability.




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-7- We have incurred operating losses in the preceding five years as follows:- Year
    
    Operating loss(in thousands of Rmb)1999
    
    
    4,7172000
    
    
    2,0292001
    
    
    13,3612002
    
    
    19,9102003
    
    
    4,012
 While the losses from New Operations were decreasing and we believe the
New Operations may be turned around in two years time, we cannot give any
assurances that operating losses will not increase in the future because our
revenues, gross margins and operating results may fluctuate significantly due
to, among other things:  
    
    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 price changes and those of our competitors;
    
    our research and development and marketing abilities;
    
    the acquisition costs of 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 forces, if any; and.
    
    the number of new projects led by the Chinese government bureaus. These factors make predicting revenues more difficult and may adversely
affect our performance and profitability. Although we believe more sales
contracts may be entered into in the future, there is no assurance that these
contracts can be successfully executed, or even if successfully executed, we
may not control our costs effectively. The operating results would be
materially adversely affected in case the contracts are not successfully
obtained and costs are not effectively controlled. Our business is facing a highly competitive market in China.




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-8- We are subject to various risks, uncertainties, expenses, delays, problems
and difficulties frequently encountered in the establishment of a software and
technology business on the Internet in China which is generally characterized
by intense competition. Our potential competitors may come from:  
    
    competitors who have greater financial and marketing resources
and greater name recognition;
    
    competitors have similar definition in their products;  
    
    large global competitors, especially after Chinas entry into
the World Trade Organisation (the WTO). The Internet market is subject to continuing changes and new competitors
may better position themselves to compete in the market as it matures. Chinas
entry into WTO may intensify the competition. If we fail to maintain our
competitive position in the market, our results may be materially adversely
affected. Risks of acquisition of new business, products and technologies As a component of our business and growth strategy, we intend to acquire
companies, products and technologies that we feel will enhance our business
model, revenue base, operations and profitability. The acquisitions may result
in use of significant amounts of cash, dilative issuances of common stocks,
amortization expenses related to certain intangible assets and annual
impairment of goodwill on acquisition, each of these could materially adversely
affect our results. We may also encounter problems in implementing effective controls over
acquired business, including:  
    
    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. The acquisition implementation process may last longer than one financial
reporting period. Any failure in such implementation may have an adverse
effect on our business, results of operates and financial condition.




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-9- There are risks of employee retention and new employee assimilation Many of our employees are located in areas and have skills in fields where
there is high worker mobility and work force turnover. The departure of a
large number of our employees or a meaningful number of key non-executive
employees, or additions of new employees can be disruptive and could materially
adversely impact our business, including our ability of new products
development, existing products upgrading and products sales and marketing.
Competition for these employees is intense and is expected to remain so for the
foreseeable future. We have seen upward pressure on wages as a result of this
intense competition for employees, which could cause an increase in our
operating expenses. We expect to rely, and will continue to rely, on a number
of key technical and management employees. If any of our key employees leave,
our business, results of operations and financial condition could suffer. Our success also depends in large part upon the continued contributions of
Li Xiao Hong, our Chairman of the Board and President, and Jiang Xinhao, our
Chief Executive Officer. The loss of their services or the services of certain
other key employees could materially adversely affect our business and
prospects. We are subject to risks of non-recurring contracts and cost controls. Prior to 2004, a substantial portion of our contracts signed by BBHL were
short-term, individual and non-recurring. Our failure in obtaining new
contracts could have a material adverse effect on our business, results of
operations and financial condition. Even if new contracts are successfully
signed, failure in cost and resources estimation and controls could expose us
to risks associated with cost overruns and penalties, which could also cause
material adverse effect on our business, results of operations and financial
condition. In 2004, we have tried efforts in improving this situation by
signing longer term contracts with guaranteed sales and recently one contract
of such nature is signed with the Legend Group. However, there is no assurance
that other similar contracts can be successfully signed and the signed
contracts will continue after its expiry. Any failure in signing these
contracts or continuing the existing contracts could have material adverse
effect on our business, results of operations and financial condition. We are subject to risks of rapid technological change in the market and
the risks associated with the product development The network security and network management market is highly fragmented
and characterized by ongoing technological developments, evolving industry
standards and rapid changes in customer requirements. Our success will depend
on our ability to:  
    
    provide a broad range of network security and network
management software 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. Our product enhancements or new products may not adequately address the
changing needs of the marketplace. New products with new technological
capabilities could replace or shorten the life cycle of our products or cause
our customers to defer or cancel purchases of our existing products.




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-10- Our product development efforts are impacted by the adoption or evolution
of industry standards and currently, no uniform industry standard had developed
in the market for encryption security products. As industry standards are
adopted or evolve, we may have to modify existing products or develop and
support new versions of existing products. In addition, if no industry
standard develops, our products and our competitors products could be
incompatible, which could prevent or delay overall development of the market
for a particular product. If our products fail to comply with existing or
evolving industry standards in a timely fashion, if any in the future, our
business, results of operation and financial condition could materially and
adversely affected. Our long-term success depends on our ability to upgrade and update
existing product offerings, modify and enhance acquired products and introduce
new products, which meet our customers needs. Future upgrades and updates may
include additional functionality, respond to user problems or address
compatibility problems with changing operating systems and environments. We
believe that our ability to provide these upgrades and updates frequently and
at low costs is key to our success. Failure to release upgrades and updates
could have a material adverse effect on our business, results of operations and
financial condition. In addition, future changes in popular operating systems
could cause compatibility problems with our products. Further, delays in the
introduction of future versions of operating systems or lack of market
acceptance of these future versions would delay or reduce demand for our future
products which were designed to operate with these future operating systems.
Our failure to introduce in a timely manner new products that are compatible
with operating systems and environments preferred by users would materially
adversely affect our business, results of operation and financial condition. We may suffer if the markets evolve out of our anticipation The markets for network management and network security products are
evolving, and their growth depends upon broader market acceptance. Although
the number of networks has increased dramatically in China, the network
management and network security markets continue to be emerging markets. These
markets may not continue to develop or may not develop rapidly enough to
benefit our business significantly. In addition, there are a number of
potential approaches to network management and network security, including the
incorporation of management and security products into network operating
systems. Therefore, even if network management and network security tools gain
broader market acceptance, potential purchasers may not select our products.
To the extent that either the network management or network security market
does continue to develop, we expect that competition will increase. We do not intend to pay dividends The future payment of dividends is within the discretion of the Board of
Directors. The Board does not intend to declare any dividends in the
foreseeable future, but instead intends to retain all future earnings, if any,
for use in our business operations. We are subject to risk of hackers attacks Following the increase in computer crimes in China, computer hackers may
create viruses to sabotage or otherwise attack our products. Although no such
event has occurred or discovered to date, the adverse impact arising from any
virus sabotage or attacks cannot be ignored. If sabotage or attacks on our
products do happen, our customers computer systems could be seriously damaged.
Consequently, our business will be adversely impacted as a result of damaged
professional image. We are subject to joint venture risks




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-11- Our joint venture agreements provide for an initial term of 50 years. In
the event the term of the joint venture agreements is not extended, the joint
ventures will be dissolved and liquidated pursuant to the provisions of the
applicable law and the applicable joint venture agreement. In addition, joint
ventures may be terminated prior to the expiration of the joint venture
agreement upon the occurrence of certain events, including without limitation,
the inability of the enterprise to conduct its business due to financial losses
or a breach of the joint venture agreement by one of the parties. We expect the volatility of our stock price will continue Our stock price was volatile and ranged from a per-share high of US$3.77
to low of US$0.03 during the period from January 1, 2003 to May 20, 2004. On
May 28, 2004, the per share closing price for common stock was US$1.60. The
stock price volatility is not within our control. Many factors affect our
stock price. Our ability to meet the expectations of investors with respect to
our operating and financial results may contribute to current and future stock
price volatility. Our business may be adversely affected by Chinese government regulation of
Internet companies. China is regulating its Internet sector by making new pronouncements or
enacting regulations regarding the legality of foreign investment in the
Chinese Internet sector, the existence and enforcement of content restrictions
on the Internet and the availability of securities offerings by companies
operating in the Chinese Internet sector. There are substantial uncertainties
regarding the proper interpretation of current and future Chinese Internet laws
and regulations. Although we believe and have been advised that many current
regulations will not apply to us, we cannot assure that existing or future
regulations will be interpreted differently. A majority of Chinese laws, regulations and legal requirements governing
the Internet are relatively new and untested, their interpretation and
enforcement of what is deemed to be socially destabilizing by Chinese
authorities may involve significant uncertainty. In addition, the Chinese
legal system is a civil law system in which decided legal cases have little
precedential value. As a result, we cannot predict the actions of Chinese
legal authorities, particularly with regard to the Internet and software,
including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement of local regulations by national laws. Besides, the interpretation and application of existing Chinese laws and
regulations, the stated positions of the Ministry of Information Industry and
the possible new laws or regulations have created substantial uncertainties
regarding the legality of existing and future foreign investments in, and the
businesses and activities of, Chinese Internet businesses. Accordingly, it is
possible that the relevant Chinese authorities could, at any time, assert that
any portion or all of our existing or future ownership structure and businesses
violates Chinese laws and regulations. It is also possible that the new laws or
regulations governing the Chinese Internet sector that may be adopted in the
future will prohibit or restrict foreign investment in, or other aspects of,
any of our current or proposed businesses and operations. If we are found to be in violation of any existing or future Chinese laws
or regulations, the relevant Chinese authorities would have broad discretion in
dealing with such a violation, including, without limitation, the following:  
    
    levying fines;
    
    revoking our business license;
    
    requiring us to restructure our ownership structure or operations; and




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-12-  
    
    requiring us to discontinue any portion or all of our Internet business. We are subject to risks relating to operating a business in China Chinas entry into the WTO.China formally became a member of the WTO in
2002. China is required to reduce tariffs and to eliminate other trade
restrictions, which may lead to increased foreign investment and foreign
competition in Chinas markets from international companies and the impact of
which on Chinas economy and our business would remain uncertain. The foreign
competitors are usually characterized by better research and development and
financial backup who can bear a longer period of net operating loss and have
larger scaled marketing campaign. Even we have optimistic expectation because
of customers preference in using locally developed products and our technical
strength, our operation may also be adversely affected if eventually the
foreign competitors form joint ventures with certain local competitors. Chinese government controls the conversion of the Chinese currency, the
Renminbi.We must rely on the Chinese governments foreign currency conversion
policies, which may change at any time, in regard to our currency exchange
needs. In 2002, a 77.4% of total revenue is received in Renminbi, which is not
freely convertible into other foreign currencies. In China, the government has
control over Renminbi reserves through, among other things, direct regulation
of the conversion of Renminbi into other foreign currencies and restrictions on
foreign imports. Although foreign currencies which are required for current
account transactions, such as the payment of dividends to shareholders to
foreign invested enterprises such as ourselves, can be bought freely at
authorized Chinese banks, the proper procedural requirements prescribed by
Chinese law must be met. At the same time, Chinese companies are also required
to sell their foreign exchange earnings to authorized Chinese banks and the
purchase of foreign currencies for capital account transactions still requires
prior approval of the Chinese government. This type of heavy regulation by the
Chinese government of foreign currency exchange restricts certain of our
business operations and a change in any of these government policies, or any
other, could further negatively impact our operations. Chinese governments austerity measures.In view of excess investments in
certain industries, the Chinese government had recently imposed austerity
measures mainly by limiting loans borrowed by certain enterprises. Such
termination of cash source may cause our customers withholding the proposed
tenders and affecting their settlements to us, which could affect materially
adversely our business development, results of operations and financial
condition. Although no such situation was noted, we cannot assure that the
adverse effects will exist in future. Our results of operations and financial
situation could be impacted negatively if such situation existed. Severe Acute Respiratory Syndrome (SARS) The SARS happened in 2003 had caused significant impact on our operations
in aspects of governments and customers withholding of tenders and closure
of their offices rendering us unable to perform duties as stipulated in our
agreements. Even the SARS is now under control, however, there is no assurance
that it will not re-emerge in the coming seasons. If it comes, we cannot
assure that the same efforts and spirits of us as if that in the post-SARS
period in 2003 can be sustained to ratify the adverse effect happened to our
operation. Our results may be materially adversely affected if another SARS or
similar epidemic happens. Rights of Shareholders under British Virgin Islands Law May Be Less than
in U.S. Jurisdictions




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-13- General.Our corporate affairs are governed by our Memorandum and
Articles of Association and by the International Business Companies Act of the
British Virgin Islands. Principles of law relating to such matters as the
validity of corporate procedures, the fiduciary duties of our management,
directors and controlling shareholders and the rights of our shareholders
differ from those that would apply if we were incorporated in a jurisdiction
within the United States. Further, the rights of shareholders under British
Virgin Islands law are not as clearly established as the rights of shareholders
under legislation or judicial precedent in existence in most United States
jurisdictions. Thus, our public shareholders may have more difficulty in
protecting their interests in the face of actions by the management, directors
or controlling shareholders than they might have as shareholders of a
corporation incorporated in a United States jurisdiction. Fiduciary Duties.Under the laws of most jurisdictions in the United
States, majority and controlling shareholders generally have certain
fiduciary responsibilities to the minority shareholders. Shareholder action
must be taken in good faith and actions by controlling shareholders which are
obviously unreasonable may be declared null and void. British Virgin Islands
law protecting the interests of minority shareholders may not be as protective
in all circumstances as the law protecting minority shareholders in United
States jurisdictions. In addition, in most United States jurisdictions,
directors owe a fiduciary duty to the corporation and its shareholders,
including a duty of care, pursuant to which directors must properly apprise
themselves of all reasonably available information, and a duty of loyalty,
pursuant to which they must protect the interests of the corporation and
refrain from conduct that injures the corporation or its shareholders or that
deprives the corporation or its shareholders of any profit or advantage. Many
United States jurisdictions have enacted various statutory provisions which
permit the monetary liability of directors to be eliminated or limited. Under
British Virgin Islands law, liability of a corporate director to the
corporation is basically limited to cases of willful malfeasance in the
performance of his duties or to cases where the director has not acted honestly
and in good faith and with a view to the best interests of the corporation. Enforcement of Civil Liabilities.There is doubt that the courts of the
British Virgin Islands would enforce, either in an original action or in an
action for enforcement of judgments of United States courts, liabilities which
are predicated upon the securities laws of the United States.  Item 4.
    Information on the Company  A.
    History and development of the Company. The Company was incorporated as an International Business Company under
the laws of the British Virgin Islands (BVI) in September 1995. The Company
previously owned, through its wholly owned subsidiaries, Jing Tai Industrial
Investment Company Limited (Jing Tai), which was subsequently renamed to BHL
Networks Technology Company Limited (BHLHK), and Jolly Mind Company Limited
(Jolly Mind), both Hong Kong companies, 95% equity interests in each of Linyi
Baoquan Bathtub Company Limited (Baoquan) and Linyi Xinhua Building Ceramics
Company Limited (Xinhua)(collectively, the Disposed Operations). The
Disposed Operations are Sino-foreign equity joint ventures incorporated under
the laws of China. A wholly owned subsidiary of BHLHK, Beijing Taigong Sanitary
Wares Company Limited (Taigong), was also incorporated in Beijing in 1997
under the laws of China as our administrative and sales support office of the
PRC Operations. Pursuant to certain sales and purchases agreements entered into among
BHLHK, Shandong Linyi Industrial Enamel Joint Stock Company (Linyi
Industrial), Jolly Mind and Shandong Luozhang Group Company (Shandong
Luozhang), on July 2, 1999, the BHLHKs interest in the Disposed Operations
were disposed of through the sale by BHLHK of its 60% interests in each of
Baoquan and Xinhua to




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-14- Shandong Luozhang in cash consideration of Rmb28 million. Pursuant to a
Share Purchase Agreement dated July 2, 1999 entered into between the Company
and Linyi Industrial, the Company sold all of its interest in Jolly Mind, which
owns a 35% interest in each of Baoquan and Xinhua, to Linyi Industrial in
consideration of 1,952,291 shares (the Consideration Shares) of Common Stock
of the Company. In January, 2000, Taigong applied for a voluntary dissolution
which was approved in March, 2000. On June 30, 2000, Jingle Technology Co., Ltd., the Companys wholly owned
subsidiary incorporated in the British Virgin Islands, entered into an
agreement with China Internet Technology Co., Ltd. (China Internet) and Great
Legend Internet Technology and Service Co., Ltd. (Great legend) to acquire
the entire outstanding shares of BHL Networks Technology Co. Ltd. (BHLNet), a
company incorporated under the laws of the Cayman Islands, which owns a 76%
interest in Beijing BHL Networks Technology Co. Ltd. (BBHL), a company
incorporated under the laws of China. BHLNet and BBHL are hereinafter referred
to, collectively, as the New Operations The Companys registered office is located at P.O. Box 71, Craigmuir
Chambers, Road Town, Tortola, BVI. Only corporate administrative matters are
conducted at this office, through the Companys registered agent, HWR Services
Limited. The Companys principal executive office is located at 34th Floor,
West Tower, Shun Tak centre, 200 Connaught Road Central, Hong Kong.  B.
    Business overview. Market Overview The network security market of China is growing in the last consecutive
three years. According to statistics of the China Center for Information
Industry Development issued in April 2004, the total sales in the first quarter
of 2004 amounted to Rmb 602 million, which was increased by Rmb 105 million, or
21.1%, from Rmb 497 million of the same quarter in 2003. The existing share by categories of products in the China network security
market can be analyzed as follows:  1.
    
    Anti-virus: occupying 29.1% of the network security markets total sales
in the first quarter of 2004, it amounted to Rmb175 million, which was
increased by 28.7% from the same quarter in 2003;2.
    
    Firewall: occupying 42% of the markets total sales in the first quarter
of 2004, it amounted to Rmb 253 million, which was increased by 20.5% from
the same quarter in 2003;3.
    
    Hackers detection and protection: occupying 11.8% of the markets total
sales in the first quarter of 2004, it amounted to Rmb 71 million, which
was increased by 9.2% from the same quarter in 2003;4.
    
    Others (including data encryption): occupying 17.1% of the markets total
sales in the first quarter of 2004, it amounted to Rmb 103 million, which
was increase d by 19.8% from the same quarter in 2003. Among these products, anti-virus and firewall categories are much mature
market with very large domestic demand however, they also have very keen
competitions due to easier entry into the market. Hackers detection and
protection market, on the other hand, has high level of entry barriers due to
complicated technology required, but the market just left its infant stage and
its future growth remains uncertain, even the demand is growing as a result of
increasing awareness towards network security by the government bureaus and
large enterprises in recent years.




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-15-  By customers, the China network security market can be further analyzed
as follows:-1.
    
    Large enterprises: sales to large enterprises in the first quarter of
2004 amounted to Rmb287 million, representing 47.7% of the markets total
sales;2.
    
    Government bureaus: sales of the first quarter of 2004 to government
bureaus amounted to Rmb126 million, representing 20.9% of market share;3.
    
    Small to medium enterprises: sales of the first quarter of 2004 to small
to medium enterprises amounted to Rmb119 million, representing 19.8% of
market share;4.
    
    Education institutions: sales of first quarter of 2004 to these
institutions amounted to Rmb43 million, representing 7.1% of market share;
and5.
    
    Family: sales to family in the first quarter of 2004 amounted to Rmb27
million, representing 4.5% of market share. Large enterprises and government bureaus account for the largest market
share as they are not price sensitive due to enough funding of them in
acquiring the security products, others remain price sensitive. Company Overview The Company was transformed to a network security service provider after
our acquisition of the BHLNet in 2002. Our current business focuses on the
network security and related software development. Our long-term goal is to
maximize the value of the Company and thus the shareholders value, with an
operating strategy focused on technology innovation. We stress innovation,
reliability, flexibility and efficiency to ensure high degree of advancement in
technology and commercialization of research results. We believe the existing
market preference of local products and services, the governmental regulations
and our technological advancement will create good market opportunities for our
business. Upon the acquisition of the BHLNet, we positioned ourselves as a provider
of system integration services, network security and network management
solutions. With limited investment in research and development at the initial
stage, which is caused by our difficulties in recruiting qualified staff and
our reliance on shift of mature technologies from the Institute of Computing
Technology (ICT), our products are generally similar to those provided by our
competitors. In order to be pioneers in our key markets, we switched our
business focus to self-developed security software in 2001 and had established
a research and development team formed by experienced research staff recruited
from universities and competitors. This change was proved successfully, in
particular in the development of the Intranet/Internet Physical Separation
Security Solution (the IPSSS), a unique product which was generally
recognized and certified by the relevant government agencies and had accounted
for the majority of the 2002 sales. In 2003, based on the technology backbone
of the IPSSS, we further developed the BHL Information Security Gate System
(the Security Gate). The Security Gate enhanced the safe exchange of
information between two networks which was completely physically separated. Description of Products and Services The Company focuses in network security solution and related products. It
mainly includes the Security Gate, IPSSS, Secure Channel and Secure Server.
The major target customers include large enterprises and government bureaus,
who are less price sensitive and are financially capable in payment.




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-16- We have obtained ten certificates as related to our security products from
all related government bureaus in the past three years, which represents their
recognition of the superiority of our products. Our most outstanding products of the network security sector include
Security Gate and IPSSS. Due to complicated technical requirements, these
products face the lowest competition in the market and gives us the highest
gross profit margin compared to other products in the market. Security Gate is
a newly developed technology. Its acceptance by users is expanding,
particularly by government agencies. Management estimates that Security Gate
will finally supersede anti-virus and firewall products as one of the most well
accepted and applied network security products in Chinas large enterprises and
government agencies. Other products focus on two important areas of Internet application 
network management and e-business software development: Network management. Network management primarily includes the BHL LDAP
Catalogue Server, BHL Search Engine V2.0, BHL Charging Proxy of Network
Expenses and BHL Re-broadcasting system V2.0. These products are highly
efficient, intelligent and provide high performance in assisting enterprises in
increasing the automatic abstraction and classification of information influx
and control of network expenses. E-business software development. Our e-business software development is
separately performed in our Zhuhai branch because Zhuhai provides for easier
access, faster reaction and better communications with our customers situated
in South China and Hong Kong. Through years of experience, we have accumulated
thorough understandings of these businesses and the specific requirements in
port business, on-line banking and on-line brokerage. Business Strategy We intends to achieve our business goals primarily through the following
strategies: Establishing and leading the industrial standards We believe the Companys products are superior to our competitors
products. There are no industrial standards set out for network security in
China. As we have obtained all necessary certificates from relevant government
bureaus proving our advanced technological status, we will apply to the
relevant authorities to use our product standards as the industrial standards
in China. We will continue investing in developing new products in order to
maintain our industry leadership position. Expanding distribution channel by cooperating with large enterprises Since it is costly to establish owned distribution channels, we started to
cooperate with enterprises having wide and mature distribution channels in
China to enhance easier penetration of our products into more industrial
sectors, through OEM (producing under their brand name) production of their
products. By the end of 2003, a contract was signed with the Legend Group, the
largest network service provider of China. Two additional contracts are
currently under negotiations. It is believed that we are the first one, among
all security gate suppliers in China, to cooperate with large enterprises.
Through established distribution network of these large enterprises, we believe
we can penetrate into the market fast with minimum costs incurred. Besides, we
can also avoid future direct competition with these enterprises who are
financially strong. Capitalise on the strengths of Beijing Holdings




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-17- Beijing, being the capital of China, is the base of headquarters of large
local and overseas enterprises and government agencies. Beijing Holdings, the
controlling shareholder of the Company, is the sole window company of the
Beijing Municipal Government established in Hong Kong. Since its incorporation
in 1979, Beijing Holdings and its management, all of them were ex-government
senior officials, had established long-term and good relationships with
majority of local enterprises and government agencies. Mr. Li Xiao Hong, the
Board Chairman and the president of the Company and also the Deputy General
Manager of Beijing Holdings, has agreed to utilise his extensive business
relationships with the senior management of potential customers in the
Companys business development. Besides, Beijing Holdings expressed support to
the Company in our future development. As we expect the government agencies and universities will remain in the
foreseeable future as our major customers, we believe our specific
relationships with Beijing Holdings, especially the personal relationships
established between the management of Beijing Holdings and the leaders of these
potential customers, may contribute positively in our business development. Capitalise on the strengths of ICT ICT is a shareholder of BBHL. ICT, an institution under the Chinese
Academy of Sciences (CAS), is well recognized in China and globally in terms
of its academic reputation and specializes in the research and development of
high-performance computer systems. The mission of ICT is Invigorate China
through Science and Education. The research of ICT is divided into fundamental
research, key technology research and application research. These research
fields supplement each other and work in coordination to develop key
technologies for the national economy and the peoples livelihood and to
transform research results into high technology products to meet the market
needs. The management of ICT highly values the cooperation with Beijing
Holdings and the Company. The Company believes the support from ICT, even though not our main source
for advanced technology, serves as one of the technology platforms of our
company. We can launch new products faster than certain competitors and have
savings in research and development costs , and thus, higher margin can be
obtained.  C.
    Organizational structure. Control of the Company Except as disclosed in the footnotes to the table contained in paragraph
(b) of this Item 4 below, the Company, to the best of its knowledge, is not
directly or indirectly owned or controlled by another corporation or by any
foreign government. The following table sets forth as of June 20, 2004, (i) all persons known
to the Company to be the owner of more than ten percent of the Companys Common
Stock and the Common Stock owned by the officers and directors as a group. Common Stock
    
    Beijing Holdings
34th Floor, West Tower, Shun Tak Centre,
200 Connaught Road Central, Hong Kong.
    
    4,372,882
(2)(3)
    
    
    63.43
    %




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-18- Common Stock
    
    Great Legend
c/o 34th Floor, West Tower, Shun Tak Centre,
200 Connaught Road Central, Hong Kong.
    
    1,186,441
(4)
    
    
    17.21
    %Common Stock
    
    China Internet
c/o 34th Floor, West Tower, Shun Tak Centre,
200 Connaught Road Central, Hong Kong.
    
    508,474
(4)
    
    
    7.38
    %Common Stock
    
    All officers and directors
As a group (two persons)
    
    6,067,797
(2)(3)(4)
    
    
    88.02
    %
  (1)
    
    Unless otherwise noted, the Company believes that 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 4,372,882 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 dated 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. Li Xiao Hong, Chairman of the Board and President of the
Company, is the Deputy General Manager of Beijing Holdings and
therefore he may be deemed to beneficially own the shares of Common
Stock owned by Beijing Holdings. Mr. Li disclaims any beneficial
interest in the shares of Common Stock owned by Beijing Holdings. In
addition to Mr. Li, the Beijing Municipal Government of the PRC, the
principal shareholder of Beijing Holdings, may be deemed to
beneficially own the shares of Common Stock owned by Beijing Holdings.(4)
    
    Pursuant to a sale and purchase agreement dated June 30, 2002,
China Internet and Great Legend acquired, respectively, 1,186,441
shares and 508,474 shares from China C&Y International Holdings
Limited, another initial shareholder of the Company. Significant Subsidiaries The Company owns 100% interest in BHLHK. BHLHK was previously the holding
vehicle of the 60% interest in each of Baoquan and Xinhua, subsidiaries engaged
in bathtub and ceramic tiles business. Since the disposals of Baoquan and
Xinhua in 1999, BHLHK became the cash management vehicle of the Company,
holding the foreign currencies of our cash assets in Hong Kong. The Company owns 76% interest, through BHLNet, a wholly owned Cayman
Island incorporated subsidiary, in BBHL, an equity joint venture incorporated
in China. BHLNet is wholly owned by Jingle, a wholly owned subsidiary of the
Company incorporated in the British Virgin Islands. BHLNet and Jingle are
investment-holding vehicles. All principal activities of the Company are done
through BBHL in China.




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-19- BBHL specializes in network technology. With network security and
information security technology and support software as its main business, the
company has established its brand image with specialized technology, system
products and comprehensive service. The principal technology of the company
include: accreditation and encryption, coding, information protection and
testing, network security technical standard and related technology as well as
products and solutions in the aspect of network information processing.  D.
    Property, plants and equipment. The Company shares its office, free of charge, with Beijing Holdings, the
controlling shareholder, which is situated at 34th Floor, West Tower, Shun Tak
Centre, 200 Connaught Road Central, Hong Kong. BHLHK, Jingle and BHL Networks
are situated at the same office of the Company. BBHL leases its office at Room 214-216, Tai Li Min Yuan Office Building,
No. 1, Wai Guan Xie Street, Chaoyang District, Beijing, 100011, China at a
monthly rent of Rmb 53,000 for a period of two years commencing from September
20, 2002. Prior to this movement, BBHL leased 8th Floor, Anhua Development
Building No. 35, Anding Street, Chaoyang District, Beijing, 100029, China at a
monthly rent of Rmb89,000. The Companys principal fixed assets are computer equipment. As at
December 31, 2003, the total net book value of the computer equipments amounted
to approximately Rmb 54,000, which represented 61.6% of the total fixed assets
of the Company. The Company believes that the physical facilities are adequate to conduct
the Companys business during the next 12 months.  E.
    Corporate governance The Company is committed to ensuring high standards of corporate
governance in the interests of shareholders and devotes considerable effort to
identifying and formalising best practices. The overall management of the Companys business is vested in the Board of
Directors, with attention focused on matters affecting the Companys finances
and shareholders. These include financial statements, dividend policy,
significant changes in accounting policy, the annual operating budget, certain
material contracts, major investments, risk management strategy and treasury
policies. Through delegation of responsibilities to the President and the Chief
Executive Officer, who are also members of the Board, the day-to-day management
of the Companys business is closely monitored by the Board. The members of the Board of Directors communicate frequently to access the
development of the Companys business. All members of the Board of Directors
have full and timely access to relevant information and may take independent
professional advice if necessary. During the year, we had established the
audit committee and had set up code of business conduct and ethics for
directors, as well as the charter of audit committee of the Board of Directors.
The Company is now preparing the establishment of compensation committee in
the near future. The Company is committed to ensure a high standard of business ethics and
integrity. Due to the limited number of staff and functional departments in
previous years, we exercised closer monitoring control, which is considered
more effective and efficient in ensuring the control procedures, instead of
implementing a formal code of conducts. However, along with the Companys
growth and expansion, the Company is preparing a formal code of conducts for
all staff. The Company will carry out extensive training to ensure that all
staff levels understand the content of the code and the philosophy behind an
ethical working culture.




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-20- As the Company is listed on the US market and is a SEC reporting company,
it is generally bound by the Sarbanes Oxley Acts. The Company is in the process
of reviewing the existing internal systems and practices and taking other steps
to comply with the relevant provisions.  Item 5.
    Operating and Financial Review and Prospects MANAGEMENTS DISCUSSION AND ANALYSIS The following discussion of the financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes thereto. The following discussion contains certain
forward-looking statements that involve risk and uncertainties. Our actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, risks
and uncertainties related to the need for additional funds, the rapid growth of
the operations and our ability to operate profitably in future. All financial data referred to in the following managements discussion
has been prepared in accordance with U.S. GAAP. Results of operations for the
years ended December 31, 2001, 2002 and 2003 refers to the audited consolidated
results of the Company. U.S. GAAP requires that we adopt the accounting
policies and make estimates that management believe are most appropriate in the
circumstances for the purposes of giving a true and fair view of our results
and financial condition. Our principal accounting policies are set forth in
Note 2 to our consolidated financial statements. However, different policies,
estimates and assumptions in critical areas could lead to materially different
results. Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties and potentially result in materially
different results under different assumptions and conditions. We believe the
following critical accounting policies may affect its judgments and estimates
used in the preparation of this consolidated financial statements: - Revenue recognition.Revenue arise from product sales and the rendering of
services. Revenue is generally recognized when all of the following criteria
are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has
occurred or services have been rendered; (iii) the sellers price to the buyer
is fixed or determined, and (iv) collectibility is reasonably assured.
Specifically, product sales represent the invoiced value of goods, net of
discounts, supplied to customers. Revenues are recognized upon delivery to
customers and when title has passed. Rendering of services represent fees
charged on the provision of information technology and network security
consultancy services. Fee on such services are recognized upon the completion
of the underlying services and collectibility to the fees is reasonably
assured. Software development cost. The Company follows the accounting treatment of
the Statement of Financial Accounting Standard (SFAS) No. 2, Accounting for
Research and Development Costs to account for the research and development
costs. Costs that are related to the conceptual formulation and design of
licensed programs are expensed as research and development costs in the
consolidated income statements. The Company will capitalize the direct costs
attributable to the research and development of software as assets during the
period commencing from the establishment of technical feasibility of the
licensed program and ending when the products are generally released to the
market for sale. Determination of technical feasibility requires significant
judgment. Capitalized costs will be amortized over the lesser of the amount
computed based on the estimated revenue distribution over the products
revenue-producing lives, or the straight line method, and is applied over
periods ranging up to two years, starting from the year when the product is
released to the market. Accordingly, a total of Rmb 0.2 million was capitalized
in the year ended December 31, 2001 (the 2001 Period) and amortization of
Rmb0.1 million was charged for the year ended December 31, 2002 (the 2002
Period). There is no software development cost capitalized in the 2002 and
2003 Period.




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-21- Goodwill and intangible assets.Prior to January 1, 2002, the Company
periodically reviewed and evaluated the amortization policy of goodwill and
intangible assets, with reference to the lives of techniques acquired, the
acceptance of the products by the market, the policies adopted by other
companies in the same industry and the estimated future economic benefits
generated by the products. Impairment loss will be recognized in the
consolidated income statements if the anticipated undiscounted cash flow from
these assets is less than its carrying value. In the 2001 Period, the Company
performed a review of the amortization period and had reassessed the
amortization period of goodwill and intangible asset from twenty years and five
years to, respectively, five years to three years. The revised accounting
estimates had been adopted prospectively from January 1, 2001 and the effect to
the change was to increase amortization charge of goodwill and intangible asset
for the 2001 Period by, respectively, Rmb 2.9 million and Rmb 0.7 million.
Effective January 1, 2002, upon the adoption of SFAS No. 142, Goodwill and
Other Intangible Assets, the Company has ceased the amortization of its
goodwill. Instead, it performs periodic evaluation on the carrying value of
goodwill and intangible assets, as described below. Impairment Review.Prior to January 1, 2002, the Company periodically
evaluates the carrying value of its long-lived assets, including property,
plant and equipment, goodwill and intangible assets, for impairment. The
carrying value of a long-lived asset is considered impaired by the Company when
the anticipated undiscounted cash flow from such asset is separately
identifiable and less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
market value of the long-lived asset. Fair market value is determined primarily
using the anticipated cash flows discounted at a rate commensurate with the
risk involved or based on independent appraisals. Effective January 1, 2002. we
do not amortize goodwill. Instead, we perform tests for impairment of goodwill
annually or more frequently if events or circumstances indicate it might be
impaired. Such tests include comparing the fair value of a reporting unit with
its carrying amount, including goodwill. Impairment assessments are performed
using discounted cash flow estimates. An estimated discount rate is applied
considering the Companys cost of capital rate and specific country and
industry risk factors. Based on our impairment assessment under SFAS No. 142,
it prompted a re-assessment of all key assumptions underlying our goodwill
valuation judgments. As result of our review, we determined that goodwill
impairment charges of Rmb 7.2 million was required on the goodwill recorded in
our Beijing segment of the Company in 2002. The amount of the charge was equal
to the difference between the carrying amount of goodwill and its implied fair
value, which is based on the fair value of the net assets in respect of
reporting units. Management estimates the future cash flows expected to derive
from the use and, if applicable, the terminal value of the assets. The key
variables that management estimate include, among other factors, growth rate
and profitability margin. Although the assumptions used are consistent with
our internal planning, significant management judgment is involved in
estimating these variables, which include inherent uncertainties. If such
assets are considered impaired, they are written down to fair value as
appropriate. The management had performed impairment test as at December 31,
2003 by comparing the estimating the fair value of each of the reporting units,
based on managements estimate of future cash flows, to their respective
carrying value and no impairment loss was noted. The assumptions and conditions for goodwill and other intangible assets
reflect managements best assumptions and estimates. However, these items
involve inherent uncertainties, as described above, that may or may not be
controllable by management. Economic and political conditions, represent
uncertainties that are not controllable by management. As a result, if other
assumptions and conditions had been used in the current period, the carrying
amount of goodwill and other intangible assets could have been materially
different. Furthermore, if management uses different assumptions or if
different conditions occur in future periods, future operating results could be
materially impacted.




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-22- Recent accounting pronouncements In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of Others (FIN
45). FIN 45 requires the recognition of a liability for certain guarantee
obligations issued or modified after December 31, 2002. FIN 45 also clarifies
disclosure requirements to be made by a guarantor for certain guarantees. The
disclosure provisions of FIN 45 are effective for interim periods and fiscal
years ending after December 15, 2002. The adoption of FIN 45 did not have a
material effect on the Groups financial position or results of operations. In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables (EITF No. 00-21). This
issue addresses how revenue arrangements with multiple deliverables should be
divided into separate units of accounting and how the arrangement consideration
should be allocated to the identified separate accounting units. EITF No.
00-21 is effective for fiscal periods beginning after June 15, 2003. The Group
does not believe that this EITF will have a significant impact on its financial
statements. In January 2003, the FASB issued FIN 46 Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. In December 2003, the FASB
issued a revision to FIN No. 46, Consolidation of Variable Interest Entities,
and Interpretation of ARB No. 51, or FIN 46R. Among other changes, the revisions of FIN 46R (a) clarified some
requirements of the original FIN 46, (b) eased some implementation problems,
and (c) added new scope exceptions. FIN 46R deferred the effective date of the
Interpretation for public companies, to the end of the first reporting period
ending after March 15, 2004, except that all public companies must at a minimum
apply the provisions of the Interpretation to entities that were previously
considered special-purpose entities under the FASB literature prior to the
issuance of FIN 46R by the end of the first reporting period ending after
December 15, 2003. Our management does not expect that the adoption of FIN 46R
will have a material effect on our companys financial position or results of
operations.  A.
    Results of Operations The following table presents selected statement of operations data
expressed as a percentage of net sales for the years ended December 31, 2001,
2002 and 2003. 2001
    
    2002
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.00
    %Cost of goods sold
    
    
    71.2
    %
    
    
    58.3
    %
    
    
    56.4
    %Gross profit
    
    
    28.8
    %
    
    
    41.7
    %
    
    
    43.6
    %General and administrative expenses
    
    
    211.7
    %
    
    
    144.6
    %
    
    
    77.7
    %




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##### Table of Contents



-23- 2001
    
    2002
    
    2003Impairment of goodwill
    
    
    
    
    
    
    87.5
    %
    
    
    Bad debts expense
    
    
    
    
    
    
    50.0
    %
    
    
    Non-operating income
    
    
    35.0
    %
    
    
    29.7
    %
    
    
    20.7
    %Net loss before minority interests.
    
    
    (147.9
    %)
    
    
    (212.4
    %)
    
    
    (15.6
    %)Net loss for the year
    
    
    (125.1
    %)
    
    
    (186.5
    %)
    
    
    (8.0
    %)
 Year ended December 31, 2003 compared to year ended December 31, 2002. Net sales.Net sales increased by Rmb 3.4 million, or 41.8%, from Rmb 8.3
million of the year ended December 31, 2002 (the 2002 Period) to Rmb 11.7
million of the year ended December 31, 2003 (the 2003 Period). Analysed by
activities, net products sales amounted to Rmb 8.4 million in the 2003 Period,
which increased by Rmb 2.7 million, or 48.6%, from Rmb 5.7 million of the 2002
Period. Sales of services rendering of the 2003 Period amounted to Rmb 3.3
million, which increased by 0.7 million, or 27.1%, from Rmb 2.6 million of the
2002 Period. We expect the product sales of the year ended December 31, 2004 (the 2004
Period) will grow further following the expected growth of the whole market in
China. Our success in forming alliance with large computer suppliers will
generate more sales orders for us. For service rendering business, only slight growth is expected for the
2004 Period because customers have preference to substitute other vendors
service personnel by ours. However, due to the increasing demand of technical
professionals in the China IT market, we have encountered problems in
recruiting sufficient qualified staff. We may not fully enjoy the opportunity
of increasing income in this matter. Cost of sales.Cost of products sales primarily presented the direct
material costs of our self-developed products sold to customers. Cost of
services rendering represented the direct costs such as staff costs, rental
expenses, depreciation of equipments and other related charges. Cost of sales
of product sales increased by Rmb 1.4 million, or 48.1%, from Rmb 3.0 million
of the 2002 Period to Rmb 4.4 million of the 2003 Period. Cost of sales of
services rendering increased by Rmb 0.4 million, or 19.8%, from Rmb 1.8 million
of the 2002 Period to Rmb 2.2 million of the 2003 Period. The cost of sales
were increased along with the increase in net sales. Gross profit.Gross profit for product sales increased by Rmb 1.3
million, or 49.1%, from Rmb 2.7 million of the 2002 Period to Rmb 4.0 million
of the 2003 Period. As a percentage of sales, gross profit of product sales
increased by 0.2%, from 47.2% of the 2002 Period to 47.4% of the 2003 Period.
The gross profit remained stable for the 2002 and 2003 Period. Gross profit of
services rendering increased by Rmb 0.3 million, or 41.6%, from Rmb 0.8 million
of the 2002 Period to Rmb 1.1 million of the 2003 Period. As a percentage of
sales, gross profit of services increased by 4%, from 29.9% of the 2002 Period
to 33.9% of the 2003 Period. The increase was due primarily to better control
on direct expenses such as space rental and utilities expenses and
communication costs, etc. General and administrative expenses.General and administrative expenses
decreased by Rmb 2.8 million, or 23.8%, from Rmb 11.9 million of the 2002
Period to Rmb 9.1 million of the 2003 Period. The decrease in general and administrative expenses can be analysed as
follows:-




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##### Table of Contents



-24-  (1)
    
    Salaries and benefits decreased by Rmb 0.4 million, or 10.3%,
from Rmb 3.7 million of the 2002 Period to Rmb 3.3 million of the
2003 Period, which was mainly due to reduction in number of salesmen
and reduction in bonus payment in BBHL during the year.(2)
    
    Rental charges decreased by Rmb 0.2 million, or 27.0%, from
Rmb 0.8 million of the 2002 Period to Rmb 0.6 million of the 2003
Period, due to our movement to our new office in September 2002
bearing a lower rent.(3)
    
    Traveling and entertainment expenses decreased by Rmb 0.1
million, or 20.5%, from Rmb 0.7 million of the 2002 Period to Rmb
0.6 million of the 2003 Period due to closer control on
entertainment costs.(4)
    
    Professional fee decreased by Rmb 0.4 million, or 19.7%, from
Rmb 1.9 million of the 2002 Period to Rmb 1.5 million of the 2003
Period, which was mainly due to decrease in insurance expenses of
the 2003 Period.(5)
    
    Amortization of intangible assets decreased by Rmb 0.3
million, or 25.0%, from Rmb 1.3 million of the 2002 Period to Rmb
1.0 million of the 2003 Period. The amortization of the 2003 Period
represented the entire amortization of the remaining unamortized
balance of the intangible assets acquired from the ICT in 2000,
compared to annual amortization of Rmb 1.3 million made in the 2002
Period.(6)
    
    Depreciation charge decreased by Rmb 0.3 million, or 44.0%
from Rmb 0.8 million of the 2002 Period to Rmb 0.5 million of the
2003 Period because most fixed assets had been fully depreciated in
last year.(7)
    
    Other general and administrative expenses in aggregate
decreased by Rmb 1.1 million, or 39.4%, from Rmb 2.7 million of the
2002 Period to Rmb 1.6 million of the 2003 Period, which was mainly
due to:  (a)
    
    Rmb 0.6 million of staff advance was written off in
the 2002 Period but Rmb 0.04 million was written back in the
2003 Period.(b)
    
    Rmb 0.2 million represented loss from disposal of
fixed assets in the 2002 Period and no such loss existed in the
2003 Period.(c)
    
    Rmb 0.3 million was saved from various item of costs
due to closer control on expenditures on the 2003 Period. Impairment of goodwill.The goodwill of the Company was attributable to
the purchase of BHLNet in 2000, and which was subject to annual impairment
test. The annual impairment test was performed based on a comparison between
the fair value, which was determined by the forecasted discounted net cash
inflow for the forthcoming five years, and the carrying amount of each of the
reporting unit of us. Impairment will be made if the carrying amount of the
reporting unit exceeded its fair value. In the 2002 Period, an impairment loss
of Rmb 7.2 million was identified while no loss was considered necessary for
the 2003 Period after an impairment test was performed. Non-operating income.Non-operating income decreased by Rmb 0.03 million,
or 1.1% from Rmb 2.46 million of the 2002 Period to Rmb 2.43 million of the
2003 Period. The increase was mainly due to the net combined effect of:




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##### Table of Contents



-25-  (1)
    
    increase of Rmb 2.0 million, or 565.1%, from Rmb 0.3 million
of the 2002 Period to Rmb 2.3 million of the 2003 Period, of gains
on disposals of, and dividend income received from, marketable
securities;(2)
    
    a gain of Rmb 1.7 million arising from adjustment to
consideration for acquisition of BHLNet was recognized in the 2002
Period but no similar gain was recognized in the 2003 Period.(3)
    
    decrease of other non-operating income such as bank interest
by Rmb 0.3 million, from Rmb 0.4 million of the 2002 Period to Rmb
0.1 million of the 2003 Period. Net loss.Net loss for the 2003 Period was Rmb 0.9 million, a decrease of
Rmb 14.5 million, or 94.2%, from Rmb 15.4 million of the 2002 Period. Year ended December 31, 2002 compared to year ended December 31, 2001 Net sales.Net sales increased by Rmb 1.0 million, or 13.4%, from Rmb 7.3
million of the year ended December 31, 2001(the 2001 Period), to Rmb 8.3
million of the 2002 Period. Analysed by activities, net product sales, which
were mainly represented by our self-developed software, amounted to Rmb 5.7
million in the 2002 Period, which increased by Rmb 5.0 million, or 700%, from
Rmb 0.7 million of the 2001 Period. Sales of services represented principally
professional fee charged to our customers, which are based on the actual number
of professional staff assigned to the projects. Net sales of which for the 2002
Period amounted to Rmb 2.6 million, decreasing by Rmb 4.0 million, or 60.2%,
from Rmb 6.6 million of the 2001 Period. The decrease was mainly due to the
termination of service contract for one customer which closed its business. Cost of sales. Cost of product sales increased by Rmb 2.5 million, or
487.8%, from Rmb 0.5 million of the 2001 Period to Rmb 3.0 million of the 2002
Period. Cost of services rendering decreased by Rmb 2.9 million, or 60.8%, from
Rmb 4.7 million of the 2001 Period to Rmb 1.8 million of the 2002 Period. Gross profit.Gross profit of product sales increased by Rmb 2.5 million,
or 12.4 times, from Rmb 0.2 million of the 2001 Period to Rmb 3.0 million of
the 2002 Period. As a percentage of sales, gross profit of product sales
increased by 19.1%, from 28.1% of the 2001 Period to 47.2% of the 2002 Period.
The increase was due primarily to the increasing sales of self-developed
products which had higher profit margin. Gross profit of services rendering
decreased by Rmb 1.1 million, or 58.7%, from profit of Rmb 1.9 million of the
2001 Period to Rmb 0.8 million of the 2002 Period. However, as a percentage of
sales, gross profit of services remained stable, and increased slightly by
1.1%, from 28.8% of the 2001 Period to 29.9% of the 2002 Period. General and administrative expenses.General and administrative expenses
decreased by Rmb 3.5 million, or 22.5%, from Rmb 15.4 million of the 2001
Period to Rmb 12.0 million of the 2002 Period. The decrease was due primarily
to the decrease of Rmb 3.8 million in goodwill amortization as a result of the
Companys change in accounting policy from a regular annual amortization
according to its useful life to annual assessment of impairment. The impairment
loss on goodwill of Rmb 7.2 million for the 2002 Period was assessed based on
the requirements of SFAS No.142, of which the Group adopted during the year.
The impairment loss on goodwill for the businesses was due to deteriorating
economic condition in the PRC and the competitive environment for the groups
businesses. Non-operating income.Non-operating income decreased by Rmb 0.1 million,
or 3.8%, from Rmb 2.6 million of the 2001 Period to Rmb 2.5 million of the 2002
Period. The decrease was due primarily to the combined effect of the following
factors: -




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##### Table of Contents



-26-  (1)
    
    reduction in bank interest income by Rmb 1.1 million, from
Rmb 1.3 million of the 2001 Period to Rmb 0.2 million of the 2002
Period, as a result of the continuous decrease in bank deposit
interest rate in Hong Kong during the 2002 Period;(2)
    
    reduction in realized gain on trading securities by Rmb 0.9
million, from Rmb 1.2 million of the 2001 Period to Rmb 0.3 million
of the 2002 Period because of lesser security trading in new listing
subscription by the Company in view of poorer market performance in
the 2002 Period; and(3)
    
    increase in gain of Rmb 1.7 million arising from adjustment
on consideration paid for the acquisition of the Newly Acquired
Operations. Net loss.Net loss for the 2002 Period was Rmb 15.4 million, which
increased by Rmb 6.3 million, or 69.0%, from Rmb 9.1 million in the 2001
Period, due primarily to the reasons as described above. Taxation The Company was incorporated under the laws of the British Virgin Islands
(BVI), and under current BVI law, was not subject to tax on income or capital
gains as the Company did not carry out business in BVI. For BBHL, pursuant to
the applicable PRC income tax laws, they were fully exempt from the PRC state
income tax for two years, starting from the first profit-making year followed
by a 50% reduction over the ensuing three years (tax holidays). BBHL incurred
loss for both 2002 and 2003 Periods, therefore, the tax holidays were not
started. However, taxation of Rmb 0.2 million is recognized for BHLHK at 17.5%
of the estimated net assessable profit of Rmb 1.4 million for the 2003 Period.  B.
    Liquidity and capital resources The Company is neither engaged in any kind of off-balance sheet
arrangements and other relationships with unconsolidated entities or other
persons that are reasonably likely to affect materially liquidity and the
availability of or requirements for capital resources, nor any trading
activities that include non-exchange traded contracts accounted for at fair
value. Except for the operating lease commitment, as fully disclosed in the
financial statements, we are not involved in any kind of other commitments,
both expressed or contingent, which may cause us to make future payments under
contracts. The Companys cash and cash equivalents on hand as at December 31, 2003
was Rmb 7.4 million, which decreased by Rmb 4.8 million, or 39.4%, from Rmb
12.2 million at the beginning of the year. The net cash outflow of the operating activities of the 2003 Period was
Rmb 4.8 million, which decreased by Rmb 2.8 million, or 36.8%, from an outflow
of Rmb 7.6 million of the 2002 Period. The decrease in net cash outflow of the
2003 Period was mainly represented by settlements of Rmb 1.8 million of trade
payables and accrued liabilities incurred in or before the 2002 Period, and ,
return of cash of Rmb 0.8 million held on behalf of a related company in the
2003 Period. The net cash inflow of the investing activities of the 2003 Period was Rmb
0.3 million, which increased by Rmb 34.5 million, or 100.9%, from a net cash
outflow of Rmb 34.2 million of the 2002 Period. The net cash inflow of the 2003
Period was mainly represented by cash inflow arising from: -  (1)
    
    fund of Rmb 2.2 million withdrawn from the security trust
account;




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##### Table of Contents



-27-  (2)
    
    proceeds of Rmb 11.8 million received from disposal of
available-for-sale securities; less the following cash outflow
activities:  (1)
    
    additional fund of Rmb 2.6 million transferred to
related companies for further investment in marketable
securities near the end of the 2003 Period;(2)
    
    fund of Rmb 11.5 million used in purchasing
available-for-sales securities during the year. As of December 31, 2003, the Company, after deducting the total
liabilities from the cash and cash equivalents (net cash balance), had cash
resources of Rmb 2.3 million, which was decreased by Rmb 2.1 million, or 47.7%,
from Rmb 4.4 million of the 2002 Period. The Company believes that even lower
level of net cash balance was retained, the liquidity of the Company remains
strong. The Company has other sources of cash as follows: -  (1)
    
    Cash balance of Rmb 11.3 million kept in the security trust
account; and(2)
    
    Cash balance of Rmb 11.2 million deposited with related
companies for investment purpose; and(3)
    
    Cash of Rmb 11.2 million from disposal of available-for-sale
and trading securities when necessary. The cash balances retained in the security trust account and related
companies and fund kept in available-for-sale and trading securities can be
withdrawn or sold without any restriction. All the above sources of cash inflow
are under the sole control of the Company and are not subject to any pledge,
mortgage and encumbrance. We expect operating cash flow will be improved in
2004, due to (i) increase in gross profit arising from our expected increase in
sales volume and (ii) better control on our expenses, which can help change
the companys negative operating cash flow position. In the 2003 Period, our
Zhuhai operation generated operating profit of Rmb 0.4 million, from a loss of
Rmb 5.1 million in the 2002 Period, while the loss of the Beijing operation was
significantly reduced from Rmb 9.8 million of the 2002 Period to Rmb 2.1
million of the 2003 Period. The Company anticipates, based on managements internal forecasts and
assumptions relating to its operations, that its existing cash and funds
retained will be sufficient to meet the Companys working capital and capital
expenditure requirements for the foreseeable future. In the event that the
Companys plans change, its assumptions change or prove inaccurate, or if other
capital resources and projected cash flow otherwise prove to be insufficient to
fund operations (due to unanticipated expenses, technical problems,
difficulties or otherwise), the Company may have to seek additional financing
sooner than currently anticipated. The Company has no current arrangements with
respect to sources of additional financing and there can be no assurance that
the Company would be able to obtain additional financing on terms acceptable to
the Company.  C.
    Research and development, patents and licenses, etc. The Company acquired, through BBHL, a technological platform for the
development of internet security devices from ICT of the CAS at a cash
consideration of Rmb 4 million in 2000. This intangible assets had been fully
amortized in 2003.  Item 6.
    Directors, Senior Management and Employees  A.
    Directors and senior management.




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##### Table of Contents



-28- The directors and executive officers of the Company are as follows: Name
    
    Age
    
    PositionLi Xiao Hong
    
    
    50
    
    
    Chairman of the Board and PresidentJiang Xin Hao
    
    
    38
    
    
    Director and Chief Executive OfficerLi Guo Jie
    
    
    60
    
    
    DirectorYu Xiang Dong
    
    
    37
    
    
    DirectorBenjamin Wah
    
    
    52
    
    
    DirectorZhu Xiao Hui
    
    
    31
    
    
    DirectorMichael Siu
    
    
    35
    
    
    Secretary and Chief Financial Officer
 Li Xiao Hong, as nominee of Beijing Holdings, was appointed the Chairman
of the Board and President of the Company and BHLHK since March 2000. Mr. Li
also served as the Deputy General Manager of Beijing Holdings. Mr. Li
graduated form the Chinese University of Industry with a master degree. From
1992 to 2000, he served as the Vice-Chairman of the Beijing First Light
Industry Corporation. Prior thereto, he served as the general manager of the
Beijing Glasses Corporation. Mr. Li has over fifteen years experience in
enterprise management. Jiang Xin Hao, as a nominee of Beijing Holdings, is the Chief Executive
Officer and a Director of the Company and the General Manager of BHLHK since
July 1996. Mr. Jiang graduated from the Fudan University with a master degree.
From 1995 to 1996, he served as a manager of the Beijing Holdings and Vice
President of Jing Tai. From 1992 to 1995, he served as the Manager of the
securities department of Dong Fong Finance Company Limited, which was the first
finance company incorporated by large enterprise in the PRC. He also served as
the General Manager of investment department of Heng Tong Group, the first
public listed company of the China Staq Exchange. Prior thereto, Mr. Jiang was
a tutor of Beijing University. Mr. Jiang has more than ten years experience in
investment and corporate management Li Guo Jie was appointed a Director of the Company since September 2000.
Mr. Li is the Dean of ICT of the CAS since 1999. From 1987 to 1999, he worked
in the CAS as senior researcher and was responsible for advanced and
intelligent computing technology projects of China. Mr. Li regularly releases
research reports and valuable articles to international journals and currently
is the Chief Editor of the Journal of Computer Science and Technology. Mr. Li
obtained a bachelors degree from the Faculty of Physics in the Beijing
University in 1968. He later obtained his masters degree at the University of
Science and Technology in Beijing in 1981 and a Doctorate Degree at Purdue
University in 1985. Yu Xiang Dong was appointed an Independent Director of the Company since
June 2000. Mr. Yu graduated from the Fudan University with a masters degree.
In September 1997, he was appointed the Vice-President of the China
Communications Securities Co. Ltd. and was appointed in April 2000 the
President of the 21st High-tech Investment Co. Ltd., a fund company
specializing in investments in the high-tech industry. In 1995, he was
appointed the General Manager of the Shanghai Branch of the CMS. He served
from 1991 to 1994, as an assistant to the General Manager and the Manager of
the IPO Division of the China Merchant Securities Ltd. (CMS), the third
largest securities company in China, with a registered capital of Rmb 3.2
billion. Mr. Yu has over ten years experience in investing banking.




---



##### Table of Contents



-29- Profession Benjamin W. Wah was appointed an Independent Director of the
Company since June 2000. Mr. Wah graduated from the University of California,
Berkley with a doctorate degree. Mr. Wah was appointed the Vice President for
publications of the IEEE Computer Society in 1998 and he became its President
in 2000. In 1990, Mr. Wah was appointed the professor of the Department of ECE
of the University of Illinois in Urbana and later became the R.T. Chien
Professor of Engineering in the same university. From 1988 to 1989, Mr. Wah
served as the Program Director of the National Science Foundation in Washington
DC. He served from 1979 to 1988 as the associate professor in the Purdue
University of the United States of America. Mr. Wahs research has focused on
the development and improvement of non-linear optimization algorithms, parallel
algorithms, design of computer network protocols and automated design of
algorithms using high-speed computers. Mr. Wah is also a keen contributor of
articles published in well-recognized international journals and magazines. Zhu Xiao Hui was appointed an Independent Director of the Company since
January 2004. Mr. Zhu was a partner of Tianyuan Law Firm in Beijing since
2001. Mr. Zhu specialized in merger and acquisition, restructuring and
strategic investment in China. His client included multinational conglomerates
such as Hewlett Packard, Agilent Technologies, Matsushita, Sinochem, China
Resources and COSCO. Mr. Zhu graduated from the School of Law of the Beijing
University with a masters degree. He was nominated in 1999 by the American
Bar Association to work in the Baker & McKenzie, Chicago office as a China law
counsel. Michael Siu was appointed the Chief Financial Officer and Secretary of the
Company since September 1997 and is responsible for the financial planning of
the Company and our joint ventures in China. Mr. Siu graduated from the City
University of Hong Kong with a bachelors degree. He is a fellow member of the
Association of Chartered Certified Accountants and an associate member of the
Hong Kong Society of Accountants. Prior to his service with the Company, Mr.
Siu served in international accounting firms and has over six years experience
in business assurance and advisory services. Audit Committee Mr. Zhu Xiao Hui, Mr. Yu Xiang Dong and Mr. Benjamin Wah were appointed
the members of the Audit Committee of the Company. According to the Charter of
the Audit Committee, the responsibilities of the Audit Committee include the
oversight of (1) integrity of the Companys financial statements; (2) the
Companys compliance with legal and regulatory requirements; (3) the
qualification, appointment, compensation, retention and oversight of our
independent auditors, including resolving disagreements between management and
the auditor regarding financial reporting; and (4) the performance of the
Companys independent auditors and of the Companys internal control function. The Audit Committee was given the resources and assistance necessary to
discharge its responsibilities, including appropriate funding, as determined by
the Committee, the unrestricted access to Company personnel and documents and
the Companys independent auditors. The Committee shall also have authority,
with notice to the Chairman of the board, to engage outside legal, accounting
and other advisors as it deems necessary or appropriate. The Audit Committee is required to meet at least two times a year and may
call special meeting as required. All members of the Audit Committee shall be
financially literate, having a basic understanding of financial controls and
reporting, and none of them shall receive directly or indirectly any
compensation from the Company other than his or her directors fee and
benefits.  B.
    Compensation. The Company did not paid any compensation to directors in the 2003 Period.




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##### Table of Contents



-30- The Company has granted stock options to certain officers and directors as
described in Item 6E. There was no any new grants of option in the 2003
Period.  C.
    Board practices. The directors listed above were elected to serve as directors at the
annual meeting of the shareholders held on January 20, 2004 for the ensuing
year until the next annual meeting of the shareholders. There are no employment
contracts signed with the directors. A total of five (5) meetings of directors were held in the 2003 Period The Companys By-laws did not require the establishment of audit committee
and compensation committee. The Company previously had chosen not to separately
designate these committees and alternatively, the entire board of directors is
acting the functions of thee committees. However, following the requirements
of the Sarbanes Oxley Acts, the Company had established an audit committee
comprised of the independent directors in 2004, and is preparing for the
establishment of the compensation committee in the foreseeable future.  D.
    Employees. As at December 31, 2003, total staff of the Company consisted of 71
employees, compared to 59 staff as at December 31, 2002. The increase was due
to the increase in number of staff for services rendering business and increase
in research and development technicians of the product sales business. An analysis of the employees by function and by education background is as
follows: - Analysed by function
    
    
    
    
    
    Analysed by education backgroundCorporate administration
    
    
    9
    
    
    Secondary school
    
    Finance
    
    
    3
    
    
    Bachelor degree
    
    
    66Technology
    
    
    50
    
    
    Master degree
    
    
    5Sales and services
    
    
    9
    
    
    Doctorate degree
    
    71
    
    
    
    
    
    71
 There is no collective bargaining agreement in China. We have never
experienced any material labour disruption and are unaware of any current
efforts or plans to organize employees. The Company believes we have good
relationships with our employees.  E.
    Share ownership. The following table sets out the names and titles of the executive
officers and directors of the Company and their respective share ownership in
the Company as at June 20, 2004:




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##### Table of Contents



-31- Common Shares As a % of OutstandingName
    
    Title/Office
    
    SharesLi Xiao Hong
    
    Chairman of the Board and
President
    
    
    0
    %Jiang Xin Hao
    
    Chief Executive Officer
and Director
    
    
    0
    %Yu Xiang Dong
    
    Director
    
    
    0
    %Benjamin Wah
    
    Director
    
    
    0
    %Li Guo Jie
    
    Director
    
    
    0
    %Zhu Xiao Hui
    
    Director
    
    
    0
    %Michael Siu
    
    Chief Financial Officer and Secretary
    
    
    0
    %
 The names and titles of the executive officers and directors of the
Company to whom options have been granted by the Company which are outstanding
as of June 20, 2004 and the number of Common Shares subject to such options are
set forth in the following table: Common Shares NumberName
    
    Title/Office
    
    of Shares(1)
    
    Exercise Price(US$)
    
    Expiry DateLi Xiao Hong
    
    Chairman, Presidentand  Director
    
    
    50,000
    
    
    
    1.15
    
    
    December 28,2009Jiang Xin Hao
    
    Chief ExecutiveOfficer andDirector
    
    
    50,000
    
    
    
    1.15
    
    
    December 28, 2009Michael Siu
    
    Chief FinancialOfficer andSecretary
    
    
    40,000
    
    
    
    1.15
    
    
    December 28, 2009140,000
  (1)
    
    All options were granted pursuant to a board resolution
passed on December 28, 1999 and are fully vested as of December 31,
2003 . Executive Officers and Directors Pursuant to a members resolution passed on October 10, 1996, the 1996
Stock Option Plan (the 1996 Plan) was approved. Pursuant to another members
resolution passed on September 20, 2000 at the 2000 Members Meeting, the 2000
Stock Option Plan (the 2000 Plan) was approved. Details of these plans are
as follows:- 1996 Plan Types of Grants and Eligibility The 1996 Plan is designed to provide an incentive to employees (including
directors and officers who are employees) and to consultants who are not
employees of the Company, and its present and future




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##### Table of Contents



-32- subsidiary companies and to offer an additional inducement in obtaining
the services of such employees and consultants. Shares Subject to the 1996 Plan The aggregate number of shares of Common Stock, $0.1 par value per share,
of the Company (Common Stock) for which options may be granted under the Plan
shall not exceed 200,000. Such shares of Common Stock may, in the discretion
of the Board of Directors of the Company (the Board of Directors), consist
either in whole or in part of authorized but unissued shares of Common Stock or
shares of Common Stock held as treasury shares of the Company. Any shares of
Common Stock subject to an option which for any reason expires, is canceled or
is terminated unexercised or which ceases for any reason to be exercisable
shall again become available for the granting of options under the 1996 Plan.
The Company shall at all times during the term of the 1996 Plan reserve and
keep available such number of shares of Common Stock as will be sufficient to
satisfy the requirements of it. Administration of the 1996 Plan The 1996 Plan shall be administered by the Board of Directors or, to the
extent the Board of Directors may determine, a committee of the Board of
Directors (the Committee) consisting of not less than two directors. A
majority of the members of the Committee shall constitute a quorum, and the
acts of a majority of the members present at any meeting at which a quorum is
present, and any acts approved in writing by all members without a meeting,
shall be the acts of the Committee. All references in the 1996 Plan to
determinations or actions of the Committee shall be deemed to include
determinations and actions by the Committee or the Board of Directors. The Committee may from time to time, in its sole discretion, consistent
with the purposes of the 1996 Plan, grant options to employees (including
officers and directors who are employees of, and to consultants to, the Company
or any of its Subsidiaries. Such options granted shall cover such number of
shares of Common Stock as the Committee may determine in its sole discretion. Subject to the express provisions of the 1996 Plan, the Committee shall
have the authority, in its sole discretion, to determine the employees and the
consultants who shall be granted options; the times when options shall be
granted; the number of shares of Common Stock to be subject to each option; the
term of each option; the date each option shall become exercisable; whether an
option shall be exercisable in whole, in part or in installments and, if in
installments, the number of shares of Common Stock to be subject to each
installment, whether the installments shall be cumulative, the date each
installment shall become exercisable and the term of each installment; whether
to accelerate the date of exercise of any option or installment; whether shares
of Common Stock may be issued upon the exercise of an option as partly paid
and, if so, the dates when future installments of the exercise price shall
become due and the amounts of such installments; the exercise price of each
option; the form of payment of the exercise price; the fair market value of a
share of Common Stock; whether to restrict the sale or other disposition of the
shares of Common Stock acquired upon the exercise of an option and, if so,
whether to waive any such restriction; whether to subject the exercise of all
or any portion of an option to the fulfillment of contingencies as specified in
the applicable stock option contract, including without limitation,
contingencies relating to entering in to a covenant not to compete with the
Company, any of its Subsidiaries or a Parent, to financial objectives for the
Company, any of its Subsidiaries or a Parent, a division of any of the
foregoing, a product line or other category, and/or the period of continued
employment of the optionee with the Company, any of its Subsidiaries or a
Parent, and to determine whether such contingencies have been met; the amount,
if any, necessary to satisfy the Companys obligation to withhold taxes or
other amounts; whether an optionee is disabled; to construe the respective
Contracts and the 1996 Plan; with the consent of the optionee, to cancel or
modify an option, providedsuch modified provision would be permitted to be
included in an option on the date of modification; to




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-33- prescribe, amend and rescind rules and regulations relating to the 1996
Plan; and to make all other determinations necessary or advisable for
administering the 1996 Plan. Any controversy or claim arising out of or
relating to the 1996 Plan, any option granted under the 1996 Plan or any
applicable stock option contract shall be determined unilaterally by the
Committee in its sole discretion. The determinations of the Committee on the
above matters shall be conclusive and binding on the parties. No member or
former member of the Committee shall be liable for any action, failure to act
or determination made in good faith with respect to the 1996 Plan or any option
hereunder. Exercise Price The exercise price of the shares of Common Stock under each option shall
be determined by the Committee in its sole discretion; provided, however, the
exercise price of an option shall not be less than the fair market value of the
Common Stock subject to such option on the date of grant. Term The term of each option granted pursuant to the 1996 Plan shall be such
term as is established by the Committee, in its sole discretion; provided,
however,that the term of each option granted pursuant tot the 1996 Plan shall
be for a period not exceeding 10 years from the date of grant. Exercise An option (or any part of installment thereof), to the extent then
exercisable, shall be exercised by giving written notice to the Company at its
principal office stating which option is being exercised, specifying the number
of shares of Common Stock as to which such option is being exercised and
accompanied by payment in full of the aggregate exercise price therefore (or
the amount due on exercise if the Contract permits installment payments) (a) in
cash or by certified check or (b) if the applicable Contract permits, with
previously acquired shares of Common Stock having an aggregate fair market
value on the date of exercise equal to the aggregate exercise price of all
options being exercise, or with any combination of cash, certified check or
shares of Common Stock. The Committee may, in its sole discretion, permit payment of the exercise
price of an option by delivery by the optionee of a properly executed notice,
together with a copy of the optionees irrevocable instructions to a broker
acceptable to the Committee to deliver promptly to the Company the amount of
sale of loan proceeds sufficient to pay such exercise price. A person entitled to receive Common Stock upon the exercise of an option
shall not have the rights of shareholder with respect to such shares of Common
Stock until the date of issuance of a share certificate to him for such shares;
provided, however,that until such share certificate is issued, any optionee
using previously acquired hares of Common Stock in payment of an option
exercise price shall continue to have the rights of a shareholder with respect
to such previously acquired shares. In no case may a fraction of a share of
Common Stock be purchased or issued under the 1996 Plan. Termination of Relationship Any optionee whose relationship with the Company, its Subsidiaries and
Parent as an employee or consultant has terminated for any reason (other than
his death or disability) may exercise such option, to the extent exercisable on
the date of such termination, at any time within three months after the date of
termination, but not thereafter and in no event after the date the option would
otherwise have expired; provided, however,that if such relationship is
terminated either (a) for cause, or (b) without the consent of the Company,
such option shall terminate immediately.




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-34- Notwithstanding the foregoing, except as may otherwise be expressly
provided in the applicable Contract, options granted under the 1996 Plan shall
not be affected by any change in the status of the optionee so long as the
optionee continues to be an employee of, or a consultant to, the Company, any
of its Subsidiaries or a Parent (regardless of having changed from one to the
other or having been transferred from one corporation to another). Nothing in the 1996 Plan or in any option granted under the 1996 Plan
shall confer on any optionee any right to continue in the employ of, or as
consultant to, the Company, its Parent or any of its Subsidiaries, or interfere
in any way with any right of the Company, its Parent or any of its Subsidiaries
to terminate the optionees relationship at any time for any reason whatsoever
without liability to the Company, its Parent or any of its Subsidiaries. Death or Disability If an individual optionee dies (a) while he is an employee of, or a
consultant to, the Company any of its Subsidiaries or a Parent, (b) within
three months after the termination of such relationship (unless such
termination was for cause or without the consent of the Company) or (c) within
one year following the termination of such relationship by reason of disability
(as determined by the Board of Directors), his option may be exercised, to the
extent exercisable on the date of his death, by an executor, administrator or
other person who at the time is entitled by law to exercise the rights of a
deceased optionees under such option (the Legal Representative) at any time
within one year after death, but not thereafter and in no event after the date
the option would otherwise have expired. Any optionee whose relationship has terminated by reason of disability (as
determined by the Board of Directors) may exercise his option, to the extent
exercisable upon the effective date of such termination, at any time within one
year after such date, but not thereafter and in no event after the date the
option would otherwise have expired. Adjustment upon changes in Common Stock Notwithstanding any other provision of the 1996 Plan, in the event of a
stock dividend, split-up, combination, reclassification, recapitalization,
spin-off, merger in which the Company is the surviving corporation, or exchange
of shares or the like which results in a change in the number or kind of those
share of Common Stock which are outstanding immediately prior to such event,
the aggregate number and kind shares subject to the 1996 Plan, the aggregate
number and kind of shares subject to each outstanding option and the exercise
price thereof, whose determination shall be conclusive and binding on all
parties. Such adjustment may provide for the elimination of fractional shares
which might otherwise be subject to options without payment thereto. In the event of (a) the liquidation or dissolution of the Company, or (b)
a merger in which the Company is not the surviving corporation or a
consolidation, any outstanding options shall terminate upon the earliest of any
such event, unless other provision is made therefore in the transaction. Amendments and Termination of the 1996 Plan No option may be granted under the 1996 Plan after October 2006. The
Board of Directors, without further approval of the Companys shareholders, may
at any time suspend or terminate the 1996 Plan, in whole or in part, or amend
it form time to time in such respects as it may deem advisable, including,
without limitation, to comply with, conform to or adopt any change in
application law, regulations, rulings or interpretations of administrative
agencies; provided, however,that no amendment shall be effective without the
requisite prior or subsequent shareholder approval that would (a) increase the
maximum number of shares of Common Stock for which options may be granted under
the 1996 Plan,




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-35- (b) materially increase the benefits accruing to participants under the
1996 Plan or (c) change the eligibility requirements to receive options
hereunder. No termination, suspension or amendment of the 1996 Plan shall,
without the consent of the holder of an existing and outstanding option
affected thereby, adversely affect his rights under such option. The power of
the Committee to construe and administer any options granted under the 1996
Plan prior to the termination or suspension of the 1996 Plan nevertheless shall
continue after such termination or during such suspension. Non-Transferability of Options No option granted under the 1996 Plan shall be transferable otherwise than
by will or the laws of descent and distribution, and options may be exercise,
during the lifetime of the optionee, only by the optionee or his Legal
Representatives. Except to the extent provided above, options may not be
assigned, transferred, pledged, hypothecated or disposed of in any way (whether
by operation of law or otherwise) and shall not be subject to execution,
attachment or similar process, and any such attempted assignment, transfer,
pledge, hypothecation or disposition shall be null and void ab initioof no
force or effect. No options were granted in the 2000 Period, 2001 Period and 2002 Period in
respect of the 1996 Plan. 2000 Plan Types of Grants and Eligibility The 2000 Plan is designed to provide an incentive to key employees
(including officers and directors who are key employees) of the Company and to
consultants and directors who are not employees of the Company and its present
and future subsidiaries and to offer an additional inducement in obtaining the
services of such individuals. Shares Subject to the 2000 Plan The aggregate number of shares of Common Stock for which options may be
granted under the 2000 Plan may not exceed 400,000; provided, however, that the
maximum number of shares of Common Stock with respect to which options may be
granted to any individual in any fiscal year may not exceed 100,000. Such
shares of Common Stock may consist either in whole or in part of authorized but
unissued shares of Common Stock or shares of Common Stock held in the treasury
of the Company. Shares of Common Stock subject to an option which for any
reason expires, is cancelled or is terminated unexercised or which ceases for
any reason to be exercisable may again become available for the granting of
options under the 2000 Plan. Administration of the 2000 Plan Except in the case of non-employee director options, in which case the
Plan is administered by the Board of Directors, the 2000 Plan is administered
by the Committee consisting of not less than two directors, each of whom shall
be a non-employee director within the meaning of rules and regulations
promulgated by the Securities and Exchange Commission. Subject to the express provisions of the 2000 Plan, the Committee has the
authority, in its sole discretion, with respect to options, to determine, among
other things: the key employees, consultants and advisors who are to receive
options; the times when they may receive options; the number of shares of
Common Stock to be subject to each option; the term of each option; the date
each option is to become exercisable; whether an option is to be exercisable in
whole, in part or in instalments, and, if in instalments, the number of shares
of Common Stock to be subject to each instalment; whether the




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-36- installments are to be cumulative; the date each instalment is to become
exercisable and the term of each instalment; whether to accelerate the date of
exercise of any instalment; whether shares of Common Stock may be issued on
exercise of an option as partly paid, and, if so, the dates when future
instalments of the exercise price are to become due and the amounts of such
instalments; the exercise price of each option; the form of payment of the
exercise price; whether to restrict the sale or other disposition of the shares
of Common Stock acquired upon the exercise of an option and to waive any such
restriction; and whether to subject the exercise of all or any portion of an
option to the fulfillment of contingencies as specified in an applicable stock
option contract. With respect to all options, the Committee has such
discretion to determine the amount, if any, necessary to satisfy the Companys
obligation to withhold taxes; with the consent of the optionee, to cancel or
modify an option, provided such option as modified would be permitted to be
granted on such date under the terms of the 2000 Plan; to prescribe, amend and
rescind rules and regulations relating to the 2000 Plan; and to make all other
determinations necessary or advisable for administering the 2000 Plan. The
Board of Directors has the authority described above with respect to the
granting of non-employee director options. Exercise Price The exercise price of the shares of Common Stock under each option is to
be determined by the Committee. The exercise price of the shares of Common
Stock under each non-employee director option is to be equal to the fair market
value of the Common Stock subject to such option on the date of grant. Term The term of each option granted pursuant to the 2000 Plan is established
by the Committee, in its sole discretion, at or before the time such option is
granted. Subject to early termination, each non-employee director option is to
be exercisable on a term of ten years from the date of grant. Exercise An option (or any part or instalment thereof), to the extent then
exercisable, is to be exercised by giving written notice to the Company at its
principal office. Payment in full of the aggregate exercise price may be made
(a) in cash or by certified check, or (b) if the applicable stock option
contract at the time of grant so permits, with the authorization of the
Committee, with previously acquired shares of Common Stock having an aggregate
fair market value, on the date of exercise, equal to the aggregate exercise
price of all options being exercised, or (c) with any combination of cash,
certified check or shares of Common Stock. The Committee may, in its discretion, permit payment of the exercise price
of an option by delivery by the optionee of a properly executed exercise
notice, together with a copy of his irrevocable instructions to a broker
acceptable to the Committee to deliver promptly to the Company the amount of
sale or loan proceeds sufficient to pay such exercise price. Termination of Relationship Any employee holder of an option whose employment or relationship with the
Company (and its parent and subsidiaries) has terminated for any reason other
than his death or disability may exercise such option, to the extent
exercisable on the date of such termination, at any time within three months
after the date of termination, but not thereafter and in no event after the
date the option would otherwise have expired; provided, however, that if his
employment is terminated either (a) for cause, or (b) without the consent of
the Company, said option terminates immediately. Options granted to employees
under the 2000 Plan are not affected by any change in the status of the holder
so long as he or she continues to be a




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-37- full-time employee of the Company, its parent or any of its subsidiaries
(regardless of having been transferred from one corporation to another). Death or Disability If an optionee dies (a) while he is an employee or consultant to, the
Company, its parent or any of its subsidiaries, (b) within three months after
the termination of such relationship (unless such termination was for cause or
without the consent of the Company), or (c) within one year following the
termination of such relationship by reason of disability, an option may be
exercised, to the extent exercisable on the date of death, by the Legal
Representatives, at any time within one year after death, but not thereafter
and in no event after the date the option would otherwise have expired. Any optionee whose relationship has terminated by reason of disability may
exercise his option, to the extent exercisable upon the effective date of such
termination, at any time within one year after such date, but not thereafter
and in no event after the date the option would otherwise have expired. Adjustments Upon Changes in Common Stock Notwithstanding any other provisions of the 2000 Plan, in the event of any
change in the outstanding Common Stock by reason of a share dividend,
recapitalization, merger or consolidation in which the Company is the surviving
corporation, split-up, combination or exchange of shares or the like, the
aggregate number and kind of shares subject to the 2000 Plan, the aggregate
number and kind of shares subject to each outstanding option and the exercise
price thereof will be appropriately adjusted by the Board of Directors, whose
determination will be conclusive. In the event of (a) the liquidation or dissolution of the Company or (b) a
merger or consolidation in which the Company is not the surviving corporation,
any outstanding options will terminate, unless other provision is made therefor
in the transaction. Amendments and Termination of the 2000 Stock Option Plan No option may be granted under the 2000 Plan after October 2007. The
Board of Directors, without further approval of the Companys stockholders,
may at any time suspend or terminate the 2000 Plan, in whole or in part, or
amend it from time to time in such respects as it may deem advisable,
including, without limitation, to comply with the provisions of certain rules
and regulations promulgated by the Securities and Exchange Commission, among
other things; provided, however, that no amendment may be effective without the
requisite prior or subsequent shareholder approval which would (a) except as
required for anti-dilution adjustments, increase the maximum number of shares
of Common Stock for which options may be granted under the 2000 Plan, (b)
materially increase the benefits to participants under the 2000 Plan, or (c)
change the eligibility requirements for individuals entitled to receive options
under the 2000 Plan. Non-Transferability of Options No option granted under the 2000 Plan may be transferable otherwise than
by will or the laws of descent and distribution, and options may be exercised,
during the lifetime of the holder thereof, only by such holder or such holders
legal representatives. Except to the extent provided above, options may not be
assigned, transferred, pledged, hypothecated or disposed of in any way (whether
by operation of law or otherwise) and may not be subject to execution,
attachment or similar process. No optionee has any rights as a shareholder with respect to any shares
subject to an option prior to the date of the issuance of a certificate or
certificates for such shares.




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-38- No options were granted under the 2000 Plan since its inception.  Item 7.
    Major Shareholders and Related Party Transactions  A.
    Major shareholders. See Item 4 (C) of the details of the major shareholders. Except as
disclosed below, there was no significant related party transactions made with
major shareholders  B.
    Related party transactions.  (a)
    
    During the years ended December 31, 2001, 2002 and 2003, the Company had
related party transactions with certain related parties as follows: - Year ended December 31,2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000Transactions with related partiesService income received from Kang De
    
    
    6,598
    
    
    
    754
    
    
    
    Rental expenses paid to holding company
    
    
    248
    
    
    
    
    
    
    
    Service fee paid to a fellow subsidiary
    
    
    142
    
    
    
    41
    
    
    
    
 December 31, 2002
    December 31, 2003Rmb000
    
    Rmb000Balances with related partiesFunds held by the ultimate holding
company for security investment
purposes
    
    
    6,590
    
    
    
    6,529Funds held by a fellow subsidiary for
security investment purposes
    
    
    1,846
    
    
    
    4,485Due from fellow subsidiaries
    
    
    56
    
    
    
    165
 Note (a)     Other than information already disclosed elsewhere in this Form 20-F, no
person who has been an insider of the Company since January 1, 2003 or any
associate or affiliate of such insider has had any material direct or indirect
interest in any transaction with the Company since January 1, 2003 or in any
proposed transaction which has materially affected or would materially affect
the Company or its subsidiaries. (b)     Except for the above disclosed, there is no other amounts due from any
fellow subsidiaries and related companies which are not part of the
consolidated entity.




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-39-  C.
    Interests of experts and counsel. Not Applicable.  Item 8.
    Financial Information  A.
    Consolidated Statements and Other Financial Information. The Companys consolidated financial statements are included herein under
Item 18. Except for an interim dividend paid in 1997, the Company has not paid any
dividends on its Common Shares. The payment of dividends in the future, if
any, is within the discretion of the Board of Directors of the Company and will
depend upon the Companys earnings, its capital requirements and financial
condition and other relevant factors. The Company does not anticipate
declaring or paying any dividends in the foreseeable future.  B.
    Significant Changes. Not Applicable  Item 9.
    The Offer and Listing.  A.
    Offer and listing details. The annual high and low market prices for the five most recent full
financial years are as set forth below: Common Stocks
    
    WarrantsNASDAQ Small Cap Market(Year Ending)
    
    High
    
    Low
    
    High
    
    LowDecember 31, 2003
    
    
    0.700
    
    
    
    0.030
    
    
    
    N/A
    
    
    
    N/ADecember 31, 2002
    
    
    0.430
    
    
    
    0.010
    
    
    
    N/A
    
    
    
    N/ADecember 31, 2001
    
    
    0.444
    
    
    
    0.090
    
    
    
    N/A
    
    
    
    N/ADecember 31, 2000
    
    
    2.500
    
    
    
    0.219
    
    
    
    0.938
    
    
    
    0.031December 31, 1999
    
    
    0.938
    
    
    
    0.094
    
    
    
    0.188
    
    
    
    0.063
 The high and low market prices for each financial quarter over the two
most recent full financial years are as set forth below: Common StocksNASDAQ Small Cap Market(Quarter Ending)
    
    High
    
    LowDecember 31, 2003
    
    
    0.650
    
    
    
    0.250September 30, 2003
    
    
    0.690
    
    
    
    0.280June 30, 2003
    
    
    0.700
    
    
    
    0.030




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##### Table of Contents



-40- Common StocksNASDAQ Small Cap Market(Quarter Ending)
    
    High
    
    LowMarch 31, 2003
    
    
    0.470
    
    
    
    0.050December 31, 2002
    
    
    0.160
    
    
    
    0.010September 30, 2002
    
    
    0.430
    
    
    
    0.150June 30, 2002
    
    
    0.430
    
    
    
    0.160March 31, 2002
    
    
    0.430
    
    
    
    0.170
 For the most recent six months, the high and low market prices of the
Companys Common Shares are as set forth below: Common StocksNASDAQ Small Cap Market(Month Ending)
    
    High
    
    LowMay 31, 2004
    
    
    1.880
    
    
    
    1.220April 30, 2004
    
    
    3.770
    
    
    
    1.700March 31, 2004
    
    
    2.610
    
    
    
    0.430February 28, 2004
    
    
    0.590
    
    
    
    0.430January 31, 2004
    
    
    0.590
    
    
    
    0.370December 31, 2003
    
    
    0.650
    
    
    
    0.310
 According to the terms of issuance, the Companys Warrants had expired on
December 13, 1999 and was subsequently extended for additional two years to
December 13, 2001 pursuant to a Board resolution passed on December 3, 1999.
The Companys Warrants were de-listed from the NASDAQ Small Cap Market on May
15, 2001 due to the Companys failure in complying the NASD Marketplace Rules
4310 (c) (1), which requires the Company to maintain two active market makers
for the Warrants. On December 13, 2001, the Companys Warrants expired.  B.
    Plan of Distribution. Not Applicable.  C.
    Markets. The Companys Common Stock and Warrants were included for quotation on the
NASDAQ National Market on December 13, 1996 under the symbols TRFDF and
TRFWF respectively. Pursuant to the implementation of the new listing
requirements since February 1998, the Company moved the listing of Common Stock
and Warrants to the NASDAQ Small Cap Market on October 12, 1998 under the same
symbols. Subsequent to the de-listing of the Companys Warrants from the NASDAQ
Small Cap Market as stated in Item 9A above. As at December 31, 2001, the
Companys Common Shares were listed for quotation on the NASDAQ Small Cap
Market and not on any other public trading market.  D.
    Selling Shareholders.




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-41- Not applicable Dilution. The Company had authorized the issuance, pursuant to the 1996 Stock Option
Plan, of options to purchase 200,000 shares of Common Stock to the Companys
existing shareholders, employees, officers, directors and consultants.
Pursuant to a board resolution passed on December 28, 1999, options were
granted, for an exercise period of ten years, to certain directors and officers
at an exercise price of US$1.15 each.  E.
    Expenses of the issue. Not Applicable.  Item 10.
    Additional Information.  A.
    Share capital. Not Applicable.  B.
    Memorandum and articles of association. The Memorandum and Articles of Association of the Company was included in
the Form 1 Registration Statement filed to the Securities and Exchange
Commission upon the Initial Public Offering of the Company. Its subsequent
amendments were included as resolutions in the proxy statements for the
shareholders meeting filed to the Securities and Exchange Commission when
occurred. Our corporate affairs are governed by our Memorandum and Articles of
Association and by the International Business Companies Act of the British
Virgin Islands. Principles of law relating to such matters as the validity of
corporate procedures, the fiduciary duties of our management, directors and
controlling shareholders and the rights of our shareholders differ from those
that would apply if we were incorporated in a jurisdiction within the United
States. Further, the rights of shareholders under British Virgin Islands law
are not as clearly established as the rights of shareholders under legislation
or judicial precedent in existence in most United States jurisdictions. Thus,
our public shareholders may have more difficulty in protecting their interests
in the face of actions by the management, directors or controlling shareholders
than they might have as shareholders of a corporation incorporated in a United
States jurisdiction. Please refer to Item 3(D) for a detailed discussion of
such risk.  C.
    Material contracts. In March 2003, BBHL had entered into an agreement with the Legend Group,
for a period of three years ending on March 14, 2006, to produce the Security
Gate under the Lenova brand, the unique brand name owned by the Legend Group.
The revenue related from this contract in the 2003 Period amounted to Rmb 1.9
million, representing 23.3% and 16.7% of the total revenue of BBHL and the
Company respectively.




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-42-  D.
    Exchange controls. Exchange Rates The following table sets forth-certain information concerning exchange
rate between Renminbi and U. S. dollars for the periods indicated: Noon Buying Rate (1)PeriodPeriod
    
    End
    
    Average (2)
    
    High
    
    Low(RMB Per US$)1996
    
    
    8.3284
    
    
    
    8.3387
    
    
    
    8.5000
    
    
    
    8.32671997
    
    
    8.3255
    
    
    
    8.3247
    
    
    
    8.3283
    
    
    
    8.32001998
    
    
    8.2789
    
    
    
    8.2969
    
    
    
    8.3000
    
    
    
    8.27781999
    
    
    8.2795
    
    
    
    8.2797
    
    
    
    8.2785
    
    
    
    8.22762000
    
    
    8.2774
    
    
    
    8.2784
    
    
    
    8.2799
    
    
    
    8.27732001
    
    
    8.2766
    
    
    
    8.2772
    
    
    
    8.2786
    
    
    
    8.26762002
    
    
    8.2800
    
    
    
    8.2770
    
    
    
    8.2800
    
    
    
    8.26692003
    
    
    8.2767
    
    
    
    8.2771
    
    
    
    8.2800
    
    
    
    8.2765January 2004
    
    
    8.2768
    
    
    
    8.2770
    
    
    
    8.2772
    
    
    
    8.2767February 2004
    
    
    8.2769
    
    
    
    8.2768
    
    
    
    8.2773
    
    
    
    8.2700March 2004
    
    
    8.2770
    
    
    
    8.2771
    
    
    
    8.2774
    
    
    
    8.2767April 2004
    
    
    8.2771
    
    
    
    8.2769
    
    
    
    8.2772
    
    
    
    8.2768May 2004
    
    
    8.2769
    
    
    
    8.2771
    
    
    
    8.2773
    
    
    
    8.2768
  (1)
    
    The noon buying rate in New York for cable transfers payable in foreign
currencies as certified for customs purposes by the Federal Reserve Bank
of New York.(2)
    
    Determined by averaging the rates on the last business day of each month
during the relevant period.  E.
    Taxation. The following discussion is a summary of certain anticipated, British
Virgin Islands, Cayman Islands, Hong Kong and PRC tax consequences of an
investment in the Common Stock and warrants. The discussion does not deal with
all possible tax consequences relating to an investment in the Common Stock and
warrants and does not purport to deal with the tax consequences applicable to
all categories of investors, some of which (such as dealers in securities,
insurance companies and tax-exempt entities) may be subject to special rules.
In particular, the discussion does not address the tax consequences under
state, local and other national (e.g., United States, non-British Virgin Island
and non-Hong Kong) tax laws. Accordingly, each prospective investor should
consult its own tax advisor regarding the particular tax




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##### Table of Contents



-43- consequences to it of an investment in the Common Stock and warrants. The
following discussion is based upon laws and relevant interpretations there of
in effect as of the date of this Annual Report, all of which are subject to
change. British Virgin Islands Taxation. Under the International Business Companies Act of the British Virgin
Islands as currently in effect, a holder of Common Stock who is not a resident
of the British Virgin Islands is exempt from British Virgin Islands income tax
on dividends paid with respect to the Common Stock and all holders of Common
Stock are not liable to British Virgin Islands income tax on gains realized
during the year on sale or disposal of such shares; the British Virgin Islands
does not impose a withholding tax on dividends paid by the Company incorporated
under the International Business Companies Act. There are no capital gains, gift or inheritance taxes levied by the
British Virgin Islands on companies incorporated under the International
Business Companies Act. In addition, the Common Stock is not subject to
transfer taxes, stamp duties or similar charges. There is no income tax treaty or convention currently in effect between
the United States and the British Virgin Islands. Hong Kong Taxation Under the laws of Hong Kong, as currently in effect, a holder of Common
Stock is not subject to Hong Kong tax on dividends paid with respect to such
shares and no holder of Common Stock is liable for Hong Kong tax on gains
realized on sale or other disposition of such Common Stock except that those
persons who are classified for Hong Kong purposes as dealers in securities in
Hong Kong may be subject to Hong Kong tax in respect of any gain resulting on
the disposition of Common Stock. Hong Kong does not impose a withholding tax
on dividends paid by the Company or its subsidiaries. In addition, the Company
will not be subject to Hong Kong taxes as a result of its receipt of dividends
from any of its subsidiaries. PRC Taxation There are no material PRC tax consequences to holders of Common Stock
solely as a result of the purchase, ownership and disposition of such Common
Stock. There is income tax treaty in effect between the United States and the
PRC. Cayman Island Taxation The Cayman Islands currently have no exchange control restrictions and no
income, corporate or capital gains tax, estate duty, inheritance tax, gift tax
or withholding tax applicable to the Company or any holder of shares.
Accordingly, payment of dividends on, and any transfer of, the shares will not
be subject to taxation in the Cayman Islands, no Cayman Islands withholding tax
will be required on such payments to any holder of a share and gains derived
from the sale of shares will not be subject to Cayman Islands income or
corporation tax. The Cayman Islands are not party to any double taxation
treaties.  F.
    Dividends and paying agents. The future payment of dividends is within the discretion of the Board of
Directors and will be dependent, upon among other factors, earnings capital
requirements, financing agreement covenants, the financial condition of the
Company and applicable law. The Board does not intend to declare any dividends
further in the foreseeable future, but instead intends to retain all future
earning, if any, for use in




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-44- the Companys business operations. To the extent that the Board may
decide to pay cash dividends in the future, such dividends will be declared
from the retained earnings, i.e., surplus, as determined by resolution of the
Board of Directors, subject to the availability and existence of such retained
earnings will also be limited by the amount of dividends which can be declared
by its subsidiaries. Applicable PRC laws and regulations required that before a Sino-foreign
equity joint venture enterprise distributes profits to its joint venture
partners, it must first satisfy all tax liabilities, provide for losses in
previous years and make allocations, in proportions determined at the
discretion of the Board of Directors, to a capital reserve fund and a public
welfare fund. Distribution of profits is required to be in proportion of each
partys investment in the joint venture.  G.
    Statement by experts. Not Applicable.  H.
    Documents on display. Documents concerning the Company that are referred to in this document may
be inspected at the office of the Company, which is 34th Floor, West Tower,
Shun Tak Centre, 200 Connaught Road Central, Hong Kong.  I.
    Subsidiary Information. Not Applicable  Item 11.
    Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to risk of foreign currency exchange rate
fluctuation. The Company has never used derivative instruments to hedge its
exchange rate risks, does not plan to do so, and may not be successful should
it attempt to do so in the future. Nevertheless, the Company believes such risk
is low due to no foreign currency liabilities are incurred and the principal
operations are limited solely to the China market. The Companys trading
securities are not subject to any foreign currency and interest rate risks. In the normal course of business, we also face risks that are either
non-financial or non-quantifiable. Such risks principally include country
risk, credit risk and legal risk.  Item 12.
    Description of Securities Other than Equity Securities. Not Applicable.  Item 13.
    Default, Dividend Arrearages and Delinquencies. None.  Item 14.
    Material Modifications to the Rights of Security Holders and Use of Proceeds. Not applicable.  Item 15. Controls and Procedures We evaluated the design and operation of our disclosure controls and
procedures to determine whether they are effective in ensuring that we disclose
the required information in a timely manner and in




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-45- accordance with the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and the rules and forms of the Securities and Exchange
Commission. Management, including the Chief Executive Officer and the Chief
Financial Officer, supervised and participated in the evaluation. The
evaluation was completed within 90-day period prior to the filing of this
Annual Report on Form 20-F. The Chief Executive Officer and the Chief Financial Officer concluded,
based on their review, that our disclosure controls and procedures, as defined
by Exchange Act Rules 13a-14(c) and 15d-14(c), are effective and ensure that we
disclose the required information in reports that we file under the Exchange
Act and that the filings are recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. No significant were made to our internal controls or other factors
that could significantly affect these controls subsequent to the date of their
evaluation. It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems,
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how remote.  Item 16A.
    Audit Committee Financial Expert The Board has determined that Mr. Yu Xiang Dong, an independent director and is
a member of the Audit Committee, is an financial expert as defined under the
applicable rules of the SEC issued pursuant to Section 407 of the
Sarbanes-Oxley Act of 2002.  Item 16B.
    Code of Ethics Code of Ethics are in the process of preparation by the Company.  Item 16C.
    Principal Accountant Fees and Services The audit fee of PricewaterhouseCoopers, the independent auditors for the
fiscal years ended December 31, 2003 and 2002, amounted to Rmb 0.5 million and
Rmb 0.4 million respectively. Apart from audit service, PricewaterhouseCoopers
was not engaged by the Company in other kind of professional services.  Item 17.
    Financial Statements. The Company has elected to provide Financial Statements pursuant to Item 18 (see below).  Item 18.
    Financial Statements. The following documents are filed as Attachment A hereto and are included as
part of this Annual report on Form 20-F. Financial Statements.Report of Independent Auditors.Consolidated Statements of Operations and Comprehensive Income of the
Group for each of the three years in the period ended December 2001, 2002
and 2003.Consolidated Balance Sheets of the Group as of December 31, 2002 and
2003.




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##### Table of Contents



-46- Consolidated Statements of Cash Flows of the Group for each of the three
years in the period ended December 31, 2001, 2002 and 2003.Consolidated Statements of Changes in Shareholders Equity of the Group
for each of the three years in the period ended December 31, 2001, 2002
and 2003.Notes to consolidated Financial Statements.
  Item 19.
    Exhibits. The following exhibits are filed as part of this annual report: 1. List of Companys significant subsidiaries, their jurisdiction of
incorporation and the names under which they do business, if different
from their name. 2. Certification of Chief Executive Officer and Chief Financial Officer
required by Section 302 of the Sarbanes-Oxley Act 3. Certification of Chief Executive Officer and Chief Financial Officer
required by Section 906 of the Sarbanes-Oxley Act




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##### Table of Contents



-48- 
 EXHIBITS INDEX The following exhibits are filed as part of this annual report: 1. List of Companys significant subsidiaries, their jurisdiction of
incorporation and the names under which they do business, if different
from their name. 2. Certification of Chief Executive Officer and Chief Financial Officer
required by Section 302 of the Sarbanes-Oxley Act 3. Certification of Chief Executive Officer and Chief Financial Officer
required by Section 906 of the Sarbanes-Oxley Act




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##### Table of Contents



Report of Independent Auditors To the Shareholders and Board of Directors of
Tramford International Limited We have audited the accompanying consolidated balance sheets of Tramford
International Limited and its subsidiaries (the Group) as of December 31,
2003 and 2002, and the related consolidated statements of operations and
comprehensive income, cash flows and changes in shareholders equity for each
of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Groups management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tramford
International Limited and its subsidiaries at December 31, 2003 and 2002, and
the results of their operations and their cash flows for the three years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. PricewaterhouseCoopers
Certified Public Accountants Hong Kong, June 28, 2004 -F-1-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in thousands, except per share data)
for the years ended December 31, 2001, 2002 and 2003 Note
    
    2001
    
    2002
    
    2003
    
    2003Rmb
    
    Rmb
    
    Rmb
    
    US$(Note 2(d))RevenuesProduct sales
    
    
    
    
    
    
    707
    
    
    
    5,658
    
    
    
    8,405
    
    
    
    1,015Rendering of services
    
    
    
    
    
    
    6,598
    
    
    
    2,625
    
    
    
    3,337
    
    
    
    4037,305
    
    
    
    8,283
    
    
    
    11,742
    
    
    
    1,418Costs of salesProduct sales
    
    
    
    
    
    
    (508
    )
    
    
    (2,986
    )
    
    
    (4,421
    )
    
    
    (534
    )Rendering of services
    
    
    
    
    
    
    (4,695
    )
    
    
    (1,839
    )
    
    
    (2,204
    )
    
    
    (266
    )(5,203
    )
    
    
    (4,825
    )
    
    
    (6,625
    )
    
    
    (800
    )Gross profit
    
    
    
    
    
    
    2,102
    
    
    
    3,458
    
    
    
    5,117
    
    
    
    618Selling and general and administrative
expenses
    
    
    
    
    
    
    (15,463
    )
    
    
    (11,977
    )
    
    
    (9,129
    )
    
    
    (1,102
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (7,249
    )
    
    
    
    
    
    
    Bad debt expense
    
    
    
    
    
    
    
    
    
    
    (4,142
    )
    
    
    
    
    
    
    Operating loss
    
    
    
    
    
    
    (13,361
    )
    
    
    (19,910
    )
    
    
    (4,012
    )
    
    
    (484
    )Non-operating income
    
    
    3
    
    
    
    2,555
    
    
    
    2,456
    
    
    
    2,429
    
    
    
    293Non-operating expenses
    
    
    4
    
    
    
    
    
    
    
    (141
    )
    
    
    
    
    
    
    Loss before income tax provision
    
    
    
    
    
    
    (10,806
    )
    
    
    (17,595
    )
    
    
    (1,583
    )
    
    
    (191
    )Income tax provision
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    (249
    )
    
    
    (30
    )Net loss before minority interests
    
    
    
    
    
    
    (10,806
    )
    
    
    (17,595
    )
    
    
    (1,832
    )
    
    
    (221
    )Minority interests
    
    
    
    
    
    
    1,665
    
    
    
    2,149
    
    
    
    890
    
    
    
    107Net loss for the year
    
    
    
    
    
    
    (9,141
    )
    
    
    (15,446
    )
    
    
    (942
    )
    
    
    (114
    )Other comprehensive income/(losses),
net of tax:Net unrealized (loss)/gain on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    (587
    )
    
    
    401
    
    
    
    48Realized loss on sale of
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    587
    
    
    
    71Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    (355
    )
    
    
    (43
    )Comprehensive (losses)/income
    
    
    
    
    
    
    (9,141
    )
    
    
    (16,019
    )
    
    
    (309
    )
    
    
    (38
    )Loss per share
    
    
    12- Basic and dilutive
    
    
    
    
    
    
    (1.32
    )
    
    
    (2.24
    )
    
    
    (0.14
    )
    
    
    (0.01
    )Weighted-average ordinary shares
    
    
    12- Basic and dilutive
    
    
    
    
    
    
    6,902
    
    
    
    6,895
    
    
    
    6,894
    
    
    
    6,894
 -F-2-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
at December 31, 2002 and 2003 Note
    
    2002
    
    2003
    
    2003Rmb
    
    Rmb
    
    US$(Note 2(d))ASSETSCURRENT ASSETSCash and cash equivalents
    
    
    
    
    
    
    12,203
    
    
    
    7,400
    
    
    
    894Short-term investments  security trust account
    
    
    
    
    
    
    13,540
    
    
    
    11,265
    
    
    
    1,360Trading securities
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    Available-for-sale securities
    
    
    
    
    
    
    8,560
    
    
    
    11,197
    
    
    
    1,352Trade accounts receivable, net
    
    
    
    
    
    
    2,589
    
    
    
    2,655
    
    
    
    321Inventories
    
    
    
    
    
    
    1,219
    
    
    
    707
    
    
    
    85Due from related parties
    
    
    13
    
    
    
    8,492
    
    
    
    11,179
    
    
    
    1,350Other assets
    
    
    6
    
    
    
    1,190
    
    
    
    1,344
    
    
    
    162TOTAL CURRENT ASSETS
    
    
    
    
    
    
    47,842
    
    
    
    45,747
    
    
    
    5,524Property, plant and equipment, net
    
    
    7
    
    
    
    534
    
    
    
    88
    
    
    
    11Intangible asset
    
    
    8
    
    
    
    1,000
    
    
    
    
    
    
    
    Goodwill
    
    
    9
    
    
    
    5,747
    
    
    
    5,747
    
    
    
    694Software development costs
    
    
    10
    
    
    
    85
    
    
    
    
    
    
    
    TOTAL ASSETS
    
    
    
    
    
    
    55,208
    
    
    
    51,582
    
    
    
    6,229LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESTrade accounts payable
    
    
    
    
    
    
    139
    
    
    
    270
    
    
    
    32Due to a related party
    
    
    13
    
    
    
    830
    
    
    
    
    
    
    
    Consideration payable on the acquisition of an
operating unit
    
    
    
    
    
    
    1,850
    
    
    
    1,850
    
    
    
    223Accrued professional fees
    
    
    
    
    
    
    1,070
    
    
    
    583
    
    
    
    70Income tax payable
    
    
    
    
    
    
    
    
    
    
    249
    
    
    
    30Value added tax and business tax payable
    
    
    
    
    
    
    1,434
    
    
    
    1,243
    
    
    
    150Other liabilities and accrued expenses
    
    
    11
    
    
    
    2,495
    
    
    
    1,196
    
    
    
    145TOTAL CURRENT LIABILITIES
    
    
    
    
    
    
    7,818
    
    
    
    5,391
    
    
    
    650Contingencies and commitments
    
    
    16Minority interests
    
    
    
    
    
    
    890
    
    
    
    
    
    
    
    SHAREHOLDERS EQUITYShare capital
    
    
    15
    
    
    
    187,730
    
    
    
    187,730
    
    
    
    22,673Accumulated losses
    
    
    
    
    
    
    (140,587
    )
    
    
    (141,529
    )
    
    
    (17,093
    )Accumulative other comprehensive losses
    
    
    
    
    
    
    (643
    )
    
    
    (10
    )
    
    
    (1
    )TOTAL SHAREHOLDERS EQUITY
    
    
    
    
    
    
    46,500
    
    
    
    46,191
    
    
    
    5,579TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    55,208
    
    
    
    51,582
    
    
    
    6,229
 -F-3-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
for the years ended December 31, 2001, 2002 and 2003 2001
    
    2002
    
    2003
    
    2003Rmb
    
    Rmb
    
    Rmb
    
    US$Cash flows from operating activitiesNet loss
    
    
    (9,141
    )
    
    
    (15,446
    )
    
    
    (942
    )
    
    
    (114
    )Adjustments to reconcile net (loss)/income to net
cash provided by/(used in) operating activities
Minority interests in loss of consolidated
subsidiaries
    
    
    (1,665
    )
    
    
    (2,149
    )
    
    
    (890
    )
    
    
    (107
    )Amortization of intangible asset, goodwill and
software development costs
    
    
    5,281
    
    
    
    1,418
    
    
    
    1,085
    
    
    
    131Impairment of goodwill
    
    
    
    
    
    
    7,249
    
    
    
    
    
    
    
    Depreciation
    
    
    1,133
    
    
    
    816
    
    
    
    475
    
    
    
    57Dividend income
    
    
    
    
    
    
    (2
    )
    
    
    (295
    )
    
    
    (36
    )Unrealized loss/(gain) on trading securities
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    Gain on disposal of available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    (2,005
    )
    
    
    (242
    )Loss on disposal of fixed assets
    
    
    
    
    
    
    198
    
    
    
    
    
    
    
    Gain on adjustment to consideration for the
acquisition of subsidiaries
    
    
    
    
    
    
    (1,697
    )
    
    
    
    
    
    
    Bad debt expense
    
    
    
    
    
    
    4,142
    
    
    
    
    
    
    
    Changes in assets and liabilities:Decrease/(increase) in trade accounts receivable
    
    
    294
    
    
    
    (2,576
    )
    
    
    (66
    )
    
    
    (8
    )(Increase)/decrease in trading securities
    
    
    
    
    
    
    (59
    )
    
    
    49
    
    
    
    6Decrease/(increase) in inventories
    
    
    12
    
    
    
    (1,139
    )
    
    
    512
    
    
    
    62Decrease/(increase) in due from related parties
and other assets
    
    
    7,876
    
    
    
    1,616
    
    
    
    (263
    )
    
    
    (32
    )Increase/(decrease) in trade accounts payable,
amount due to a related party and other current
liabilities
    
    
    103
    
    
    
    (19
    )
    
    
    (2,676
    )
    
    
    (323
    )Increase in income tax payable
    
    
    
    
    
    
    
    
    
    
    249
    
    
    
    30Net cash provided by/(used in) operating activities
    
    
    3,893
    
    
    
    (7,638
    )
    
    
    (4,767
    )
    
    
    (576
    )Cash flows
from investing activities
Settlement of investment in subsidiaries
    
    
    
    
    
    
    (18,312
    )
    
    
    
    
    
    
    Security trust account
    
    
    
    
    
    
    814
    
    
    
    2,275
    
    
    
    275Dividend income
    
    
    
    
    
    
    2
    
    
    
    295
    
    
    
    36Funds held by related parties for security
investment purposes (note 13)
    
    
    (868
    )
    
    
    (7,568
    )
    
    
    (2,578
    )
    
    
    (311
    )Proceeds from disposal of available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    11,810
    
    
    
    1,426Purchase of available-for-sales securities
    
    
    
    
    
    
    (9,147
    )
    
    
    (11,454
    )
    
    
    (1,383
    )Purchases of property, plant and equipment
    
    
    (114
    )
    
    
    (70
    )
    
    
    (29
    )
    
    
    (4
    )Proceeds from disposal of property, plant and
equipment
    
    
    
    
    
    
    86
    
    
    
    
    
    
    
    Payment for software development cost capitalized
    
    
    (170
    )
    
    
    
    
    
    
    
    
    
    
    Net cash (used in)/provided by investing activities
    
    
    (1,152
    )
    
    
    (34,195
    )
    
    
    319
    
    
    
    39Cash flows
from financing activities
Purchase of treasury shares
    
    
    (18
    )
    
    
    (3
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (18
    )
    
    
    (3
    )
    
    
    
    
    
    
    Effect of exchange rate changes on cash and cash
equivalents
    
    
    
    
    
    
    14
    
    
    
    (355
    )
    
    
    (43
    )Net increase/(decrease) in cash and cash equivalents
    
    
    2,723
    
    
    
    (41,822
    )
    
    
    (4,803
    )
    
    
    (580
    )Cash and cash equivalents at beginning of year
    
    
    51,302
    
    
    
    54,025
    
    
    
    12,203
    
    
    
    1,474Cash and cash equivalents at end of year
    
    
    54,025
    
    
    
    12,203
    
    
    
    7,400
    
    
    
    894
 -F-4-




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TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Amounts in thousands)
for the years ended December 31, 2001, 2002 and 2003 Accumulatedother
    
    TotalAccumulated
    
    comprehensive
    
    shareholders'Equity
    
    losses
    
    losses
    
    equityRmb
    
    Rmb
    
    Rmb
    
    RmbBalance at December 31, 2000
    
    
    
    
    
    
    187,751
    
    
    
    (116,000
    )
    
    
    (70
    )
    
    
    71,681Net loss
    
    
    
    
    
    
    
    
    
    
    (9,141
    )
    
    
    
    
    
    
    (9,141
    )Purchase of treasury shares
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    (18
    )Balance at December 31, 2001
    
    
    
    
    
    
    187,733
    
    
    
    (125,141
    )
    
    
    (70
    )
    
    
    62,522Net loss
    
    
    
    
    
    
    
    
    
    
    (15,446
    )
    
    
    
    
    
    
    (15,446
    )Purchase of treasury shares
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (3
    )Net unrealized loss on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (587
    )
    
    
    (587
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14Balance at December 31, 2002
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    587
    
    
    
    587Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (355
    )
    
    
    (355
    )Balance at December 31, 2003
    
    
    
    
    
    
    187,730
    
    
    
    (141,529
    )
    
    
    (10
    )
    
    
    46,191US$
    
    US$
    
    US$
    
    US$Balance at December 31, 2003
    
    (Note 2(d))
    
    
    22,673
    
    
    
    (17,093
    )
    
    
    (1
    )
    
    
    5,779
 -F-5-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  1
    
    Nature of operations and basis of presentation Tramford International Limited (Tramford) was incorporated under the
laws of the British Virgin Islands on September 19, 1995 as a holding company.
The consolidated financial statements include the accounts of the Tramford and
its subsidiaries (hereinafter collectively referred to as the Group). On 8 May 2000, Jingle Technology Limited (JTL), a 100% subsidiary of
Tramford, was formed to act as an investment holding company within the Group.
Effective July 1, 2000, JTL purchased 100% interests in BHL Networks Technology
Co. Ltd. (BHLNet), which in turn holds 76% interest in Beijing BHL Networks
Technology Co. Ltd (BBHL), for a consideration of Rmb21,959. Pursuant to
agreements entered into among the Group and the vendors in September 2002, the
consideration was reduced from Rmb21,959 to Rmb20,262. BBHL is a Sino-foreign
equity joint venture and is principally engaged in the provision of information
technology and network security consultancy services and sales of computer
related products in the Peoples Republic of China (the PRC). BHL and BBHL
are collectively referred to as the New Operations in these financial
statements. The New Operations continue to engage in the provision of
information technology and network security consultancy services and the
development of network security software for all years presented. The other
wholly owned subsidiary of Tramford, BHL Networks Technology Company Limited
(formerly Jing Tai Industrial Investment Company Limited), acts as the treasury
center for the Group. The accompanying financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
of America (US GAAP), present the consolidated results of the operations of
the Group. All intercompany balances and transactions have been eliminated in
the consolidated financial statements of the Group. The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Accounting estimates have been employed in these financial statements
to determine reported amounts, including realizability of receivables and other
assets, useful lives of assets and income taxes. Actual results could differ
from those estimates. The financial information has been prepared in Renminbi (Rmb), the
national currency of the PRC and also the functional currency of the Group (see
also footnote 2(d)). Unless indicated otherwise, amounts in Renminbi have been
rounded to the nearest thousand. -F-6-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  2
    
    Summary of significant accounting policies The following is a summary of significant accounting policies followed by
the Group in the preparation of the financial statements.  (a)
    
    Revenues Revenues arise from product sales and the rendering of services. Revenue
is generally recognized when all of the following criteria are met (i)
persuasive evidence of an arrangement exists; (ii) delivery has occurred or
services have been rendered; (iii) the sellers price to the buyer is fixed or
determinable, and (iv) collectibility is reasonably assured. Specifically,
product sales represent the invoiced value of goods, net of discounts, supplied
to customers. Revenues are recognized upon delivery to customers and when
title has passed. Rendering of services represent fees charged on the
provision of information technology and network security consultancy services.
Fees on such services are recognized upon the completion of the underlying
services and collectibility to the fees is reasonably assured.  (b)
    
    Taxation Deferred income taxes are provided using the liability method under
Statement of Financial Accounting Standards (SFAS) No.109, Accounting for
Income Taxes. Under the liability method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the carrying amounts of existing assets and liabilities in
the financial statements and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The tax consequences of
these differences are classified as current or non-current based on the
classification of the related asset or liability for financial reporting. A
valuation allowance is provided to reduce the amount of deferred tax assets if
it is considered more likely than not that some portion of, or all of, the
deferred tax assets will not be realized.  (c)
    
    Concentration of credit risk and major customers The Group is engaged in the provision of information technology and
network security services to a wide range of industries and end users within
the PRC. All the Groups revenue is derived from sales to customers located in
the PRC. Accordingly, the Groups trade accounts receivable are concentrated
with respect to geography. The Group performs ongoing credit evaluations of
its customers and generally does not require collateral. Approximately, 13%,
17% and 28% of the total revenues were contributed by 3 major customers during
the year ended December 31, 2003.  (d)
    
    Foreign currency transaction gains and losses and translation of foreign
currencies All foreign currency transaction gains and losses are recognized as other
non-operating (expense)/income in the Statements of Operations. The Renminbi is not freely convertible into foreign currencies. The PRC
Government has instituted a single regulated floating exchange rate system
principally based on market supply and demand. Under this system, a nationwide
inter-bank foreign market has been established by designating certain banks as
authorized foreign exchange banks where Renminbi can be converted into foreign
currencies subject to prior approval from the PRC State Administration of
Exchange Control. The functional currency of BBHL is Renminbi. The functional currency of Tramford and its other subsidiaries is the Hong
Kong dollar. The financial statements of Tramford and these subsidiaries are
translated into Renminbi, using exchange rates in effect at period end,
wherever appropriate, for assets and liabilities and average exchange rates
during each reporting period for results of operations. Adjustments resulting
from the translation of financial statements are reflected as a separate
component of shareholders equity. For the convenience of the reader, a translation of amounts from Renminbi
(Rmb) into United States Dollars (US$) 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, 2003 of Rmb
8.2767 = US$1.00. Such translations should not be construed as representations
that the Renminbi amounts represent or have been or could have been converted
into United States dollars at that or any other rate.  (e)
    
    Property, plant and equipment Property, plant and equipment are stated at historical cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the respective assets. Upon
retirement or sale, the cost of disposed assets and the related accumulated
depreciation are deducted from the respective accounts and the resulting gain
or loss is included as other non-operating income/(expense) in the Statement of
Operations. Maintenance and repair costs are expensed as incurred. The
estimated useful lives of property, plant and equipment are as follows: Motor vehicles
    
    5 yearsFurniture, fixtures, office and computer equipment
    
    3 years
 -F-7-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  2
    
    Summary of significant accounting policies (continued)  (f)
    
    Intangible asset Intangible asset represents technology platform for the development of
server switch and network security device acquired by the Group for cash. It
is recognized at cost and is amortized on a straight-line basis over its
estimated useful life of three years.  (g)
    
    Software development costs Costs that are related to the conceptual formulation and design of
licensed programs are expensed as incurred. Capitalization of costs will
happen during the period when technological feasibility of the licensed program
is established and when the product is ready for general release to the market.
The annual amortization of the capitalized amounts is the greater of the
amount computed based on the estimated revenue distribution over the products
revenue-producing lives, or the straight-line method, and is applied over
periods ranging up to two years commencing when the products are generally
released to the market.  (h)
    
    Goodwill Goodwill represents cost in excess of the fair value of net assets
acquired and was amortized on a straight-line basis over a period of five years
prior to January 1, 2002. The Group adopted Statement of Financial Accounting
Standard (SFAS) No. 142, Goodwill and Other Intangible Assets,effective
January 1, 2002, and ceased the amortization of goodwill. Instead it is tested
at least annually for impairment.  (i)
    
    Impairment Annual impairment test for goodwill is carried out in two steps. The
first step of the impairment test is used to identify potential impairment,
compares the fair value of the reporting unit with its carrying amount,
including goodwill. The fair value is determined by the forecasted discounted
net cash inflow of the reporting unit for a period of five years. If the
carrying amount of the reporting unit exceeds its fair value, goodwill of the
reporting unit is considered impaired. The second step of the impairment test
quantifies the amount of the impairment loss by comparing the carrying amount
of goodwill to its implied fair value. An impairment loss is recorded to the
extent the carrying amount of goodwill exceeds its implied fair value.
Goodwill must be tested for impairment at least annually, or more frequently if
warranted. The Group has performed the required impairment test for 2003 and
no impairment is identified. The carrying value of a long-lived asset is considered impaired by the
Group when the anticipated undiscounted cash flow from such asset is less than
its carrying value. If an impairment is identified, a loss is recognized based
on the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved
or based on independent appraisals. Long-lived assets, including certain identifiable intangibles with
finite-lives, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable.  (j) Inventories Inventories are valued at the lower of cost and net realizable value.
Cost includes the purchase cost of products at invoiced value using a first-in
first-out method. Net realizable value is determined by reference to the sales
proceeds of items sold in the ordinary course of business or to a management
estimate based on prevailing market conditions.  (k)
    
    Cash and cash equivalents Cash and cash equivalents include cash on hand, demand deposits with banks
and liquid investments with an original maturity of three months or less. The
carrying value of cash equivalents approximates their fair value.  (l)
    
    Short-term investments The Group invests in highly liquid investments with maturities less than
one year, at the time of purchase that are considered to be short-term
investments. The carrying amount of the investments approximates fair value
due to their short maturity. The Group maintains certain security investments
with security firms under the name of its fellow subsidiary or related company,
which hold these investments in trust for the Group. Periodic evaluations are
performed on the relative credit standing of these investments that are
considered in the Groups investment strategy. -F-8-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  2
    
    Summary of significant accounting policies (continued)  (m)
    
    Investment in securities Securities held principally for resale in the near term are classified as
trading securities upon acquisition and recorded at their fair values.
Unrealized gains and losses on trading securities are included in non-operating
income and expenses. Other securities are defined as securities
available-for-sale under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115 Accounting for Certain Investments in Debt and
Equity Securities. Available-for-sale securities are carried at fair value,
with unrealized gains and losses, if any, reported, net of tax, in other
comprehensive income.  (n)
    
    Earnings per share Basic earnings per share represents income available to common
shareholders divided by the weighted-average number of common stocks
outstanding during the period. Diluted earnings per share reflects additional
common stocks that would have been outstanding if dilutive potential common
stocks have been issued, as well as any adjustment to income that would result
from the assumed issuance. Dilutive potential common stocks that may be issued
by the Group relate solely to outstanding stock options and bonds with stock
purchase warrants, and are determined using the treasury stock method. Effects
of stock options and bonds with stock purchase warrants are excluded from the
computation if the effect would be antidilutive.  (o)
    
    Stock options The Group applies Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees and complies with the disclosure
provisions of SFAS No. 123 Accounting for Stock-Based Compensation (SFAS No.
123). In general, compensation cost is recognized based on the difference, if
any, between the fair value of the Companys shares and the exercise price as
determined on the date the option is granted. Under APB Opinion No. 25,
because the exercise price of all the options issued by the Company equals or
is higher than the market price of the underlying stock on the date of grant,
no compensation expense is recognized.  (q)
    
    Recent accounting pronouncements In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of Others (FIN
45). FIN 45 requires the recognition of a liability for certain guarantee
obligations issued or modified after December 31, 2002. FIN 45 also clarifies
disclosure requirements to be made by a guarantor for certain guarantees. The
disclosure provisions of FIN 45 are effective for interim periods and fiscal
years ending after December 15,2002. The adoption of FIN 45 did not have a
material effect on the Groups financial position or results of operations. In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables (EITF No. 00-21). This
issue addresses how revenue arrangements with multiple deliverables should be
divided into separate units of accounting and how the arrangement consideration
should be allocated to the identified separate accounting units. EITF No.
00-21 is effective for fiscal periods beginning after June 15, 2003. The Group
does not believe that this EITF will have a significant impact on its financial
statements. In January 2003, the FASB issued FIN 46 Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. In December 2003, the
FASB issued a revision to FIN No. 46, Consolidation of Variable Interest
Entities, and Interpretation of ARB No. 51, or FIN 46R. Among other changes, the revisions of FIN 46R (a) clarified some
requirements of the original FIN 46, (b) eased some implementation problems,
and (c) added new scope exceptions. FIN 46R deferred the effective date of the
Interpretation for public companies, to the end of the first reporting period
ending after March 15, 2004, except that all public companies must at a minimum
apply the provisions of the Interpretation to entities that were previously
considered special-purpose entities under the FASB literature prior to the
issuance of FIN 46R by the end of the first reporting period ending after
December 15, 2003. The Companys management does not expect that the adoption
of FIN 46R will have a material effect on the Groups financial position or
results of operations. -F-9-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  3
    
    Non-operating income Non-operating income consisted of the following: Year ended December 31,2001
    
    2002
    
    2003Rmb
    
    Rmb
    
    RmbGain on adjustment to consideration for the acquisition of
subsidiaries (note)
    
    
    
    
    
    
    1,697
    
    
    
    Realized gains on trading securities
    
    
    1,242
    
    
    
    347
    
    
    
    8Realized gains on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    2,005Dividend income from marketable securities
    
    
    
    
    
    
    2
    
    
    
    295Bank interest
    
    
    1,286
    
    
    
    169
    
    
    
    119Compensation received from a supplier on goods returned
    
    
    
    
    
    
    182
    
    
    
    Others
    
    
    27
    
    
    
    59
    
    
    
    22,555
    
    
    
    2,456
    
    
    
    2,429
 Note:  During the year 2002, the Group renegotiated the consideration in respect
of the acquisition of the New Operations made in 2000. The revised
consideration is Rmb20,262, representing a discount on the original
consideration of Rmb21,959. This change in consideration resulted in the
recognition of a gain of Rmb1,697 in 2002.  4
    
    Non-operating expenses Non-operating expenses consisted of the following: Year ended December 31,2001
    
    2002
    
    2003Rmb
    
    Rmb
    
    RmbUnrealized loss on trading securities
    
    
    
    
    
    
    9
    
    
    
    Others
    
    
    
    
    
    
    132
    
    
    
    
    
    
    
    141
    
    
    
    
 -F-10-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  5
    
    Income tax provision Tramford was incorporated under the laws of the British Virgin Islands
(BVI), and under current BVI law is not subject to tax on income or capital
gains as it does not carry out business in the BVI. The Companys subsidiary operating in Hong Kong provides Hong Kong profits
tax at the rate of 17.5% for the year ended December 31, 2003 based on
estimated assessable profits arising in Hong Kong. No provision for Hong Kong
profits tax was provided for this subsidiary for 2001 and 2002 as it had no
estimated assessable profits. The Companys subsidiary operating in the PRC incurred a loss and
therefore no PRC income tax has been provided. Composition of income tax expense The current and deferred portion of income tax expense included in the
consolidated statements of operations and comprehensive income for the years
ended December 31 are as follows: 2001Rmb
    
    2002Rmb
    
    2003RmbCurrent income tax expenses
    
    
    
    
    
    
    
    
    
    
    249Recognition of deferred tax assets
    
    
    4,148
    
    
    
    2,560
    
    
    
    1,531Change in valuation allowance
    
    
    (4,148
    )
    
    
    (2,560
    )
    
    
    (1,531
    )Income tax expenses
    
    
    
    
    
    
    
    
    
    
    249
 Reconciliation of income tax expense by applying PRC statutory Enterprise
Income Tax rate Income tax expense differed from the amounts computed by applying PRC
statutory Enterprise Income Tax (EIT) rate of 33% as a result of the
following: 2001Rmb
    

2002Rmb
    

2003RmbRmb
    
    Rmb
    
    RmbIncome tax credit at PRC statutory EIT rate
    
    
    (3,566
    )
    
    
    (5,806
    )
    
    
    (522
    )Effect of different taxation rates in Hong Kong
    
    
    (300
    )
    
    
    59
    
    
    
    (474
    )Income not subject to taxation
    
    
    (218
    )
    
    
    (593
    )
    
    
    (76
    )Expenses not deductible for taxation purpose
    
    
    
    
    
    
    3,780
    
    
    
    Utilization of previously unrecognized tax losses
    
    
    (64
    )
    
    
    
    
    
    
    (192
    )Increase in previously recognized tax loss
resulting from an increase in tax rate
    
    
    
    
    
    
    
    
    
    
    (18
    )Tax losses not recognized
    
    
    4,148
    
    
    
    2,560
    
    
    
    1,531Total income tax expense
    
    
    
    
    
    
    
    
    
    
    249
  Significant components of deferred tax assets December 31,
2001Rmb
    
    December 31,
2002Rmb
    
    December 31,
2003RmbTax loss carryforwards
    
    
    4,639
    
    
    
    7,199
    
    
    
    8,538Less: valuation allowance
    
    
    (4,639
    )
    
    
    (7,199
    )
    
    
    (8,538
    )Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    
 Tax loss carry forwards from the Companys PRC subsidiary can be carried
forward for 5 years. As the realization of the current tax loss carry forwards
credit is uncertain, a full valuation allowance against the deferred tax assets
as at December 31, 2003 has been provided. -F-11-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  6
    
    Other assets Other assets consisted of the following: December 31,
    
    December 31,2002
    
    2003Rmb
    
    RmbRental and utility deposits
    
    
    399
    
    
    
    179Prepayment for inventories
    
    
    312
    
    
    
    Advance to staff
    
    
    224
    
    
    
    204Prepayment for insurance
    
    
    
    
    
    
    414Prepayment for consultancy fee
    
    
    
    
    
    
    155Others
    
    
    255
    
    
    
    3921,190
    
    
    
    1,344
  7
    
    Property, plant and equipment, net December 31,
    
    December 31,2002
    
    2003Rmb
    
    RmbComputer equipment
    
    
    1,912
    
    
    
    1,941Furniture, fixtures and office equipment
    
    
    576
    
    
    
    576Motor vehicles
    
    
    107
    
    
    
    107Less: accumulated depreciation
    
    
    (2,061
    )
    
    
    (2,536
    )534
    
    
    
    88
 Depreciation for the year ended December 31, 2001, 2002 and 2003 amounted
to Rmb1,133, Rmb816 and Rmb475 respectively.  8
    
    Intangible asset The intangible asset, representing the amortized cost of the network
security and server switch technology acquired in 2000, is as follows: December 31,
    
    December 31,2002
    
    2003Rmb
    
    RmbGross carrying amount
    
    
    4,000
    
    
    
    4,000Less: accumulated amortization
    
    
    (3,000
    )
    
    
    (4,000
    )1,000
    
    
    
    
 Amortization expense for the years ended December 31, 2001, 2002 and 2003
amounted to Rmb1,467, Rmb1,333 and Rmb1,000 respectively. The intangible asset
has been fully amortized in the year ended December 31, 2003. -F-12-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  9
    
    Goodwill The Group recorded goodwill of Rmb16,951, in connection with the
acquisition of its New Operations in 2000. The carrying amount of goodwill has
been assigned to the network security and information technology consultancy
reporting units, which also are reportable segments. The goodwill for the year
ended December 31, 2003 is as follows: Network
    
    Informationsecurity
    
    technology
    
    TotalRmb
    
    Rmb
    
    RmbGoodwill acquired in 2000
    
    
    15,112
    
    
    
    1,839
    
    
    
    16,951Less: accumulated amortization prior to 2002
    
    
    (3,526
    )
    
    
    (429
    )
    
    
    (3,955
    )Impairment loss for 2002
    
    
    (7,249
    )
    
    
    
    
    
    
    (7,249
    )Balance as of December 31, 2002 and 2003
    
    
    4,337
    
    
    
    1,410
    
    
    
    5,747
 The network security consultancy segment is tested for impairment in the
fourth quarter of 2002, after the annual forecasting process. Due to economic
recession in the region, operating profits and cash flows were lower than
expected. Based on the trend, the earning forecast for the next five years was
revised. In 2002, goodwill impairment loss of Rmb7,249 was recognized in the
network security consultancy reporting unit. The fair value of that reporting
unit was estimated using present value of future cash flows. In the fourth quarter of 2003, an assessment for impairment carried out
and no further impairment was identified. The amortization expense and net income of the Group for the year of
initial application and prior year, in which no extraordinary items were
recognized, are as follows: For the year ended December 31,2001
    
    2002
    
    2003Rmb
    
    Rmb
    
    RmbReported net loss
    
    
    (9,141
    )
    
    
    (15,446
    )
    
    
    (942
    )Add back: goodwill amortization
    
    
    3,955
    
    
    
    
    
    
    
    Adjusted net loss
    
    
    (5,186
    )
    
    
    (15,446
    )
    
    
    (942
    )Basic loss per share:Reported net loss per share
    
    
    (1.32
    )
    
    
    (2.24
    )
    
    
    (0.14
    )Add back: goodwill amortization
    
    
    0.57
    
    
    
    
    
    
    
    Adjusted net loss per share
    
    
    (0.75
    )
    
    
    (2.24
    )
    
    
    (0.14
    )
  10
    
    Software development costs December 31,
    
    December 31,2002
    
    2003Rmb
    
    RmbSoftware development costs capitalized
    
    
    170
    
    
    
    170Less: accumulated amortization
    
    
    (85
    )
    
    
    (170
    )85
    
    
    
    
 Amortization expense for the years ended December 31, 2001, 2002 and 2003
amounted to RmbNil, Rmb85 and Rmb85 respectively. The software development
costs has been fully amortized in the year ended December 31, 2003. -F-13-




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TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  11
    
    Other liabilities and accrued expenses December 31,
    
    December 31,2002
    
    2003Rmb
    
    RmbDeposits received
    
    
    880
    
    
    
    289Accrued salaries and staff benefits
    
    
    674
    
    
    
    766Others
    
    
    941
    
    
    
    1412,495
    
    
    
    1,196
  12
    
    Loss per share Basic loss per share represents income available to common stockholders
divided by the weighted-average number of common stocks outstanding during the
period. Diluted earnings per share reflects additional common stocks that
would have been outstanding if dilutive potential common stocks have been
issued, as well as any adjustment to income that would result from the assumed
issuance. Dilutive potential common stocks that may be issued by the Group
relate solely to outstanding stock options, and are determined using the
treasury stock method. Effects of stock options are excluded from the
computation if the effect would be antidilutive. Basic and diluted loss per share have been calculated in accordance with
SFAS No. 128 for the years ended December 31 as follows: Year ended December 31,2001
    
    2002
    
    2003Rmb
    
    Rmb
    
    RmbNet loss
    
    
    (9,141
    )
    
    
    (15,446
    )
    
    
    (942
    )Weighted-average
shares used in
computing basic and
diluted
(loss)/earnings per
share
    
    
    6,902
    
    
    
    6,895
    
    
    
    6,894Loss per share
- Basic and dilutive
    
    
    (1.32
    )
    
    
    (2.24
    )
    
    
    (0.14
    )
 In 2001, 2002 and 2003, exercise of stock options would have been
antidilutive and, therefore, was not considered in the computation of diluted
loss per share. -F-14-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  13
    
    Related party transactions The transactions and balances with related parties are analyzed as follows: Year ended December 31,2001
    
    2002
    
    2003Rmb
    
    Rmb
    
    RmbTransactions with related partiesSales
    
    
    6,598
    
    
    
    754
    
    
    
    Rental expense
    
    
    248
    
    
    
    
    
    
    
    Service fee
    
    
    142
    
    
    
    41
    
    
    
    
 December 31,
    
    December 31,2002
    
    2003Rmb
    
    RmbBalances with related partiesFunds held by the ultimate holding company for security investment
    
    
    6,590
    
    
    
    6,529purposes
Funds held by a fellow subsidiary for security investment purposes
    
    
    1,846
    
    
    
    4,485Due from fellow subsidiaries
    
    
    56
    
    
    
    165Total due from related parties
    
    
    8,492
    
    
    
    11,179Due to a related company
    
    
    830
    
    
    
    
 Apart from sales to a fellow subsidiary of an ex-shareholder of a branch
of Rmb6,598 in 2001, substantially all related party transactions are entered
into with fellow subsidiary of the Group. The balances with related parties are unsecured and interest-free, and
have no fixed terms of repayment.  14
    
    Retirement plans As stipulated by the regulations of PRC, the PRC subsidiary is required to
make contributions to the retirement plan at the rate of 19% of the base
salaries of their staff. Contributions made in connection with the plan, which
are expensed as incurred, were Rmb272, Rmb233 and Rmb293 for the years 2001,
2002 and 2003 respectively. The PRC subsidiary has no obligation for the
payment of pension benefits beyond the annual contributions described above. -F-15-




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  15
    
    Share capital Changes in share capital of Tramford are analyzed as follows: Common StockAdditionalNo. of
    
    (par
    
    paid-inRef
    
    shares
    
    US$0.01)
    
    capital
    
    Warrants
    
    TotalRmb
    
    Rmb
    
    Rmb
    
    RmbJanuary 1, 2001
    
    
    
    
    
    
    6,905,797
    
    
    
    575
    
    
    
    184,265
    
    
    
    2,911
    
    
    
    187,751Purchase of own shares
    
    
    (a
    )
    
    
    (10,100
    )
    
    
    (1
    )
    
    
    (17
    )
    
    
    
    
    
    
    (18
    )Expiration of warrants
    
    
    (b
    )
    
    
    
    
    
    
    
    
    
    
    2,911
    
    
    
    (2,911
    )
    
    
    December 31, 2001
    
    
    
    
    
    
    6,895,697
    
    
    
    574
    
    
    
    187,159
    
    
    
    
    
    
    
    187,733January 1, 2002
    
    
    
    
    
    
    6,895,697
    
    
    
    574
    
    
    
    187,159
    
    
    
    
    
    
    
    187,733Purchase of own shares in 2002
    
    
    (c
    )
    
    
    (1,200
    )
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (3
    )December 31, 2002 and
December 31, 2003
    
    
    
    
    
    
    6,894,497
    
    
    
    571
    
    
    
    187,159
    
    
    
    
    
    
    
    187,730
 (a) For the year ended December 31, 2001, a total of 10,100 shares of
Common Stock were repurchased at an average price of US$0.20 per share. (b) All warrants issued by the Company expired during the year ended
December 31, 2001. (c) For the year ended December 31, 2002, a total of 1,200 shares of
Common Stock were repurchased at an average price of US$0.28 per share. (d) On October 10, 1996, a stock option plan was set up to grant options
to certain employees and directors of the Company for a maximum of 200,000
shares. The stock option plan provides for a grant of options to employees,
officers, directors and consultants of the Group. The stock option plan is
administered by the Board of Directors or a committee appointed by the Board,
which determines the terms of options grant, including the exercise price, the
number of shares subject to the option and options exercisability. The
exercise price of all options granted under the stock option plan must be at
least equal to the fair market value of such shares on the date of grant. The
maximum term of options granted under the stock option plan is 10 years. As of
December 31, 1998, no options had been granted under the stock option plan.
Pursuant to a board resolution passed on December 28, 1999, 200,000 options
were granted to certain directors and officers at that time at an exercise
price of US$1.15 each. Of the 200,000 options granted, 140,000 options were
still held by certain directors and officers of the Company as of December 31,
2003. These options are fully vested as of December 31, 2003 and are
exercisable within ten years commencing from December 28, 1999. Apart from
60,000 options which were forfeited upon the resignation of the relevant
directors, no other options were issued, exercised, forfeited or expired under
this stock option plan during the years ended December 31, 2001, 2002 and 2003. On September 20, 2000, another stock option plan was set up to grant
options to certain employees and directors of the Company for a maximum of
400,000 shares. This stock option plan provides for a grant of options to
employees, officers, directors and consultants of the Group. The stock option
plan is administered by the Board of Directors or a committee appointed by the
Board, which determines the terms of options grant, including the exercise
price, the number of shares subject to the option and options exercisability.
The exercise price of all options granted under the stock option plan must be
at least equal to the fair market value of such shares on the date of grant.
The maximum term of options granted under the stock option plan is 10 years.
No options were granted under this plan since its inception. -F-16-




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TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  15
    
    Share capital (continued) (e) The Company applies Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees and related interpretations in
accounting for its employee stock options. Under APB Opinion No. 25, because
the exercise price of all the options issued by the Company equals or is higher
than the market price of the underlying stock on the date of grant, no
compensation expense is recognized. (f) Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 Accounting for Stock-Based Compensation, and is
determined as if the Group had accounted for its employee stock options under
the fair value method of SFAS No. 123. The fair value of options granted
during the year ended December 31, 1999 was RMB720. The fair value for these
options was estimated at the date of grant using a Black-Scholes option
valuation model with the following weighted-average assumptions for the year
ended December 31, 1999; risk-free interest rate of 5.3%; no dividend yield;
volatility factor of the expected market price of the Companys common share of
233.5%; and a weighted-average expected life of the option of ten years.
However, pro forma disclosures are not presented as there are no options
granted during the three years ended December 31, 2003 and there are no pro
forma impact as related to our options granted in 1999 for all periods
presented.  16
    
    Contingencies and commitments Operating lease commitments As of December 31, 2003, the aggregate future minimum lease payments under
non-cancelable operating leases are as follows: December 31,2003RmbYear ending December 31, 2004
    
    
    160
 Lease rental costs incurred by the Group for the year ended December 31,
2001, 2002 and 2003 amounted to Rmb2,014, Rmb1,047 and Rmb596 respectively. Contingencies On 16 July 2002, an ex-shareholder of one of the Groups Beijing operating
unit filed claims against the Group in the International Arbitration Commission
for Economics in China (the Commission) with respect to the consideration on
the Groups acquisition of an operating unit. The ex-shareholder has requested
that the Commission order the Group to settle the consideration of Rmb1,850, to
pay Rmb50 for breach of contract and Rmb100 for legal fee incurred in
connection with this litigation. In the opinion of management, it is
reasonably possible that the Group have to settle the consideration of Rmb1,850
and the amount is recorded in the financial statements. However, management
considers the likelihood of loss in respect of the breach of contract and legal
fee is remote. Accordingly, no provision has been made as of December 31,
2003. -F-17-




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TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  17
    
    Segment information Segments were determined based on products and services provided by each
segment. Accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Segment performance is
evaluated based on profit or loss from operations before interest, other
income/expense and taxes. Product sales constitute the sale of network
security softwares and devices. Rendering of services represents the provision
of information technology services. The Groups operations have been
classified into two business segments: product sales and rendering of services.
Summarized financial information by business segment for 2003, 2002 and 2001
is as follows: NetOperating
    
    identifiable
    
    Depreciationprofit/
    
    assets/
    
    and
    
    CapitalRevenue
    
    (loss)
    
    (liabilities)
    
    amortization
    
    expendituresRmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    RmbYear 2003Product sales
    
    
    8,405
    
    
    
    (2,102
    )
    
    
    3,581
    
    
    
    1,560
    
    
    
    29Rendering of services
    
    
    3,337
    
    
    
    355
    
    
    
    702
    
    
    
    
    
    
    
    Total operating segments
    
    
    11,742
    
    
    
    (1,747
    )
    
    
    4,283
    
    
    
    1,560
    
    
    
    29Corporate
    
    
    
    
    
    
    (2,265
    )
    
    
    36,161
    
    
    
    
    
    
    
    Group
    
    
    11,742
    
    
    
    (4,012
    )
    
    
    40,444
    
    
    
    1,560
    
    
    
    29Year 2002Product sales
    
    
    5,658
    
    
    
    (9,778
    )
    
    
    5,923
    
    
    
    2,075
    
    
    
    70Rendering of services
    
    
    2,625
    
    
    
    (5,085
    )
    
    
    (61
    )
    
    
    159
    
    
    
    Total operating segments
    
    
    8,283
    
    
    
    (14,863
    )
    
    
    5,862
    
    
    
    2,234
    
    
    
    70Corporate
    
    
    
    
    
    
    (5,047
    )
    
    
    35,781
    
    
    
    
    
    
    
    Group
    
    
    8,283
    
    
    
    (19,910
    )
    
    
    41,643
    
    
    
    2,234
    
    
    
    70Year 2001Product sales
    
    
    707
    
    
    
    (6,330
    )
    
    
    9,648
    
    
    
    2,238
    
    
    
    97Rendering of services
    
    
    6,598
    
    
    
    (610
    )
    
    
    5,024
    
    
    
    362
    
    
    
    16Total operating segments
    
    
    7,305
    
    
    
    (6,940
    )
    
    
    14,672
    
    
    
    2,600
    
    
    
    113Corporate
    
    
    
    
    
    
    (6,421
    )
    
    
    37,893
    
    
    
    3,814
    
    
    
    Group
    
    
    7,305
    
    
    
    (13,361
    )
    
    
    52,565
    
    
    
    6,414
    
    
    
    113
 The Group operates mainly in the PRC and accordingly no geographical
segment information is presented. -F-18-




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-47- 
 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Company certifies that it meets all of the requirements for filing
Form 20-F and has duly caused this Annual Report to be signed on its behalf by
the undersigned, thereunto duly authorised. Tramford International limitedDate: June 28, 2004
    
    /s/ Michael SiuName: Michael Siu
Title: Chief Financial Officer and Secretary