##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) 
OF THE SECURITIES EXCHANGE ACT OF
1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 000-29008
 CHINA
TECHNOLOGY DEVELOPMENT GROUP CORPORATION
  
  
 
  
   Title of each class
    
    Name of each exchange on which registeredNone
    
    Not Applicable
   
    
    o þ
  o þ
   þ o
  o o þ
  o þ
  o þ




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TABLE OF CONTENTS  PART IItem 1. Identity of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on the CompanyItem 4A. Unsolved Staff CommentsItem 5 Operating and Financial Review and ProspectsItem 6 Directors, Senior Management and EmployeesItem 7 Major Shareholders and Related Party TransactionsItem 8 Financial InformationItem 9 The Offer and ListingItem 10 Additional InformationItem 11 Quantitative and Qualitative Disclosures About Market RiskItem 12 Description of Securities Other than Equity SecuritiesPART IIItem 13 Default, Dividend Arrearages and DelinquenciesItem 14 Material Modifications to the Rights of Security Holders and Use of ProceedsItem 15 Controls and ProceduresItem 16A Audit Committee Financial ExpertItem 16B. Code of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions from the Listing Standards for Audit CommitteeItem 16E. Purchase of Equity Securities by the Issuer and Affiliated PurchasersItem 17 Financial StatementsItem 18 Financial StatementsItem 19 ExhibitsSIGNATURESEX-3.1 Memorandum and Articles of AssociationEX-10.1 New Shares Subscription AgreementsEX-10.2 Investment AgreementEX-10.3 New Shares Subscription AgreementsEX-10.4 Purchase AgreementEX-10.5 Framework AgreementEX-14.1 Code of EthicsEX-21.1 List of Company's SubsidiariesEX-31.1 Certification of Chief Executive OfficerEX-31.2 Certification of Chief Financial OfficerEX-32.1 Certification of CEO and CFO    Table of Contents  Introduction
    
    
    CTDC, Company, us or we refer to China Technology Development Group Corporation. The term you
refers to holders of our common stock.
    
    Hong Kong and the Government refer to the Hong Kong Special Administrative Region of the Peoples
Republic of China and its government, respectively.
    
    China and the Chinese government refer to the Peoples Republic of China and its government.
    
    All references to Renminbi, or Rmb are to the legal currency of China, all references to U.S.
dollars, dollars, $ or US are to the legal currency of the United States and all references to Hong
Kong dollars or HK$ are to the legal currency of Hong Kong. Any discrepancies in any table between totals
and sums of the amounts listed are due to rounding.
 1




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##### Table of Contents



PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 A. Selected financial data.
    2




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(Amounts in thousands, except per share data)Year
    
    Year
    
    Year
    
    Year
    
    Year
    
    YearEnded
    
    Ended
    
    Ended
    
    Ended
    
    Ended
    
    EndedDecember
    
    December
    
    December
    
    December
    
    December
    
    December31,
    
    31,
    
    31,
    
    31,
    
    31,
    
    31,2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2006Rmb(1)
    
    Rmb(1)
    
    Rmb(1)
    
    Rmb(1)
    
    Rmb(1)
    
    US$(2)Consolidated Statement
of Operations Data:Operating Loss
    
    
    (15,105
    )
    
    
    (4,378
    )
    
    
    (10,779
    )
    
    
    (17,833
    )
    
    
    (108,871
    )
    
    
    (13,655
    )Non-operating income
    
    
    2,456
    
    
    
    2,310
    
    
    
    167
    
    
    
    276
    
    
    
    58
    
    
    
    7Non-operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,628
    )
    
    
    (3,526
    )
    
    
    (442
    )Loss from continuing
operations before
minority interests
    
    
    (12,790
    )
    
    
    (2,198
    )
    
    
    (10,369
    )
    
    
    (19,903
    )
    
    
    (112,229
    )
    
    
    (14,076
    )Discontinued operationsIncome/(loss) from
discontinued
operations before
income tax
    
    
    (4,805
    )
    
    
    366
    
    
    
    254
    
    
    
    (341
    )
    
    
    (7,872
    )
    
    
    (987
    )Net loss for the year
    
    
    (15,446
    )
    
    
    (942
    )
    
    
    (10,115
    )
    
    
    (19,532
    )
    
    
    (114,586
    )
    
    
    (14,371
    )Loss per share
    
    
    (2.24
    )
    
    
    (0.14
    )
    
    
    (1.47
    )
    
    
    (2.67
    )
    
    
    (10.13
    )
    
    
    (1.27
    )Loss per share from
continuing operations
    
    
    (1.54
    )
    
    
    (0.19
    )
    
    
    (1.51
    )
    
    
    (2.63
    )
    
    
    (9.43
    )
    
    
    (1.18
    )Earnings/(loss) per
share from
discontinued
operations
    
    
    (0.70
    )
    
    
    0.05
    
    
    
    0.04
    
    
    
    (0.04
    )
    
    
    (0.7
    )
    
    
    (0.09
    )
 3




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(Amounts in thousands, except per share data)Year
    
    Year
    
    Year
    
    Year
    
    Year
    
    YearEnded
    
    Ended
    
    Ended
    
    Ended
    
    Ended
    
    EndedDecember
    
    December
    
    December
    
    December
    
    December
    
    December31,
    
    31,
    
    31,
    
    31,
    
    31,
    
    31,2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2006Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    US$(2)Supplemental data
to Consolidated
Statements of
OperationsRevenues
    
    
    5,658
    
    
    
    8,405
    
    
    
    2,720
    
    
    
    6,488
    
    
    
    9,343
    
    
    
    1,172Cost of sales
    
    
    2,986
    
    
    
    4,421
    
    
    
    1,394
    
    
    
    2,507
    
    
    
    4,288
    
    
    
    538Gross Profit
    
    
    2,672
    
    
    
    3,984
    
    
    
    1,326
    
    
    
    3,981
    
    
    
    5,055
    
    
    
    634Consolidated
Balance Sheet Data:Total assets
    
    
    55,208
    
    
    
    51,582
    
    
    
    39,355
    
    
    
    117,849
    
    
    
    64,751
    
    
    
    8,297Total liabilities
    
    
    7,818
    
    
    
    5,391
    
    
    
    6,501
    
    
    
    13,626
    
    
    
    14,111
    
    
    
    1,808Shareholders equity
    
    
    46,500
    
    
    
    46,191
    
    
    
    32,854
    
    
    
    98,708
    
    
    
    50,640
    
    
    
    6,489
 4




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##### Table of Contents



(1)
    
    During the fiscal year ended December 31, 2005, we disposed of the Zhuhai branch of Beijing
BHL Networks Technology Co., Ltd (BBHL) and during the fiscal year eneded December 31, 2006,
we disposed of Anji Bio, the production base of our Nutraceutical Operations. The operating
results up to the date of disposal and the loss resulted from the disposal were reported as
discontinued operations. To conform to the presentation of the current year, the comparative
operating results of the disposed segments for the years ended December 31, 2002, 2003, 2004
and 2005 were reclassified as discontinued operations.
 (2)
    
    For the convenience of the reader, translation of amounts from Renminbi into United States
Dollars has been made at the noon buying rate in New York City for cable transfer in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of New York on
December 29, 2006 of Rmb 7.8041 = US$1.00 for assets and liabilities and Rmb7.97306 = US$1.00
for revenues and expenses.
 Exchange Rate Information
    Average
    
    High
    
    Low
    
    Period-end(Rmb per U.S. $1.00)2001 (1)
    
    
    8.2770
    
    
    
    8.2786
    
    
    
    8.2676
    
    
    
    8.27662002 (1)
    
    
    8.2770
    
    
    
    8.2800
    
    
    
    8.2669
    
    
    
    8.28002003 (1)
    
    
    8.2770
    
    
    
    8.2800
    
    
    
    8.2765
    
    
    
    8.27692004 (1)
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.2764
    
    
    
    8.27652005 (1)
    
    
    8.1472
    
    
    
    8.2765
    
    
    
    8.0702
    
    
    
    8.07022006 (1)
    
    
    7.9579
    
    
    
    8.0702
    
    
    
    7.8041
    
    
    
    7.8041December 2006 (2)
    
    
    7.8219
    
    
    
    7.8350
    
    
    
    7.8041
    
    
    
    7.8041January 2007 (2)
    
    
    7.7876
    
    
    
    7.8127
    
    
    
    7.7705
    
    
    
    7.7714February 2007 (2)
    
    
    7.7502
    
    
    
    7.7632
    
    
    
    7.7410
    
    
    
    7.7410March 2007 (2)
    
    
    7.7369
    
    
    
    7.7454
    
    
    
    7.7232
    
    
    
    7.7232April 2007 (2)
    
    
    7.7247
    
    
    
    7.7345
    
    
    
    7.7090
    
    
    
    7.7090May 2007 (2)
    
    
    7.6733
    
    
    
    7.7065
    
    
    
    7.6463
    
    
    
    7.6516
 5




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(1)
    
    Annual averages are calculated by averaging the rates on the last business day of each month
during the relevant period.(2)
    
    Monthly average is calculated by averaging the daily rates during the relevant period. B. Capitalization and indebtedness.
  C. Reasons for the offer and use of proceeds.
  D. Risk factors.
   Forward Looking Statements
 Private Securities Litigation Reform Act of 1995
 
    
    our ability to achieve or sustain profitability in the rapidly changing Internet and nutraceutical market in which we
operate;
    
    our ability to successfully integrate acquired businesses, products and technologies;
    
    our ability to keep pace with the rapidly changing technology and products in the market we operate;
    
    our ability to achieve our future pricing strategies or policies;
    
    our ability to achieve our plans to expand our sales;
    
    our ability to achieve our plans to diversify our sources of revenues industry;
    
    our ability to respond to competition in the China market;
    
    our ability to maintain and protect our intellectual property.
  (a) Risks Associated with Our Business
 (1) We have limited operating history and evolving business model and strategy.
    6




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(2) We have continued to incur operating losses and we cannot provide assurance that we
will achieve or sustain profitability.
  Operating lossYear
    
    (in thousands of Rmb)2002
    
    
    (15,105
    )2003
    
    
    (4,378
    )2004
    
    
    (10,779
    )2005
    
    
    (17,833
    )2006
    
    
    (108,871
    )
          
   (3) We may not be competitive and increased competition could seriously harm our business.
  
    
    Longer operating history;
    
    Greater financial, technical, marketing, sales and other resources;
    
    Greater profitability in their operations;
    
    Superior product functionality in certain areas;
    
    Greater name recognition;
    
    A broader range of products to offer; and
    
    A larger base of customers.
  (4) We may not successfully integrate acquired businesses, products and technologies.
   7




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




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(7) We are subject to risks of excessive reliance on certain significant customers.
  (8) We may not be able to keep pace with the rapid technological changes in the market,
new competition, and new product developments.
  
     
    (9) We do not intend to pay dividends.
  (10) We are subject to risk of computer hackers attacks.
  (11) Our subsidiaries are subject to termination.
  (12) We may not be able to adequately control the business of our subsidiaries. We have
experienced integration issues with one of our subsidiaries.
 9




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(13) We
may fail to consummate a settlement with the Anji Buyers
  (14) We may not be able to successfully implement our growth strategies.
  (15) We may face difficulties in implementing our acquisition strategy, including
identifying suitable opportunities and integrating them with our existing operations.
   (16) Unauthorized use of our intellectual property by third parties, and the expenses
incurred in protecting our intellectual property rights, may adversely affect our business.
   10




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##### Table of Contents



(17) Because there is limited business insurance coverage in China, any business
disruption or litigation we experience might result in our incurring substantial costs and the
diversion of resources.
  (18) We are subject to risks of acquisition of new business, products and technologies.
    (19) We may need additional financing.
  (b) Risks
Associated with China.
  (1) We are subject to risks relating to operating a business in China.
 We may face foreign competition as a result of Chinas entry into the World Trade Organization
(WTO).
 We may experience foreign currency losses due to fluctuations in exchange rates.
 11




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Our operations and assets in China are subject to significant political and economic uncertainties.
 We may have limited legal recourse under Chinese law if disputes arise under our contracts with
third parties.
 (2) Our business may be adversely affected by Chinese government regulations.
 Internet Security
   12




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Nutraceutical Business
     -
 -
 -
 -
 (c) Risks Related to Our Technology and Product Research and Development
 (1) Our
product supply may be affected if deficiencies identified by regulatory agencies are not
properly remedied
  (2) We may be adversely affected by our insufficient insurance cover on product liability
  (3) We must respond quickly and effectively to new research and developments.
  (d) Risks Associated with Investing in our common stock.
  (1) Our stock price has been and may continue to be volatile.
  13




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(2) The sale or availability for sale of substantial amounts of our common stock could adversely
affect their market price.
  (3) Rights of Shareholders under British Virgin Islands Law May Be Less Than Those of Shareholders
in U.S. Jurisdictions.
    (4) Our
stock may cease trading if we fail to comply with requirements under Section
404 of the Sarbanes-Oxley Act of 2002
   14




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Item 4. Information on the Company
 A. History and development of the Company.
          15




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##### Table of Contents



B. Business overview.
 Market Overview
 1. Network Security Business:
 Analysis International
  2. Nutraceutical Business:
 16




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National Economy and Social Development Report 2006 Healthcare Product Market Research 2004-2005
  Company Overview
    Business Strategy
  Expanding distribution channels by cooperating with market leaders
   Strengthen the management team
  Acquiring companies with potential and expansion of product applicability
   Capital Expenditures
    17




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Seasonal sales
  Source of raw materials
   Description of Products and Services
 Network Security Business:
    Nutraceutical Business:
    18




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##### Table of Contents



C. Organizational structure.
   Country of
    
    OwnershipsName
    
    Incorporation
    
    Interests
    
    Direct ParentBHL Networks Technology Co Ltd
(BHLHK)
    
    Hong Kong
    
    
    100
    %
    
    The CompanyJingle Technology Co Ltd (Jingle)
    
    BVI
    
    
    100
    %
    
    The CompanyBHL Networks Technology Co Ltd
(BHLNet)
    
    Cayman Islands
    
    
    100
    %
    
    JingleBeijing BHL Networks Technology Co 
Ltd (BBHL)
    
    China
    
    
    76
    %
    
    BHLNetChina Natures Technology Inc.
(CNT)
    
    BVI
    
    
    100
    %
    
    The CompanyZhejiang University (Hangzhou)
Innoessen Bio-technology Inc.
(Zhejiang Innoessen)
    
    China
    
    
    71.43
    %
    
    CNTChina Green Industry Group Limited
(Green Industry)
    
    BVI
    
    
    100
    %
    
    The CompanyGreen Energy Industry Limited
(Green Energy)
    
    BVI
    
    
    100
    %
    
    Green IndustryFullwing Limited (Fullwing)
    
    BVI
    
    
    100
    %
    
    Green EnergyMargot Limited (Margot)
    
    BVI
    
    
    100
    %
    
    Green EnergyChina Green Holdings Limited
(Green Holdings)
    
    BVI
    
    
    100
    %
    
    Green IndustrySinofield Group Limited
(Sinofield)
    
    BVI
    
    
    100
    %
    
    Green HoldingsSouthwick International Limited
(Southwick)
    
    BVI
    
    
    100
    %
    
    Green HoldingsTrenda International Limited
(Trenda)
    
    BVI
    
    
    100
    %
    
    Green HoldingsShenzhen Innoessen Bio-Tech Inc.
(Shenzhen Innoessen)
    
    China
    
    
    100
    %
    
    SouthwickChina Merchants Zhangzhou
Development Zone Innoessen Biotech
Co., Ltd. (Zhangzhou Innoessen)
    
    China
    
    
    100
    %
    
    SinofieldChina Green Investment Group 
Limited (Green Investment)
    
    China
    
    
    100
    %
    
    The CompanyChina Green Food Investment 
Limited (Green Food Investment)
    
    BVI
    
    
    100
    %
    
    Green InvestmentWellknown Limited (Wellknown)
    
    BVI
    
    
    100
    %
    
    Green Food InvestmentGreen China Club Limited (Green
Club)
    
    BVI
    
    
    100
    %
    
    The Company
 19




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D. Property, plant and equipment.
    2
   
 Item 4A. Unsolved Staff Comments
  
 Item 5 Operating and Financial Review and Prospects
 MANAGEMENTS DISCUSSION AND ANALYSIS
  20




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Revenue recognition.
 Impairment.
   Recent accounting pronouncements.
  21




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##### Table of Contents



 .
   A. Results of Operations
  (Amounts in thousands, Rmb)2004
    
    *2005 (Note 1)
    
    2006Percentage
    
    
    
    
    
    Percentage
    
    
    
    
    
    PercentageAmount
    
    of Net sales
    
    Amount
    
    of Net sales
    
    Amount
    
    of Net salesNet sales
    
    
    2,720
    
    
    
    100
    %
    
    
    6,488
    
    
    
    100
    %
    
    
    9,343
    
    
    
    100
    %Cost of sales
    
    
    (1,394
    )
    
    
    51.3
    %
    
    
    (2,507
    )
    
    
    38.6
    %
    
    
    (4,288
    )
    
    
    45.9
    %Gross profit
    
    
    1,326
    
    
    
    48.7
    %
    
    
    3,981
    
    
    
    61.4
    %
    
    
    5,055
    
    
    
    54.1
    %Selling, general and
administrative
expenses
    
    
    (7,768
    )
    
    
    285.6
    %
    
    
    (21,686
    )
    
    
    334.2
    %
    
    
    (43,508
    )
    
    
    465.7
    %Impairment of goodwill
    
    
    (4,337
    )
    
    
    159.4
    %
    
    
    
    
    
    
    
    
    
    
    (69,526
    )
    
    
    744.2
    %Provision for doubtful
accounts
    
    
    
    
    
    
    
    
    
    
    (128
    )
    
    
    
    
    
    
    (892
    )Operating loss
    
    
    (10,779
    )
    
    
    
    
    
    
    (17,833
    )
    
    
    
    
    
    
    (108,871
    )Interest income
    
    
    243
    
    
    
    
    
    
    
    302
    
    
    
    
    
    
    
    214Finance cost
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (89
    )Non-operating income
    
    
    167
    
    
    
    
    
    
    
    276
    
    
    
    
    
    
    
    58Non-operating expenses
    
    
    
    
    
    
    
    
    
    
    (2,628
    )
    
    
    
    
    
    
    (3,526
    )Income tax provision
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (15
    )Minority interests 
continuing operations
    
    
    
    
    
    
    
    
    
    
    712
    
    
    
    
    
    
    
    5,515Loss from continuing
operations
    
    
    (10,369
    )
    
    
    
    
    
    
    (19,191
    )
    
    
    
    
    
    
    (106,714
    )Discontinued operations
Income/(loss) from
discontinued
operations
    
    
    254
    
    
    
    
    
    
    
    (341
    )
    
    
    
    
    
    
    (7,872
    )Net loss for the year
    
    
    (10,115
    )
    
    
    
    
    
    
    (19,532
    )
    
    
    
    
    
    
    (114,586
    )
 
 *
    
    Certain revenue and expenses of Anji Bio were reclassified to discontinued operations (see Note 7 in
consolidated financial statements). 22




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Year ended December 31, 2006 compared to year ended December 31, 2005
 Revenues.
 (1)
    
    sales to Legendsec, the largest and new customer of BBHL, contributed Rmb 2.4
million, or 25.67%, to the total revenues in 2006. The contract with Legendsec was
entered into in 2005 and its service began in 2006.
 (2)
    
    sales to Legend, the second largest customer of BBHL consisted of Rmb 2.32
million, or 24.8% of the total revenues in 2006. The revenue from Legend slightly decreased
by Rmb 0.15 million, or 6.77% from Rmb 2.47 in 2005.
 (3)
    
    sales to Computer Associates International Inc CA, the third largest customer of
BBHL consisted of 20% of the total revenues in 2006, increased by Rmb1.84 million, or 65.7
times, from Rmb0.03 million in 2005 to Rmb1.87 million in 2006; and
 (4)
    
    the aggregated sales to other individual customers, however, decreased by Rmb 1.29
million, or 33.98%, from Rmb 4.09 million in 2005 to Rmb 2.70 million in 2006 due primarily to
resources reallocated to new customer Legendsec in order to improve
the profit margin to
the Company.
 Cost of sales.
 Gross profit.
 Selling, general and administrative expenses.
  (1)
    
    salaries and benefits of us increased by Rmb13.64 million, or 138.3%, from Rmb9.86
million in 2005 to Rmb23.50 million in 2006. The increase could be further analyzed as
follows:(a)
    
    salaries and benefits of our Corporate Office increased by Rmb 14.76 million,
or 278.2%, from Rmb5.31 million in 2005 to Rmb 20.07 million in 2006. The significant
increase was due primarily to: (i) stock-based compensation of Rmb14.04 million which
was recorded in 2006 for the fair value of 880,000 stock options granted to director
and senior management; and (ii) most of the Company's staff joined the Corporate office in the fourth
quarter of 2005 so the amount recorded did not reflect the annualized expenses as in
2006;
 23




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##### Table of Contents



(b)
    
    salaries and benefits of our Nutraceutical Operations increased by Rmb0.57
million, or 359.5%, from Rmb 0.16 million in 2005 to Rmb 0.73 million in 2006. The
same expenses of 2005 only included the salaries and benefits paid since the
Nutraceutical Operations was acquired in November 2005, while the 2006 expenses
included the full year of expenses. If 2005 expenses were annualized, the same
expenses decreased in 2006, due primarily to staff lay-offs in September 2006 in
Zhejiang Innoessen.; and(c)
    
    salaries and benefits of our IT operations decreased by Rmb1.69 million, or
38.7%, from Rmb4.39 million in 2005 to Rmb2.7 million in 2006, which was due primarily
to the lay-off of certain technical support and post-sales services staff in 2006.
 (2)
    
    Rental charges increased by Rmb0.12 million, or 11.8%, from Rmb1.01 million in 2005 to
Rmb1.13 million in 2006. The increase was analyzed as follows:
 (a)
    
    the rental charges of Rmb0.47 million was incurred by our Corporate Office
in 2006, while Rmb0.3 million incurred in 2005 due to the lease which commenced May
2005;(b)
    
    the rental charges incurred by our Nutraceutical Operations amounted to
Rmb0.11 million, which was increased by Rmb0.05 million, or 97.4%, from Rmb0.06
million in 2005 to Rmb0.11 million in 2006; and(c)
    
    a saving of rental charges of Rmb0.1 million, or 16.4%, was achieved by our
IT Operations in Beijing due to the movement to new office.
 (3)
    
    Audit fees increased by Rmb0.39 million, or 22.0%, from Rmb1.77 million in 2005 to
Rmb2.16 million in 2006. The audit fees of Rmb2.16 million expensed in 2006 included:
 (a)
    
    additional accrual of Rmb0.72 million in audit fees relating to 2005 due to
additional audit work performed by PricewaterhouseCoopers, our former independent
registered public accounting firm;(b)
    
    the audit fee of Rmb1.34 million charged for 2006 by Friedman LLP, the
independent registered public accounting firm appointed by our shareholders meeting
held on December 22, 2006; and(c)
    
    Rmb0.10 million charged by PricewaterhouseCoopers LLP to issue a consent letter
for inclusion of their audit reports, for the fiscal years ended December 31, 2004 and
2005, in the Companys 2006 Annual Report.
 (4)
    
    Legal and other professional fees increased by Rmb1.34 million, or 25.6%, from Rmb5.24 in of
the 2005 to Rmb6.58 million in 2006. The increase was due primarily to:
 (a)
    
    Rmb0.18 million was incurred in 2006 as legal
consultation fees in relation to the dispute with Anji Bio.(b)
    
    Rmb2.39 million was incurred in 2006 as the compensation paid to certain
consultants, which represented the fair value of the 150,000 stock options granted to
these consultants; and(c)
    
    Rmb1.1 million was paid as consultancy fee to Ivory Capital Pte Ltd in 2005
but no such expenses were incurred in 2006 after the consulting contract expired.
 (5)
    
    Traveling and entertainment expenses increased by Rmb0.27 million, or 33.8%, from Rmb0.8
million in 2005 to Rmb1.07 million in 2006. The increase was due primarily to frequent travels
for investigations performed to search for new production base in China in 2006;
 (6)
    
    Write-off of intangible assets of Rmb6.21 million was provided for in 2006, compared to two
months amortization of Rmb0.21 million which was provided for in 2005; and
 (7)
    
    Depreciation charges increased by Rmb0.31 million, or 82.4%, from Rmb0.38 million in 2005 to
Rmb0.69 million in 2006, due primarily to full years depreciation for fixed assets provided
for in 2006, compared to two months of such depreciation in 2005.
 Provision for doubtful accounts.
 Non-operating income.
 Non-operating expenses.
 (1)
    
    loss of Rmb2.99 million incurred from disposal of property, plant and equipment; and
 (2)
    
    decrease of Rmb2.11 million as loss transferred from comprehensive loss upon sales of
available-for-sale securities in 2006.
 Loss from discontinued operations.
 24




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##### Table of Contents



Net loss.
 Year ended December 31, 2005 compared to year ended December 31, 2004
 Revenues.
 Cost of sales.
 Gross profit.
 Selling, general and administrative expenses.
  (1)
    
    salaries and benefits increased by Rmb6.72 million, or 214%, from Rmb3.14 million in 2004 to
Rmb9.86 million in 2005. The increase was due primarily to significant increase in headcount
during 2005. The increase is further segmented as follows:
 (a)
    
    salaries and benefits of IT Operations increased by Rmb1.77 million, or 67.6%,
from Rmb2.62 million in 2004 to Rmb4.39 million in 2005, the increase was in line with
our increase in headcount from 37 employees during in 2004 to 63 employees during in
2005;(b)
    
    salaries and benefits of our Corporate Office increased by Rmb 4.79 million, or
926.2%, from Rmb 0.52 million in 2004 to Rmb5.31 million in 2005. The significant
increase was primarily due to: (a) an amount of Rmb2.48 million, being the difference
between the exercise price and market price of options granted to the newly appointed
chairman and CEO in 2005, was recognized as staff costs; and (b) the size of our
Corporate Office team which was expanded in 2005 to include temporary co-Chief
Executive Officer positions. An aggregate of eight employees were newly recruited,
including two Co-CEOs and a Chief Scientist.
 (2)
    
    Rental charges increased by Rmb0.55 million, or 136.4%, from Rmb0.40 million in 2004 to
Rmb0.95 million in 2005. The increase was mainly caused by the following:
 (a)
    
    a new office was rented in May 2005 in Hong Kong to accommodate the increase in
headcount of our Corporate Office, thus leading to additional rental charges equal to
Rmb0.30 million during 2005.(b)
    
    additional office space was rented for our IT Operations in June 2005, leading
to increased rental expenses of Rmb0.25 million in 2005.
 (3)
    
    Audit fees increased by Rmb1.16 million, or 190.0%, from Rmb0.61 million in 2004 to Rmb1.77
million in 2005, due primarily to increased audit work caused by increased activities of the
Company.
 (4)
    
    Legal and professional fees increased by Rmb3.58 million, or 334.6%, from Rmb1.07 million in
2004 to Rmb4.65 million in 2005. This significant increase was mainly due to:
 (a)
    
    Fees of Rmb0.84 million were incurred in 2005 in connection with the
Companys pre-acquisition assessment of the CNT group. These fees included Rmb0.5
million for legal issues and Rmb0.34 million for an independent audit;
 25




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##### Table of Contents



(b)
    
    A retainer fee of Rmb1.94 million was incurred in 2005 in consideration for
the non-exclusive advisory services performed by Ivory Capital Asia Pte. Ltd. to
assist the Company in raising up to US$20 million;(c)
    
    A fee of Rmb0.69 million was accounted for in 2005 as the fair value of the
stock options granted to certain consultants recruited by the Company to provide
capital market advisory services to the Company;(d)
    
    A consultants fee of Rmb0.60 million was incurred by BBHL relating to
various sub-contractors for testing and post-sale maintenance services of the
Security Gate.
 (5)
    
    Traveling and entertainment expenses increased by Rmb 0.29 million, or 68.5%, from Rmb 0.43
million in 2004 to Rmb0.72 million in 2005, due primarily to more frequent travel for
acquisition of our Nutraceutical Operations and promotion of our business;
 (6)
    
    Amortization charge of intangible assets of Rmb0.22 million was incurred in 2005, being the
amortization of the extraction of bamboo flavonoids and its application patents of the CNT
group incurred for the period November 1 to December 31, 2005.
 (7)
    
    Depreciation charge was increased by Rmb0.30 million, or 375.0%, from Rmb0.08 million in 2004
to Rmb0.38 million in 2005, due primarily to increase in property, plant and equipment as a
result of the acquisition of the CNT group.
 Provision for doubtful accounts.
 Non-operating income.
 Non-operating expense.
 Loss from discontinued operations.
 Net loss.
 Taxation
     B. Liquidity and capital resources
 Working capital and cash flows
  26




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##### Table of Contents



Capital resources
   Investment in China Merchants Zhangzhou Development Zone Innoessen Biotech Company Limited
  Letter of intent with Going International Limited (Going International)
  Issue of new shares to Max Winner Investments Limited, Smartweed Investments Limited and Xinhua
Gold Net International Co. Ltd.
   27




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##### Table of Contents



C. Research and development, patents and licenses, etc.
 Network Security Business:
  Nutraceutical Business:
   D. Trend Information
  E. Off-balance Sheet Arrangements
  F. Tabular disclosure of contractual obligations.
  December 31,2005
    
    2006Rmb
    
    RmbIn respect of land and buildings- Not more than one year
    
    
    615
    
    
    
    506- More than one year and not more than five years
    
    
    332
    
    
    
    253Total
    
    
    947
    
    
    
    759
  (a)
    
    The lease agreement for our Corporate Office (situated in Hong Kong) commenced on May 27,
2005, and shall continue for a period of two years, at a monthly rent of Rmb31,000. As of
December 31, 2006, the future minimum lease payments under this non-cancelable operating lease
amounted to Rmb152,000 for year ending December 31, 2007.
 (b)
    
    The lease agreement for staff quarters (situated in Hong Kong) for managers of our Corporate
Office commenced on December 11, 2005, and shall continue for a period of two years, but it
can be terminated after one year, at a monthly rent of Rmb7,000. As of December 31, 2006, the
future minimum lease payments under this non-cancelable operating
lease amounted to Rmb14,000 which represented two months of rent
for year ending December 31, 2007. Upon mutual agreement with
the landlord, the lease agreement was cancelled earlier.
 (c)
    
    The lease agreement for staff quarters (situated in Hong Kong) for Alan Li, the Chairman of
the Board and Chief Executive Officer of the Company, commenced on December 8, 2005, and shall
continue for a period of two years, but it can be terminated after one year, at a monthly rent
of Rmb8,000. As of December 31, 2006, the future minimum lease payments under this
non-cancelable operating lease amounted to Rmb8,000 which represented one month of rent for year ending
December 31, 2007. Upon mutual agreement with
the landlord, the lease agreement was cancelled earlier.
 28




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##### Table of Contents



(d)
    
    The lease agreement for the office of BBHL commenced on November 11, 2006, and shall continue
for a period of two years, at a monthly rent of Rmb25,000. As of December 31, 2006, the future
minimum lease payments under this non-cancelable operating lease amounted to Rmb304,000 and
Rmb253,000 for years ending December 31, 2007 and 2008 respectively.
 (e)
    
    The lease agreement for the office of Zhejiang Innoessen (situated in Hangzhou, PRC)
commenced on November 1, 2006, at a
monthly rent of Rmb9,000 through June 30, 2007. As of December
31, 2006, the future minimum lease payments under this non-cancelable operating lease amounted
to Rmb28,000 for the year ending December 31, 2007.
   Contingencies
 G. Safe Harbor.
   
 Item 6 Directors, Senior Management and Employees
 A. Directors and senior management.
  Name
    
    Age
    
    Positions with the CompanyAlan Li
    
    
    39
    
    
    Chairman of the Board, Executive
Director and Chief Executive OfficerZhenwei Lu
    
    
    36
    
    
    Executive Director and Chief Operating
OfficeKang Li
    
    
    39
    
    
    Executive Director, Chief Investment
Officer and Acting Chief Financial
Officer and Company SecretaryXu Qian
    
    
    43
    
    
    Executive DirectorJu Zhang
    
    
    44
    
    
    Executive DirectorLoong Cheong Chang (1) (3)
    
    
    61
    
    
    Independent DirectorXiaoping Wang
    
    
    47
    
    
    Independent DirectorXinping Shi (2) (3)
    
    
    48
    
    
    Independent DirectorYezhong Ni (1)
    
    
    36
    
    
    Independent DirectorWeidong Wang (2) (3)
    
    
    40
    
    
    Independent DirectorYu Keung Poon (1) (2)
    
    
    42
    
    
    Independent Director
 29




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##### Table of Contents



(1)
    
    Member of the Audit Committee(2)
    
    Member of the Compensation Committee(3)
    
    Member of the Nominating Committee Information about Directors and Officers
  Mr. Alan Li
 Mr. Zhenwei Lu
 Mr. Kang Li
 Mr. Xu Qian
 Mr. Ju Zhang
 Mr. Loong Cheong Chang
 Mr. Xiaoping Wang
 Dr. Xinping Shi
 30




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##### Table of Contents



Mr. Weidong Wang
 Mr. Yu Keung Poon
 Mr. Yezhong Ni
   Audit Committee
   Compensation Committee
 31




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##### Table of Contents



Nominating Committee.
 B. Compensation.
   Compensation paid(Amounts in thousand, Rmb)Name
    
    Management position held
    
    2005
    
    2006Alan Li
    
    Chairman, Executive
Director and Chief
Executive Officer
    
    
    303
    
    
    
    910Xu Qian
    
    Executive Director
    
    
    315
    
    
    
    910Michael Siu
    
    Resigned Chief Financial
Officer and Secretary
    
    
    487
    
    
    
    715
  C. Board practices.
  32




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##### Table of Contents



D. Employees.
   2006
    
    2005Corporate administration
    
    
    16
    
    
    
    18Finance
    
    
    6
    
    
    
    8Research and developments
    
    
    6
    
    
    
    7Technology
    
    
    27
    
    
    
    43Sales and services
    
    
    13
    
    
    
    24Workers
    
    
    0
    
    
    
    30Total
    
    
    68
    
    
    
    130
  E. Share ownership.
   ExerciseNumber
    
    
    per optionName
    
    Title/Office
    
    of options
    
    
    (US$)
    
    
    Expiration DateAlan Li
    
    Chairman, Chief Executive Officer and Executive Director
    
    
    75,000
    
    
    
    1.85
    
    
    September 20, 2015 (2)100,000
    
    
    
    3.18
    
    
    September 18, 2016 (3)Zhenwei Lu
    
    Executive Director
    
    
    40,000
    
    
    
    1.85
    
    
    September 20, 2015 (2)60,000
    
    
    
    3.18
    
    
    September 18, 2016 (3)Xu Qian
    
    Executive Director
    
    
    50,000
    
    
    
    1.15
    
    
    December 28, 2009 (1)25,000
    
    
    
    1.85
    
    
    September 20, 2015 (2)140,000
    
    
    
    3.18
    
    
    September 18, 2016 (3)Ju Zhang
    
    Executive Director
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2015 (2)10,000
    
    
    
    3.18
    
    
    September 18, 2016 (3)Xinping Shi
    
    Independent Director
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2015 (2)10,000
    
    
    
    3.18
    
    
    September18, 2016 (3)Yezhong Ni
    
    Independent Director
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2015 (2)10,000
    
    
    
    3.18
    
    
    September 18, 2016 (3)
 33




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##### Table of Contents



ExerciseNumber
    
    
    per optionName
    
    Title/Office
    
    of options
    
    
    (US$)
    
    
    Expiration DateWeidong Wang
    
    Independent Director
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2015 (2)10,000
    
    
    
    3.18
    
    
    September 18, 2016 (3)Changshan Zhao
    
    Resigned-Chairman and Executive Director  (4)
    
    
    50,000
    
    
    
    1.15
    
    
    December 28, 2009 (1)45,000
    
    
    
    1.85
    
    
    September 20, 2015 (2)190,000
    
    
    
    3.18
    
    
    September 18, 2016 (3)Michael Siu
    
    Resigned-Executive Director, Chief Financial Officer and Secretary (4)
    
    
    40,000
    
    
    
    1.15
    
    
    December 28, 2009 (1)15,000
    
    
    
    1.85
    
    
    September 20, 2015 (2)90,000
    
    
    
    3.18
    
    
    September 18, 2016 (3)Yibing Zhang
    
    Resigned-Chief Financial Officer and Company Secretary
    
    
    20,000
    
    
    
    3.18
    
    
    September 18, 2016 (3)60,000
    
    
    
    3.18
    
    
    September 18, 2016 (3)Peter Fu
    
    Resigned-Independent Director (4)
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2015 (2)10,000
    
    
    
    3.18
    
    
    September 18, 2016 (3)L C Wan
    
    Resigned-Independent Director (4)
    
    
    10,000
    
    
    
    3.18
    
    
    September 20, 2016 (2)Meng Wan
    
    Resigned Independent Director (4)
    
    
    10,000
    
    
    
    1.85
    
    
    September 20, 2016 (2)10,000
    
    
    
    3.18
    
    
    September 18, 2016 (3)
 
 (1)
    
    These options were granted under the Companys 1996 Stock Option Plan. These options were
granted pursuant to a board resolution passed on December 28, 1999 (the Resolution) and are
fully vested as of December 31, 2006.(2)
    
    These options were granted under the Companys 2000 Stock Option Plan. These options were
granted pursuant to a board resolution passed on September 20, 2005 and are fully vested as of
December 31, 2006.(3)
    
    These options were granted under the Companys 2005 Stock Option Plan. These options were
granted pursuant to a board resolution passed on September 18, 2006 and are fully vested as of
December 31, 2006.(4)
    
    The options held by resigned directors were fully vested and
were granted an extension to December 31, 2007 by the
Company's Compensation Committee. Stock Option Plans
   1996 Stock Option Plan
     34




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provided
  provided
  provided, however,
    provided, however,
 35




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##### Table of Contents



provided, however,
          provided, however,
  ab
initio
 36




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##### Table of Contents



2000 Stock Option Plan
               37




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2005 Stock Option Plan
     38




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39




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##### Table of Contents



Item 7 Major Shareholders and Related Party Transactions
 A. Major shareholders.
  Shares of common stock beneficiallyPrincipal Stockholder
    
    owned (1)
    
    Percent of classChina Biotech Holdings Limited (China Biotech) 

of 5/F, B&H Plaza, 27 Industry Ave, 

Shekou, Shenzhen 518067, 

PR China
    
    
    3,500,000
    
    
    
    24.74
    %Beijing Holdings of Room 4301, Central Plaza 18
Harbour 
Road, Wanchai Hong Kong
    
    
    2,009,323
    
    
    
    14.20
    %Harvest Smart Overseas Limited 

of c/o Unit 1712-13, Tower 1, Admiralty Centre,
No.18 
Harcourt Road, Hong Kong
    
    
    1,000,000
    
    
    
    7.07
    %Eastern Ceremony Group Limited 

of c/o of c/o Unit 1712-13, Tower 1, Admiralty
Centre, No.18 Harcourt Road, Hong Kong
    
    
    800,000
    
    
    
    5.66
    %Great Legend Internet Technology and Service
Co., Ltd. of 
c/o Room 4301, Central Plaza, 18
Harbour Road, Wanchai, 
Hong Kong
    
    
    508,474
    
    
    
    3.59
    %
 40




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##### Table of Contents



Shares of common stock beneficiallyPrincipal Stockholder
    
    owned (1)
    
    Percent of classAlan Li of c/o Unit 1712-13, Tower 1, Admiralty
Centre, 
No.18 Harcourt Road, Hong Kong
    
    
    0
    (2)(4)
    
    
    *Zhenwei Lu of c/o Unit 1712-13, Tower 1,
Admiralty 
Centre, No.18 Harcourt Road, Hong Kong
    
    
    0
    (2)(4)
    
    
    *Xu Qian of c/o Rm 4301, Central Plaza,

18 Harbour Road,Wanchai, Hong Kong
    
    
    0
    (3)
    
    
    *Kang Li of c/o Unit 1712-13, Tower 1, Admiralty
Centre, 
No.18 Harcourt Road, Hong Kong
    
    
    0
    (2)
    
    
    *Ju Zhang of c/o Unit 1712-13, Tower 1, Admiralty
Centre, 
No.18 Harcourt Road, Hong Kong
    
    
    0
    (4)
    
    
    *All officers and directors as a group (5 persons)
    
    
    7,817,797
    (2)(3)(4)
    
    
    55.26
    %
 
 *
    
    less than 1%.(1)
    
    Unless otherwise noted, all persons named in the table have sole voting and investment
power with respect to all shares of common stock beneficially owned by them.(2)
    
    Mr. Alan Li, Chairman of the Board, Executive Director and Chief Executive Officer,
and Mr. Zhenwei Lu , our Executive Director and Chief Operating Officer and Kang Li, the
Executive Director, Chief Investment Officer and Acting Chief Financial Officer and Company
Secretary, are Directors of China Biotech and therefore they may be deemed to beneficially own
the shares of Common Stocks owned by China Biotech.(3)
    
    Mr. Xu Qian, Executive Director, is also the Assistant General Manager and Chief
Financial Officer of Beijing Holdings and therefore he may be deemed to be beneficially own
the shares of Common Stocks owned by Beijing Holdings.(4)
    
    Holds options which are not currently exercisable or which vest within 60 days of June 20,
2007.  B. Related party transactions.
  Year ended December 31,2004
    
    
    2005
    
    
    2006Rmb
    
    
    Rmb
    
    
    Rmb(Amounts in thousands)
    
    
    (Amounts in thousands)
    
    
    (Amounts in thousands)Transactions with related partiesDisposal of Zhuhai branch of BBHL to
BEDC (a)
    
    
    
    
    
    
    1,300
    
    
    
    Net operating cash outflows of Zhuhai
branch reimbursed (a)
    
    
    
    
    
    
    (1,300
    )
    
    
    Acquisition of CNT from Beijing
Holdings by issuance of 2,233,800 new
shares at US$2.41 per share and
2,146,200 new shares at US$2.1 per
share respectively (b)
    
    
    
    
    
    
    79,928
    
    
    
    Disposal of available-for-sale
securities to Beijing Holdings (c)
    
    
    
    
    
    
    2,167
    
    
    
    Subscription proceeds receivable from
China Biotech (d)
    
    
    
    
    
    
    
    
    
    
    29,422
 
 (a)
    
    On March 31, 2005, BBHL entered into an agreement with BEDC, the sole shareholder
of China Internet Technology Company Limited (China Internet), the then 17.21%
shareholder of the Company, to sell its Zhuhai branch for a consideration of Rmb 1.3
million. The consideration was determined based on the operating cashflow generated by
Zhuhai branch from May 1, 2002 to March 31, 2005, the period of which Zhuhai branch was
managed and controlled by the Company. Upon disposal, the Company agreed to reimburse
the same aggregated net operating cash outflows of Rmb1.3 million to the Zhuhai branch
as part of the conditions of 41




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##### Table of Contents



disposal. The consideration of the transaction is
zero as the Company received Rmb1.3 million from BEDC and at the same time the Company
transferred Rmb1.3 million to Zhuhai branch. The transaction was closed on March 31,
2005 and resulted in a disposal loss of Rmb0.51 million.(b)
    
    On September 13, 2005, the Company entered into agreements with Beijing Holdings,
the then 47.18% shareholder of the Company, to (i) acquire a 51% equity interest in CNT
in exchange for 2,233,800 shares of the Company and (ii) obtain an option to acquire the
remaining 49% equity interest in CNT in exchange for 2,146,200 shares of the Company.
Effective October 31, 2005, the acquisition of 51% of CNT was completed and effective
December 22, 2005, the option was exercised and the remaining 49% equity interest in CNT
was acquired by the Company.(c)
    
    On November 17, 2005, the Company entered into a sale and purchase agreement with
Beijing Holding to dispose of all of the 6,312,000 shares invested in Xian Haitian
Antenna Company Limited (Xian Haitian) for a cash consideration of Rmb2.17 million.
These shares were previously held as available-for-sale securities by the Company and it
represented approximately 0.975% of the outstanding shares of Xian Haitian. The sale
consideration was determined by the quoted closing stock price of Xian Haitian at
HK$0.33 per share at the date of the agreement. Xian Haitian is a company engaged in
research, development, production, sales, installation, services and wireless
communication network optimization of base station antennas and is also listed on the
Growth Enterprise Market of the Hong Kong Stock Exchange. The shares were acquired upon
the initial public offering (IPO) of Xian Haitian. Its stock price dropped
continuously after the IPO due to poorer operating results as a result of the keen
competition in the market. Beijing Holdings is also a passive investor of Xian Haitian
who owns approximately 8% equity interest of Xian Haitian after its IPO. Beijing
Holdings currently nominates one non-executive director to the board of Xian Haitian
and does not currently participate in the management or operations of Xian Haitian.(d)
    
    On November 27, 2006, the Company entered into a subscription agreement with
China Biotech Holdings Limited (China Biotech) to issue 1,500,000 new shares and
2,000,000 warrants at US$2.50 each and US$0.01 each respectively. The total
consideration was Rmb 29.422 million. The transaction was completed on January 12, 2007
and the subscription proceeds were fully received by the Company
simultaneously. Following the completion of the transaction, China Biotech became the
single largest shareholder of the Company by owning 25.34% of the total outstanding
shares of the Company.  December 31,2005
    
    2006Rmb
    
    Rmb(Amounts in thousands)
    
    (Amounts in thousands)Balances with related partiesProceeds receivable from Beijing Holdings, a
shareholder, in respect of sale of shares of Xian
Haitian Antenna (e)
    
    
    2,167
    
    
    
    Proceeds receivable from Beijing Holdings, a
shareholder, in respect of sale of product of Anji Bio
(f)
    
    
    18
    
    
    
    Subscription proceeds receivable from China Biotech (g)
    
    
    
    
    
    
    29,422Funds held by China Biotech for potential acquisition
of technology and business in China (g)
    
    
    6,262
    
    
    
    6,242Due from China Biotech (h)
    
    
    
    
    
    
    500Due to BEDC, the holding company of a shareholder (i)
    
    
    645
    
    
    
    59Due to China Biotech (j)
    
    
    244
    
    
    
    890
  (e)
    
    On November 17, 2005, the Company entered into a sale and purchase agreement with Beijing
Holding to dispose of all of the shares it held in Xian Haitian for cash consideration of
Rmb2.17 million. The value of the consideration was determined by the quoted closing stock
price of Xian Haitian at HK$0.33 per share at the date of the agreement.
 (f)
    
    Anji Bio sold their health product totaling Rmb 18 to Beijing Holdings. However, the full
provision was made for our investment in Anji Bio in the fiscal year ended December 31, 2006,
the amount was grouped into the net assets of discontinued operations.
 (g)
    
    China Biotech is the single largest shareholder of the Company since January 12, 2007. China
Biotech has experience in the nutraceutical business in China. China Biotechs experience
includes making investments in companies and technologies involved in this industry. In view
of China Biotechs experience, the Company deposited Rmb 6.42 million with China Biotech for
the purpose of making (with the assistance of China Biotech) potential acquisitions of
technology and businesses in the nutraceutical industry in China. There was no agreement
signed for the funds deposited with China Biotech and the Company can withdraw the funds
without any restrictions.
 42




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##### Table of Contents



(h)
    
    The amount represented the loan repayment on behalf of China Biotech Holdings Ltd. By
Zhejiang Innoessen.
 (i)
    
    The amount represented the contract sums received on behalf of BEDC by BHLHK in Hong Kong as
the customer of BEDC paid in Hong Kong dollars whereas BEDC did not maintain a Hong Kong
dollar bank account in Hong Kong.
 (j)
    
    The amount represented administrative expenses paid on behalf
of CNT and Shenzhen Innoessen
by China Biotech in China.
  C. Interests of experts and counsel.
  
 Item 8 Financial Information
 A. Consolidated Statements and Other Financial Information.
    B. Significant Changes.
  
 Item 9 The Offer and Listing.
 A. Offer and listing details.
   NASDAQ Capital Market
    
    Common Stock(Year Ending)
    
    High
    
    LowDecember 31, 2006
    
    
    12.150
    
    
    
    1.340December 31, 2005
    
    
    8.800
    
    
    
    1.530December 31, 2004
    
    
    5.600
    
    
    
    0.350December 31, 2003
    
    
    0.700
    
    
    
    0.030December 31, 2002
    
    
    0.430
    
    
    
    0.010
  43




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##### Table of Contents



NASDAQ Capital Market
    
    Common Stock(Quarter Ending)
    
    High
    
    LowMarch 31, 2007
    
    
    8.100
    
    
    
    3.250December 31, 2006
    
    
    9.000
    
    
    
    4.020September 30, 2006
    
    
    4.740
    
    
    
    1.340June 30, 2006
    
    
    7.510
    
    
    
    3.420March 31, 2006
    
    
    12.15
    
    
    
    2.11December 31, 2005
    
    
    3.600
    
    
    
    1.560September 30, 2005
    
    
    4.650
    
    
    
    1.530June 30, 2005
    
    
    3.171
    
    
    
    3.240March 31, 2005
    
    
    8.800
    
    
    
    3.030
  NASDAQ Capital Market
    
    Common Stock(Month Ending)
    
    High
    
    LowMay 31, 2007
    
    
    3.790
    
    
    
    2.710April 30, 2007
    
    
    4.490
    
    
    
    3.470March 31, 2007
    
    
    5.130
    
    
    
    3.250February 28, 2007
    
    
    6.850
    
    
    
    3.250January 31, 2007
    
    
    8.100
    
    
    
    6.920December 31, 2006
    
    
    8.450
    
    
    
    7.330
 B. Plan of Distribution.
  C. Markets.
    D. Selling Shareholders.
  E. Dilution.
 (a)
    
    The Company had authorized the issuance, pursuant to the 1996 Stock Option Plan, 2000 Stock
Option Plan and 2005 Stock Option Plan, of options to purchase respectively 200,000 shares,
400,000 shares and 1,000,000 shares, respectively, of Common Stock to the Companys existing
shareholders, employees, officers, directors and consultants.
 (b)
    
    Pursuant to a board resolution passed on December 28, 1999, options to purchase 140,000
shares of Common Stock were granted, for an exercise period of ten years, to certain directors
and officers at an exercise price of US$1.15 per share.
 44




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##### Table of Contents



(c)
    
    Pursuant to a board resolution passed on September 20, 2005, options to purchase the
remaining 60,000 shares of Common Stock under the 1996 Stock Option Plan were granted and
pursuant to the same board resolution, options to purchase 370,000 shares of Common Stock were
granted under the 2000 Stock Option Plan, for an exercise period of ten years, to a director
at an exercise price of US$1.85 per share.
 (d)
    
    Pursuant to a board resolution passed on September 18, 2006, options to purchase 30,000
shares of Common Stock under the 2000 Stock Option Plan were granted. Pursuant to the same
board resolution, options to purchase 1,000,000 shares of Common Stock were granted under the
2005 Stock Option Plan. All options granted by this resolution were granted to certain
directors and officers, for an exercise period of ten years, at an exercise price of US$3.18
per share.
 (e)
    
    As at June 30, 2007, 90,000, 107,000 and 140,000 options granted under the 1996 Stock Option
Plan, the 2000 Stock Option Plan and the 2005 Stock Option Plan, respectively were exercised.
 (f)
    
    The Company entered into an agreement dated July 12, 2005 with Ivory Capital Asia Pte, Ltd
(the Ivory Capital) (filed as Exhibit 10.1 hereto) on an non-exclusive basis to raise at
least US$20 million in new capital for the Company and its subsidiaries and to provide
financial advisory services to the Company concerning the strategic development of the
Companys business for a period of six months, unless the extension was mutually agreed.
Pursuant to the agreement, retainer fee of US$40,000 per month was payable 50% in cash and 50%
in the Companys shares at average price of last 30 days prior to date of the signing of the
agreement. Besides, a success fee of 3% on the initial US$20 million of capital commitments
received from investors and 4% on the amount of capital commitments in excess of US$20 million
received from investors was payable in cash, if any. Accordingly, an aggregate of 34,488
shares of our Common Stock shall be issued to Ivory Capital as part of the retainer fee
charged. Ivory Capital finally failed to raise any funds for the Company during the six month
contract term and the services of Ivory Capital were terminated by the Company. The 34,488
shares of common stock were not issued to Ivory Capital. The Company, however, is currently
under negotiation with Ivory Capital for the resumption of the contract at the same terms as
previously signed as substantial pre-funding work has been done even though no funds were
finally raised. As of date, no agreement, memorandum or letter of intent has been signed in
respect of resuming the contract but a provision of the unpaid retainer fee was made in the
financial statements for the fiscal year ended December 31, 2006.
 F. Expenses of the issue.
  
 Item 10 Additional Information.
 A. Share capital.
  B . Memorandum and articles of association.
    Summary of Major Amendments in the Amended and Restated Memorandum and Articles of Association
  Memorandum of Association
   45




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Articles of Association
      46




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##### Table of Contents



47




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##### Table of Contents



C. Material contracts.
  48




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##### Table of Contents



D. Exchange controls.
     E. Taxation.
  49




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##### Table of Contents



British Virgin Islands Taxation
    Hong Kong Taxation
  China Taxation
  Cayman Island Taxation
  United States Federal Income Taxation
   
  
  50




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##### Table of Contents



Distributions
   Taxable Dispositions
  Non-U.S. Holders
  F. Dividends and paying agents.
  G. Statement by experts.
  H. Documents on display.
    51




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##### Table of Contents



Subsidiary Information.
  
 Item 11 Quantitative and Qualitative Disclosures About Market Risk.
 Foreign exchange risk
      Interest rate risk
  Inflation
  
 Item 12 Description of Securities Other than Equity Securities.
  52




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##### Table of Contents



PART II
 
 Item 13 Default, Dividend Arrearages and Delinquencies.
  
 Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds.
  
 Item 15 Controls and Procedures
       
 Item 16A Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
  
 Item 16C. Principal Accountant Fees and Services
 Audit Fees
 53




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##### Table of Contents



Audit-Related Fees
  Tax Fees
  All Other Fees
  Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
  Audit of Financial Statements
  
 Item 16D. Exemptions from the Listing Standards for Audit Committee.
  
 Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers.
 Not Applicable.
 
 Item 17 Financial Statements.
  
 Item 18 Financial Statements.
         54




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Item 19 Exhibits.
            55




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SIGNATURES
  CHINA TECHNOLOGY DEVELOPMENT
GROUP CORPORATIONDate:June 28,2007
    
    /s/ Kang Li

Name: Kang LiTitle: Acting Chief Financial Officer and Secretary
 56




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm as of
December 31, 2006 and for the year then ended
    
    F  1Report of Independent Registered Public Accounting Firm as of
December 31, 2005 and for each of the two years ended December 31,
2004 and 2005
    
    F  2Consolidated Statements of Operations for each of the three years
ended December 31, 2004, 2005 and 2006
    
    F 3Consolidated Balance Sheets as of December 31, 2005 and 2006
    
    F  4Consolidated Statements of Cash Flows for each of the three years
ended December 31, 2004, 2005 and 2006
    
    F  5Consolidated Statements of Changes in Shareholders Equity for each
of the three years ended December 31, 2004, 2005 and 2006
    
    F  8Notes
to Consolidated Financial Statements
    
    F  9




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      /s/ PricewaterhouseCoopers
   F-2




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##### Table of Contents



CHINA
TECHNOLOGY DEVELOPMENT GROUP CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts expressed in thousands except for per share data)
For the years ended December 31, 2004, 2005 and 2006
 *Notes
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2006Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    USDContinuing operations:Revenues
    
    
    22
    
    
    
    2,720
    
    
    
    6,488
    
    
    
    9,343
    
    
    
    1,172Cost of sales
    
    
    
    
    
    
    (1,394
    )
    
    
    (2,507
    )
    
    
    (4,288
    )
    
    
    (538
    )Gross profit
    
    
    
    
    
    
    1,326
    
    
    
    3,981
    
    
    
    5,055
    
    
    
    634Selling, general and adminstrative expenses
    
    
    
    
    
    
    (7,768
    )
    
    
    (21,686
    )
    
    
    (43,508
    )
    
    
    (5,457
    )Impairment of goodwill
    
    
    
    
    
    
    (4,337
    )
    
    
    
    
    
    
    (69,526
    )
    
    
    (8,720
    )Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    (128
    )
    
    
    (892
    )
    
    
    (112
    )Operating loss
    
    
    22
    
    
    
    (10,779
    )
    
    
    (17,833
    )
    
    
    (108,871
    )
    
    
    (13,655
    )Interest income
    
    
    
    
    
    
    243
    
    
    
    302
    
    
    
    214
    
    
    
    27Finance costs
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    (89
    )
    
    
    (11
    )Non-operating income
    
    
    4
    
    
    
    167
    
    
    
    276
    
    
    
    58
    
    
    
    7Non-operating expenses
    
    
    5
    
    
    
    
    
    
    
    (2,628
    )
    
    
    (3,526
    )
    
    
    (442
    )Loss before income tax provision
    
    
    
    
    
    
    (10,369
    )
    
    
    (19,894
    )
    
    
    (112,214
    )
    
    
    (14,074
    )Income tax provision
    
    
    6
    
    
    
    
    
    
    
    (9
    )
    
    
    (15
    )
    
    
    (2
    )Loss from continuing operations before minority interests
    
    
    
    
    
    
    (10,369
    )
    
    
    (19,903
    )
    
    
    (112,229
    )
    
    
    (14,076
    )Minority interest-continuing operations
    
    
    
    
    
    
    
    
    
    
    712
    
    
    
    5,515
    
    
    
    692Loss from continuing operations
    
    
    
    
    
    
    (10,369
    )
    
    
    (19,191
    )
    
    
    (106,714
    )
    
    
    (13,384
    )Discontinued operations:
    
    
    7Income/(loss) from discontinued operations before income taxes
    
    
    
    
    
    
    254
    
    
    
    (341
    )
    
    
    (7,872
    )
    
    
    (987
    )Net loss for the year
    
    
    
    
    
    
    (10,115
    )
    
    
    (19,532
    )
    
    
    (114,586
    )
    
    
    (14,371
    )Loss per share
    
    
    17-Basic and dilutive
    
    
    
    
    
    
    (1.47
    )
    
    
    (2.67
    )
    
    
    (10.13
    )
    
    
    (1.27
    )Loss per share from continuing operations-Basic and dilutive
    
    
    
    
    
    
    (1.51
    )
    
    
    (2.63
    )
    
    
    (9.43
    )
    
    
    (1.18
    )Income/ (loss) per share from discontinued operations-Basic and dilutive
    
    
    
    
    
    
    0.04
    
    
    
    (0.04
    )
    
    
    (0.70
    )
    
    
    (0.09
    )Weighted average common shares
    
    
    17-Basic and dilutive
    
    
    
    
    
    
    6,894
    
    
    
    7,327
    
    
    
    11,312
    
    
    
    11,312
 
 *
    
    Certain revenues and expenses were reclassified to discontinued operations for comparative purpose (see Note 7).  F-3




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##### Table of Contents



CHINA
TECHNOLOGY DEVELOPMENT GROUP CORPORATION
 CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands except share and per share data)
at December 31, 2005 and 2006
 Notes
    
    
    2005
    
    
    2006
    
    
    2006Rmb
    
    
    Rmb
    
    
    USDASSETSCURRENT ASSETSCash and cash equivalents
    
    
    
    
    
    
    18,324
    
    
    
    3,475
    
    
    
    445Short-term investments-security trust account
    
    
    
    
    
    
    109
    
    
    
    19,867
    
    
    
    2,546Available-for-sale securities
    
    
    
    
    
    
    366
    
    
    
    165
    
    
    
    21Trade accounts receivable, net
    
    
    
    
    
    
    791
    
    
    
    1,457
    
    
    
    187Inventories
    
    
    
    
    
    
    2,586
    
    
    
    1,507
    
    
    
    193Value added tax and business tax recoverable
    
    
    
    
    
    
    
    
    
    
    137
    
    
    
    18Due from related parties
    
    
    18
    
    
    
    8,447
    
    
    
    36,164
    
    
    
    4,634Other assets
    
    
    8
    
    
    
    1,462
    
    
    
    1,273
    
    
    
    163TOTAL CURRENT ASSETS
    
    
    
    
    
    
    32,085
    
    
    
    64,045
    
    
    
    8,207Prepaid expense for rental of land
    
    
    9
    
    
    
    528
    
    
    
    
    
    
    
    Property, plant and equipment, net
    
    
    10
    
    
    
    9,169
    
    
    
    706
    
    
    
    90Goodwill
    
    
    12
    
    
    
    69,526
    
    
    
    
    
    
    
    Other intangible asset
    
    
    11
    
    
    
    6,541
    
    
    
    
    
    
    
    TOTAL ASSETS
    
    
    
    
    
    
    117,849
    
    
    
    64,751
    
    
    
    8,297LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESTrade accounts payable
    
    
    
    
    
    
    572
    
    
    
    885
    
    
    
    113Accrued professional fees
    
    
    
    
    
    
    3,869
    
    
    
    5,607
    
    
    
    718Income taxes payable
    
    
    
    
    
    
    245
    
    
    
    236
    
    
    
    30Value added tax and business tax payable
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    Deferred government grants
    
    
    13
    
    
    
    230
    
    
    
    
    
    
    
    Due to a related party
    
    
    18
    
    
    
    889
    
    
    
    949
    
    
    
    122Short term borrowings
    
    
    14
    
    
    
    3,569
    
    
    
    
    
    
    
    Deferred tax liabilities
    
    
    
    
    
    
    492
    
    
    
    492
    
    
    
    63Other liablities and accrued expenses
    
    
    15
    
    
    
    3,719
    
    
    
    5,942
    
    
    
    762TOTAL CURRENT LIABILITIES
    
    
    
    
    
    
    13,626
    
    
    
    14,111
    
    
    
    1,808Contingencies and commitments
    
    
    21Minority interests
    
    
    
    
    
    
    5,515
    
    
    
    
    
    
    
    SHAREHOLDERS EQUITYCommon stock, (US$0.01 par value;
2,500,000,000 shares in 2005 and
5,000,000,000 authorised in 2006; shares
issued and outstanding 11,274,497 in 2005 and
13,809,497 in 2006)
    
    
    20
    
    
    
    910
    
    
    
    1,078
    
    
    
    138Additional paid-in capital
    
    
    
    
    
    
    269,924
    
    
    
    335,692
    
    
    
    41,827Accumulated deficit
    
    
    
    
    
    
    (171,176
    )
    
    
    (285,762
    )
    
    
    (35,582
    )Accumulated other comprehensive income/ (loss)
    
    
    
    
    
    
    (950
    )
    
    
    (368
    )
    
    
    106TOTAL SHAREHOLDERS EQUITY
    
    
    
    
    
    
    98,708
    
    
    
    50,640
    
    
    
    6,489TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    117,849
    
    
    
    64,751
    
    
    
    8,297
  F-4




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##### Table of Contents



CHINA
TECHNOLOGY DEVELOPMENT GROUP CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts expressed in thousands)
For the years ended December 31, 2004, 2005 and 2006
 2004
    
    
    2005
    
    
    2006
    
    
    2,006Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Cash flows from operating activitiesNet loss
    
    
    (10,115
    )
    
    
    (19,532
    )
    
    
    (114,586
    )
    
    
    (14,371
    )Adjustments to reconcile net loss to net cash used in operating activitiesMinority interests in loss of consolidated subsidiaries
    
    
    
    
    
    
    (712
    )
    
    
    (5,515
    )
    
    
    (692
    )Amortization of intangible asset, goodwill and software development costs
    
    
    
    
    
    
    692
    
    
    
    6,209
    
    
    
    779Stock-based compensation
    
    
    
    
    
    
    3,176
    
    
    
    16,431
    
    
    
    2,061Impairment of goodwill
    
    
    4,748
    
    
    
    
    
    
    
    69,526
    
    
    
    8,720Amortization of long-term prepayment for rental of land
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    Depreciation
    
    
    76
    
    
    
    376
    
    
    
    693
    
    
    
    87Dividend income
    
    
    (67
    )
    
    
    (115
    )
    
    
    (4
    )
    
    
    (1
    )Profit on disposal of property, plant and equipment
    
    
    
    
    
    
    (1
    )
    
    
    (4
    )
    
    
    (1
    )Impairment of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    2,989
    
    
    
    375(Gain)/loss
on disposal of available-for-sale securities
    
    
    (100
    )
    
    
    2,596
    
    
    
    488
    
    
    
    61Loss on disposal of discontinued operations
    
    
    
    
    
    
    509
    
    
    
    7,872
    
    
    
    987Provision for doubtful accounts
    
    
    
    
    
    
    128
    
    
    
    892
    
    
    
    112Changes in assets and liabilities:(Increase)/decrease in trade accounts receivable
    
    
    1,595
    
    
    
    321
    
    
    
    (1,004
    )
    
    
    (129
    )(Increase)/decrease in inventories
    
    
    (485
    )
    
    
    79
    
    
    
    (444
    )
    
    
    (57
    )(Increase)/decrease in due from related parties and other assets
    
    
    228
    
    
    
    (7,621
    )
    
    
    1,423
    
    
    
    182Increase/(decrease) in trade accounts payable, amount
due to a related party and other current liabilities
    
    
    1,110
    
    
    
    1,904
    
    
    
    5,016
    
    
    
    643Increase/(decrease) in income taxes payable
    
    
    
    
    
    
    (4
    )
    
    
    (9
    )
    
    
    (1
    )(Increase)/decrease in income tax recoverable
    
    
    
    
    
    
    35
    
    
    
    (174
    )
    
    
    (22
    )Net cash used in operating activities
    
    
    (3,010
    )
    
    
    (18,167
    )
    
    
    (10,201
    )
    
    
    (1,267
    )Cash flows from investing activitiesSecurity trust account
    
    
    4,393
    
    
    
    6,763
    
    
    
    (181
    )
    
    
    (23
    )Dividend income
    
    
    67
    
    
    
    115
    
    
    
    4
    
    
    
    1Decrease in funds held by related parties for
security investment purposes
    
    
    1,097
    
    
    
    10,081
    
    
    
    
    
    
    
    Acquisition of subsidiaries, net of cash acquired (Note (a))
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    Net cash and cash equivalents disposed of upon disposal of
discontinued operations (Notes (b) and (c))
    
    
    
    
    
    
    (350
    )
    
    
    (3,550
    )
    
    
    (455
    )Proceeds from disposal of available-for-sale securities
    
    
    4,788
    
    
    
    12,511
    
    
    
    276
    
    
    
    35Purchase of available-for-sales securities
    
    
    (9,443
    )
    
    
    
    
    
    
    
    
    
    
    Purchases of property, plant and equipment
    
    
    (37
    )
    
    
    (879
    )
    
    
    (1,126
    )
    
    
    (141
    )Proceeds from disposal of property, plant and equipment
    
    
    
    
    
    
    1
    
    
    
    5
    
    
    
    1Net cash provided by (used in) investing activites
    
    
    865
    
    
    
    28,207
    
    
    
    (4,572
    )
    
    
    (582
    )Cash flows from financing activitiesProceeds from exercise of stock option
    
    
    
    
    
    
    
    
    
    
    505
    
    
    
    65Write-off the
loan to Jian ou (Note (d))










(600
)


(77
)Proceeds from short-term borrowings
    
    
    
    
    
    
    3,500
    
    
    
    
    
    
    
    Repayments of short-term borrowings
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    
    
    
    
    3,490
    
    
    
    (95
    )
    
    
    (12
    )
 F-5




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Amount expressed in thousands)
For the years ended December 31, 2004, 2005 and 2006
 2004
    
    
    2005
    
    
    2006
    
    
    2,006Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (461
    )
    
    
    19
    
    
    
    35Net increase/ (decrease) in cash and cash equivalents
    
    
    (2,145
    )
    
    
    13,069
    
    
    
    (14,849
    )
    
    
    (1,826
    )Cash and cash equivalents at beginning of year
    
    
    7,400
    
    
    
    5,255
    
    
    
    18,324
    
    
    
    2,271Cash and cash equivalents at end of year
    
    
    5,255
    
    
    
    18,324
    
    
    
    3,475
    
    
    
    445Supplemental disclosure of cash flow informationIncome taxes paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest paid
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    Supplemental disclosure non-cash financing activitiesIssue of new shares for business combination in 2005, and
for financing activities in 2006
    
    
    
    
    
    
    79,928
    
    
    
    48,766
    
    
    
    6,250Issue of warrants for financing activities in 2006
    
    
    
    
    
    
    
    
    
    
    234
    
    
    
    30Stock
options granted (Note 16)
    
    
    
    
    
    
    3,176
    
    
    
    16,431
    
    
    
    2,061
 Note(a) purchase of China Nature Technology Inc. (Note 3)
 2005RmbNet assets acquired (excluding cash & cash equivalents):Trade accounts receivable, net
    
    
    108Inventories
    
    
    1,473Due from related parties
    
    
    21Income tax recoverable
    
    
    35Other assets
    
    
    1,638Long-term prepayment for rental of land
    
    
    530Property, plant and equipment, net
    
    
    8,617Intangible asset
    
    
    6,891Goodwill
    
    
    38,457Trade accounts payable
    
    
    (271
    )Deferred government grants
    
    
    (273
    )Due to a related party
    
    
    (204
    )Short term borrowings
    
    
    (79
    )Deferred tax liabilities
    
    
    (251
    )Other liabilities and accrued expenses
    
    
    (913
    )Minority interests
    
    
    (11,804
    )43,975Discharged by:Issuance of shares at fair value
    
    
    43,523Capitalized
expenses directly incurred in acquisition o CNT*
    
    
    936Less: Cash and cash equivalents acquired from CNT
    
    
    (484
    )Total net consideration
    
    
    43,975
 *
    
    Out of the capitalized acquisition expenses, an aggregate of Rmb 417 was still unpaid as of
December 31, 2005. F-6




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##### Table of Contents



CHINA
TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 (Amounts expressed in thousands, unless otherwise stated)
 Note(b)
Disposal of discontinued operations  Zhuhai (Note 7)
 2005RmbNet assets disposed of (excluding cash & cash equivalents):Trade accounts receivable, net
    
    
    56Other assets
    
    
    18Goodwill
    
    
    999Income tax payables
    
    
    (753
    )Other liabilities and accrued expenses
    
    
    (161
    )Loss on disposal of discontinued operations
    
    
    159(509
    )(350
    )Discharged by:Cash and cash equivalents disposed
    
    
    (350
    )
 Note(c) Disposal
of discontinued operations  Anji Bio
 2006RmbNet assets disposed of (excluding cash and cash equivalents):Trade accounts receivable, net
    
    
    338Inventories
    
    
    1,523Due from related parties
    
    
    18Prepaid expenses and other assets
    
    
    162Property, plant & equipment, net
    
    
    6,434Intangible asset
    
    
    332Trade accounts payable
    
    
    (301
    )Income tax payables
    
    
    (4
    )Short term borrowing
    
    
    (3,569
    )Other liabilities and accrued expenses
    
    
    (611
    )4,322Loss on disposal of discontinued operations
    
    
    (7,872
    )(3,550
    )Discharged by:Cash and cash equivalents
    
    
    3,550
 Note(d)
Write- off the loan to Jianou
 RmbProvision
for loan to Jian ou
    
    
    600
  F-7




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##### Table of Contents



CHINA
TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Amounts in thousands)
For the years ended December 31, 2004, 2005 and 2006
 AccumulatedAdditional
    
    
    
    
    
    
    other
    
    
    TotalCommon Stock
    Paid in
    
    
    Accumulated
    
    
    comprehensive
    
    
    shareholdersShares

    
    
    Amount

    
    
    Capital
    
    
    Deficit
    
    
    income/ (loss)
    
    
    equityRmb

    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    RmbBalance at December 31, 2003
    
    
    
    6,894,497
    
    
    
    571
    
    
    
    187,159
    
    
    
    (141,529
    )
    
    
    (10
    )
    
    
    46,191Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,115
    )
    
    
    
    
    
    
    (10,115
    )Net unrealized loss on available-for-
sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,222
    )
    
    
    (3,222
    )Total comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,222
    )Balance at December 31, 2004
    
    
    
    6,894,497
    
    
    
    571
    
    

    
    187,159
    
    
    
    (151,644
    )
    
    
    (3,232
    )
    
    
    32,854Issue of shares
    
    
    
    4,380,000
    
    
    
    339
    
    
    
    79,589
    
    
    
    
    
    
    
    
    
    
    
    79,928Stock options granted
    
    
    
    
    
    
    
    
    
    
    
    3,176
    
    
    
    
    
    
    
    
    
    
    
    3,176Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,532
    )
    
    
    
    
    
    
    (19,532
    )Net unrealized loss on available-for-
sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (147
    )
    
    
    (147
    )Less: Reclassification adjustment for
loss realized on sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,890
    
    
    
    2,890Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (461
    )
    
    
    (461
    )Total comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,282Balance at December 31, 2005
    
    
    
    11,274,497
    
    
    
    910
    
    
    
    269,924
    
    
    
    (171,176
    )
    
    
    (950
    )
    
    
    98,708Issue of shares
    
    
    
    2,500,000
    
    
    
    165
    
    
    
    48,601
    
    
    
    
    
    
    
    
    
    
    
    48,766Shares issued upon exercise of stock options
    
    
    
    35,000
    
    
    
    3
    
    
    
    502
    
    
    
    
    
    
    
    
    
    
    
    505Issue of Warrants during the year
    
    
    
    
    
    
    
    
    
    
    
    234
    
    
    
    
    
    
    
    
    
    
    
    234Stock options granted
    
    
    
    
    
    
    
    
    
    
    
    16,431
    
    
    
    
    
    
    
    
    
    
    
    16,431Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114,586
    )
    
    
    
    
    
    
    (114,586
    )Net unrealized loss on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    84Less: Reclassification adjustment for
loss realized on sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    479
    
    
    
    479Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    19Total comprehensive income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    582Balance at December 31, 2006
    
    
    
    13,809,497
    
    
    
    1,078
    
    
    
    335,692
    
    
    
    (285,762
    )
    
    
    (368
    )
    
    
    50,640
  F-8




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 1
    
    Nature of operations and basis of presentation
        F-9




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 1
    
    Nature of operations and basis of presentation (continued)
      Name of Company
    
    Jurisdiction
    
    Effective interestBHLHK
    
    Hong Kong
    
    100%JTL
    
    BVI
    
    100%BHLNet
    
    Cayman Islands
    
    100%BBHL
    
    China
    
    76%CNT
    
    BVI
    
    100%Zhejiang Innoessen
    
    China
    
    71.43%Shenzhen Innoessen
    
    China
    
    100%Zhangzhou Innoessen
    
    China
    
    100%
 F-10




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 2
    
    Summary of significant accounting policies
  (a)
    
    Consolidation
     (b)
    
    Revenues
  (c)
    
    Deferred Taxes
  F-11




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 2
    
    Summary of significant accounting policies (continued)(d)
    
    Concentration of credit risk and major customers
  (e)
    
    Foreign currency transaction gains and losses and translation of foreign currencies
    (f)
    
    Property, plant and equipment
  Building
    
    20 yearsPlant and machineries
    
    10 yearsMotor vehicles
    
    5 yearsFurniture, fixtures, office and computer equipment
    
    3 years
 (g)
    
    Prepaid expense for rental of land
  F-12




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 2
    
    Summary of significant accounting policies (continued)
 (h)
    
    Intangible assets
  (i)
    
    Goodwill
  (j)
    
    Impairment
    (k)
    
    Trade Accounts Receivable
  (l)
    
    Inventories
  (m)
    
    Cash and cash equivalents
  (n)
    
    Investment in securities
  F-13




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 2
    
    Summary of significant accounting policies (continued)(o)
    
    Earnings per share
  (p)
    
    Deferred government grants
  (q)
    
    Stock-based compensation
     F-14




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 2
    
    Summary of significant accounting policies (continued)(q)
    
    Stock-based compensation (continued)
  2004
    
    
    2005Rmb
    
    
    RmbNet loss for the year, as reported






     
    
    (10,115
    )
    


    
    (19,532
    )Add: Stock-based compensation, as reported
    
    
    


    
    
    2,475Less: Stock-based compensation determined using the fair value
method
    
    
    


    
    
    (7,791
    )Pro forma loss for the year

    
    (10,115
)


    
    
    (24,848
    )Basic and diluted net loss per share (in Rmb)- As reported

    
    (1.47
)


    
    
    (2.67
    )- Pro forma

    
    (1.47
)



    
    
    (3.39
    )
  2005
    
    2006Options deemedOptions deemed
    
    granted to the
    
    Options
    
    Optionsgranted to the
    
    Chief-Executive
    
    granted to other
    
    granted toChairman on
    
    Officer on
    
    employees on
    
    employees onFebruary 8
    
    March 29
    
    September 21
    
    September 18Average risk-free rate of return
    
    
    3.313
    %
    
    
    3.861
    %
    
    
    4.050
    %
    
    
    4.833
    %Weighted average expected option life
    
    2 years
    
    2 years
    
    5 years
    
    2 yearsVolatility rate
    
    
    197.2
    %
    
    
    158.2
    %
    
    
    133.8
    %
    
    
    121.62
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 F-15




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 2
    
    Summary of significant accounting policies (continued)(r)
    
    Operating leases
  (s)
    
    Reclasifications
  (t)
    
    Fair value of financial instruments
  (u)
    
    Recent accounting pronouncements
    .
  F-16




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
  F-17




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 3
    
    Business combination
   Acquisition of51%
    
    
    49%Rmb
    
    
    RmbConsideration Paid:Shares of common stock issued at fair valueDirect cost related to the acquisition capitalized
    
    
    43,523
    
    
    
    36,405936
    
    
    
    Subtotal
    
    
    44,459
    
    
    
    36,405Less Net assets acquiredCash and
cash equivalents
    
    
    247
    
    
    
    2,387Trade accounts receivable, net
    
    
    56
    
    
    
    166Inventories
    
    
    751
    
    
    
    748Due from related parties
    
    
    11
    
    
    
    19Income taxes
recoverable
    
    
    18
    
    
    
    Other assets
    
    
    835
    
    
    
    307Property, plant and equipment, net
    
    
    4,665
    
    
    
    4,487Intangible assets
    
    
    3,514
    
    
    
    3,205Trade accounts payable
    
    
    (138
    )
    
    
    (148
    )Income taxes payable
    
    
    
    
    
    
    (2
    )Deferred government grants
    
    
    (139
    )
    
    
    (113
    )Due to a related party
    
    
    (104
    )
    
    
    (119
    )Short term borrowings
    
    
    (40
    )
    
    
    (1,749
    )Deferred tax liabilities
    
    
    (251
    )
    
    
    (241
    )Other
liabilities and accrued expenses
    
    
    (466
    )
    
    
    (909
    )Minority interests
    
    
    (2,957
    )
    
    
    (2,702
    )Subtotal
    
    
    6,002
    
    
    
    5,336Goodwill arising from acquisition of
Nutraceutical Operations
    
    
    38,457
    
    
    
    31,069
    UnauditedYears ended December 31,2004
    
    2005Rmb
    
    RmbRevenue from continuing operations
    
    
    6,854
    
    
    
    11,698Net loss for the year from continuing operations
    
    
    (11,623
    )
    
    
    (20,064
    )Loss per
share from continuing operations
    
    
    (1.69
    )
    
    
    (2.74
    )
   F-18




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 4
    
    Non-operating income
  Year ended December 31,2004
    
    
    2005
    
    
    2006Rmb
    
    
    Rmb
    
    
    RmbRealized gains on available-for-sale securities
    
    
    100
    
    
    
    
    
    
    
    Dividend income from available-for-sale securities
    
    
    67
    
    
    
    115
    
    
    
    4Subsidies from government
    
    
    
    
    
    
    161
    
    
    
    42Subsidies from research and development project
    
    
    
    
    
    
    
    
    
    
    8Other
    
    
    
    
    
    
    
    
    
    
    4167
    
    
    
    276
    
    
    
    58
 5
    
    Non-operating expenses
 Non-operating expenses consisted of the following:
 Year ended December 31,2004
    
    
    2005
    
    
    2006Rmb
    
    
    Rmb
    
    
    RmbLoss on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    2,989Realized loss on available-for-sale
securities  transferred from
comprehensive loss
    
    
    
    
    
    
    2,596
    
    
    
    488Other
    
    
    
    
    
    
    32
    
    
    
    49
    
    
    
    2,628
    
    
    
    3,526
 F-19




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 6
    
    Income tax provision
  Composition of income tax expense
  2004
    
    
    2005
    
    
    2006Rmb
    
    
    Rmb
    
    
    RmbCurrent income tax expenses
    
    
    
    
    
    
    9
    
    
    
    15Recognition of deferred tax assets
    
    
    2,927
    
    
    
    5,943
    
    
    
    5,295Change in valuation allowance
    
    
    (2,927
    )
    
    
    (5,943
    )
    
    
    (5,295
    )Income tax expenses
    
    
    
    
    
    
    9
    
    
    
    15
 Reconciliation of income tax expense by applying PRC statutory Enterprise Income Tax rate
  2004
    
    
    2005
    
    
    2006Rmb
    
    
    Rmb
    
    
    RmbIncome tax credit at PRC statutory EIT rate
    
    
    (3,338
    )
    
    
    (6,446
    )
    
    
    (37,813
    )Effect of different taxation rate in Hong
Kong
    
    
    465
    
    
    
    572
    
    
    
    32,564Income not subject to taxation
    
    
    (53
    )
    
    
    (60
    )
    
    
    (31
    )Change in valuation allowance
    
    
    2,926
    
    
    
    5,943
    
    
    
    5,295Total income tax expense
    
    
    
    
    
    
    9
    
    
    
    15
 Significant components of deferred tax assets
 December 31,
    
    
    December 31,2005
    
    
    2006Rmb
    
    
    RmbTax loss carryforwards


    
    
    17,407

    
    
    
    14,033Less: valuation allowance
    
    
    (17,407
    )
    
    
    (14,033
    )Deferred tax assets
    
    
    
    
    
    
    
  F-20




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 7
    
    Discontinued operations
    Year ended
    
    
    Year ended
    
    
    Year endedDecember
    
    
    December
    
    
    December31, 2004
    
    
    31, 2005
    
    
    31, 2006Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    RmbZhuhai
    
    
    Zhuhai
    
    
    Anji Bio
    
    
    Anji BioRevenues
    
    
    3,949
    
    
    
    1,040
    
    
    
    1,015
    
    
    
    Cost of sales
    
    
    (2,755
    )
    
    
    (678
    )
    
    
    (783
    )
    
    
    Gross profit
    
    
    1,194
    
    
    
    362
    
    
    
    232
    
    
    
    Selling, general and administrative expenses
    
    
    (529
    )
    
    
    (141
    )
    
    
    (285
    )
    
    
    Impairment of goodwill
    
    
    (411
    )
    
    
    
    
    
    
    
    
    
    
    Profit from discontinued operations
    
    
    254
    
    
    
    221
    
    
    
    (53
    )
    
    
    Loss on disposal of discontinued operations
    
    
    
    
    
    
    (509
    )
    
    
    
    
    
    
    (7,872
    )Profit/ (loss) from discontinued operations
    
    
    254
    
    
    
    (288
    )
    
    
    (53
    )
    
    
    (7,872
    )
  F-21




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 8
    
    Other assets
  December 31,
    
    
    December 31,2005
    
    
    2006Rmb
    
    
    RmbRental and utility deposits
    
    
    408
    
    
    
    375Advance to staff
    
    
    267
    
    
    
    202Prepayment for insurance
    
    
    305
    
    
    
    387Prepayment for consultancy fee
    
    
    80
    
    
    
    122Prepayment for raw materials
    
    
    83
    
    
    
    50Other
    
    
    319
    
    
    
    1371,462
    
    
    
    1,273
 9
    
    Prepaid expense for rental of land
 December 31,
    
    
    December 31,2005
    
    
    2006Rmb
    
    
    RmbAcquisition of subsidiaries
    
    
    530
    
    
    
    Amortisation
    
    
    (2
    )
    
    
    528
    
    
    
    
  10
    
    Property, plant and equipment, net
 December 31,
    
    
    December 31,2005
    
    
    2006Rmb
    
    
    RmbBuilding
    
    
    2,475
    
    
    
    0Plant and machineries
    
    
    5,170
    
    
    
    0Computer equipments
    
    
    1,678
    
    
    
    1,781Furniture, fixtures and office equipments
    
    
    1,099
    
    
    
    980Motor vehicles
    
    
    830
    
    
    
    445Less: accumulated depreciation
    
    
    (2,083
    )
    
    
    (2,500
    )9,169
    
    
    
    706
  11
    
    Intangible assets
   F-22




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 11
    
    Intangible assets (continued)
     F-23




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 11
    
    Intangible assets (continued)
 ImpairmentAccumulated
    
    Balance as
    
    loss for fiscal
    
    Balance asFair value
    
    amortisation/
    
    of
    
    year ended
    
    ofupon
    
    write off in
    
    December
    
    December 31,
    
    Decemberacquisition
    
    2005
    
    31, 2005
    
    2006
    
    31, 2006Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    RmbCore Technology
    
    
    624
    
    
    
    (13
    )
    
    
    611
    
    
    
    (611
    )
    
    
    Completed technologyBamboo leaf extract for prostate disease
    
    
    209
    
    
    
    (7
    )
    
    
    202
    
    
    
    (202
    )
    
    
    AOB antioxidant from bamboo leaf extract
    
    
    1,726
    
    
    
    (58
    )
    
    
    1,668
    
    
    
    (1,668
    )
    
    
    EOB from bamboo leaf extract
    
    
    1,964
    
    
    
    (65
    )
    
    
    1,899
    
    
    
    (1,899
    )
    
    
    Bamboo shoot extractive for dietary supplements
and fertilixer
    
    
    1,892
    
    
    
    (63
    )
    
    
    1,829
    
    
    
    (1,829
    )
    
    
    Zhukangning capsule from bamboo leaf extract
    
    
    343
    
    
    
    (11
    )
    
    
    332
    
    
    
    (332
    )
    
    
    6,134
    
    
    
    (204
    )
    
    
    5,930
    
    
    
    (5,930
    )
    
    
    IPR&D technologyBamboo shoot extractive for calorie control
    
    
    448
    
    
    
    (448
    )
    
    
    
    
    
    
    
    
    
    
    Bamboo shoot extractive for hair loss prevention
    
    
    27
    
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    475
    
    
    
    (475
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    7,233
    
    
    
    (692
    )
    
    
    6,541
    
    
    
    (6,541
    )
    
    
    
  12
    
    Goodwill
  Network
    
    Information
    
    Nutraceuticalsecurity
    
    technology
    
    operations
    
    TotalRmb
    
    Rmb
    
    Rmb
    
    RmbBalance as of December 31, 2004
    
    
    
    
    
    
    999
    
    
    
    
    
    
    
    999Goodwill arising from
Nutraceutical Operations in
2005
    
    
    
    
    
    
    
    
    
    
    69,526
    
    
    
    69,526Goodwill relating to
discontinued operations in
2005
    
    
    
    
    
    
    (999
    )
    
    
    
    
    
    
    (999
    )Balance as of December 31, 2005
    
    
    
    
    
    
    
    
    
    
    69,526
    
    
    
    69,526Impairment loss for 2006
    
    
    
    
    
    
    
    
    
    
    (69,526
    )
    
    
    (69,526
    )Balance as of December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  F-24




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 12
    
    Goodwill (continued)
  13
    
    Deferred government grants
 RmbBalance as at December 31, 2005
    
    
    230Amounts utilized during the year:- Research and development costs
    
    
    (230
    )Balance as at December 31, 2006
    
    
    
  14
    
    Short term borrowings
  December 31,
    
    
    December 31,2005
    
    
    2006Rmb
    
    
    RmbUnsecured bank loans repayable within one year
    
    
    3,069
    
    
    
    A secured revolving banking facility
    
    
    500
    
    
    
    Total
    
    
    3,569
    
    
    
    
  15
    
    Other liabilities and accrued expenses
 December 31,
    
    
    December 31,2005
    
    
    2006Rmb
    
    
    RmbDeposits received
    
    
    934
    
    
    
    887Accrued salaries and staff benefits
    
    
    2,021
    
    
    
    2,202Accrued liability for property, plant and equipment
    
    
    
    
    
    
    1,198Accrued filing fee
    
    
    
    
    
    
    365Accrued courier charges
    
    
    
    
    
    
    763Other
    
    
    764
    
    
    
    5273,719
    
    
    
    5,942
 F-25




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 16
    
    Stock-based compensation
     F-26




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 16
    
    Stock-based compensation (continued)
  Year ended December 31,2004
    
    
    2005
    
    
    2006Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    exercise
    
    
    
    
    
    exerciseNumber
    
    
    price
    
    
    Number
    
    
    price
    
    
    
    
    
    priceof
    
    
    (US$ per
    
    
    of
    
    
    (US$ per
    
    
    Number
    
    
    (US$ peroptions
    
    
    share)
    
    
    options
    
    
    share)
    
    
    of options
    
    
    share)Outstanding at beginning of year
    
    
    140,000
    
    
    
    1.15
    
    
    
    140,000
    
    
    
    1.15
    
    
    
    570,000
    
    
    
    1.68Granted
    
    
    
    
    
    
    
    
    
    
    430,000
    
    
    
    1.85
    
    
    
    1,030,000
    
    
    
    3.18Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,000
    )
    
    
    1.85Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    140,000
    
    
    
    1.15
    
    
    
    570,000
    
    
    
    1.68
    
    
    
    1,565,000
    
    
    
    2.66
  Options outstanding
    
    
    
    
    
    
    Options exercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    averageremaining
    
    
    exercise
    
    
    
    
    
    
    exerciseNumber
    
    
    contractual
    
    
    price (US$
    
    
    Number
    
    
    price (US$Date of grant
    
    outstanding
    
    
    life
    
    
    per share)
    
    
    exercisable
    
    
    per share)December 28, 1999
    
    
    140,000
    
    
    4 years
    
    
    1.15
    
    
    
    140,000
    
    
    
    1.15September 20, 2005
    
    
    430,000
    
    
    9.72 years
    
    
    1.85
    
    
    
    395,000
    
    
    
    1.85570,000
    
    
    
    
    
    
    
    
    
    
    
    570,000
  Options outstanding
    
    
    
    
    
    
    Options exercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    averageremaining
    
    
    exercise
    
    
    
    
    
    
    exerciseNumber
    
    
    contractual
    
    
    price (US$
    
    
    Number
    
    
    price (US$Date of grant
    
    outstanding
    
    
    life
    
    
    per share)
    
    
    exercisable
    
    
    per share)December 28, 1999
    
    
    140,000
    
    
    3 years
    
    
    1.15
    
    
    
    140,000
    
    
    
    1.15September 20, 2005
    
    
    430,000
    
    
    8.72 years
    
    
    1.85
    
    
    
    395,000
    
    
    
    1.85September 21, 2006
    
    
    1,030,000
    
    
    9.28 years
    
    
    3.18
    
    
    
    1,030,000
    
    
    
    3.181,600,000
    
    
    
    
    
    
    
    
    
    
    
    1,565,000
  F-27




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 16
    
    Stock-based compensation (continued)
  Stock-based compensation to non-employees
    2005
    
    
    2006Average risk-free rate of return
    
    
    3.983
    %
    
    
    4.833
    %Weighted average expected option life
    
    2.5 years
    
    2 yearsVolatility rate
    
    
    133.18
    %
    
    
    121.62
    %Dividend yield
    
    
    
    
    
    
    
 F-28




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 17
    
    Earnings/(loss) per share
  Year ended December 31,2004
    
    
    *2005
    
    
    2006Rmb
    
    
    Rmb
    
    
    RmbNet loss for the year
    
    
    (10,115
    )
    
    
    (19,532
    )
    
    
    (114,586
    )Net loss from continuing operations attributable to
holders of common stock, basic and diluted shares
    
    
    (10,369
    )
    
    
    (19,191
    )
    
    
    (106,714
    )Net income/(loss) from discontinued operations
attributable to holders of common stock, basic and
dilutive shares
    
    
    254
    
    
    
    (341
    )
    
    
    (7,872
    )Weighted-average shares used in computing basic and
diluted loss per share
    
    
    6,894
    
    
    
    7,327
    
    
    
    11,312Incremental shares from assumed conversions of stock
options and warrants
    
    
    55
    
    
    
    274
    
    
    
    1,150Weighted-average shares used in computing diluted
loss per share
    
    
    6,949
    
    
    
    7,601
    
    
    
    12,462Loss per share (in Rmb)- Basic and dilutive
    
    
    (1.47
    )
    
    
    (2.67
    )
    
    
    (10.13
    )Loss per share from continuing operations (in Rmb)- Basic and dilutive
    
    
    (1.51
    )
    
    
    (2.63
    )
    
    
    (9.43
    )Earnings/(loss) per share from discontinued operations
(in Rmb)- Basic and dilutive
    
    
    0.04
    
    
    
    (0.04
    )
    
    
    (0.70
    )
 
 *
    
    Certain revenues and expenses were reclassified to discontinued operations for comparative
purposes (see Note 7).   F-29




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 18
    
    Related party transactions
  Year ended December 31,2004
    
    
    2005
    
    
    2006Rmb
    
    
    Rmb
    
    
    RmbTransactions with related partiesDisposal of Zhuhai branch of BBHL to BEDC (Note a)
    
    
    
    
    
    
    1,300
    
    
    
    Net operating cash outflows of Zhuhai branch reimbursed (Note a)
    
    
    
    
    
    
    (1,300
    )
    
    
    Acquisition of CNT from Beijing Holdings by issuance of 2,233,800 new
shares at US$2.41 per share and 2,146,200 new shares at US$2.1 per
share respectively (Note b)
    
    
    
    
    
    
    79,928
    
    
    
    Disposal of available-for-sale securities to Beijing Holdings (Note c)
    
    
    
    
    
    
    2,167
    
    
    
    Subscription proceeds receivable from China Biotech (Note d)
    
    
    
    
    
    
    
    
    
    
    29,422
 
 (a)
    
    On March 31, 2005, BBHL entered into an agreement with BEDC, the sole shareholder of China
Internet Technology Company Limited (China Internet), the then 17.21% shareholder of the
Company, to sell its Zhuhai branch for a consideration of Rmb 1.3 million. The consideration
was determined based on the operating cashflow generated by Zhuhai branch from May 1, 2002 to
March 31, 2005, the period of which Zhuhai branch was managed and controlled by the Company.
Upon disposal, the Company agreed to reimburse the same aggregated net operating cash outflows
of Rmb1.3 million to the Zhuhai branch as part of the conditions of disposal. The
consideration of the transaction is zero as the Company received Rmb1.3 million from BEDC and
at the same time the Company transferred Rmb1.3 million to Zhuhai branch. The transaction was
closed on March 31, 2005 and resulted in a disposal loss of Rmb0.51 million.
 (b)
    
    On September 13, 2005, the Company entered into agreements with Beijing Holdings, the then
47.18% shareholder of the Company, to (i) acquire a 51% equity interest in CNT in exchange for
2,233,800 shares of the Company and (ii) obtain an option to acquire the remaining 49% equity
interest in CNT in exchange for 2,146,200 shares of the Company. Effective October 31, 2005,
the acquisition of 51% of CNT was completed and effective December 22, 2005, the option was
exercised and the remaining 49% equity interest in CNT was acquired by the Company.
 (c)
    
    On November 17, 2005, the Company entered into a sale and purchase agreement with Beijing
Holding to dispose of all of the 6,312,000 shares invested in Xian Haitian Antenna Company
Limited (Xian Haitian) for a cash consideration of Rmb2.17 million. These shares were
previously held as available-for-sale securities by the Company and it represented
approximately 0.975% of the outstanding shares of Xian Haitian. The sale consideration was
determined by the quoted closing stock price of Xian Haitian at HK$0.33 per share at the date
of the agreement. Xian Haitian is a company engaged in research, development, production,
sales, installation, services and wireless communication network optimization of base station
antennas and is also listed on the Growth Enterprise Market of the Hong Kong Stock Exchange.
The shares were acquired upon the initial public offering (IPO) of Xian Haitian. Its stock
price dropped continuously after the IPO due to poorer operating results as a result of the
keen competition in the market. Beijing Holdings is also a passive investor of Xian Haitian
who owns approximately 8% equity interest of Xian Haitian after its IPO. Beijing Holdings
currently nominates one non-executive director to the board of Xian Haitian and does not
currently participates in the management or operations of Xian Haitian.
 (d)
    
    On November 27, 2006, the Company entered into a subscription agreement with China Biotech
Holdings Limited (China Biotech) to issue 1,500,000 new shares and 2,000,000 warrants at
US$2.50 each and US$0.01 each, respectively. The total consideration was Rmb 29,422. The
transaction was completed on January 12, 2007 and the subscription proceeds were fully
received by the Company simultaneously. Following the completion of the transaction, China
Biotech became the single largest shareholder of the Company by owning 24.74% of the total
outstanding shares of the Company.
 F-30




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 18
    
    Related party transactions (continued)
  December 31,2005
    
    
    2006Rmb
    
    
    RmbBalances with related parties:Due from related partiesProceeds receivable from Beijing Holdings, a shareholder, in
respect of sale of shares of Xian Haitian Antenna (Note e)
    
    
    2,167
    
    
    
    Proceeds receivable from Beijing Holdings, a shareholder, in
respect of sale of product of Anji Bio (Note f)
    
    
    18
    
    
    
    Subscription proceeds receivable from China Biotech (Note d )
    
    
    
    
    
    
    29,422Funds held by China Biotech for potential acquisition of
technology and business in China (Note g)
    
    
    6,262
    
    
    
    6,242Due from China Biotech (Note h)
    
    
    
    
    
    
    5008,447
    
    
    
    36,164Due to related parties:Due to BEDC, the holding company of a shareholder (Note i)
    
    
    645
    
    
    
    59Due to China Biotech (Note j)
    
    
    244
    
    
    
    890889
    
    
    
    949
 
  (e)
    
    On November 17, 2005, the Company entered into a sale and purchase agreement with Beijing
Holding to dispose of all of the shares it held in Xian Haitian for cash consideration of
Rmb2.17 million. The value of the consideration was determined by the quoted closing stock
price of Xian Haitian at HK$0.33 per share at the date of the agreement.
 (f)
    
    Anji Bio sold their health product totaling Rmb 18 to Beijing Holdings. However, the full
provision was made for our investment in Anji Bio for the fiscal year ended December 31, 2006,
the consolidated balance sheet at December 31, 2006 did not include the accounts of Anji Bio.
 (g)
    
    China Biotech is the single largest shareholder of the Company since January 12, 2007. China
Biotech has experience in the nutraceutical business in China. China Biotechs experience
includes making investments in companies and technologies involved in this industry. In view
of China Biotechs experience, the Company deposited Rmb 6.242 million with China Biotech for
the purpose of making (with the assistance of China Biotech) potential acquisitions of
technology and businesses in the nutraceutical industry in China. There was no agreement
signed for the funds deposited with China Biotech and the Company can withdraw the funds
without any restrictions.
 (h)
    
    The amount represented the loan repayment on behalf of China Biotech Holdings Ltd. by Zhejiang
Innoessen.
 (i)
    
    The amount represented the contract sums received on behalf of BEDC by BHLHK in Hong Kong as
the customer of BEDC paid in Hong Kong dollars whereas BEDC did not maintain a Hong Kong
dollar bank account in Hong Kong.
 (j)
    
    The amount represented administrative expenses paid on behalf of CNT and Shenzhen Inocessen
by China Biotech in China.
  F-31




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 19
    
    Retirement benefits
  20
    
    Common StockCommon Stock of the Company as of December 31, 2005 and 2006 was as follows:
 Ordinary sharesShares
    
    with par value
    
    AdditionalCommon Stock
    
    Treasury Stock
    
    US$0.01 each
    

paid-in-capital
    
    TotalRmb
    
    
    
    Rmb
    
    
    
    RmbDecember 31, 2004
    
    
    6,894,497
    
    
    
    2,150,391
    
    
    
    571
    
    
    
    187,159
    
    
    
    187,730Issues of shares for
acquisition during
the year
    
    
    4,380,000
    
    
    
    
    
    
    
    339
    
    
    
    79,589
    
    
    
    79,928Stock options
granted to certain
consultants (Note
(a))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    701
    
    
    
    701Stock options
granted to officers
(Note (b))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,475
    
    
    
    2,475Cancellation of
treasury stocks
    
    
    
    
    
    
    (2,150,391
    )
    
    
    
    
    
    
    
    
    
    
    December 31, 2005
    
    
    11,274,497
    
    
    
    
    
    
    
    910
    
    
    
    269,924
    
    
    
    270,834Issues of shares for
financing during the
year
    
    
    2,500,000
    
    
    
    
    
    
    
    165
    
    
    
    48,601
    
    
    
    48,766Issues of warrants
during the year (Note (f))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234
    
    
    
    234Proceeds from
exercise of stock
option
    
    
    35,000
    
    
    
    
    
    
    
    3
    
    
    
    502
    
    
    
    505Stock options
granted to certain
consultants (Note
(a))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,038
    
    
    
    14,038Stock options
granted to chairman,
officers, directors
and staff (Note (e))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,393
    
    
    
    2,393December 31, 2006
    
    
    13,809,497
    
    
    
    
    
    
    
    1,078
    
    
    
    335,692
    
    
    
    336,770
 
 (a)
    
    This represented the fair value of the stock options granted to certain consultants.(b)
    
    This represented the expenses of the stock options granted to the Companys chairman and
chief executive officer.(c)
    
    The entire treasury stocks of 2,150,391 shares of the Company had been cancelled during the
year ended December 31, 2005(e)
    
    This represented the expenses of the stock options granted to the Companys chairman,
officers, directors and staffs.(f)
    
    This represented 3,000,000 warrants issued at US$0.01 per
warrant, with the exercise price at US$5.00 per share. F-32




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated
 21
    
    Contingencies and commitments
 Operating lease commitments
  December 31,2005
    
    
    2006Rmb
    
    
    RmbIn respect of land and buildings- Not more than one year
    
    
    615
    
    
    
    506- More than one year and not more than five years
    
    
    332
    
    
    
    253Total
    
    
    947
    
    
    
    759
  (a)
    
    The lease agreement for our Corporate Office (situated in Hong Kong) commenced on May 27,
2005, and shall continue for a period of two years, at a monthly rent of Rmb31. As of December
31, 2006, the future minimum lease payments under this non-cancelable operating lease amounted
to Rmb153 for year ending December 31, 2007.
 (b)
    
    The lease agreement for staff quarters (situated in Hong Kong) for managers of our Corporate
Office commenced on December 11, 2005, and shall continue for a period of two years, but it
can be ternminated after one year, at a monthly rent of Rmb7. As of December 31, 2006, the
future minimum lease payments under this non-cancelable operating
lease amounted to Rmb14 which represented two months of rent for
year ending December 31, 2007. Upon mutual agreement with the
landlord, the lease agreement was cancelled earlier.
 (c)
    
    The lease agreement for staff quarters (situated in Hong Kong) for Alan Li, the Chairman of
the Board and Chief Executive Officer of the Company, commenced on December 8, 2005, and
shall continue for a period of two years, but it can be ternminated after one year, at a
monthly rent of Rmb8. As of December 31, 2006, the future minimum lease payments under this
non-cancelable operating lease amounted to Rmb8 which represented one
month of rent for year ending December 31, 2007. Upon mutual agreement with the
landlord, the lease agreement was cancelled earlier.
 (d)
    
    The lease agreement for the office of BBHL commenced on November 11, 2006, and shall continue
for a period of two years, at a monthly rent of Rmb25. As of December 31, 2006, the future
minimum lease payments under this non-cancelable operating lease amounted to Rmb304 and Rmb253
for years ending December 31, 2007 and 2008 respectively.
 (e)
    
    The lease agreement for the office of Zhejiang Innoessen (situated in Hangzhou, PRC)
commenced on November 1, 2006, at a monthly rent of Rmb9 through
June 30, 2007. As of December
31, 2006, the future minimum lease payments under this non-cancelable operating lease amounted
to Rmb28 for the year ending December 31, 2007.
  F-33




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated
 21
    
    Contingencies and commitments (continued)
 Capital commitments
 Investment in China Merchants Zhangzhou Development Zone Innoessen Biotech Company Limited
  Contingencies
   F-34




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 22
    
    Segment information
    NetIdentifiable
    
    
    DepreciationOperating
    
    
    assets/
    
    
    and
    
    
    CapitalRevenues
    
    
    loss
    
    
    (liabilities)
    
    
    amortization
    
    
    expendituresRmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    RmbYear 2006IT Operations
    
    
    9,291
    
    
    
    65
    
    
    
    1,822
    
    
    
    139
    
    
    
    81Nutraceutical Operations
    
    
    52
    
    
    
    (8,979
    )
    
    
    (789
    )
    
    
    6,547
    
    
    
    968Total operating segments
    
    
    9,343
    
    
    
    (8,914
    )
    
    
    1,033
    
    
    
    6,688
    
    
    
    1,04Corporate
    
    
    
    
    
    
    (99,957
    )
    
    
    49,607
    
    
    
    216
    
    
    
    77Group
    
    
    9,343
    
    
    
    (108,871
    )
    
    
    50,640
    
    
    
    6,902
    
    
    
    1,126Year 2005*IT Operations
    
    
    6,468
    
    
    
    (3,269
    )
    
    
    2,579
    
    
    
    67
    
    
    
    221Nutraceutical Operations
    
    
    20
    
    
    
    (1,290
    )
    
    
    11,890
    
    
    
    239
    
    
    
    16,584Total operating segments
    
    
    6,488
    
    
    
    (4,559
    )
    
    
    14,469
    
    
    
    306
    
    
    
    16,805Corporate
    
    
    
    
    
    
    (13,274
    )
    
    
    14,713
    
    
    
    118
    
    
    
    454Group
    
    
    6,488
    
    
    
    (17,833
    )
    
    
    29,182
    
    
    
    424
    
    
    
    17,259Year 2004IT Operations
    
    
    2,720
    
    
    
    (7,798
    )
    
    
    (1,920
    )
    
    
    76
    
    
    
    Total operating segments
    
    
    2,720
    
    
    
    (7,798
    )
    
    
    (1,920
    )
    
    
    76
    
    
    
    Corporate
    
    
    
    
    
    
    (2,981
    )
    
    
    33,473
    
    
    
    
    
    
    
    Group
    
    
    2,720
    
    
    
    (10,779
    )
    
    
    31,553
    
    
    
    76
    
    
    
    
 
 *
    
    Certain revenues and expenses were reclassified to discontinued operations for comparative purposes  F-35




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##### Table of Contents



CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)
 22
    
    Segment information (continued)
     23
    
    Subsequent events
 1. Letter of intent with Going International Limited
  2. Issue of new shares to Max Winner Investments Limited, Smartweed Investments Limited and Xinhua
Gold Net International Co. Ltd.
  3. Restructuring Shenzhen Innoessen and Zhangzhou Innoessen into the new holding limited
anddisposal of CNT group
   4. New
Lease for Corporate Office
  5. Lease for the Companys production base
 2
 F-36