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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 20-F (Mark One) o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934
 OR þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number TRAMFORD INTERNATIONAL LIMITED     British Virgin Islands   Room 2413-18, Shui On Centre, 8 Harbour Road, Wanchai, Hong Kong   Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class
    Name of each exchange on which registeredNone
    
    Not Applicable
 Securities registered or to be registered pursuant to Section 12(g) of the Act. Common Stock, Par Value US$0.01 each   Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None   As of June 24, 2005, there were 6,894,497 shares of Common Stock outstanding, with par value of
US$0.01 each. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes       o No Indicate by check mark which financial statement item the registrant has elected to follow o Item 17       þ Item 18




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-2- Introduction This annual report on Form 20-F includes our audited consolidated financial statements as of
December 31, 2003 and 2004, and for each of the three years in the period ended December 31, 2002,
2003 and 2004. We listed our common stock, par value of US$0.01 each, on the Nasdaq Small Capital Market, or
Nasdaq, under the symbol TRFDF. Except as otherwise required and for purposes of this Annual Report only:-  
    
    Tramford, Company, us or we refer to Tramford International Limited. The
term you refers to holders of our common stocks.
    
    Hong Kong and the Government refer to the Hong Kong Special Administrative
Region of the Peoples Republic of China and its government, respectively.
    
    PRC, China and the PRC government refer to the Peoples Republic of China and
its government.
    
    All references to Renminbi, or Rmb are to 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. Forward Looking Statements Some of the statements contained in this Annual Report contain forward-looking information
within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are
found in Item 3, this Item 4, Item 5 and other sections in which the future prospects of the
Company are discussed. These statements include information concerning:  
    
    our ability to achieve or sustain profitability in the rapidly changing Internet 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 PRC network security market;
    
    our ability to maintain and protect our intellectual property. You can identify these statements by forward-looking terminology such as anticipate,
expect, believe, goal, plan, intend, estimate, may, can, could, will and
would or similar words. These forward-looking statements involve known and unknown risks,
uncertainties and other factors, including those described in this Item 4 and elsewhere in this
annual report that could cause our actual results to differ materially from those anticipated in
these




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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 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 Securities.PART 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 ServicesPART IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. ExhibitsSIGNATURESEX-1 AMENDED MEMORANDUM & ARTICLES OF ASSOCIATIONEX-8 LIST OF COMPANY'S SUBSIDIARIESEX-12.1 CERTIFICATION OF CEO REQUIRED BY SECTION 302EX-12.2 CERTIFICATION OF CFO REQUIRED BY SECTION 302EX-13 CERTIFICATE OF CEO & CFO REQUIRED BY SECTION 906    Table of Contents  -3- forward-looking statements. For a further discussion of such risks and uncertainties, see
Item 3, Key Information  Risk Factors. You should consider these factors carefully in evaluating
any forward-looking statements and should not place any undue reliance on any forward-looking
statement. You should keep in mind that any forward-looking statement made by us in this Annual
Report or elsewhere speaks only as of the date on which we made it. New risks and uncertainties
come up from time to time, and it is impossible for us to predict these events or how they may
affect us. We are under no obligation to, and do not intend, to update or revise our
forward-looking statements made herein to reflect actual results or changes in assumptions or other
factors that could affect those statements. 
 PART I 
 Item 1. Identity of Directors, Senior Management and Advisers Not Applicable. 
 Item 2. Offer Statistics and Expected Timetable Not Applicable. 
 Item 3. Key Information A.Selected financial data The following selected financial date should be read in conjunction with the Managements
Discussion and Analysis of Financial and Results of Operations, and the Consolidated
Financial Statements and notes thereto included elsewhere in this Annual Report. The selected financial data as at December 31, 2003 and 2004 and years ended December 31,
2002, 2003 and 2004 have been derived from and should be read with our audited consolidated
financial statements, including notes to the consolidated financial statements, included in this
Annual Report beginning on page F-1. We derived the selected financial data as at December 31,
2000, 2001, 2002, 2003 and 2004 from our consolidated financial statements, which have been
prepared in accordance with U. S. GAAP, but have not been included in this Annual Report. All financial data included elsewhere in this Annual Report are expressed, unless otherwise
stated, in the nearest thousand of Renminbi This Annual Report contains translations of Renminbi
amounts into U.S. dollar amounts, solely for your convenience. Unless otherwise indicated, the
translations have been made at Rmb8.2765 = US$1.00, which was the noon buying rate in The City of
New York for cable transfers in Renminbi as certified for customs purposes by the Federal Reserve
Bank of New York on December 31, 2004. See Item Key Information  Selected Financial Data 
Exchange Rate Information for historical information regarding this noon buying rate. You should
not construe these translations as representations that the Renminbi actually represents such U.S.
dollar amounts or could have been or could be converted into U.S. dollars at the rate indicated or
at any other rates.




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-4- (Amounts in thousands, except per share data)Year Ended December 312000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2004Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$(1)Consolidated Statement of
Operations data:Revenues
    
    
    15,727
    
    
    
    7,305
    
    
    
    8,283
    
    
    
    11,742
    
    
    
    6,669
    
    
    
    806Cost of sales
    
    
    12,612
    
    
    
    5,203
    
    
    
    4,825
    
    
    
    6,625
    
    
    
    4,149
    
    
    
    502Gross Profit
    
    
    3,115
    
    
    
    2,102
    
    
    
    3,458
    
    
    
    5,117
    
    
    
    2,520
    
    
    
    304Selling, general and administrative
expenses
    
    
    (5,144
    )
    
    
    (15,463
    )
    
    
    (11,977
    )
    
    
    (9,129
    )
    
    
    (8,297
    )
    
    
    (1,002
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (7,249
    )
    
    
    
    
    
    
    (4,748
    )
    
    
    (575
    )Bad debt expense
    
    
    
    
    
    
    
    
    
    
    (4,142
    )
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (2,029
    )
    
    
    (13,361
    )
    
    
    (19,910
    )
    
    
    (4,012
    )
    
    
    (10,525
    )
    
    
    (1,273
    )Non-operating income
    
    
    3,373
    
    
    
    2,555
    
    
    
    2,456
    
    
    
    2,429
    
    
    
    410
    
    
    
    50Non-operating expense
    
    
    
    
    
    
    
    
    
    
    (141
    )
    
    
    
    
    
    
    Income/(loss) before income
tax provision and minority interests
    
    
    1,344
    
    
    
    (10,806
    )
    
    
    (17,595
    )
    
    
    (1,583
    )
    
    
    (10,115
    )
    
    
    (1,223
    )Income tax provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (249
    )
    
    
    
    
    
    
    Minority Interests
    
    
    96
    
    
    
    1,665
    
    
    
    2,149
    
    
    
    890
    
    
    
    
    
    
    
    Net income/(loss) for the year
    
    
    1,440
    
    
    
    (9,141
    )
    
    
    (15,446
    )
    
    
    (942
    )
    
    
    (10,115
    )
    
    
    (1,223
    )Earnings/(loss) per share
    
    
    0.21
    
    
    
    (1.32
    )
    
    
    (2.24
    )
    
    
    (0.14
    )
    
    
    (1.47
    )
    
    
    (0.18
    )Consolidated Balance Sheet data:Total assets
    
    
    104,128
    
    
    
    93,407
    
    
    
    55,208
    
    
    
    51,582
    
    
    
    39,355
    
    
    
    4755Total liabilities
    
    
    27,743
    
    
    
    27,846
    
    
    
    7,818
    
    
    
    5,391
    
    
    
    6,501
    
    
    
    785Shareholders equity
    
    
    71,681
    
    
    
    62,522
    
    
    
    46,500
    
    
    
    46,191
    
    
    
    32,854
    
    
    
    3,970
 
 (1)
    
    For the convenience of the reader, translation of amounts from Renminbi into United States
Dollars (US$) has been made at the noon buying rate in New York City for cable transfer in
foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York
on December 31, 2004 of Rmb 8.2765 = $1.00. Exchange Rate Information We have published our financial statements in U.S. dollars. Our business is primarily
conducted in China and denominated in Renminbi. Reports will be made to shareholders and will be
expressed in U.S. dollars using the then-current exchange rates. The conversion of Renminbi into
U.S. dollars in this Annual Report is based on the noon buying rate in The City of New York for
cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New
York. Unless otherwise noted, all translations from Renminbi to U.S. dollars in this annual report
were made at $1.00 to RMB8.2765, which was the prevailing rate on December 31, 2004. The
prevailing rate on May 31, 2005 was $1.00 to RMB8.2765. We make no representation that any
Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or




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-5- Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC
government imposes controls over its foreign currency reserves in part through direct regulation of
the conversion of Renminbi into foreign exchange and though restrictions on foreign trade. The following table sets forth various information concerning exchange rates between the
Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your
convenience and are not necessarily the exchange rates that we used in this annual report or will
use in the preparation of our periodic reports or any other information to be provided to you. The
source of these rates is the Federal Reserve Bank of New York. Average (1)
    
    
    High
    
    
    Low
    
    
    Period-end(RMB per U.S. $1.00)2000
    
    
    8.2784
    
    
    
    8.2799
    
    
    
    8.2768
    
    
    
    8.27742001
    
    
    8.2770
    
    
    
    8.2786
    
    
    
    8.2676
    
    
    
    8.27662002
    
    
    8.2770
    
    
    
    8.2800
    
    
    
    8.2669
    
    
    
    8.28002003
    
    
    8.2770
    
    
    
    8.2800
    
    
    
    8.2765
    
    
    
    8.27692004
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.2764
    
    
    
    8.2765December 2004
    
    
    8.2765
    
    
    
    8.2767
    
    
    
    8.2765
    
    
    
    8.2765January 2005
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765February 2005
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765March 2005
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765April 2005
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765May 2005
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765
    
    
    
    8.2765
 
 (1)
    
    Annual averages are calculated by averaging the rates on the last business day of each
month during the relevant period. B.Capitalization and indebtedness. Not Applicable. C.Reasons for the offer and use of proceeds. Not Applicable. D.Risk factors. Certain risks associated with your investment in our common stock are described below. These
risks and other additional risks not presently known to us or that we deem immaterial may impair
our business operations and could materially adversely affect our business, operating results and
financial condition and could result in a complete loss of your investment. You should carefully
consider the
risks described below and other information in this Annual Report before deciding to invest in
the Company. (a) Risks Associated with Our Business (1) We have a limited operating history and are facing an evolving business model and strategy. We were originally engaged in the sanitary wares and ceramic tiles manufacturing business,
which was changed to the Internet related business in June 2000, with a focus on system integration
services (SI). In 2001, SI was terminated due to very keen competition and a low profit margin.
We then positioned ourselves as a network security services provider and started developing our own
products. Major developments of our existing products were completed in 2002 and




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-6- certificates for
these products were obtained from the Police Bureau, Security Bureau, etc in subsequent months. The network security market of China is rapidly evolving. We lack experience in managing this
new market. We are planning to strengthen the sales and marketing function to minimize this risk,
such as, active participation in exhibitions, recruitments of qualified sales team and interview of
senior management of customers. However, we cannot assure you that we will finally succeed in
meeting customers needs in these markets. If we fail to modify our business model or strategy to
adapt to these market changes, our business financial condition and results of operations may
suffer. (2) We have continued operating losses and we cannot provide assurance that we can achieve or
sustain profitability. We have incurred operating losses in the preceding five years as follows: Operating lossYear
    
    (in thousands of Rmb)2000
    
    
    2,0292001
    
    
    13,3612002
    
    
    19,9102003
    
    
    4,0122004
    
    
    10,525
 The rapidly evolving Internet market in which we operate has made it difficult for us to
estimate our future performance and profitability. We cannot give any assurances that operating
losses will not increase in the future because our revenues, gross margins and operating results
may fluctuate significantly due to, among other things:  -
    
    our ability to obtain timely and accurate user sales information;-
    
    the effectiveness of our distribution channel;-
    
    product upgrading or updating progress by us or our competitors;-
    
    the mix of products sold;-
    
    our competitors price changes;-
    
    our research and development and marketing abilities;-
    
    our acquisition costs of new technology or businesses;-
    
    employee wage pressure arising from increased competition for skilled employees
and increased governmental staff welfare regulations;-
    
    extraordinary costs incurred for acquisitions or any reductions in work force,
if any; and-
    
    the number of new projects led by the Chinese government bureaus.




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-7-   The above factors make predicting revenues more difficult and may adversely affect our
performance and profitability. Although we believe new or additional sales contracts may be
entered into in the future, there is no assurance that these contracts can be successfully
executed, or even if successfully executed, we may not be able to control our costs effectively.
The operating results would be materially adversely affected in case the contracts are not
successfully obtained and costs are not effectively controlled. (3) We may not successfully integrate acquired businesses, products and technologies As a component of our business and growth strategy, we intend to acquire companies, products
and technologies that we feel will enhance our business model, revenue base, operations and
profitability. The acquisitions may result in use of significant amounts of cash, dilutive
issuances of common stock, amortization expenses related to certain intangible assets and annual
impairment of goodwill on acquisition, each of these could materially adversely affect our results. We may also encounter problems in implementing effective controls over acquired businesses,
including:  
    
    the difficulties of integrating, assimilating and managing the operations,
technologies, intellectual property, products and personnel of the acquired business;
including the implementation of controls, procedures, and policies appropriate for a
listed company at the acquired business that prior to acquisition had lacked such
controls, policies and procedures, particularly if the acquired business will exist as
a separate line of business of us or as a subsidiary not wholly owned by us.
    
    the diversion of management attention to business concerns of the acquired business
from that of our existing operation.
    
    declining employee morale and retention issues for employees in the acquired business.
    
    the risk of litigation by terminated employees and contractors.
    
    our lack of familiarly with other conditions and business practices of the acquired
business. The acquisition implementation process may last longer than one financial reporting period.
Any failure in such implementation may have an adverse effect on our business, results of
operations and financial condition. (4) We may face risks in retaining current employees and retaining new employees. Many of our employees are located in areas and have skills in fields where there is high
worker mobility and work force turnover. The departure of a large number of our employees or a
meaningful number of key non-executive employees, or additions of new employees can be disruptive
and could materially adversely impact our business, including our ability of new product
development, existing products upgrading and products sales and marketing. Competition for these
employees is intense and is expected to remain so for the foreseeable future. We have seen upward
pressure on wages as a result of this intense competition for employees, which could cause an
increase in our operating expenses. We expect to rely, and will continue to rely, on a number of
key technical and management employees. If any of our key employees leave, our business, results
of operations and financial condition could suffer. Our future success is dependent upon the continued services of our key executives and
employees. We rely on their expertise in our business operations. We do not have employment




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-8- contracts with our executive officers and the loss of their services could materially adversely
affect our business, financial condition and results of operations. (5) We are subject to risks of excessive reliance on certain significant customers and risks of
non-recurring contracts and cost controls. In 2004, our largest two customers accounted for over 79.9% of our total sales, compared to
44.5 % in 2003 sales. Although we believe that we have good relationships with these customers,
we cannot assure you that we will continue to maintain good relationships with these customers. A
loss of one or both of these customers could have a material adverse effect on our business,
results of operation and financial condition. Prior to 2004, a substantial portion of our contracts signed by our subsidiary  BBHL were
short-term, individual and non-recurring. Our failure in obtaining new contracts could have a
material adverse effect on our business, results of operations and financial condition. Even if
new contracts are successfully signed, failure in cost and resources estimation and controls could
expose us to risks associated with cost overruns and penalties, which could also cause a material
adverse effect on our business, results of operations and financial condition. In 2004, we have
attempted to improve this situation by seeking longer term contracts with guaranteed sales. We had
entered into contract with the Legend Group last year, however, due to internal restructuring in
both the management and business lines of the Legend Group, the contract term of the guarantee
sales was finally cancelled. We cannot assure you that the contract can be maintained successfully.
Any failure in maintaining the contract will materially and adversely affect the Companys sales.
Besides, any additional changes in the contract terms could have material adverse effect on our
business, results of operations and financial condition. (6) We may not be able to keep pace with the rapid technological changes in the market, new
competition, and new product developments The network security and network management market is highly fragmented and characterized by
ongoing technological developments, evolving industry standards and rapid changes in customer
requirements. Our success will depend on our ability to:  -
    
    provide a broad range of network security and network management software
products;-
    
    timely develop and introduce new products with technological advances;-
    
    respond promptly to new customer requirements;-
    
    comply promptly with evolving industry standards;-
    
    provide upgrades and updates to users frequently at the lowest costs; and-
    
    maintain compatibility of our products with popular operating systems and
develop products that are compatible with new or otherwise emerging operating systems. Our product enhancements or new products may not adequately address the changing needs of the
marketplace. New products with new technological capabilities could replace or shorten the life
cycle of our products or cause our customers to defer or cancel purchases of our existing products. Our product development efforts are impacted by the adoption or evolution of industry
standards and currently, no uniform industry standard has been developed in the market for
encryption security products. As industry standards are adopted or evolve, we may have to modify
existing products or develop and support new versions of existing products. In addition, if an




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-9- industry standard does not develop, our products and our competitors products could be
incompatible, which could prevent or delay overall development of the market for a particular
product. If our products fail to comply with existing or evolving industry standards in a timely
fashion, if any in the future, our business, results of operation and financial condition could be
materially and adversely affected. Our long-term success depends on our ability to upgrade and update existing product offerings,
modify and enhance acquired products and introduce new products, which meet our customers needs.
Future upgrades and updates may include additional functionality, response to user problems or
address compatibility problems with changing operating systems and environments. We believe that
our ability to provide these upgrades and updates frequently and at low costs is key to our
success. Failure to release upgrades and updates could have a material adverse effect on our
business, results of operations and financial condition. In addition, future changes in popular
operating systems could cause compatibility problems with our products. Further, delays in the
introduction of future versions of operating systems or lack of market acceptance of these future
versions would delay or reduce demand for our future products which were designed to operate with
these future operating systems. Our failure to introduce in a timely manner new products that are
compatible with operating systems and environments preferred by users would materially and
adversely affect our business, results of operations and financial condition. The markets for network management and network security products are evolving, and their
growth depends upon broader market acceptance. Although the number of networks has increased
dramatically in China, the network management and network security markets continue to be emerging
markets. These markets may not continue to develop or may not develop rapidly enough to benefit
our business significantly. In addition, there are a number of potential approaches to network
management and network security, including the incorporation of management and security products
into network operating systems. Therefore, even if network management and network security tools
gain broader market acceptance, potential purchasers may not select our products. To the extent
that either the network management or network security market does continue to develop, we expect
that competition will increase.




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-10- (7) We do not intend to pay dividends Payment of dividends is within the discretion of our Board of Directors. Our Board of
Directors does not intend to declare any dividends in the foreseeable future, but instead intends
to retain all future earnings, if any, for use in our business operations. (8) We are subject to risk of hackers attacks Following the increase in computer crimes in China, computer hackers may create viruses to
sabotage or otherwise attack our products. Although no such event has occurred or been discovered
to date, the adverse impact arising from any virus sabotage or attacks cannot be ignored. If
sabotage or attacks on our products do happen, our customers computer systems could be seriously
damaged. Consequently, our business will be adversely impacted as a result of our impaired
professional image. (9) Our joint ventures are subject to termination Our joint venture agreement for our 76% held subsidiary, BBHL, provides for an initial term of
50 years. In the event the term of the joint venture agreements is not extended, the joint
ventures will be dissolved and liquidated pursuant to the provisions of the applicable law and the
applicable joint venture agreement. In addition, joint ventures may be terminated prior to the
expiration of the joint venture agreement upon the occurrence of certain events, including without
limitation, the inability of the enterprise to conduct its business due to financial losses or a
breach of the joint venture agreement by one of the parties. (10) We may not be able to successfully implement our growth strategies We are pursuing a number of growth strategies, which will require us to introduce more
technological products through partnerships, joint ventures and acquisitions. Some of these
strategies relate to new technological products for which there are no established markets in
China, or relate to technological products in which we lack experience and expertise. We cannot
assure you that we will be able to deliver new technological products on a commercially viable
basis or in a timely manner, or at all. Any failure in implementation of our strategies could
materially adversely affect our business, financial condition and results of operations. (11) We may face difficulties in implementing our acquisition strategy, including identifying
suitable opportunities and integrating them with our existing operations. As part of our business strategy, we intend to use partnerships and acquisitions to facilitate
the introduction of new service offerings as well as to add capabilities that we do not currently
have. For example, we may consider acquiring or entering into partnerships with firms that
specialize in other security products or unique software where expertise is not easily obtained. However, our ability to implement this strategy will depend on the availability of suitable
acquisition candidates at an acceptable cost, our ability to compete effectively to attract and
reach agreement with acquisition candidates or joint venture partners on commercially reasonable
terms, the availability of financing to complete larger acquisitions or joint ventures, as well as
our ability to obtain any required governmental approvals. In addition, the benefits of a
partnership, acquisition or joint venture transaction may take considerable time to develop, and
there is no assurance that any particular partnership, acquisition or joint venture will produce
the intended benefits. For example, we may experience difficulties in integrating acquisitions
with our existing operations and personnel. The identification and completion of these
transactions may require us to expend significant management time and resources. Moreover, the
partnership, acquisition and joint venture strategies we pursue could
also cause earnings or ownership dilution to our shareholders interests, which could result
in losses to investors.




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-11- (12) We may be subject to intellectual property infringement claims, which may force us to incur
substantial legal expenses and, if determined adversely against us, may materially disrupt our
business. We cannot be certain that our website content and our research tools do not or will not
infringe upon patents, valid copyrights or other intellectual property rights held by third
parties. We may become subject to legal proceedings and claims from time to time relating to the
intellectual property of others in the ordinary course of our business. If we are found to have
violated the intellectual property rights of others, we may be enjoined from using such
intellectual property, and we may incur licensing fees or be forced to develop alternatives. In
addition, we may incur substantial expenses in defending against these third party infringement
claims, regardless of their merit. Successful infringement or licensing claims against us may
result in substantial monetary liabilities, which may materially and adversely affect our business. (13) Unauthorized use of our intellectual property by third parties, and the expenses incurred in
protecting our intellectual property rights, may adversely affect our business. We regard our copyrights, trademarks, trade secrets and other intellectual property as
critical to our success. Unauthorized use of the intellectual property used in our business may
adversely affect our business and reputation. We rely on trademark and copyright law, trade secret
protection and confidentiality agreements with our employees, customers, business partners and
others to protect our intellectual property rights. Despite our precautions, it may be possible for
third parties to obtain and use our intellectual property without authorization. The validity,
enforceability and scope of protection of intellectual property in technological industries are
uncertain and still evolving. In particular, the laws and enforcement procedures in China do not
protect intellectual property rights to the same extent as do the laws and enforcement procedures
in the United States. Moreover, litigation may be necessary in the future to enforce our
intellectual property rights. Future litigation could result in substantial costs and diversion of
our resources, and could disrupt our business, as well as have a material adverse effect on our
financial condition and results of operations. (14) 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. The insurance industry in China is still at an early stage of development. Insurance companies
in China offer limited business insurance products and do not, to our knowledge, offer business
liability insurance. While business disruption insurance is available to a limited extent in China,
we have determined that the risks of disruption, cost of such insurance and the difficulties
associated with acquiring such insurance make having such insurance impractical for us. As a
result, except for directors and officers insurance, employees compensation insurance and fire
insurance we do not have any other business liability, disruption or litigation insurance coverage
for our operations in China. Any business disruption or litigation might result in our incurring
substantial costs and the diversion of resources (15) We are subject to risks of acquisition of new business, products and technologies Our industry has experienced, and is expected to continue to experience, a significant amount
of consolidation. It is one of our growth strategies to acquire or make investments in
complementary companies, products and technologies in future. Our acquisitions and strategic investments involve a number of risks and we may not realize
the expected benefits of these transactions. We may lose all or a portion of our investment,
particularly in the case of our strategic minority investments, if any. Our available cash and
securities may be used to buy or invest in companies or products, which could result in significant
acquisition-related charges to earnings and dilution to our shareholders. Moreover, we may have to




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-12- incur or assume the acquirees liabilities, including liabilities that are unknown at the time of
acquisition, which may result in a material adverse effect on us. Besides, in case the acquiree does not perform as anticipated, we would be required to incur a
significant impairment of goodwill. Any impairment of goodwill may adversely
and materially affect our results of operations and financial conditions. (16) We are subject to risk of need for additional financing We are currently intending to strengthen our marketing effort. Besides, our growth strategy
involves continuous acquisitions of new businesses. There may result in a shortage of cash in the
future which will cause us to seek additional financing sooner than anticipated. We cannot assure
you that such financing would be available on terms satisfactory to us, if at all. If we need to
pay higher than anticipated costs for additional financing, our results of operations or financial
conditions may be materially and adversely affected. Besides, upon new shares issued for financing
or acquisition purposes, interests of existing shareholders will also be diluted. (b) Risks Associated with China A substantial majority of our assets are located in China and a substantial majority of our
revenue is derived from our operations in China. Accordingly, our business, financial condition,
results of operations and prospects are subject, to a significant extent, to economic, political
and legal developments in China. (1) The PRCs economic, political and social conditions, as well as government policies, could
affect the financial markets in China and our business. The PRC economy differs from the economies of most developed countries in many respects,
including the amount of government involvement, level of development, growth rate, control of
foreign exchange and allocation of resources. While the PRC economy has experienced significant
growth in the past twenty years, growth has been uneven, both geographically and among various
sectors of the economy. The PRC government has implemented various measures to encourage economic
growth and guide the allocation of resources. Some of these measures benefit the overall PRC
economy, but may also have a negative effect on us. For example, our financial condition and
results of operations may be adversely affected by government control over capital investments or
changes in tax regulations that are applicable to us. The PRC economy has been transitioning from a planned economy to a more market-oriented
economy. Although the PRC government has implemented measures since the late 1970s emphasizing the
utilization of market forces for economic reform, the reduction of state ownership of productive
assets and the establishment of improved corporate governance in business enterprises, a
substantial portion of productive assets in China is still owned by the PRC government. In
addition, the PRC government continues to play a significant role in regulating industry
development by imposing industrial policies. The PRC government also exercises significant control
over Chinas economic growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to
particular industries or companies. Most recently, the PRC government implemented a number of
measures, such as raising
bank reserves against deposit rates to place additional limitations on the ability of
commercial banks to make loans, in order to slow down certain segments of the Chinese economy which
it believed to be overheating. These actions, as well as future actions and policies of the PRC
government, could materially affect the financial markets in China and indirectly affect our
business and operations. (2) The PRC legal system embodies uncertainties which could limit the legal protections available.




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-13- The PRC legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential value. In 1979, the
PRC government began to promulgate a comprehensive system of laws and regulations governing
economic matters in general. The overall effect of legislation over the past 25 years has
significantly enhanced the protections afforded to various forms of foreign investment in China.
However, the laws, regulations and legal requirements are constantly changing, and their
interpretation and enforcement involve uncertainties. These uncertainties could limit the legal
protections available to us and other foreign investors, including you. In addition, we cannot
predict the effect of future developments in the PRC legal system, particularly with regard to the
Internet, including the promulgation of new laws, changes to existing laws or the interpretation or
enforcement thereof, or the preemption of local regulations by national laws. (3) Our business is facing a highly competitive market in China. We are subject to various risks, uncertainties, expenses, delays, problems and difficulties
frequently encountered in the establishment of a software and technology business on the Internet
in China which is generally characterized by intense competition. Our potential competitors may come from:  -
    
    competitors who have greater financial and marketing resources and greater name
recognition;-
    
    competitors who have similar technical specifications in their products;-
    
    large global competitors who have entered China, especially after Chinas entry
into the World Trade Organisation (the WTO). The Internet market in China is subject to continuing changes and new competitors may better
position themselves to compete in the market as it matures. Chinas entry into WTO may intensify
the competition. If we fail to maintain our competitive position in the market, our results may be
materially adversely affected. (4) Our business may be adversely affected by Chinese government regulation of Internet companies. China is regulating its Internet sector by making new pronouncements or enacting regulations
regarding the legality of foreign investment in the Chinese Internet sector, the existence and
enforcement of content restrictions on the Internet and the availability of securities offerings by
companies operating in the Chinese Internet sector. There are substantial uncertainties regarding
the proper interpretation of current and future Chinese Internet laws and regulations. Although we
believe and have been advised that many current regulations will not apply to us, we cannot assure
that existing or future regulations will be interpreted differently. A majority of Chinese laws, regulations and legal requirements governing the Internet are
relatively new and untested, their interpretation and enforcement of what is deemed to be socially
destabilizing by Chinese authorities may involve significant uncertainty. In addition, the Chinese
legal system is a civil law system in which decided legal cases have little precedential value. As
a result, we cannot predict the actions of Chinese legal authorities, particularly with regard to
the Internet and software, including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement of local regulations by national laws. Besides, the interpretation and application of existing Chinese laws and regulations, the
stated positions of the Ministry of Information Industry and the possible new laws or regulations
have created substantial uncertainties regarding the legality of existing and future foreign




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-14- investments in, and the businesses and activities of, Chinese Internet businesses. Accordingly, it
is possible that the relevant Chinese authorities could, at any time, assert that any portion or
all of our existing or future ownership structure and businesses violate Chinese laws and
regulations. It is also possible that the new laws or regulations governing the Chinese Internet
sector that may be adopted in the future will prohibit or restrict foreign investment in, or other
aspects of, any of our current or proposed businesses and operations. If we are found to be in violation of any existing or future Chinese laws or regulations, the
relevant Chinese authorities would have broad discretion in dealing with such a violation,
including, without limitation, the following:  -
    
    levying fines;-
    
    revoking our business license;-
    
    requiring us to restructure our ownership structure or operations; and-
    
    requiring us to discontinue any portion or all of our Internet business. (5) We are subject to other risks relating to operating a business in China We may face foreign competition with Chinas entry into the WTO.China formally became a
member of the WTO in 2002. China is required to reduce tariffs and to eliminate other trade
restrictions, which may lead to increased foreign investment and foreign competition in Chinas
markets from international companies and the impact of which on Chinas economy and our business
would remain uncertain. The foreign competitors are usually characterized by better research and
development and financial backup who can bear a longer period of net operating loss and have larger
scaled marketing campaign. Even with locally developed products occupying the majority of the
existing market share, we cannot assure you that this strength will be maintained, particularly
when foreign competitors form joint ventures with certain local competitors. Any success in
increasing market share by foreign competitors will materially and adversely affect our business,
results of operations and financial condition. We may experience foreign currency losses due to fluctuations in exchange rates.The Chinese
government controls the conversion of the Chinese currency, the Renminbi. We must rely on the
Chinese governments foreign currency conversion policies, which may change at any time, in regard
to our currency exchange needs. In 2004, 40.8% of our total revenue was received in Renminbi,
which is not freely convertible into other foreign currencies. In China, the government has control
over Renminbi reserves through, among other things, direct regulation of the conversion of Renminbi
into other foreign currencies and restrictions on foreign imports. Although foreign currencies
which are
required for current account transactions, such as the payment of dividends to shareholders
to foreign invested enterprises such as ourselves, can be bought freely at authorized Chinese
banks, the proper procedural requirements prescribed by Chinese law must be met. At the same time,
Chinese companies are also required to sell their foreign exchange earnings to authorized Chinese
banks and the purchase of foreign currencies for capital account transactions still requires prior
approval of the Chinese government. This type of heavy regulation by the Chinese government of
foreign currency exchange restricts certain of our business operations and a change in any of these
government policies, or any other, could further negatively impact our operations. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S.
dollar would affect our financial results reported in U.S. dollar terms without giving effect to
any underlying change in our business or results of operations. For example, due to the recent
devaluation of the U.S. dollar against other reserve currencies, as well as pressure from a number
of other governments (including the United States), the PRC government has indicated that it may
adjust the current rate at which Renminbi-U.S. dollar exchanges are fixed, as well as re-evaluate
its




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-15- decades-old policy of using a fixed-rate regime to govern foreign currency transactions,
although the PRC government has not committed itself to take any such action currently.
Fluctuations in the exchange rate will also affect the relative value of any dividend we issue
which will be exchanged into U.S. dollars and earnings from and the value of any U.S. dollar
denominated investments we make in the future. Very limited hedging transactions are available in China to reduce our exposure to exchange
rate fluctuations. To date, we have not entered into any hedging transactions in an effort to
reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging
transactions in the future, the availability and effectiveness of these hedges may be limited and
we may not be able to successfully hedge our exposure at all. In addition, our currency exchange
losses may be magnified by PRC exchange control regulations that restrict our ability to convert
Renminbi into foreign currency. Because a significant portion of our revenue and cash operations are denominated in Renminbi,
fluctuations in exchange rates between U.S. dollars and Renminbi will affect our balance sheet and
earnings per share in U.S. dollars. We may be adversely affected by the Chinese governments austerity measures to reduce
inflation in China.In recent years, China has not experienced significant inflation, and thus
inflation has not had a significant effect on our business historically. According to the National
Bureau of Statistics of China, the change in the Consumer Price Index in China was 0.7%, (0.8)%,
1.2% and 3.9% in 2001, 2002, 2003 and 2004, respectively. However, following a 2.8% average change
in the Consumer Price Index in China in the first quarter of 2004 and a 3.8% change in the month of
April 2004, the Chinese government announced measures to restrict lending and investment in China
in order to reduce inflationary pressures in Chinas economy. The decrease in cash available from
bank borrowings of our potential customers may cause them to withhold the proposed tenders and
affect their settlements to us, which could materially and adversely affect our business
development, results of operations and financial condition. The Chinese government may introduce
further measures intended to reduce the inflation rate in China. Any such measures adopted by the
Chinese government may not be successful in reducing or slowing the increase in Chinas inflation
rate. Sustained or increased inflation in China may have an adverse impact on Chinas economy. The
deteriorated economy will impact our development and our operations may not adhere to our preset
business strategies. The recurrence of Severe Acute Respiratory Syndrome (SARS) in China, or similar adverse
public health developments, may materially and adversely affect our business and operating results. From December 2002 to June 2003, China and certain other countries experienced an
outbreak of a new and highly contagious form of atypical pneumonia now known as severe acute
respiratory syndrome, or SARS. On July 5, 2003, the World Health Organization declared that the
SARS outbreak had been
contained. Since September 2003, however, a number of isolated new cases of SARS have been
reported, most recently in central China in April 2004. During May and June of 2003, many
businesses in China were closed by the PRC government to prevent transmission of SARS. Any
recurrence of the SARS outbreak, or a development of a similar health hazard in China, may
adversely affect our business and operating results. For instance, a recurrence of SARS or any
other epidemic may reduce the level of economic activity in affected areas and negatively impact
Chinas economy. In addition, health or other government regulations may require temporary closure
of our offices, content providers or sponsors, which will severely disrupt our business operations
and have a material adverse effect on our financial condition and results of operations. (c) Risks Associated with Investing in our common stock Stock prices of technological-related companies, particularly companies with business
operations primarily in China, have fluctuated widely in recent years, which could result in
substantial losses to investors.




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-16- (1) Our stock price has been and may continue to be volatile. Our stock price was volatile and ranged from a per-share high of US$8.8 to low of US$0.37
during the period from January 1, 2004 to May 27, 2005. On May 27, 2005, the per share closing
price for our common stock was US$3.95. Many factors affect our stock price which we cannot
control. Our ability to meet the expectations of investors with respect to our operating and
financial results may contribute to current and future stock price volatility. Our stock price may be adversely affected by the performance and fluctuation of the stock
prices of other technology companies with business operations mainly in China that have listed
their securities in the U.S. Recently, a number of PRC companies have listed their securities, or are in the process of
preparing to list their securities, on U.S. stock markets. Some of these companies have
experienced significant volatility, including significant price declines in connection with their
initial public offerings. The trading performances of these Chinese companies securities at the
time of or after their offerings may affect the overall investor sentiment towards PRC companies
listed in the U.S. and consequently may impact the trading performance of our company. These various
market and industry factors may significantly affect the market price of our company, regardless of
our actual operating performance. The price and trading volume for our common stock may be highly volatile for business specific
reasons. Factors such as variations in our revenue, earnings and cash flow, announcements of new
investments, cooperation arrangements or acquisitions, and fluctuations in market prices for our
services and technological products could cause the market price for our common stock to change
substantially. Any of these factors may result in large and sudden changes in the volume and price
at which our common stock shall trade. There is no assurance that these factors will not occur in
the future. (2) The sale or availability for sale of substantial amounts of our common stock could adversely
affect their market price. Sales of substantial amounts of our common stock in the public market in future, or the
perception that these sales could occur, could adversely affect the market price of our common
stock and could materially impair our future ability to raise capital through offerings of our
common stock.




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-17- (3) Rights of Shareholders under British Virgin Islands Law May Be Less Than Those of Shareholders
in U.S. Jurisdictions Our corporate affairs are governed by our Memorandum and Articles of Association and by the
International Business Companies Act of the British Virgin Islands. Principles of law relating to
such matters as the validity of corporate procedures, the fiduciary duties of our management,
directors and controlling shareholders and the rights of our shareholders differ from those that
would apply if we were incorporated in a jurisdiction within the United States. Further, the
rights of shareholders under British Virgin Islands law are not as clearly established as the
rights of shareholders under legislation or judicial precedent in existence in most United States
jurisdictions. Thus, our public shareholders may have more difficulty in protecting their
interests in the face of actions by the management, directors or controlling shareholders than they
might have as shareholders of a corporation incorporated in the United States jurisdiction. Under the laws of most jurisdictions in the United States, majority and controlling
shareholders generally have certain fiduciary responsibilities to the minority shareholders.
Shareholder action must be taken in good faith and actions by controlling shareholders which are
obviously unreasonable may be declared null and void. British Virgin Islands law protecting the
interests of minority shareholders may not be as protective in all circumstances as the law
protecting minority shareholders in United States jurisdictions. In addition, in most United
States jurisdictions, directors owe a fiduciary duty to the corporation and its shareholders,
including a duty of care, pursuant to which directors must properly apprise themselves of all
reasonably available information, and a duty of loyalty, pursuant to which they must protect the
interests of the corporation and refrain from conduct that injures the corporation or its
shareholders or that deprives the corporation or its shareholders of any profit or advantage. Many
United States jurisdictions have enacted various statutory provisions which permit the monetary
liability of directors to be eliminated or limited. Under British Virgin Islands law, liability of
a corporate director to the corporation is basically limited to cases of willful malfeasance in the
performance of his duties or to cases where the director has not acted honestly and in good faith
and with a view to the best interests of the corporation. There is doubt that the courts of the British Virgin Islands would enforce, either in an
original action or in an action for enforcement of judgments of United States courts, liabilities
which are predicated upon the securities laws of the United States. 
 Item 4. Information on the Company A.History and development of the Company. Our company was incorporated as an International Business Company under the laws of the
British Virgin Islands in September 1995. We previously owned, through our wholly owned
subsidiaries, Jing Tai Industrial Investment Company Limited which was subsequently renamed to BHL
Networks Technology Company Limited (BHLHK), and Jolly Mind Company Limited (Jolly Mind), both
Hong Kong companies, 95% equity interests in each of Linyi Baoquan Bathtub Company Limited
(Baoquan) and Linyi Xinhua Building Ceramics Company Limited (Xinhua, and together with
Baoquan, the Disposed Operations). The Disposed Operations are Sino-foreign equity joint ventures
incorporated under the laws of China. A wholly owned subsidiary of BHLHK, Beijing Taigong Sanitary
Wares Company Limited (Taigong), was also incorporated in Beijing in 1997 under the laws of China
as our administrative and sales support office of our Disposed Operations. Pursuant to certain sales and purchases agreements entered into among BHLHK, Shandong Linyi
Industrial Enamel Joint Stock Company (Linyi Industrial), Jolly Mind and Shandong Luozhang Group
Company (Shandong Luozhang), on July 2, 1999, BHLHK sold its 60% interests in each of
the Disposed Operations to Shandong Luozhang for cash consideration of Rmb28 million. Pursuant
to a Share Purchase Agreement dated July 2, 1999 entered into between




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-18- our company and Linyi
Industrial, we sold all of our interest in Jolly Mind, which owned a 35% interest in each of the
Disposed Operations, to Linyi Industrial in consideration of 1,952,291 shares (the Consideration
Shares) of Common Stock of the Company. Taigong was voluntarily dissolved in March, 2000. On June 30, 2000, Jingle Technology Co., Ltd., our wholly owned subsidiary incorporated in the
British Virgin Islands, entered into an agreement with China Internet Technology Co., Ltd. (China
Internet) and Great Legend Internet Technology and Service Co., Ltd. (Great Legend) to acquire
the entire outstanding shares of BHL Networks Technology Co. Ltd. (BHLNet), a company
incorporated under the laws of the Cayman Islands, which owns a 76% interest in Beijing BHL
Networks Technology Co. Ltd. (BBHL), a company incorporated under the laws of China. BHLNet and
BBHL are hereinafter referred to collectively as the IT Operations. The following diagram illustrates our corporate and share ownership structure as at June 24,
2005: (FLOW CHART) Our registered office is located at P.O. Box 71, Craigmuir Chambers, Road Town, Tortola, BVI.
Only corporate administrative matters are conducted at this office, through our registered agent,
HWR Services Limited. Our principal executive office is located at Room 2413-18, Shui On Centre, 8
Harbour Road, Wanchai, Hong Kong.




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-19- B.Business overview. Market Overview Chinas network security market has grown during the last three years. According to
statistics of the CCW Research released in March 2005, the total sales for 2004 amounted to Rmb
2,870 million, which was increased by Rmb 681 million, or 31.1%, from Rmb 2189 million of 2003.
Due to increased awareness of network safety concerns by users, we expect the growth rate of the
network security market will remain steady and may grow fast in the foreseeable future. CCW
Research forecasted that the sales for network security market will reach Rmb 3,830 million in
2005, a growth rate of approximately 33.4% over 2004. They also forecasted the compound growth
rate will be as high as 31.3% from 2003 to 2008. Anti-virus software accounted for over 25% of the Chinese network security markets total
sales of 2004, amounting to Rmb770 million. Experts forecasted the growth rate for this category
will increase by 37.7% for the year 2005; Firewall software comprised 46% of the Chinese network security markets total sales of 2004,
amounting to Rmb 1330 million. The Hackers detection and protection market will increase by 40%
for the year 2005. Anti-virus and firewall products have a more mature market in the Chinese network security
industry with very large domestic demand, but they also face keen competition due to easier entry
into the market. We believe that the hackers detection and protection market, on the other hand,
has higher entry barriers due to more complicated technology required for such products, but its
future growth remains uncertain, although we believe the demand is growing as a result of
increasing awareness towards network security by the government bureaus and large enterprises in
recent years.  Also according to the CCW Research, by customers, the China network security market can be
broken down as follows:-1.
    
    Financial enterprises: sales to financial enterprises in 2004 amounted to Rmb600 million,
representing 20.9% of the markets total sales;2.
    
    Government bureaus: sales in 2004 to government bureaus amounted to Rmb591 million,
representing 20.6% of market share;3.
    
    Telecommunication enterprises: sales in 2004 to telecommunication enterprises amounted to
Rmb479 million, representing 16.7% of market share;4.
    
    Resources enterprises: sales in 2004 to resources enterprises amounted to Rmb215 million,
representing 7.5% of market share;5.
    
    Traffic enterprises and public utilities:sales in 2004 to traffic enterprises and public
utilities amounted to Rmb207 million, representing 7.2% of market share;6.
    
    Education institutions: sales in 2004 to these institutions amounted to Rmb178 million,
representing 6.2% of market share;7.
    
    Manufacturing enterprises: sales in 2004 to manufacturing enterprises amounted to Rmb195
million, representing 6.8% of the markets total sales;8.
    
    Logistic enterprises: sales in 2004 to logistic enterprises amounted to Rmb146 million,
representing 5.1% of market share; and




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-20-  9.
    
    Others: sales to other users in 2004 amounted to Rmb258 million, representing 9% of market
share. Financial enterprises and government bureaus account for the largest market share as they are
not price sensitive due to their funding in acquiring the security products, others remain price
sensitive. Company Overview The Company was originally engaged in the sanitary wares and ceramic tiles manufacturing
business and transitioned to Internet related business in June 2000, with a specific focus on
system integration services (SI). In 2001, the Company phased out the SI business due to strong
competition and low profit margins. As a result, we transformed to a network security service
provider after our acquisition of BHLNet in 2002. Our current business focuses on the network
security and related software development. Our long-term goal is to maximize the value of our
company and thus the shareholders value, with an operating strategy focused on technology
innovation. We stress innovation, reliability, flexibility and efficiency to ensure a high degree
of advancement in technology and commercialization of research results. We believe the existing
market preference of local products and services, the governmental regulations and our
technological advancement will create good market opportunities for our business. Upon the acquisition of BHLNet, we positioned ourselves as a provider of system integration
services, network security and network management solutions. With limited investment in research
and development at the initial stage, which is caused by our difficulties in recruiting qualified
staff and our reliance on a shift of mature technologies from the Institute of Computing Technology
(ICT). Our products are generally similar to those provided by our competitors. In order to be
pioneers in our key markets, we switched our business focus to self-developed security software in
2001 and had established a research and development team formed by experienced research staff
recruited from universities and competitors. This change was proved successfully, in particular in
the development of the Intranet/Internet Physical Separation Security Solution (the IPSSS), a
unique product which was generally recognized and certified by the relevant government agencies and
had accounted for the majority of the 2002 sales. In 2003, based on the technology backbone of the
IPSSS, we further developed the BHL Information Security Gate System (the Security Gate). The
Security Gate enhanced the safe exchange of information between two networks which were completely
physically separated. Description of Products and Services We focus on network security solutions and related products. They mainly include the Security
Gate, IPSSS, Secure Channel and Secure Server. Our major target customers include large
enterprises and government bureaus, who are less price sensitive and are financially capable to
pay. We have obtained ten certificates as related to our security products from all related
government bureaus in the past three years, which represent their recognition of the validity of
our products. Our most outstanding products in the network security sector include Security Gate and IPSSS.
Due to complicated technical requirements, we believe these products face the lowest competition in
the market and provide us the highest gross profit margin compared to other products in the market.
Security Gate is a newly developed technology. We believe its acceptance by users will expand,
particularly by government agencies. Other products focus on two important areas of Internet application  network management and
e-business software development: Network management. Network management primarily includes the BHL LDAP Catalogue Server, BHL
Search Engine V2.0, BHL Charging Proxy of Network Expenses and BHL Re-broadcasting system V2.0.
These products are highly efficient, intelligent and provide high




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-21- performance in assisting
enterprises in increasing the automatic abstraction and classification of information influx and
control of network expenses. E-business software development. Our e-business software development is operated separately at our Zhuhai branch. Through years of experience, we have accumulated a thorough understanding of
these businesses and the specific requirements in port business, on-line banking and on-line
brokerage. In March 2005, for reasons of effective management and better control of direct costs,
we sold our Zhuhai branch to a third party at a consideration of Rmb 1,300,000. The consideration
was fully received, even the sale and purchase agreement was not finally signed. In the meantime,
the same business was retained in Beijing. Business Strategy We intend to achieve our business goals primarily through the following strategies: Expanding distribution channel by cooperating with large enterprises Since it is costly to establish owned distribution channels, we started to cooperate with
enterprises having wide and mature distribution channels in China to enhance easier penetration of
our products into more industrial sectors, through OEM (producing under their brand name)
production of their products. Through the established distribution networks of these large
enterprises, we believe we can penetrate into the market at minimum cost. Capitalize on the strengths of Beijing Holdings Beijing, the capital of China, is the base of large local and overseas enterprises and
government agencies. Beijing Holdings, the controlling shareholder of the Company, is the sole
window company of the Beijing Municipal Government established in Hong Kong. Since its
incorporation in 1979, Beijing Holdings and its management, all of whom were ex-government senior
officials, had established strong and long-term relationships with a majority of local enterprises
and government agencies. In February 2005, Beijing Holdings, following the resignation of Li Xiao
Hong, who was ex-Deputy General Manager of Beijing Holdings, nominated Mr. Zhao Chang Shan, the
General Manager of Beijing Holdings, to become the Chairman of the Company. We expect that government agencies and universities will remain our major customers in the
foreseeable future. We believe our specific relationships with Beijing Holdings, especially the
good connection established between the management of Beijing Holdings and the leaders of these
potential customers, may contribute positively to our business development. Capitalize
on the strengths of Institute of Computing Technology (ICT) ICT is a shareholder of BBHL. ICT, an institution under the Chinese Academy of Sciences
(CAS), is well recognized in China and globally in terms of its academic reputation and
specializes in the research and development of high-performance computer systems. The mission of
ICT is Invigorate China through Science and Education. The research of ICT is divided into
fundamental research, key technology research and application research. These research fields
supplement each other
and work cooperatively to develop key technologies for the national economy and the peoples
livelihood and to transform research results into high technology products to meet market needs.
The management of ICT highly values the cooperation with Beijing Holdings and the Company. We believe the support from ICT will serve as one of the technology platforms of our company.
We believe that we can launch new products faster than some of our competitors and save research
and development costs, which could result in higher margins. Strengthen the management team




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-22- We plan to invite capable candidates to join our management team, and we have in the last year
appointed new directors and officers. We currently have as advisers financial, operational,
investment and public relation experts, and will in the foreseeable future, focus on the
recruitment of investor relations, marketing and research and development experts. We believe a
strong management team can significantly contribute to the strategic planning and its
implementation to our company. Acquiring companies with good potential Following the appointment of our new Chief Investment Officer in May 2005, we will again
recognize that merger and acquisitions will become one of our growth strategies. We will identify
potential targets to penetrate into different industries and increase in sales Improving investor relations We plan to improve our relations with investors. We plan to launch a website and recurit
experts in the United States to closely follow communications with investors. We believe that our
increased transparency will attract more attention from existing and potential investors. C.Organizational structure. We conduct substantially all of our business through our 76% held subsidiary in China, BBHL. The following table set forth the details of our subsidiaries as at the date of this Annual
Report: Country of
    
    OwnershipsName
    
    Incorporation
    
    Interests
    
    Direct ParentBHL Networks Technology Co Ltd (BHLHK)
    
    Hong Kong
    
    
    100
    %
    
    Tramford
International
LimitedJingle Technology Co Ltd (Jingle)
    
    BVI
    
    
    100
    %
    
    Tramford
International
LimitedBHL Networks Technology Co Ltd (BHLNet)
    
    Cayman Islands
    
    
    100
    %
    
    JingleBeijing BHL Networks Technology Co Ltd (BBHL)
    
    China
    
    
    76
    %
    
    BHLNet




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##### Table of Contents



-23- The following diagram illustrates our corporate and share ownership structure as at the
date of this Annual Report: (FLOW CHART) BHLHK is the cash management vehicle of the Company. BHLNet and Jingle are investment-holding
vehicles. BBHL specializes in network technology. With network security and information security
technology and support software as its main business, the company has established its brand image
with specialized technology, system products and comprehensive service. The principal technology of
the company include: accreditation and encryption, coding, information protection and testing,
network security technical standard and related technology as well as products and solutions in the
aspect of network information processing. D.Property, plant and equipment. Our principal executive office is situated at Room 2413-18, Shui On Centre, 8 Harbour Road,
Wanchai, Hong Kong. It is leased from May 20, 2005 at a monthly rent of Rmb 33,000. BBHL leases its office at Room 214-216, Tai Li Min Yuan Office Building, No. 1, Wai Guan Xie
Street, Chaoyang District, Beijing, 100011, China (Tai Li Min Yuan) at a monthly rent of Rmb
53,000 for a period of two years commencing September 20, 2002. Upon the expiry of the lease
agreement on September 20, 2004, BBHL exercised the option granted by the lease agreement to extend
the lease for an additional one year at the same terms.. Due to an increase in number of staff,
BBHL also leased another office at Room 316 of Tai Li Min Yuan, at a monthly rent of Rmb 11,000,
for the period from June 1, 2005 to October 31, 2005. Our principal fixed assets are computer equipment. As at December 31, 2004, the total net book
value of the computer equipments amounted to approximately Rmb 43,000, which represented 87.8% of
our total fixed assets. We believe that the physical facilities are adequate to conduct our business in the next 12
months.




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##### Table of Contents



-24- E.Corporate governance We are committed to ensuring high standards of corporate governance in the interests of
shareholders and we devote considerable effort to identifying and formalising best practices. The overall management of our business is vested in the Board of Directors, with attention
focused on matters affecting our finances and shareholders. These include financial statements,
dividend policy, significant changes in accounting policy, the annual operating budget, certain
material contracts, major investments, risk management strategy and treasury policies. Through
delegation of responsibilities to the President and the Chief Executive Officer, who are also
members of the Board, the day-to-day management of our business is closely monitored by the Board. The members of the Board of Directors communicate frequently to assess the development of our
business. All members of the Board of Directors have full and timely access to relevant information
and may take independent professional advice if necessary. During the year, we had established the
audit committee and had set up code of business conduct and ethics for directors, as well as the
audit committee charter of the Board of Directors. In May 2005, we also established a compensation
committee. Mr. Peter Fu, Mr. L C Wan and Mr. Ni Ye Zhong are members of both the Audit Committee
and the Compensation Committee. All of them are independent directors of the Company. We are committed to ensuring a high standard of business ethics and integrity. Due to the
limited number of staff and functional departments in previous years, we exercised closer
monitoring control, which is considered more effective and efficient in ensuring the control
procedures, instead of implementing a formal code of conduct. However, along with our growth and
expansion, we are preparing a formal code of conduct for all staff. We will carry out extensive
training to ensure that all staff levels understand the content of the code and the philosophy
behind an ethical working culture. 
 Item 5. Operating and Financial Review and Prospects MANAGEMENTS DISCUSSION AND ANALYSIS The following discussion of the financial condition and results of operations should be read
in conjunction with the consolidated financial statements and related notes thereto. The following
discussion contains certain forward-looking statements that involve risk and uncertainties. Our
actual results could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, risks and uncertainties related to
the need for additional funds, the rapid growth of the operations and our ability to operate
profitably in future. All financial data referred to in the following managements discussion has been prepared in
accordance with U.S. GAAP. Results of operations for the years ended December 31, 2002, 2003 and
2004 refer to our audited consolidated results. U.S. GAAP requires that we adopt the accounting
policies and make estimates that management believe are most appropriate in the circumstances for
the purposes of giving a true and fair view of our results and financial condition. Our principal
accounting policies are set forth in Note 2 to our consolidated financial statements. However,
different policies, estimates and assumptions in critical areas could lead to materially different
results. Critical accounting policies are defined as those that are reflective of significant
judgments and uncertainties and potentially result in materially different results under different
assumptions and conditions. We believe
the following critical accounting policies may affect our judgments and estimates used in the
preparation of this consolidated financial statements: - Revenue recognition.Our revenue includes product sales and the rendering of services.




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-25- Revenue is generally recognized when all of the following criteria are met (i) persuasive evidence
of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the
sellers price to the buyer is fixed or determinable, and (iv) collectibility is reasonably
assured. Revenue of product sales includes invoiced value of goods supplied to our customers after
deducting any discount given. It is recognized upon delivery to customers and when title has
passed. Revenue from rendering of services includes fees charged for the provision of information
technology and network security consultancy services, which are recognized upon the completion of
the underlying services and when collectibility to the fees is reasonably assured. Impairment Review of Goodwill.Prior to January 1, 2002, we periodically evaluated the
carrying value of our long-lived assets, including property, plant and equipment, goodwill and
intangible assets, for impairment. The carrying value of a long-lived asset is considered impaired
by us when the anticipated undiscounted cash flow from such asset is separately identifiable and
less than its carrying value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the long-lived asset. Fair market value is
determined primarily using the anticipated cash flows discounted at a rate commensurate with the
risk involved or based on independent appraisals. Effective January 1, 2002. we do not amortize
goodwill. Instead, we perform tests for impairment of goodwill annually or when events or
circumstances indicate it might be impaired. Our existing annual impairment test for goodwill is
carried out in two steps:  1.
    
    To identify potential impairment by comparing the fair value of the reporting
unit with its carrying amount, including goodwill. The fair value is determined by the
forecasted discounted net cash inflows of the reporting unit for a period of five
years, which we believe is a reasonable period of product life cycle for IT industry.
If the carrying amount of the our reporting unit exceeds its fair value as calculated
above, goodwill of the reporting unit is considered impaired;2.
    
    To quantify the amount of the impairment loss by comparing the carrying amount
of goodwill to its implied fair value. An impairment loss is recorded to the extent the
carrying amount of goodwill exceeds its implied fair value. Our goodwill must be tested for impairment at least annually, or more frequently if warranted. The assumptions and conditions for goodwill and other intangible assets reflect managements
best assumptions and estimates. However, these items involve inherent uncertainties, as described
above, that may or may not be controllable by management. Economic and political conditions,
represent uncertainties that are not controllable by management. As a result, if other assumptions
and conditions had been used in the current period, the carrying amount of goodwill and other
intangible assets could have been materially different. Furthermore, if management uses different
assumptions or if different conditions occur in future periods, future operating results could be
materially impacted. Recent accounting pronouncements.In November 2004, the Financial Accounting Standards Board,
or the FASB, issued FASB Statement No. 151,Inventory Costs  an amendment of ARB No. 43 (SFAS
No. 151), which is the result of its efforts to converge U.S. accounting standards for inventories
with International Accounting Standards. SFAS No. 151 requires idle facility expenses, freight ,
handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It
also requires that allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory
costs incurred
during fiscal years beginning after June 15, 2005. We are currently assessing the impact of
this statement on our results of operations, financial position and cash flows upon adoption and
has not yet completed that assessment. In December 2004, the FASB issued a revised SFAS No. 123 (revised 2004),(SFAS No.




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-26- 123R)
Share-Based Payment. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based
Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (Opinion
25) and amends SFAS No. 95 Statement of Cash Flows. SFAS No. 123R requires all share-based
awards to employees, including grants of employee stock options, to be recognized in the financial
statements based on their grant-date fair values. Excess tax benefits are to be recognized as an
addition to paid-in capital and reflected as financing cash inflows in the statement of cash flows.
SFAS No. 123R also eliminates the use of the intrinsic value method of accounting, as discussed in
Opinion 25 and was provided in Statement 123 as an alternative to valuation. Under Opinion 25,
issuing stock options to employees generally resulted in recognition of no compensation cost.
Under SFAS No. 123R, we are required to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of those awards, with
limited exceptions. The original effective date was interim or annual reporting periods beginning
after June 15, 2005, but subsequently the SEC has converted this to be only applicable to annual
periods beginning after this date. We do not expect the adoption of SFAS No. 123R to have a
material impact on its financial position or results of operations. In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets, an amendment
of APB Opinion No. 29 (SFAS 153) effective for nonmonetary asset exchanges occurring in the
fiscal year beginning January 1, 2006. SFAS 153 requires that exchanges of productive assets be
accounted for at fair value unless fair value cannot be reasonably determined or the transaction
lacks commercial substance. We are currently assessing the impact of this statement on our results
of operations, financial position and cash flows upon adoption and has not yet completed that
assessment. In March 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS
154), which was a replacement of APB Opinion No. 20 and FAS No. 3 effective for accounting changes
made in fiscal years beginning after December 15, 2005. SFAS 154 requires restrospective
application to prior periods financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative effect of the
change. It also requires that retrospective application of a change in accounting principle be
limited to the direct effects of the change. SFAS also requires that a change in depreciation,
amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change
in accounting estimate effected by a change in accounting principle. We are currently assessing the
impact of this statement on our results of operations, financial position and cash flows upon
adoption and has not yet completed that assessment. A.Results of Operations The following table presents selected statement of operations data and such data expressed as
a percentage of net sales for the years ended December 31, 2002, 2003 and 2004.




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-27- (Amounts in thousands, Rmb)2002
    
    
    2003
    
    
    2004Percentage of
    
    
    
    
    
    
    Percentage of
    
    
    
    
    
    
    Percentage ofAmount
    
    
    Net Revenue
    
    
    Amount
    
    
    Net Revenue
    
    
    Amount
    
    
    Net RevenueNet sales
    
    
    8,283
    
    
    
    100
    %
    
    
    11,742
    
    
    
    100
    %
    
    
    6,669
    
    
    
    100
    %Cost of sales
    
    
    4,825
    
    
    
    58.3
    %
    
    
    6,625
    
    
    
    56.4
    %
    
    
    4,149
    
    
    
    62.2
    %Gross profit
    
    
    3,458
    
    
    
    41.7
    %
    
    
    5,117
    
    
    
    43.6
    %
    
    
    2,520
    
    
    
    37.8
    %Selling, general and
administrative expenses
    
    
    11,977
    
    
    
    144.6
    %
    
    
    9,129
    
    
    
    77.7
    %
    
    
    8,297
    
    
    
    124.4
    %Impairment of goodwill
    
    
    7,249
    
    
    
    87.5
    %
    
    
    
    
    
    
    
    
    
    
    4,748
    
    
    
    71.1
    %Bad debts expense
    
    
    4,142
    
    
    
    50.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (19,910
    )
    
    
    
    
    
    
    (4,012
    )
    
    
    
    
    
    

    (10,525
    )Non-operating income
    
    
    2,456
    
    
    
    
    
    
    
    2,429
    
    
    
    
    
    
    
    410Non-operating expenses
    
    
    (141
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss before minority interests
    
    
    (17,595
    )
    
    
    
    
    
    
    (1,832
    )
    
    
    
    
    
    
    (10,115
    )Net loss for the year
    
    
    (15,446
    )
    
    
    
    
    
    
    (942
    )
    
    
    
    
    
    
    (10,115
    )
 Year ended December 31, 2004 compared to year ended December 31, 2003. Net sales.Net sales decreased by Rmb 5.1 million, or 43.2%, from Rmb 11.7 million of the year
ended December 31, 2003 (the 2003 Period) to Rmb 6.7 million of the year ended December 31, 2004
(the 2004 Period). Analysed by activities, net products sales amounted to Rmb 2.7 million in the
2004 Period, which was decreased by Rmb 5.7 million, or 67.6%, from Rmb 8.4 million of the 2003
Period. The decrease was mainly attributable to the restructuring exercise undertaken by the Legend
Group, the largest customer of product sales, during the year, which led to cessation of revenue
from it in the second and third quarters of the 2004 Period. Sales of services for the 2004 Period
amounted to Rmb 3.9 million, which increased by 0.6 million, or 18.3%, from Rmb 3.3 million of
the 2003 Period. The increase was due primarily to increase in number of professional technicians
requested by customers. Cost of sales.Cost of products sales primarily represented the direct material costs of our
self-developed products sold to customers. Cost of services rendering represented the direct costs
such as staff costs, rental expenses, depreciation of equipments and other related charges. Cost
of sales of product sales decreased by Rmb 3.0 million, or 68.5%, from Rmb 4.4 million of the 2003
Period to Rmb 1.4 million of the 2004 Period. Cost of sales of services rendering increased by Rmb
0.6 million, or 25.0%, from Rmb 2.2 million of the 2003 Period to Rmb 2.8 million of the 2004
Period. The decrease in cost of sales was mainly due to the decrease in net sales. As a percentage
of net sales, the increase in cost of sales was mainly due to the increase in sales discount given to customers of
our services rendering business, as a term of their promising headcount increase in 2004.




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-28- Gross profit.Gross profit for product sales decreased by Rmb 2.7 million, or 66.7%, from Rmb
4.0 million of the 2003 Period to Rmb 1.3 million of the 2004 Period. As a percentage of sales,
gross profit of product sales increased by 1.4%, from 47.4% of the 2003 Period to 48.8% of the 2004
Period. The gross profit remained stable for the 2003 and 2004 Period. Gross profit of services
rendering remained at approximately Rmb 1.1 million of the 2003 Period and 2004 Period. As a
percentage of sales, gross profit of services decreased by 3.7%, from 33.9% of the 2003 Period to
30.2% of the 2004 Period. The decrease was due primarily to discounts given to our customers as
explained above. Selling, general and administrative expenses.Selling, general and administrative expenses
decreased by Rmb 0.8 million, or 9.1%, from Rmb 9.1 million of the 2003 Period to Rmb 8.3 million
of the 2004 Period. The decrease in selling and general and administrative expenses was mainly due to the
following factors:-  (1)
    
    Salaries and benefits decreased by Rmb 0.2 million, or 5.7%, from Rmb 3.3
million of the 2003 Period to Rmb 3.1 million of the 2004 Period, which was mainly due
to reduction in number of technology support staffs and reduction in bonus payment of
salesmen as a result of significant drop in net sales of our product sales segment
during the year.(2)
    
    Amortization of intangible assets and software development costs decreased by
Rmb 1.1 million, or 100%. No amortization of intangible assets and capitalized
software development cost were made for the 2004 Period as it had been fully amortized
in the 2003 Period.(3)
    
    Depreciation charge decreased by Rmb 0.4 million, or 84.2% from Rmb 0.5 million
of the 2003 Period to Rmb 0.1 million of the 2004 Period because most of the fixed
assets had been fully depreciated in prior year.(4)
    
    Legal and professional fee increased by Rmb 0.3 million, or 38.1%, from Rmb 0.8
million of the 2003 Period to Rmb 1.1 million of the 2004 Period, which was mainly due
to increase in legal services for our proposed registration of the Companys 2000 stock
option plan with the SEC and providing advice in respect of restrictions applicable to
exercise of options..(5)
    
    Insurance expenses increased by Rmb 0.4 million, or 166%, from Rmb 0.3 million
of the 2003 Period to Rmb 0.7 million of the 2004 Period. The increase was mainly due
to the increased amount of our directors and officers insurance. Impairment of goodwill.Our goodwill was attributable to the purchase of BHLNet in 2000, and
which was subject to an annual impairment test. The annual impairment test was performed based on
a comparison between the fair value, which was determined by the forecasted discounted net cash
inflow and our carrying amount of each of the reporting units. Impairment will be recognized if
the carrying amount of the reporting unit exceeded its fair value. In the 2004 Period, an
assessment for impairment was carried out after the annual forecasting process. In view of the
underperformance of the Internet security reporting unit, the earning forecast was revised to a
lower level. Based on the revised forecast, the present value of future cashflows of the Internet
security reporting unit is lower than the carrying value of goodwill and therefore, a goodwill
impairment loss of Rmb 4.3 million was reported.
Further, an assessment for impairment was carried out for the information technology
consultancy reporting unit and a shortfall of Rmb0.4 million was identified and an impairment loss
of this amount was recognized.




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##### Table of Contents



-29- Non-operating income.Non-operating income decreased by Rmb 2.02 million, or 83.12% from Rmb
2.43 million of the 2003 Period to Rmb 0.41 million of the 2004 Period. The decrease was mainly
due to the net combined effect of the followings:  (1)
    
    increase of Rmb 0.1 million, or 104.2%, from Rmb 0.1 million of the 2003
Period to Rmb 0.2 million of the 2004 Period, of the bank interest income received.(2)
    
    decrease of Rmb 1.9 million, or 95%, from Rmb 2 million of the 2003 Period to
Rmb 0.1 million of the 2004 Period, of realized gain on available-for-sale securities,(3)
    
    decrease of Rmb 0.23 million, or 77.3%, from Rmb 0.30 million of the 2003
Period to Rmb 0.07 million of the 2004 Period, of dividend income from marketable
securities. Net loss. Net loss for the 2004 Period was Rmb 10.1 million, an increase of Rmb 9.2 million,
or 973.77%, from Rmb 0.9 million of the 2003 Period. Year ended December 31, 2003 compared to year ended December 31, 2002. Net sales.Net sales increased by Rmb 3.5 million, or 41.8%, from Rmb 8.3 million of the year
ended December 31, 2002 (the 2002 Period) to Rmb 11.7 million of the 2003 Period. Analysed by
activities, net products sales amounted to Rmb 8.4 million in the 2003 Period, which increased by
Rmb 2.7 million, or 48.6%, from Rmb 5.7 million of the 2002 Period. Sales of services for the 2003
Period amounted to Rmb 3.3 million, which increased by 0.7 million, or 27.1%, from Rmb 2.6 million
of the 2002 Period. Cost of sales.Cost of sales of product sales increased by Rmb 1.4 million, or 48.1%, from
Rmb 3.0 million of the 2002 Period to Rmb 4.4 million of the 2003 Period. Cost of sales of
services rendered increased by Rmb 0.4 million, or 19.8%, from Rmb 1.8 million of the 2002 Period
to Rmb 2.2 million of the 2003 Period. The cost of sales were increased along with the increase in
net sales. As a percentage of sales, the decrease in cost of sales was mainly due to the results of
controls we implemented on direct expenses. Gross profit.Gross profit for product sales increased by Rmb 1.3 million, or 49.1%, from Rmb
2.7 million of the 2002 Period to Rmb 4.0 million of the 2003 Period. As a percentage of sales,
gross profit of product sales increased by 0.2%, from 47.2% of the 2002 Period to 47.4% of the 2003
Period. The gross profit remained stable for the 2002 and 2003 Period. Gross profit of services
rendering increased by Rmb 0.3 million, or 44.1%, from Rmb 0.8 million of the 2002 Period to Rmb
1.1 million of the 2003 Period. As a percentage of sales, gross profit of services increased by
4%, from 29.9% of the 2002 Period to 33.9% of the 2003 Period. The increase was due primarily to
the results of controls we implemented on direct expenses such as space rental and utilities
expenses and communication costs. Selling, general and administrative expenses.Selling, general and administrative expenses
decreased by Rmb 2.8 million, or 23.8%, from Rmb 11.9 million of the 2002 Period to Rmb 9.1 million
of the 2003 Period. The decrease in general and administrative expenses was attributable to the following factors:  (1)
    
    Salaries and benefits decreased by Rmb 0.4 million, or 10.3%, from Rmb 3.7
million of the 2002 Period to Rmb 3.3 million of the 2003 Period, which was mainly due
to reduction in number of salesmen and reduction in bonus payment in BBHL during the
year.




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##### Table of Contents



-30-  (2)
    
    Rental charges decreased by Rmb 0.4 million, or 43.0%, from Rmb 1.0 million of
the 2002 Period to Rmb 0.6 million of the 2003 Period, due to our movement to our new
office in September 2002 bearing a lower rent.(3)
    
    Traveling and entertainment expenses decreased by Rmb 0.1 million, or 20.5%,
from Rmb 0.7 million of the 2002 Period to Rmb 0.6 million of the 2003 Period due to
closer control on entertainment costs.(4)
    
    Professional fee decreased by Rmb 0.4 million, or 19.7%, from Rmb 1.9 million
of the 2002 Period to Rmb 1.5 million of the 2003 Period, which was mainly due to
decrease in insurance expenses of the 2003 Period.(5)
    
    Amortization of intangible assets decreased by Rmb 0.3 million, or 25.0%, from
Rmb 1.3 million of the 2002 Period to Rmb 1.0 million of the 2003 Period. The
amortization of the 2003 Period represented the entire amortization of the remaining
unamortized balance of the intangible assets acquired from the ICT in 2000, compared to
annual amortization of Rmb 1.3 million made in the 2002 Period.(6)
    
    Depreciation charge decreased by Rmb 0.1 million, or 27.0% from Rmb 0.4 million
of the 2002 Period to Rmb 0.5 million of the 2003 Period because most fixed assets had
been fully depreciated in last year.(7)
    
    Other general and administrative expenses in aggregate decreased by Rmb 1.1
million, or 39.4%, from Rmb 2.7 million of the 2002 Period to Rmb 1.6 million of the
2003 Period, which was mainly due to:  (a)
    
    Rmb 0.6 million of staff advance was written off in the 2002 Period
but Rmb 0.04 million was written back in the 2003 Period.(b)
    
    Rmb 0.2 million represented loss from disposal of fixed assets in
the 2002 Period and no such loss existed in the 2003 Period.(c)
    
    Rmb 0.3 million was saved from various item of costs due to closer
control on expenditures on the 2003 Period. Impairment of goodwill.The goodwill of the Company was attributable to the purchase of
BHLNet in 2000, and which was subject to an annual impairment test. The annual impairment test was
performed based on a comparison between the fair value, which was determined by the forecasted
discounted net cash inflow and the carrying amount of each of the reporting unit of us. Impairment
will be taken if the carrying amount of the reporting unit exceeded its fair value. In the 2002
Period, an impairment loss of Rmb 7.2 million was identified due to the underperformance of the
Internet security reporting unit caused by the economic recession in the region. In the 2003
Period, no impairment loss was considered necessary after an impairment test was performed. Non-operating income.Non-operating income decreased by Rmb 0.03 million, or 1.1% from Rmb
2.46 million of the 2002 Period to Rmb 2.43 million of the 2003 Period. The decrease was mainly
due to the net combined effect of:  (1)
    
    the increase of Rmb 2.0 million, or 565.3%, from Rmb 0.3 million of the 2002 Period
to Rmb 2.3 million of the 2003 Period, of gains on disposals of, and dividend income
received from, marketable securities;




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##### Table of Contents



-31-  (2)
    
    a gain of Rmb 1.7 million arising from adjustment to consideration for
acquisition of BHLNet was recognized In the 2002 Period but no similar gain was
recognized in the 2003 Period.(3)
    
    decrease of other non-operating income such as bank interest by Rmb 0.3
million, from Rmb 0.4 million of the 2002 Period to Rmb 0.1 million of the 2003 Period. Net loss.Net loss for the 2003 Period was Rmb 0.9 million, a decrease of Rmb 14.5 million,
or 93.9%, from Rmb 15.4 million of the 2002 Period. Taxation We were incorporated under the laws of the British Virgin Islands (BVI), and under current BVI
law, are not subject to tax on income or capital gains as we did not carry out business in BVI. BBHL, pursuant to the applicable PRC income tax laws, is fully exempt from the PRC state
income tax for two years, starting from the first profit-making year followed by a 50% reduction
over the ensuing three years (tax holidays). BBHL incurred loss since its incorporation, and
therefore, the tax holidays were not started. BHLHK is subject to taxation in Hong Kong. Since no estimated net assessable profit is
recognized for the 2004 Period, no tax provision is made for BHLHK. For the 2003 Period, a tax
provision of Rmb 249,000 was incurred for net assessable profit estimated for the year. B. Liquidity and capital resources We have neither engaged in any form of off-balance sheet arrangement/ relationships with
unconsolidated entities or other persons that are reasonably likely to affect materially liquidity
and the availability of or requirements for capital resources, nor any trading activities that
include non-exchange traded contracts accounted for at fair value. Except for the operating lease
commitment, as fully disclosed in the financial statements, we are not involved in any kind of
other commitments, both expressed or contingent, which may cause us to make future payments under
contracts. Our cash and cash equivalents on hand as of December 31, 2004 was Rmb 5.3 million, which
decreased by Rmb 2.1 million, or 29.0%, from Rmb 7.4 million at the beginning of the year. The net cash outflow of the operating activities of the 2004 Period was Rmb 3.0 million, which
decreased by Rmb 1.8 million, or 36.9%, from an outflow of Rmb 4.8 million of the 2003 Period. The
decrease in net cash outflow of the 2004 Period was mainly due to an increase in sales deposits
received from customers and settlements of accounts receivable. The net cash inflow of the investing activities of the 2004 Period was Rmb 0.9 million, which
increased by Rmb 0.6 million, or 171.2%, from a net cash inflow of Rmb 0.3 million of the 2003
Period. The change in net cash inflow of the 2004 Period, was mainly due to our withdrawal of Rmb
1.1 million from funds held by a related company, which was originally held for security
investment purposes. As of December 31, 2004, after deducting the total liabilities from the cash and cash
equivalents (net cash balance), we had a cash deficit of Rmb 1.2 million, which decreased by Rmb
0.8 million, or 38.0%, from Rmb 2.0 million of the 2003 Period. We believe that we have enough cash
resources, even if our cash balance were further reduced, to sustain our operation for the next
twelve months. We have other sources of cash as follows: -  (1)
    
    Cash of Rmb 19.6 million from disposal of available-for-sale and trading
securities when necessary; and




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-32-  (2)
    
    Cash balance of Rmb 10.1 million we had deposited with related companies for
securities investment purpose. The cash balances retained in available-for-sale and trading securities can be withdrawn or
sold without any restriction. All the above sources of cash inflow are under our sole control and
are not subject to any pledge, mortgage or encumbrance. We anticipate, based on our internal
forecasts and assumptions relating to our operations, that our existing cash and funds retained
will be sufficient to meet our working capital requirements for the next twelve months. However, as
acquisition is one of our growth strategies, we may need to obtain additional funds through
issuance of new equity or debt in acquiring new business. we may have to seek additional financing
sooner than currently anticipated. We have no current arrangements with respect to sources of
additional financing and there can be no assurance that we would be able to obtain additional
financing on terms acceptable to us. C.Research and development, patents and licenses, etc. We acquired, through BBHL, a technological platform for the development of internet security
devices from ICT of the CAS at a cash consideration of Rmb 4 million in 2000. This intangible
asset had been fully amortized in 2003. Subsequent to that, we did not incurr significant expenses
in acquiring techniques but had maintained a research and development team to upgrade the
existing products and all costs of which had been recorded as expenses in the statement of
operations when occurred. D.Trend Information Other than as disclosed elsewhere in this Annual Report, we are not aware of any trends,
uncertainties, demands, commitments or events that are reasonably likely to have a material effect
on our net sales, profitability, liquidity or capital resources, or that caused the disclosed
financial information to be not necessarily indicative of future operating results or financial
conditions. E.Off-balance Sheet Arrangements We have no outstanding off-balance sheet arrangements, derivative financial instruments, interest
rate swap transactions or foreign currency forward contracts. We do not engage in trading
activities involving non-exchange traded contracts.




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-33- F.Tabular disclosure of contractual obligations. We have entered into leasing arrangements relating to the office premise of BBHL that are
classified as operating leases. The following sets forth our known contractual obligations as of
December 31, 2004 are specified below: Office Premises
    
    
    Total(in Rmb)In respect of land and buildings- within one year
    
    
    477,000
    
    
    
    477,000- in the second year
    
    
    
    
    
    
    - in the third year
    
    
    
    
    
    
    - in the forth year
    
    
    
    
    
    
    - in the fifth year
    
    
    
    
    
    
    
 Contingencies On
16 July 2002, an ex-shareholder of one of the Groups Beijing operating unit filed
claims against BBHL in the International Arbitration Commission for
Economics in China with respect to the remaining consideration on the
Groups acquisition of the operating unit. The ex-shareholder has requested that the Commission order
the group to settle the remaining consideration of Rmb1,800, to pay Rmb50 for delay in completion
of contract and Rmb 100 for legal fees incurred in connection with this arbitration. The arbitration
has been scheduled to take place in July 2005. The Group has fully provided for the claim. 
 Item 6. Directors, Senior Management and Employees A.Directors and senior management. Our directors and executive officers and their present positions with our company, as at the
date of this Annual Report, are as follows: Name
    
    Age
    
    Positions with the CompanyZhao Changshan
    
    
    40
    
    
    Chairman of the BoardJeff Qian
    
    
    42
    
    
    Chief Executive Officer and DirectorAlan Li
    
    
    38
    
    
    Co-Chief Executive Officer (Greater China) and DirectorZhang Ju
    
    
    42
    
    
    DirectorMichael Siu
    
    
    36
    
    
    Chief Financial Officer, Secretary and DirectorPeter Fu (1)(2)(3)
    
    
    50
    
    
    DirectorL C Wan (1)(2)(3)
    
    
    44
    
    
    DirectorWan Meng (1)
    
    
    41
    
    
    DirectorNi Ye Zhong (1)(2)(3)
    
    
    36
    
    
    DirectorAaron Zhu
    
    
    37
    
    
    Co-Chief Executive Officer (International)Lu Zhen Wei
    
    
    34
    
    
    Chief Investment Officer
 
 (1)
    
    Independent director(2)
    
    Member of the Audit Committee(3)
    
    Member of the Compensation Committee Information about Directors and Officers Set forth below is certain information with respect to each director and officer: Mr. Zhao Changshan, aged 40, nominee of Beijing Holdings, was appointed the Chairman of the
Board since February 8, 2005. He also was the Vice-Chairman and General Manager of Beijing
Holidngs. Mr. Zhao obtained his master degree in business administration in the Guanghua




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-34- School of
Management of the Beijing University. He was appointed the Vice-Chairman and General Manager of
Beijing Holdings in November 2003. Prior thereto, he was a senior officer of the Beijing Peoples
Municipal Government (BPMG). Mr. Jeff Qian, aged 42, nominee of Beijing Holdings, was appointed the Director and Chief
Executive Officer of the Company since March 29, 2005. Mr. Qian graduated from the Economics and
Management of the Beijing Industrial University with a bachelor degree in Economics in 1986. From
1986 to 1993, he worked as an economic analyst in the Statistics Bureau of the Beijing Peoples
Municipal Government (the BPMG). From 1993 to 1996, he worked as an independent auditor in Hong
Kong and from 1996 to 1998, he worked as the Project Chief Financial Officer of the TA Orient
Telecommunication Co., Ltd. Since 1998, he worked as the Finance Manager of Beijing Holdings, and
was promoted to the Chief Financial Officer of BHL in March 2005. Mr. Qian has extensive
experience in merger and acquisition, corporate restructuring and financial management. Mr. Alan Li, was appointed the Co-Chief Executive Officer (Greater China) and Director of the
Company since May 24, 2005. Mr. Li obtained his master degree in Business Administration from
Murdoch University, Australia. Mr. Li was also an Executive Director of Sheung Tai Investment
Limited since 2003, a company engaged in investment and mergers and acquisitions of hospitals and
large pharmaceuticals factories in China. From 2000 to 2002, Mr. Li had been the Executive
Director and Vice President of Linchest Technology Ltd. (Linchest) and he had led Linchest in
achieving the 60% market share of the School Management education software in China. Mr. Li has
extensive experience in management, financial planning and investments in China, and particularly,
he has deep exposure in overseas listing of Chinese companies. Mr. Li is currently responsible for
business development, mergers and acquisition and capital market development of the Company in the
Greater China Region. Mr. Zhang Ju, aged 42, was appointed a Director of the Company since May 24, 2005. Mr. Zhang
obtained his master degree from the Chinese Academy of Social Sciences in Philosophy and a bachelor
degree from Tsinghua University in Energy Engineering. He was the Deputy Chairman and General
Manager of China Merchants Technology Holdings Co. Ltd. (CMTH), a wholly owned subsidiary of the
China Merchant Group, one of the largest state-owned enterprises directly under the administration
of the China State Council and having its business zones all across Hong Kong and China in real
estate, energy, logistics and technology, and the largest ports, highways, and industrial zones
investor and operator n China. Mr. Zhang was also the Associate Professor at the Chinese Academy
of Medical Sciences and Peking Union Medical College, the Assistant Director of Department of
Research in National Committee of Science & Technology and Department of Research in Chinese
Ministry of Science & Technology. Michael Siu, aged 36, was appointed a Director of the Company on February 8, 2005. He had
also served as the Chief Financial Officer and Secretary of the Company since September 1997. He
is currently a fellow member of the Association of Chartered Certified Accountants and an associate
member of the Hong Kong Institute of Certified Public Accountants. The Board of Directors
appreciated his performance during his service with the Company and therefore invited him as a
member of the Board of Directors. Peter Fu, aged 50, was appointed an Independent Director and a member of the Audit Committee
of the Company since April 5, 2005. On May 24, 2005, he was also appointed a member of the
Companys Compensation Committee. Mr. Fu began his career in the finance industry in 1978 after
his graduation from Wharton School, University of Pennsylvania. He made his mark as one of
top institutional sales in Hong Kong when he worked for HG Asia (currently known as ABN Amro) in
the mid-80s. Since then, Mr. Fu had taken up senior sales positions in other investment banks
including Citicorp Vickers and Barings Securities in Hong Kong. For the ten years between late
1991 and early 2001, Mr. Fu was one of the senior executives of the Peregrine Group in Hong Kong,
which operates currently under the name of BNP Paribas Peregrine. He is currently head of




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-35- the
corporate finance team of the Kim Eng Group focusing on Hong Kong and China business. Heaquartered
in Singapore, the Kim Eng Group is one of the largest investment banks in Asia. L C Wan, aged 44, was appointed an Independent Director and member and the financial expert of
the Audit Committee of the Company since March 24, 2005. On May 24, 2005, he was also appointed a
member of the Companys Compensation Committee. Mr. Wan graduated from the Coventry Polytechnic
with a master degree in 1988. He was fellow member of the Chartered Association of Certified
Accountants and an associate member of the Hong Kong Institute of Certified Public Accountants.
Prior to his service with the Company, he was the General Manager in Finance and Administration of
the China Digital satNet Limited and the Project Financial Controller of the C.P. Pokphand Co. Ltd.
Mr. Wan had extensive and valuable experience in financial management. Wan Meng, aged 41, was appointed an Independent Director of the Company since May 24, 2005.
Professor Wan Meng was the Dean of Laws of the Beijing Foreign Studies University, an Arbitrator of
the China International Economic and Trade Arbitration Commission and China Maritime Arbitration
Commission and a member of The World Jurist Association. Professor Wan also received his doctorate
and master of laws degrees from Wuhan University Law School, and he taught as a guest professor at
Wuhan University and at Zhonnan University of Economics and Law. He was also a senior research
fellow at the London Institute of International Banking and Finance. Professor Wan specializes in
economic law and is a former President and Chief Justice of the Wuhan Maritime Court and Chief
Judge of the Economic Division of the Hubei High Court. Ni Ye Zhong, aged 36, was appointed an Independent Director and a member of the Audit
Committee of the Company since April 28, 2005. On May 24, 2005, he was also appointed a member of
the Companys Compensation Committee. Mr. Ni was a partner of the Kingson Law Firm, one of the top
law firms in China. He graduated from the Law School of the Beijing University in 1990 and was
experienced in legal services for bankruptcy, derivatives and financial instruments. Mr. Ni had
been appointed in 1999 as one of the lead attorneys for the liquidation of the Guangdong
International Trust & Investment Company, the largest bankruptcy case of financial institution in
the Chinese history. Aaron Zhu, aged 37, was appointed the Co-Chief Executive Officer (International) of the
Company since May 24, 2005. Mr. Zhu obtained his bachelor degree in Economics in 1990 from the
Shenzhen University of China and a master degree in Business Administration from Regent University
in 1992 in Virginia, U.S.A. From 1992 to 1994, Mr. Zhu worked as an investment analyst for U.S.
Media Corporation. In 1994, Mr. Zhu joined Fourth Shift corporation of Minneapolis as a business
consultant and financial controller of Asia subsidiary until 1997. From 1997 to 2000, Mr. Zhu
worked as Vice President and Controller for Harrington Corporation based in Illinois. From 2000 to
2004, Mr. Zhu was one of the founders and an Executive Director of DiChain Holdings, a Hong Kong
based investment holding company. During that period, Mr. Zhu functioned as Executive Director for
China Merchants DiChain (Asia), a Hong Kong listed company; Executive Director and Chief Financial
Officer of China Technology Global Corporation, an OTCBB listed company and Executive Director and
President of China Pharmaceuticals International, another OTCBB listed company. Mr. Zhu has
extensive experience in strategic business planning and development of international public listed
company. Mr. Zhu is currently responsible for U.S. capital market management and strategic
international business planning and development of the Company. Lu Zhenwei, aged 34, was appointed the Chief Investment Officer of the Company since
May 24, 2005. Mr. Lu obtained his bachelor degree from Shanghai Marine College and a master degree
from Zhong Nan Finance, Politics and Law University. He was also the Vice General Manager of CMTH.
Since 1993, Mr. Lu had served as an executive of China Merchants Group at its Guangzhou office, an
executive of Shenzhen Haihong Chemicals Co., Ltd., The Finance Manager of Hong Kong Haitong
Limited, the Finance Manager and Assistant to the General Manager of Shenzhen Zhaoxun Communication
Co. Ltd, and Assistant to General Manager of




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-36- CMTH and Shenzhen Merchants Technology Investment
Holdings Co., Ltd. Mr. Lu is currently responsible for strategic corporate investment and mergers
and acquisitions of the Company in the Greater China Region. There are no family relationships between the above named officers and directors. We do not
have any arrangement with Beijing Holdings and pursuant to which that Mr. Zhao Chang Shan and Mr.
Jeff Qian were elected as director of the Company. Audit Committee Mr. Peter Fu, L C Wan and Ni Ye Zhong were appointed the members of the Audit Committee of our
board of directors. According to the Charter of the Audit Committee, the responsibilities of the
Audit Committee include the oversight of (1) integrity of our financial statements; (2) our
compliance with legal and regulatory requirements; (3) the qualification, appointment,
compensation, retention and oversight of our independent auditors, including resolving
disagreements between management and the auditors regarding financial reporting; and (4) the
performance of our independent auditors and of our internal control function. The Audit Committee was given the resources and assistance necessary to discharge its
responsibilities, including appropriate funding, as determined by the Committee, the unrestricted
access to our personnel and documents and our independent auditors. The Committee shall also have
authority, with notice to the Chairman of the board, to engage outside legal, accounting and other
advisors as it deems necessary or appropriate. The Audit Committee is required to meet at least two times a year and may call special meeting
as required. All members of the Audit Committee shall be financially literate, having a basic
understanding of financial controls and reporting, and none of them shall receive directly or
indirectly any compensation from our company other than his or her directors fee and benefits. B.Compensation. We did not pay compensation to both the executive and independent director in the 2004 Period. The compensation paid to Michael Siu in the 2004 Period amounted to Rmb 696,000. The Company has granted stock options to certain officers and directors as described in Item
6E. There was no new grant of option in the 2004 Period. We do not have any employment contracts with our officers or directors. C.Board practices. At the annual meeting of January 20, 2004, Li Xiao Hong, Jiang Xin Hao, Yu Xiang Dong and Zhu
Xiao Hui were appointed the directors of the Company. The subsequent changes in directors of the
Company up to the date of this Annual Report were as follows:- Li Xiao Hong
    
    resigned on February 8, 2005Jiang Xin Hao
    
    resigned on March 29, 2005Zhu Xiao Hui
    
    resigned on April 28, 2005Zhao Chang Shan
    
    appointed on February 8, 2005Michael Siu
    
    appointed on February 8, 2005Jeff Qian
    
    appointed on March 29, 2005Zhang Ju
    
    appointed on May 24, 2005Peter Fu*
    
    appointed on April 6, 2005L C Wan*
    
    appointed on March 24, 2005




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-37- Wan Meng*
    
    appointed on May 24, 2005Ni Ye Zhong*
    
    appointed on April 28, 2005
 
  A total of three (3) meetings of directors were held in 2004 Our By-laws did not require the establishment of audit committee and compensation committee.
Following the requirements of the Sarbanes Oxley Act of 2002, we had established an audit committee
comprised of the independent directors in 2004. On May 24, 2005, we had established the
Compensation Committee comprising of these independent directors as members. It is stated in the
charters that only independent directors are qualified to be appointed as members of these
committees. D.Employees. As of December 31, 2004, our total staff consisted of 66 employees, which was mainly because
vacancies were not filled after resignation of certain technology support staff since business of
the product sales segment underperformed in 2004.. An analysis of the employees by function is as follows: - Analysed by function
    
    2004
    
    
    2003Corporate administration
    
    
    9
    
    
    
    9Finance
    
    
    3
    
    
    
    3Technology
    
    
    46
    
    
    
    50Sales and services
    
    
    8
    
    
    
    966
    
    
    
    71
 We do not have any collective bargaining agreements with our employees. We have never
experienced any material labour disruptions and are unaware of any current efforts or plans to
organize employees. We believe we have good relationships with our employees. E.Share ownership. None of our executive officers and directors own shares of the company as of June 20, 2005: The names and titles of our executive officers and directors to whom we have granted options
which are outstanding as of June 20, 2005 and the number of shares of our common stock subject to
such options are set forth in the following table: Number
    
    
    Exerciseof Shares of
    
    
    Price per
    
    
    ExpirationName
    
    
    Title/Office
    

common stock (1)
    
    
    share(US$)
    
    
    DateZhao Changshan
    
    Chairman, President
and Director
    
    
    50,000
    
    
    
    1.15
    
    
    December 28,2009Jeff
Qian
    
    
    

    Chief Executive
Officer and
Director
    
    
    50,000
    
    
    
    1.15
    
    
    December 28, 2009Michael
Siu
    
    
    
    Chief Financial
Officer, Secretary
and Director
    
    
    40,000
    
    
    
    1.15
    
    
    December 28, 2009140,000




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-38-  
 (1)
    
    All options were granted pursuant to a board resolution passed on December 28,
1999 (the Resolution) and are fully vested as of December 31, 2004. Pursuant to the
Resolution, the persons holding the position of Chairman and Chief Executive Officer
were each granted 50,000 options. Unless the options were exercised during their
service period with the Company, the remaining unexercised options can be succeeded by
the newly appointed persons holding these positions. Mr. Li Xiaohong and Mr. Jiang
Xinhao had resigned on February 8, 2005 and March 9, 2005 respectively. They had not
exercised any of the above options granted and so Mr. Zhao Changshan and Mr. Jeff Qian,
respectively the newly appointed Chairman and Chief Executive Officer, succeeded all
granted options of their respective positions. Executive Officers and Directors Pursuant to a shareholders resolution passed on October 10, 1996, the 1996 Stock Option Plan
(the 1996 Plan) was approved. Pursuant to another shareholders resolution passed on September
20, 2000 at the 2000 Shareholders Meeting, the 2000 Stock Option Plan (the 2000 Plan) was
approved. Details of these plans are as follows: 1996 Plan Types of Grants and Eligibility The 1996 Plan is designed to provide an incentive to employees (including directors and
officers who are employees) and to consultants who are not our employees, and our present and
future subsidiary companies and to offer an additional inducement in obtaining the services of such
employees and consultants. Shares Subject to the 1996 Plan The aggregate number of shares of our common stock, $0.01 par value per share (Common Stock)
for which options may be granted under the Plan shall not exceed 200,000. Such shares of Common
Stock may, in the discretion of our Board of Directors (the Board of Directors), consist either
in whole or in part of authorized but unissued shares of Common Stock or shares of Common Stock
held as treasury shares. Any shares of Common Stock subject to an option which for any reason
expires, is cancelled or is terminated unexercised or which ceases for any reason to be exercisable
shall again become available for the granting of options under the 1996 Plan. We shall at all
times during the term of the 1996 Plan reserve and keep available such number of shares of Common
Stock as will be sufficient to satisfy the requirements of it. Administration of the 1996 Plan The 1996 Plan shall be administered by the Board of Directors or, to the extent the Board of
Directors may determine, a committee of the Board of Directors (the Committee) consisting of not
less than two directors. A majority of the members of the Committee shall constitute a quorum, and
the acts of a majority of the members present at any meeting at which a quorum is present, and any
acts approved in writing by all members without a meeting, shall be the acts of the Committee. All
references in the 1996 Plan to determinations or actions of the Committee shall be deemed to
include determinations and actions by the Committee or the Board of Directors.




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-39- The Committee may from time to time, in its sole discretion, consistent with the purposes of
the 1996 Plan, grant options to employees (including officers and directors who are our employees,
our consultants or any of our subsidiaries. Such options granted shall cover such number
of shares of Common Stock as the Committee may determine in its sole discretion. Subject to the express provisions of the 1996 Plan, the Committee shall have the authority, in
its sole discretion, to determine the employees and the consultants who shall be granted options;
the times when options shall be granted; the number of shares of Common Stock to be subject to each
option; the term of each option; the date each option shall become exercisable; whether an option
shall be exercisable in whole, in part or in installments and, if in installments, the number of
shares of Common Stock to be subject to each installment, whether the installments shall be
cumulative, the date each installment shall become exercisable and the term of each installment;
whether to accelerate the date of exercise of any option or installment; whether shares of Common
Stock may be issued upon the exercise of an option as partly paid and, if so, the dates when
future installments of the exercise price shall become due and the amounts of such installments;
the exercise price of each option; the form of payment of the exercise price; the fair market value
of a share of Common Stock; whether to restrict the sale or other disposition of the shares of
Common Stock acquired upon the exercise of an option and, if so, whether to waive any such
restriction; whether to subject the exercise of all or any portion of an option to the fulfillment
of contingencies as specified in the applicable stock option contract, including without
limitation, contingencies relating to entering into a covenant not to compete with us, any of
subsidiaries or a parent, to financial objectives for us, any of our subsidiaries or a parent, a
division of any of the foregoing, a product line or other category, and/or the period of continued
employment of the optionee with us, any of our subsidiaries or a parent, and to determine whether
such contingencies have been met; the amount, if any, necessary to satisfy our obligation to
withhold taxes or other amounts; whether an optionee is disabled; to construe the respective
Contracts and the 1996 Plan; with the consent of the optionee, to cancel or modify an option,
providedsuch modified provision would be permitted to be included in an option on the date of
modification; to prescribe, amend and rescind rules and regulations relating to the 1996 Plan; and
to make all other determinations necessary or advisable for administering the 1996 Plan. Any
controversy or claim arising out of or relating to the 1996 Plan, any option granted under the 1996
Plan or any applicable stock option contract shall be determined unilaterally by the Committee in
its sole discretion. The determinations of the Committee on the above matters shall be conclusive
and binding on the parties. No member or former member of the Committee shall be liable for any
action, failure to act or determination made in good faith with respect to the 1996 Plan or any
option hereunder. Exercise Price The exercise price of the shares of Common Stock under each option shall be determined by the
Committee in its sole discretion; provided, however, the exercise price of an option shall not be
less than the fair market value of the Common Stock subject to such option on the date of grant. Term The term of each option granted pursuant to the 1996 Plan shall be such term as is
established by the Committee, in its sole discretion; provided, however,that the term of each
option granted pursuant to the 1996 Plan shall be for a period not exceeding ten years from the
date of grant. Exercise An option (or any part of installment thereof), to the extent then exercisable, shall be
exercised by giving written notice to us at our principal office stating which option is being
exercised, specifying the number of shares of Common Stock as to which such option is being
exercised and accompanied by payment in full of the aggregate exercise price therefore (or the




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-40- amount due on exercise if the Contract permits installment payments) (a) in cash or by certified
check or (b) if the applicable Contract permits, with previously acquired shares of Common Stock
having an aggregate fair market value on the date of exercise equal to the aggregate exercise price
of all options being exercise, or with any combination of cash, certified check or shares of Common
Stock. The Committee may, in its sole discretion, permit payment of the exercise price of an option
by delivery by the optionee of a properly executed notice, together with a copy of the optionees
irrevocable instructions to a broker acceptable to the Committee to deliver promptly to us the
amount of sale of loan proceeds sufficient to pay such exercise price. A person entitled to receive Common Stock upon the exercise of an option shall not have the
rights of shareholder with respect to such shares of Common Stock until the date of issuance of a
share certificate to him for such shares; provided, however,that until such share certificate is
issued, any optionee using previously acquired shares of Common Stock in payment of an option
exercise price shall continue to have the rights of a shareholder with respect to such previously
acquired shares. In no case may a fraction of a share of Common Stock be purchased or issued under
the 1996 Plan. Termination of Relationship Any optionee whose relationship with us, our subsidiaries and parent as an employee or
consultant as terminated for any reason (other than his death or disability) may exercise such
option, to the extent exercisable on the date of such termination, at any time within three months
after the date of termination, but not thereafter and in no event after the date the option would
otherwise have expired; provided, however,that if such relationship is terminated either (a) for
cause, or (b) without our consent, such option shall terminate immediately. Notwithstanding the foregoing, except as may otherwise be expressly provided in the applicable
Contract, options granted under the 1996 Plan shall not be affected by any change in the status of
the optionee so long as the optionee continues to be our employee of, or our consultant, any of
our subsidiaries or a parent (regardless of having changed from one to the other or having been
transferred from one corporation to another). Nothing in the 1996 Plan or in any option granted under the 1996 Plan shall confer on any
optionee any right to continue in the employ of, or as consultant to us, our parent or any of our
subsidiaries, or interfere in any way with any right of ours, our parent or any of our subsidiaries
to terminate the optionees relationship at any time for any reason whatsoever without liability to
us, our parent or any of our subsidiaries.




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-41- Death or Disability If an individual optionee dies (a) while he is our employee of, our consultant, any of
our subsidiaries or a parent, (b) within three months after the termination of such relationship
(unless such termination was for cause or without our consent) or (c) within one year following the
termination of such relationship by reason of disability (as determined by the Board of Directors),
his option may be exercised, to the extent exercisable on the date of his death, by an executor,
administrator or other person who at the time is entitled by law to exercise the rights of a
deceased optionees under such option (the Legal Representative) at any time within one year after
death, but not thereafter and in no event after the date the option would otherwise have expired. Any optionee whose relationship has terminated by reason of disability (as determined by the
Board of Directors) may exercise his option, to the extent exercisable upon the effective date of
such termination, at any time within one year after such date, but not thereafter and in no event
after the date the option would otherwise have expired. Adjustment upon changes in Common Stock Notwithstanding any other provision of the 1996 Plan, in the event of a stock dividend,
split-up, combination, reclassification, recapitalization, spin-off, merger in which we are the
surviving corporation, or exchange of shares or the like which results in a change in the number or
kind of those shares of Common Stock which are outstanding immediately prior to such event, the
aggregate number and kind of shares subject to the 1996 Plan, the aggregate number and kind of
shares subject to each outstanding option and the exercise price thereof, whose determination shall
be conclusive and binding on all parties. Such adjustment may provide for the elimination of
fractional shares which might otherwise be subject to options without payment thereto. In the event of (a) the liquidation or dissolution of our company, or (b) a merger in which we
are not the surviving corporation or a consolidation, any outstanding options shall terminate upon
the earliest of any such event, unless other provision is made therefore in the transaction. Amendments and Termination of the 1996 Plan No option may be granted under the 1996 Plan after October 2006. The Board of Directors,
without further approval of our shareholders, may at any time suspend or terminate the 1996 Plan,
in whole or in part, or amend it form time to time in such respects as it may deem advisable,
including, without limitation, to comply with, conform to or adopt any change in application law,
regulations, rulings or interpretations of administrative agencies; provided, however,that no
amendment shall be effective without the requisite prior or subsequent shareholder approval that
would (a) increase the maximum number of shares of Common Stock for which options may be granted
under the 1996 Plan, (b) materially increase the benefits accruing to participants under the 1996
Plan or (c) change the eligibility requirements to receive options hereunder. No termination,
suspension or amendment of the 1996 Plan shall, without the consent of the holder of an existing
and outstanding option affected thereby, adversely affect his rights under such option. The power
of the Committee to construe and administer any options granted under the 1996 Plan prior to the
termination or suspension of the 1996 Plan nevertheless shall continue after such termination or
during such suspension. Non-Transferability of Options No option granted under the 1996 Plan shall be transferable otherwise than by will or the laws
of descent and distribution, and options may be exercised, during the lifetime of the optionee, only
by the optionee or his Legal Representatives. Except to the extent provided above, options may not
be
assigned, transferred, pledged, hypothecated or disposed of in any way (whether by operation
of law or otherwise) and shall not be subject to execution, attachment or similar process,




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-42- and any
such attempted assignment, transfer, pledge, hypothecation or disposition shall be null and void ab
initioof no force or effect. No options were granted in the 2000 Period, 2001 Period and 2002 Period in respect of the 1996
Plan. 2000 Plan Types of Grants and Eligibility The 2000 Plan is designed to provide an incentive to our key employees (including officers and
directors who are key employees) and to consultants and directors who are not our employees or
employees of our present and future subsidiaries and to offer an additional inducement in obtaining
the services of such individuals. Shares Subject to the 2000 Plan The aggregate number of shares of Common Stock for which options may be granted under the 2000
Plan may not exceed 400,000; provided, however, that the maximum number of shares of Common Stock
with respect to which options may be granted to any individual in any fiscal year may not exceed
100,000. Such shares of Common Stock may consist either in whole or in part of authorized but
unissued shares of Common Stock or shares of Common Stock held in our treasury shares. Shares of
Common Stock subject to an option which for any reason expires, is cancelled or is terminated
unexercised or which ceases for any reason to be exercisable may again become available for the
granting of options under the 2000 Plan. Administration of the 2000 Plan Except in the case of non-employee director options, in which case the Plan is administered by
the Board of Directors, the 2000 Plan is administered by a committee consisting of not less than
two directors (the 2000 Plan Committee), each of whom shall be a non-employee director within
the meaning of rules and regulations promulgated by the Securities and Exchange Commission. Subject to the express provisions of the 2000 Plan, the 2000 Plan Committee has the authority,
in its sole discretion, with respect to options, to determine, among other things: the key
employees, consultants and advisors who are to receive options; the times when they may receive
options; the number of shares of Common Stock to be subject to each option; the term of each
option; the date each option is to become exercisable; whether an option is to be exercisable in
whole, in part or in instalments, and, if in instalments, the number of shares of Common Stock to
be subject to each instalment; whether the instalments are to be cumulative; the date each
instalment is to become exercisable and the term of each instalment; whether to accelerate the date
of exercise of any instalment; whether shares of Common Stock may be issued on exercise of an
option as partly paid, and, if so, the dates when future instalments of the exercise price are to
become due and the amounts of such instalments; the exercise price of each option; the form of
payment of the exercise price; whether to restrict the sale or other disposition of the shares of
Common Stock acquired upon the exercise of an option and to waive any such restriction; and whether
to subject the exercise of all or any portion of an option to the fulfillment of contingencies as
specified in an applicable stock option contract. With respect to all options, the 2000 Plan
Committee has such discretion to determine the amount, if any, necessary to satisfy our obligation
to withhold taxes; with the consent of the optionee, to cancel or modify an option, provided such
option as modified would be permitted to be granted on such date
under the terms of the 2000 Plan; to prescribe, amend and rescind rules and regulations
relating to the 2000 Plan; and to make all other determinations necessary or advisable for
administering the 2000 Plan. The Board of Directors has the authority described above with respect
to the granting of non-employee director options.




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-43- Exercise Price The exercise price of the shares of Common Stock under each option is to be determined by the
2000 Plan Committee. The exercise price of the shares of Common Stock under each non-employee
director option is to be equal to the fair market value of the Common Stock subject to such option
on the date of grant. Term The term of each option granted pursuant to the 2000 Plan is established by the 2000 Plan
Committee, in its sole discretion, at or before the time such option is granted. Subject to early
termination, each non-employee director option is to be exercisable on a term of ten years from the
date of grant. Exercise An option (or any part or instalment thereof), to the extent then exercisable, is to be
exercised by giving written notice to us at our principal office. Payment in full of the aggregate
exercise price may be made (a) in cash or by certified check, or (b) if the applicable stock option
contract at the time of grant so permits, with the authorization of the 2000 Plan Committee and with
previously acquired shares of Common Stock having an aggregate fair market value, on the date of
exercise, equal to the aggregate exercise price of all options being exercised, or (c) with any
combination of cash, certified check or shares of Common Stock. The 2000 Plan Committee may, in its discretion, permit payment of the exercise price of an
option by delivery by the optionee of a properly executed exercise notice, together with a copy of
his irrevocable instructions to a broker acceptable to the 2000 Plan Committee to deliver promptly
to us the amount of sale or loan proceeds sufficient to pay such exercise price. Termination of Relationship Any employee holder of an option whose employment or relationship with us (and our parent and
subsidiaries) has terminated for any reason other than his death or disability may exercise such
option, to the extent exercisable on the date of such termination, at any time within three months
after the date of termination, but not thereafter and in no event after the date the option would
otherwise have expired; provided, however, that if his employment is terminated either (a) for
cause, or (b) without our consent, such option terminates immediately. Options granted to
employees under the 2000 Plan are not affected by any change in the status of the holder so long as
he or she continues to be our full-time employee, our parent or any of our subsidiaries
(regardless of having been transferred from one corporation to another). Death or Disability If an optionee dies (a) while he is our employee, our consultant, our parent or any of our
subsidiaries, (b) within three months after the termination of such relationship (unless such
termination was for cause or without our consent), or (c) within one year following the termination
of such relationship by reason of disability, an option may be exercised, to the extent exercisable
on the date of
death, by the Legal Representatives, at any time within one year after death, but not
thereafter and in no event after the date the option would otherwise have expired. Any optionee whose relationship has terminated by reason of disability may exercise his
option, to the extent exercisable upon the effective date of such termination, at any time within
one year after such date, but not thereafter and in no event after the date the option would
otherwise have expired. Adjustments Upon Changes in Common Stock




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-44- Notwithstanding any other provisions of the 2000 Plan, in the event of any change in the
outstanding Common Stock by reason of a share dividend, recapitalization, merger or consolidation
in which we are the surviving corporation, split-up, combination or exchange of shares or the like,
the aggregate number and kind of shares subject to the 2000 Plan, the aggregate number and kind of
shares subject to each outstanding option and the exercise price thereof will be appropriately
adjusted by the Board of Directors, whose determination will be conclusive. In the event of (a) the liquidation or dissolution of our company or (b) a merger or
consolidation in which we are not the surviving corporation, any outstanding options will
terminate, unless other provision is made therefore in the transaction. Amendments and Termination of the 2000 Stock Option Plan No option may be granted under the 2000 Plan after October 2007. The Board of Directors,
without further approval of our stockholders, may at any time suspend or terminate the 2000 Plan,
in whole or in part, or amend it from time to time in such respects as it may deem advisable,
including, without limitation, to comply with the provisions of certain rules and regulations
promulgated by the Securities and Exchange Commission, among other things; provided, however, that
no amendment may be effective without the requisite prior or subsequent shareholder approval which
would (a) except as required for anti-dilution adjustments, increase the maximum number of shares
of Common Stock for which options may be granted under the 2000 Plan, (b) materially increase the
benefits to participants under the 2000 Plan, or (c) change the eligibility requirements for
individuals entitled to receive options under the 2000 Plan. Non-Transferability of Options No option granted under the 2000 Plan may be transferable otherwise than by will or the laws
of descent and distribution, and options may be exercised, during the lifetime of the holder
thereof, only by such holder or such holders legal representatives. Except to the extent provided
above, options may not be assigned, transferred, pledged, hypothecated or disposed of in any way
(whether by operation of law or otherwise) and may not be subject to execution, attachment or
similar process. No optionee has any rights as a shareholder with respect to any shares subject to an option
prior to the date of the issuance of a certificate or certificates for such shares. No options were granted under the 2000 Plan since its inception.




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-45- 
 Item 7. Major Shareholders and Related Party Transactions A.Major shareholders. The following table sets forth as of June 25, 2005, the beneficial ownership of (i) all
persons known to us to be beneficial owners of equal or more than five percent or more of our
common stock and (ii) our officers and directors and (iii) our officers and director as a group. Shares of commonstock beneficiallyPrincipal Stockholder
    

owned (1)
    
    
    Percent of classBeijing
Holdings
Room 4301, Central Plaza, 18 Harbour Road,Wanchai, Hong Kong.
    
    
    3,252,882
    (2)
    
    
    47.18
    %China
Internet Technology Co., Ltd.
c/o Room 2413-18, Shui On Centre,
8 Harbour Road, Wanchai, Hong Kong.
    
    
    1,186,441
    
    
    
    17.21
    %Great Legend Internet Technology
and Service Co., Ltd.
c/o Room 2413-18, Shui On Centre,
8 Harbour Road, Wanchai, Hong Kong.
    
    
    508,474
    
    
    
    7.38
    %Zhao Chang
Shanc/o
Room 2413-18, Shui On Centre,
8 Harbour Road, Wanchai, Hong Kong
    
    
    0
    (3)
    
    
    0
    %Jeff Qian
c/o Room 2413-18, Shui On Centre,
8 Harbour Road, Wanchai, Hong Kong
    
    
    0
    (3)
    
    
    0
    %All officers
and directors As a group (nine persons)
    
    
    4,947,797
    (2)(3)
    
    
    88.02
    %
  
 (1)
    
    Unless otherwise noted, all persons named in the table have sole voting and investment power
with respect to all shares of common stock beneficially owned by them.(2)
    
    Included in the 3,252,882 shares owned by Beijing Holdings are 974,576 shares and 849,576
shares owned by CMEC Ceramics Holdings Limited (CMEC) and Perfect Capital Holdings Limited
(Perfect Capital) respectively. CMEC was previously owned by CMEC-GE Capital China
Industrial Holding Limited. Pursuant to a sale and purchase agreement date June 30, 2000,
Beijing Holdings acquired the entire interest of CMEC. Pursuant to another sale and purchase
agreement dated May 30, 2002, Beijing Holdings, through Perfect capital, a 100% subsidiary,
acquired the entire shares of the Company held by Oriental Patron China Investment Limited, an
initial shareholder of the Company.(3)
    
    Mr. Zhao Chang Shan, Chairman of the Board, and Mr. Jeff Qian, Chief Executive Officer of us,
are respectively, the General Manager and Chief Financial Officer of Beijing Holdings and
therefore they
may be deemed to beneficially own the shares of Common Stock owned by Beijing Holdings. In
addition to them, the Beijing Municipal Government of the PRC, the principal shareholder of




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-46-  Beijing Holdings, may be deemed to beneficially own the shares of Common Stock owned by
Beijing Holdings. Except as disclosed below, there was no significant related party transactions made with
major shareholders B.Related party transactions.  (a)
    
    During the years ended December 31, 2002, 2003 and 2004, we had related party transactions
with certain related parties as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004Rmb000
    
    
    Rmb000
    
    
    Rmb000Transactions with related partiesService income received from Kang De (a)
    
    
    754
    
    
    
    
    
    
    
    Service fee paid to Beijing Holdings
Investment Management Center (b)
    
    
    41
    
    
    
    
    
    
    
    
 December 31, 2003
    
    
    December 31, 2004Rmb000
    
    
    Rmb000Balances with related partiesFunds held by Beijing Holdings for
security investment purposes (c)
    
    
    6,529
    
    
    
    6,529Funds held by Beijing Holdings
Investment Management Center for
security investment purposes (d)
    
    
    4,485
    
    
    
    3,388Due from Great Legend (e)
    
    
    
    
    
    
    30Due from fellow subsidiaries (f)
    
    
    165
    
    
    
    164
  
 Note
 (a) Kang De was a wholly owned subsidiary of Beijing Enterprises Development Corporation (BEDC),
another corporation owned by the BPMG. Beijing Holdings was nominated by the BPMG to exercise
management control of BEDC for the period from 2001 to 2002. The service income represented
revenue received by our service rendering business from Kang De in 2002. The contract with Kang De
was concluded at rate consistent with our contracts with third parties. Subsequent to the
appointments of new management team by the BPMG to exercise controls on BEDC, Kang Des business
ceased. (b) Beijing Holdings Investment Management Centre (BIMC), established in China, is a wholly owned
subsidiary of Beijing Holdings. Since 2000, we had nominated BIMC as our trading agent of
investment in Chinese securities. The service fee in 2002 represented the commission




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-47- charge for
the realized gain arising from trading of securities. In 2003, we entered an agreement with BIMC
to waive the commission and no commission fees were paid in 2003 and 2004. (c) Due to its good relationship with leading investment banks and potential investment
opportunities to be gained from those relationships, the Company deposited funds with Beijing
Holdings since 2002 to invest on behalf of us. Nevertheless, due to the poor performance of the
Hong Kong Stock market in the last two years, we withdrew the entire fund of Rmb 6,529,000 in May
2005. (d) The nature of funds deposited with BIMC was the same as that deposited with Beijing Holdings as
described above. Again, funds have been continuously withdrawn. As of May 31, 2005, the undrawn
deposit amounted to Rmb 1,300,000. (e) The amount due from Great Legend represented administrative expenses we paid on its behalf in
2004 since Great Legend did not maintain a US Dollar bank account in Hong Kong, and which were
fully repaid in 2005. (g) Other than information already disclosed elsewhere in this Form 20-F, no person who has been an
insider of the Company since January 1, 2003 or any associate or affiliate of such insider has had
any material direct or indirect interest in any transaction with our Company since January 1, 2003
or in any proposed transaction of our company. (h) Except for the above disclosures, there are no other amount due from any of our related
companies C.Interests of experts and counsel. Not Applicable. 
 Item 8. Financial Information A.Consolidated Statements and Other Financial Information. Our consolidated financial statements are included herein under Item 18. Except for an interim dividend paid in 1997, we have not paid any dividends on our common
stock. The payment of dividends in the future, if any, is within the discretion of our Board of
Directors and will depend upon our earnings, its capital requirements and financial condition and
other relevant factors. We do not anticipate declaring or paying any dividends in the foreseeable
future. B.Significant Changes. Not Applicable 
 Item 9. The Offer and Listing. A.Offer and listing details. We have authorized capital of US$25,000,000 divided into 2,500,000,000 shares of par value
US$0.01 each. As of to day, 6,894,497 shares are issued and fully paid. The annual high and low market prices of our common stock and warrants for the five most
recent full financial years are as set forth below:




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-48- NASDAQ Small Cap Market
    
    Common Stock
    
    
    Warrants(Year Ending)
    
    High
    
    
    Low
    
    
    High
    
    
    LowDecember 31, 2004
    
    
    5.600
    
    
    
    0.350
    
    
    
    N/A
    
    
    
    N/ADecember 31, 2003
    
    
    0.700
    
    
    
    0.030
    
    
    
    N/A
    
    
    
    N/ADecember 31, 2002
    
    
    0.430
    
    
    
    0.010
    
    
    
    N/A
    
    
    
    N/ADecember 31, 2001
    
    
    0.444
    
    
    
    0.090
    
    
    
    N/A
    
    
    
    N/ADecember 31, 2000
    
    
    2.500
    
    
    
    0.219
    
    
    
    0.938
    
    
    
    0.031
 The high and low market prices of our common stock and warrants for each financial quarter
over the two most recent full financial years are as set forth below: NASDAQ Small Cap Market
    
    Common Stock(Quarter Ending)
    
    High
    
    
    LowDecember 31, 2004
    
    
    5.600
    
    
    
    1.400September 30, 2004
    
    
    3.171
    
    
    
    1.320June 30, 2004
    
    
    4.200
    
    
    
    0.550March 31, 2004
    
    
    6.530
    
    
    
    0.350December 31, 2003
    
    
    0.650
    
    
    
    0.250September 30, 2003
    
    
    0.690
    
    
    
    0.280June 30, 2003
    
    
    0.700
    
    
    
    0.030March 31, 2003
    
    
    0.470
    
    
    
    0.050
 For the most recent six months, the high and low market prices of our common stock are as set
forth below: NASDAQ Small Cap Market
    
    Common Stock(Month Ending)
    
    High
    
    
    LowMay 31, 2005
    
    
    4.240
    
    
    
    3.360April 30, 2005
    
    
    4.940
    
    
    
    3.360March 31, 2005
    
    
    4.960
    
    
    
    3.080February 28, 2005
    
    
    4.790
    
    
    
    3.030January 31, 2005
    
    
    8.800
    
    
    
    3.310December 31, 2004
    
    
    5.600
    
    
    
    2.550
 According to the terms of issuance, our warrants expired on December 13, 1999 and were
subsequently extended for additional two years to December 13, 2001 pursuant to a Board resolution
passed on December 3, 1999. Our warrants were de-listed from the NASDAQ Small Cap Market on May 15,
2001 due to our failure in complying the NASD Marketplace Rules 4310 (c) (1),




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-49- which requires us to
maintain two active market makers for the warrants. On December 13, 2001, our warrants expired. B.Plan of Distribution. Not Applicable. C.Markets. Our common stock and warrants were included for quotation on the NASDAQ National Market on
December 13, 1996 under the symbols TRFDF and TRFWF respectively. Pursuant to the
implementation of the new listing requirements since February 1998, we moved the listing of our
common stock and warrants to the NASDAQ Small Cap Market on October12, 1998 under the same symbols. Our warrants were delisted from the NASDAQ Small Cap Market as stated in Item 9A above. At
December 31, 2001, our common stock was listed for quotation on the NASDAQ Small Cap Market and not
on any other public trading market. D.Selling Shareholders. Not applicable E.Dilution. The Company had authorized the issuance, pursuant to the 1996 Stock Option Plan, of options to
purchase 200,000 shares of Common Stock to the Companys existing shareholders, employees,
officers, directors and consultants. Pursuant to a board resolution passed on December 28, 1999,
options were granted, for an exercise period of ten years, to certain directors and officers at an
exercise price of US$1.15 each. F.Expenses of the issue. Not Applicable. 
 Item 10. Additional Information. A.Share capital. Not Applicable. B.Memorandum and articles of association. The Memorandum and Articles of Association of our company was included in the Form F-1
Registration Statement filed to the Securities and Exchange Commission upon our initial public
offering. Its subsequent amendments were included as resolutions in the proxy statements for the
shareholders meeting ratifying such amendments and filed with the Securities and Exchange
Commission. Our corporate affairs are governed by our Memorandum and Articles of Association and by the
International Business Companies Act of the British Virgin Islands. Principles of law relating to
such matters as the validity of corporate procedures, the fiduciary duties of our management,
directors and controlling shareholders and the rights of our shareholders differ from those that
would apply if we were incorporated in a jurisdiction within the United States. Further, the
rights of shareholders under British Virgin Islands law are not as clearly established as the
rights of shareholders under legislation or judicial precedent in existence in most United States
jurisdictions.




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-50- Thus, our public shareholders may have more difficulty in protecting their
interests in the face of actions by the management, directors or controlling shareholders than they
might have as shareholders of a corporation incorporated in a United States jurisdiction. Please
refer to Item 3(D) for a detailed discussion of such risk. C.Material contracts. We have not entered into any material contracts other than in the ordinary course of business
and other than those described in Item 4, Information on the Company or elsewhere in this Annual
Report on Form 20-F. D.Exchange controls. Chinas government imposes control over the convertibility of Rmb into foreign currencies.
Under the current unified floating exchange rate system, the Peoples Bank of China publishes a
daily exchange rate for Rmb, or the PBOC Exchange Rate, based on the previous days dealings in the
inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an authorized range above or
below the PBOC Exchange Rate according to market conditions. Pursuant to the Foreign Exchange Control Regulations issued by the State Council on January
29, 1996 and effective as of April 1, 1996 (and amended on January 14, 1997) and the Administration
of Settlement, Sale and Payment of Foreign Exchange Regulations which came into effect on July 1,
1996 regarding foreign exchange control, or the Regulations, conversion of Renminbi into foreign
exchange by foreign investment enterprises for current account items, including the distribution of
dividends and profits to foreign investors of joint ventures, is permissible upon the proper
production of qualified commercial vouchers or legal documents as required by the Regulations.
Foreign investment enterprises are permitted to remit foreign exchange from their foreign exchange
bank account in China upon the proper production of, inter alia, the board resolutions declaring
the distribution of the dividend and payment of profits. Conversion of Rmb into foreign currencies
and remittance of foreign currencies for capital account items, including direct investment, loans,
security investment, is still subject to the approval of the State Administration of Foreign
Exchange, or SAFE, in each such transaction. On January 14, 1997, the State Council amended the
Foreign Exchange Control Regulations and added, among other things, an important provision, as
Article 5 provides that the State shall not impose restrictions on recurring international payments
and transfers. Under the Regulations, foreign investment enterprises are required to open and maintain
separate foreign exchange accounts for capital account items (but not for other items). In
addition, foreign investment enterprises may only buy, sell and/or remit foreign currencies at
those banks
authorized to conduct foreign exchange business upon the production of valid commercial
documents and, in the case of capital account item transactions, document approval from SAFE. Currently, foreign investment enterprises are required to apply to SAFE for foreign exchange
registration certificates for foreign investment enterprises. With such foreign exchange
registration certificates (which are granted to foreign investment enterprises, upon fulfilling
specified conditions and which are subject to review and renewal by SAFE on an annual basis) or
with the foreign exchange sales notices from the SAFE (which are obtained on a
transaction-by-transaction basis), foreign-invested enterprises may enter into foreign exchange
transactions at banks authorized to conduct foreign exchange business to obtain foreign exchange
for their needs. E.Taxation. The following discussion is a summary of certain anticipated, British Virgin Islands, Cayman
Islands, Hong Kong and PRC tax consequences of an investment in the Common Stock




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-51- and warrants. The
discussion does not deal with all possible tax consequences relating to an investment in the Common
Stock and warrants and does not purport to deal with the tax consequences applicable to all
categories of investors, some of which (such as dealers in securities, insurance companies and
tax-exempt entities) may be subject to special rules. In particular, the discussion does not
address the tax consequences under state, local and other national (e.g., United States,
non-British Virgin Island and non-Hong Kong) tax laws. Accordingly, each prospective investor
should consult its own tax advisor regarding the particular tax consequences to it of an investment
in the Common Stock and warrants. The following discussion is based upon laws and relevant
interpretations there of in effect as of the date of this Annual Report, all of which are subject
to change. British Virgin Islands Taxation. Under the International Business Companies Act of the British Virgin Islands as currently in
effect, a holder of Common Stock who is not a resident of the British Virgin Islands is exempt from
British Virgin Islands income tax on dividends paid with respect to the Common Stock and all
holders of Common Stock are not liable to British Virgin Islands income tax on gains realized
during the year on sale or disposal of such shares; the British Virgin Islands does not impose a
withholding tax on dividends paid by the Company incorporated under the International Business
Companies Act. There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on
companies incorporated under the International Business Companies Act. In addition, the Common
Stock is not subject to transfer taxes, stamp duties or similar charges. There is no income tax treaty or convention currently in effect between the United States and
the British Virgin Islands. Hong Kong Taxation Under the laws of Hong Kong, as currently in effect, a holder of Common Stock is not subject
to Hong Kong tax on dividends paid with respect to such shares and no holder of Common Stock is
liable for Hong Kong tax on gains realized on sale or other disposition of such Common Stock except
that those persons who are classified for Hong Kong purposes as dealers in securities in Hong Kong
may be subject to Hong Kong tax in respect of any gain resulting on the disposition of Common
Stock. Hong Kong does not impose a withholding tax on dividends paid by the Company or its
subsidiaries. In addition, the Company will not be subject to Hong Kong taxes as a result of its
receipt of dividends from any of its subsidiaries. PRC Taxation There are no material PRC tax consequences to holders of Common Stock solely as a result of
the purchase, ownership and disposition of such Common Stock. There is an income tax treaty in
effect between the United States and the PRC. Cayman Island Taxation The Cayman Islands currently have no exchange control restrictions and no income, corporate or
capital gains tax, estate duty, inheritance tax, gift tax or withholding tax applicable to the
Company or any holder of shares. Accordingly, payment of dividends on, and any transfer of, the
shares will not be subject to taxation in the Cayman Islands, no Cayman Islands withholding tax
will be required on such payments to any holder of a share and gains derived from the sale of
shares will not be subject to Cayman Islands income or corporation tax. The Cayman Islands are not
party to any double taxation treaties.




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-52- F.Statement by experts. Not Applicable. G.Documents on display. Documents concerning the Company that are referred to in this document may be inspected at our
office, which is Room 2413-18, Shui On Centre, 8 Harbour Road, Wanchai, Hong Kong. H.Subsidiary Information. Not Applicable 
 Item 11. Quantitative and Qualitative Disclosures About Market Risk. Foreign exchange risk We are exposed to the risk of foreign currency exchange rate fluctuation. We have never used
derivative instruments to hedge our exchange rate risks, do not plan to do so, and may not be
successful should we attempt to do so in the future. Nevertheless, we believe such risk is low as
no foreign currency liabilities are incurred and the principal operations are limited solely to the
China market. Our trading securities are not subject to any foreign currency and interest rate
risks. Our functional currency is the RMB. Transactions in other currencies are recorded in RMB at
the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities
denominated in other currencies are remeasured into RMB at rates of exchange in effect at the
balance sheet dates. Exchange gains and losses are recorded in our statements of operations as a
component of current period earnings. The PRC State Administration for Foreign Exchange, under the authority of the Peoples Bank of
China, controls the conversion of Renminbi into foreign currencies. The principal regulation
governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996),
as amended. Under the Rules, once various procedural requirements are met, RMB is convertible for
current account transactions, including trade and services, but not for capital account
transactions, including direct investment, loan or investment in securities outside China, unless
the prior approval of
the State Administration of Foreign Exchange of the Peoples Republic of China is obtained.
Although the Chinese government regulations now allow greater convertibility of RMB for current
account transactions, significant restrictions still remain. Currently, BBHL, our PRC subsidiary,
is not involved in foreign exchange transactions as all transactions are completed in Rmb. The value of the Rmb is subject to changes in Chinas central government policies and to
international economic and political developments affecting supply and demand in the China Foreign
Exchange Trading System market. Since 1994, the conversion of Renminbi into foreign currencies,
including U.S.dollars, has been based on rates set by the Peoples Bank of China, which are set
daily based on the previous days interbank foreign exchange market rates and current exchange
rates on the world financial markets. Since 1994, the official exchange rate generally has been
stable. However, recently there has been increased political pressure on the PRC government to
decouple the Rmb from the U.S. dollar. We conduct substantially all of our operations through our PRC operating companies, and their
financial performance and position are measured in terms of Rmb. Any devaluation of the Rmb against
the United States dollar would consequently have an adverse effect on our financial performance and
asset values when measured in terms of United States dollar. Our solutions are primarily procured,
sold and delivered in the PRC for Rmb. The majority of our revenues are




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-53- denominated in RMB.
Should the RMB devalue against United States dollar, such devaluation could have a material adverse
effect on our profits and the foreign currency equivalent of such profits repatriated by the PRC
entities to us. In addition, from time to time we may have United States dollar denominated
borrowings, and therefore a decoupling of the RMB many affect our financial performance in the
future. Interest rate risk We are exposed to interest rate risk arising from having short-term variable rate borrowings
from time to time. Our future interest expense would fluctuate in line with any change in our
borrowing rates. We do not have any derivative financial instruments and believe our exposure to
interest rate risk and other relevant market risks is not material. Inflation In recent years, China has not experienced significant inflation, and thus inflation has not
had a material impact on our results of operations in recent years. According to the National
Bureau of Statistics of China, the change in Consumer Price Index in China was -0.8%, 1.2% and 3.9%
in 2002, 2003 and 2004 respectively. Recently issued accounting pronouncements In November 2004, the Financial Accounting Standards Board, or the FASB, issued FASB Statement
No. 151,Inventory Costs  an amendment of ARB No. 43 (SFAS No. 151), which is the result of its
efforts to converge U.S. accounting standards for inventories with International Accounting
Standards. SFAS No. 151 requires idle facility expenses, freight , handling costs, and wasted
material (spoilage) costs to be recognized as current-period charges. It also requires that
allocation of fixed production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. We are currently assessing the impact of this statement
on our results of operations, financial position and cash flows upon adoption and has not yet
completed that assessment. In December 2004, the FASB issued a revised SFAS No. 123 (revised 2004),(SFAS No. 123R)
Share-Based Payment. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based
Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (Opinion
25) and amends SFAS No. 95 Statement of Cash Flows. SFAS No. 123R requires all share-based
awards to employees, including grants of employee stock options, to be recognized in the financial
statements based on their grant-date fair values. Excess tax benefits are to be recognized as an
addition to paid-in capital and reflected as financing cash inflows in the statement of cash flows.
SFAS No. 123R also eliminates the use of the intrinsic value method of accounting, as discussed in
Opinion 25 and was provided in Statement 123 as an alternative to valuation. Under Opinion 25,
issuing stock options to employees generally resulted in recognition of no compensation cost.
Under SFAS No. 123R, we are required to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of those awards, with
limited exceptions. The original effective date was interim or annual reporting periods beginning
after June 15, 2005, but subsequently the SEC has converted this to be only applicable to annual
periods beginning after this date. We do not expect the adoption of SFAS No. 123R to have a
material impact on its financial position or results of operations. In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets, an amendment
of APB Opinion No. 29 (SFAS 153) effective for nonmonetary asset exchanges occurring in the
fiscal year beginning January 1, 2006. SFAS 153 requires that exchanges of productive assets be
accounted for at fair value unless fair value cannot be reasonably determined or




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##### Table of Contents



-54- the transaction
lacks commercial substance. We are currently assessing the impact of this statement on our results
of operations, financial position and cash flows upon adoption and have not yet completed that
assessment. In March 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS
154), which was a replacement of APB Opinion No. 20 and FAS No. 3 effective for accounting changes
made in fiscal years beginning after December 15, 2005. SFAS 154 requires restrospective
application to prior periods financial statements of changes in accounting principles, unless it is
impracticable to determine either the period-specific effects or the cumulative effect of the
change. It also requires that retrospective application of a change in accounting principles be
limited to the direct effects of the change. SFAS also requires that a change in depreciation,
amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change
in accounting estimates effected by a change in accounting principles. We are currently assessing the
impact of this statement on our results of operations, financial position and cash flows upon
adoption and have not yet completed that assessment. 
 Item 12. Description of Securities Other than Equity Securities. Not Applicable.




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##### Table of Contents



-55- 
 PART II 
 Item 13. Default, Dividend Arrearages and Delinquencies. None. 
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds. Not applicable. 
 Item 15. Controls and Procedures We evaluated the design and operation of our disclosure controls and procedures to determine
whether they are effective in ensuring that we disclose the required information in a timely manner
and in accordance with the Securities Exchange Act of 1934, as amended, or the Exchange Act, and
the rules and forms of the Securities and Exchange Commission. Management, including the Chief
Executive Officer and the Chief Financial Officer, supervised and participated in the evaluation.
The evaluation was completed within the 90-day period prior to the filing of this Annual Report on Form
20-F. The Chief Executive Officer and the Chief Financial Officer concluded, based on their review,
that our disclosure controls and procedures, as defined by Exchange Act Rules 13a-14(c) and
15d-14(c), are effective and ensure that we disclose the required information in reports that we
file under the Exchange Act and that the filings are recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules and forms. No
significant changes were made to our internal controls or other factors that could significantly
affect these controls subsequent to the date of their evaluation. It should be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the system are met. In
addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent limitations of control systems,
there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. 
 Item 16A. Audit Committee Financial Expert The Board has determined that Mr. Peter Fu, Mr. L C Wan and Mr. Ni Ye Zhong, independent
directors, are members of the Audit Committee, and Mr. L C Wan is the financial expert as defined
under the applicable rules of the SEC issued pursuant to Section 407 of the Sarbanes-Oxley Act of
2002. 
 Item 16B. Code of Ethics The Code of Ethics for the Board of Directors and Officers is under preparation and will
be introduced once completed, which is expected within this year. 
 Item 16C. Principal Accountant Fees and Services Audit Fees The audit fee of PricewaterhouseCoopers, the independent auditors for the fiscal years ended
December 31, 2004 and 2003, amounted to Rmb 0.61 million and Rmb 0.53 million respectively. Apart
from audit services, PricewaterhouseCoopers was not engaged by our Company for any other kind of
professional services. Audit-Related Fees




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##### Table of Contents



-56- Except as described above, no other audit-related fees were paid by us for the fiscal years
ended December 31, 2004 and 2003 to PricewaterhouseCoopers and other professional accounting firms. Tax Fees Taxation review services performed by PricewaterhouseCoopers were included as part of their
audit works for the fiscal years ended December 31, 2004 and 2003 and thus no separate bills were
issued to us. For statutory tax filings of BHLHK requested by the applicable regulations in Hong
Kong for the fiscal years ended December 31, 2004 and 2003, it was performed by S L Lee & Lau at a
fee of Rmb 3,000 and Rmb 5,000, respectively. All Other Fees PricewaterhouseCoopers did not provide any products or render any professional services, other
than those covered above under Audit Fees during either of the fiscal years ended December 31,
2004 or December 31, 2003. Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors The policy of our directors who perform the functions customarily performed by an audit
committee is to pre-approve all audit and permissible non-audit services provided by the
independent auditors. These services may include audit services and other services. Audit of Financial Statements PricewaterhouseCoopers were our principal auditors and no work was performed by persons
outside of this firm. 
 PART III 
 Item 17. Financial Statements. The Company has elected to provide Financial Statements pursuant to Item 18 (see below). 
 Item 18. Financial Statements. The following documents are filed as Attachment A hereto and are included as part of this
Annual report on Form 20-F. Financial Statements.Report of Independent Registered Public Accounting Firm.Consolidated Statements of Operations and Comprehensive Income for each of the three years
ended December 31, 2002, 2003 and 2004.Consolidated Balance Sheets as of December 31, 2003 and 2004.Consolidated Statements of Cash Flows of the company and subsidiaries for each of the three
years ended December 31, 2002, 2003 and 2004.Consolidated Statements of Changes in Shareholders Equity for each of the three years ended
December 31, 2002, 2003 and 2004.Notes to Consolidated Financial Statements.
 
 Item 19. Exhibits. The following exhibits are filed as part of this Annual Report:




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##### Table of Contents



-57- 1. Amended Memorandum and Articles of Association of Tramford International Limited 8. List of the companys significant subsidiaries, their jurisdiction of incorporation and the
names under which they operate business, if different from their name. 12. Certification of Chief Executive Officer and Chief Financial Officer required by Section 302 of
the Sarbanes-Oxley Act of 2002. 13. Certification of Chief Executive Officer and Chief Financial Officer required by Section 906 of
the Sarbanes-Oxley Act of 2002.




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##### Table of Contents



-58- 
 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Company
certifies that it meets all of the requirements for filing Form 20-F and has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto duly authorised. Tramford International limitedDate: June 30, 2005
    
    
    
    /s/ Michael SiuName:
    
    Michael SiuTitle:
    
    Executive Director, Chief
Financial Officer and Secretary




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED INDEX TO FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    
    F - 2Consolidated Statements of Operations and Comprehensive Income for each
of the three years ended December 31, 2002, 2003 and 2004
    
    
    F - 3Consolidated Balance Sheets as of December 31, 2003 and 2004
    
    
    F - 4Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2002, 2003 and 2004
    
    
    F - 5Consolidated Statements of Changes in Shareholders Equity for each of
the three years ended December 31, 2002, 2003 and 2004
    
    
    F - 6Notes to Consolidated Financial Statements
    
    
    F - 7
 F - 1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of
Tramford International Limited We have audited the accompanying consolidated balance sheets of Tramford International Limited and
its subsidiaries (the Group) as of December 31, 2004 and 2003, and the related consolidated
statements of operations and comprehensive income, cash flows and changes in shareholders equity
for each of the three years in the period ended December 31, 2004. These financial statements are
the responsibility of the Groups management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Tramford International Limited and its subsidiaries at
December 31, 2004 and 2003, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America. PricewaterhouseCoopers Hong Kong, June 30, 2005 F - 2




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Amounts in thousands, except per share data)
for the years ended December 31, 2002, 2003 and 2004
 Note
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2004Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$(Note 2(d))RevenuesProduct sales
    
    
    
    
    
    
    5,658
    
    
    
    8,405
    
    
    
    2,720
    
    
    
    329Rendering of services
    
    
    
    
    
    
    2,625
    
    
    
    3,337
    
    
    
    3,949
    
    
    
    4778,283
    
    
    
    11,742
    
    
    
    6,669
    
    
    
    806Costs of salesProduct sales
    
    
    
    
    
    
    (2,986
    )
    
    
    (4,421
    )
    
    
    (1,394
    )
    
    
    (169
    )Rendering of services
    
    
    
    
    
    
    (1,839
    )
    
    
    (2,204
    )
    
    
    (2,755
    )
    
    
    (333
    )(4,825
    )
    
    
    (6,625
    )
    
    
    (4,149
    )
    
    
    (502
    )Gross profit
    
    
    
    
    
    
    3,458
    
    
    
    5,117
    
    
    
    2,520
    
    
    
    304Selling, general and
administrative expenses
    
    
    
    
    
    
    (11,977
    )
    
    
    (9,129
    )
    
    
    (8,297
    )
    
    
    (1,002
    )Impairment of goodwill
    
    
    
    
    
    
    (7,249
    )
    
    
    
    
    
    
    (4,748
    )
    
    
    (575
    )Bad debt expense
    
    
    
    
    
    
    (4,142
    )
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    
    
    
    
    (19,910
    )
    
    
    (4,012
    )
    
    
    (10,525
    )
    
    
    (1,273
    )Non-operating income
    
    
    3
    
    
    
    2,456
    
    
    
    2,429
    
    
    
    410
    
    
    
    50Non-operating expenses
    
    
    4
    
    
    
    (141
    )
    
    
    
    
    
    
    
    
    
    
    Loss before income tax provision
    
    
    
    
    
    
    (17,595
    )
    
    
    (1,583
    )
    
    
    (10,115
    )
    
    
    (1,223
    )Income tax provision
    
    
    5
    
    
    
    
    
    
    
    (249
    )
    
    
    
    
    
    
    Net loss before minority interests
    
    
    
    
    
    
    (17,595
    )
    
    
    (1,832
    )
    
    
    (10,115
    )
    
    
    (1,223
    )Minority interests
    
    
    
    
    
    
    2,149
    
    
    
    890
    
    
    
    
    
    
    
    Net loss for the year
    
    
    
    
    
    
    (15,446
    )
    
    
    (942
    )
    
    
    (10,115
    )
    
    
    (1,223
    )Loss per share
    
    
    12- Basic and dilutive
    
    
    
    
    
    
    (2.24
    )
    
    
    (0.14
    )
    
    
    (1.47
    )
    
    
    (0.18
    )Weighted-average ordinary shares
    
    
    12- Basic and dilutive
    
    
    
    
    
    
    6,895
    
    
    
    6,894
    
    
    
    6,894
    
    
    
    6,894
 The accompanying notes are an integral part of these consolidated financial statements. F - 3




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TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
at December 31, 2003 and 2004
 Note
    
    
    2003
    
    
    2004
    
    
    2004Rmb
    
    
    Rmb
    
    
    US$(Note 2(d))ASSETSCURRENT ASSETSCash and cash equivalents
    
    
    
    
    
    
    7,400
    
    
    
    5,255
    
    
    
    635Short-term investments - security trust account
    
    
    
    
    
    
    11,265
    
    
    
    6,872
    
    
    
    Available-for-sale securities
    
    
    
    
    
    
    11,197
    
    
    
    12,730
    
    
    
    2,368Trade accounts receivable, net
    
    
    
    
    
    
    2,655
    
    
    
    1,060
    
    
    
    128Inventories
    
    
    
    
    
    
    707
    
    
    
    1,192
    
    
    
    144Due from related parties
    
    
    13
    
    
    
    11,179
    
    
    
    10,111
    
    
    
    1,222Other assets
    
    
    6
    
    
    
    1,344
    
    
    
    1,087
    
    
    
    131TOTAL CURRENT ASSETS
    
    
    
    
    
    
    45,747
    
    
    
    38,307
    
    
    
    4,628Property, plant and equipment, net
    
    
    7
    
    
    
    88
    
    
    
    49
    
    
    
    6Intangible asset
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    Goodwill
    
    
    9
    
    
    
    5,747
    
    
    
    999
    
    
    
    121Software development costs
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    TOTAL ASSETS
    
    
    
    
    
    
    51,582
    
    
    
    39,355
    
    
    
    4,755LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESTrade accounts payable
    
    
    
    
    
    
    270
    
    
    
    175
    
    
    
    21Consideration payable on the acquisition of an
operating unit
    
    
    
    
    
    
    1,850
    
    
    
    1,950
    
    
    
    236Accrued professional fees
    
    
    
    
    
    
    583
    
    
    
    888
    
    
    
    107Income tax payable
    
    
    
    
    
    
    249
    
    
    
    249
    
    
    
    30Value added tax and business tax payable
    
    
    
    
    
    
    1,243
    
    
    
    781
    
    
    
    94Other liabilities and accrued expenses
    
    
    11
    
    
    
    1,196
    
    
    
    2,458
    
    
    
    297TOTAL CURRENT LIABILITIES
    
    
    
    
    
    
    5,391
    
    
    
    6,501
    
    
    
    785Contingencies and commitments
    
    
    16Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    SHAREHOLDERS EQUITYCommon stock, US$0.01 par value; authorised
9,044,888 shares; issued and outstanding as of
December 31, 2004 and 2003
    
    
    15
    
    
    
    749
    
    
    
    749
    
    
    
    90Additional paid-in capital
    
    
    
    
    
    
    187,159
    
    
    
    187,159
    
    
    
    22,614Accumulated deficit
    
    
    
    
    
    
    (141,529
    )
    
    
    (151,644
    )
    
    
    (18,322
    )Accumulated other comprehensive losses
    
    
    
    
    
    
    (10
    )
    
    
    (3,232
    )
    
    
    (390
    )Treasury stock, at cost 2,150,391 shares as of
December 31, 2004 and 2003
    
    
    
    
    
    
    (178
    )
    
    
    (178
    )
    
    
    (22
    )TOTAL SHAREHOLDERS EQUITY
    
    
    
    
    
    
    46,191
    
    
    
    32,854
    
    
    
    3,970TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    51,582
    
    
    
    39,355
    
    
    
    4,755
 The accompanying notes are an integral part of these consolidated financial statements. F - 4




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TRAMFORD INTERANTIONAL LIMITED AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
for the years ended December 31, 2002, 2003 and 2004
 2002
    
    
    2003
    
    
    2004
    
    
    2004Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Cash flows from operating activitiesNet loss
    
    
    (15,446
    )
    
    
    (942
    )
    
    
    (10,115
    )
    
    
    (1,223
    )Adjustments to reconcile net loss to net cash
provided by/(used in) operating activitiesMinority interests in loss of consolidated
subsidiaries
    
    
    (2,149
    )
    
    
    (890
    )
    
    
    
    
    
    
    Amortization of intangible asset, goodwill and
software development costs
    
    
    1,418
    
    
    
    1,085
    
    
    
    
    
    
    
    Impairment of goodwill
    
    
    7,249
    
    
    
    
    
    
    
    4,748
    
    
    
    575Depreciation
    
    
    816
    
    
    
    475
    
    
    
    76
    
    
    
    9Dividend income
    
    
    (2
    )
    
    
    (295
    )
    
    
    (67
    )
    
    
    (8
    )Unrealized loss on trading securities
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    Gain on disposal of available-for-sale securities
    
    
    
    
    
    
    (2,005
    )
    
    
    (100
    )
    
    
    (12
    )Loss on disposal of fixed assets
    
    
    198
    
    
    
    
    
    
    
    
    
    
    
    Gain on adjustment to consideration for the
acquisition of subsidiaries
    
    
    (1,697
    )
    
    
    
    
    
    
    
    
    
    
    Bad debt expense
    
    
    4,142
    
    
    
    
    
    
    
    
    
    
    
    Changes in assets and liabilities:(Increase)/decrease in trade accounts receivable
    
    
    (2,576
    )
    
    
    (66
    )
    
    
    1,595
    
    
    
    193(Increase)/decrease in trading securities
    
    
    (59
    )
    
    
    49
    
    
    
    
    
    
    
    (Increase)/decrease in inventories
    
    
    (1,139
    )
    
    
    512
    
    
    
    (485
    )
    
    
    (59
    )Decrease/(increase) in due from related parties
and other assets
    
    
    1,616
    
    
    
    (263
    )
    
    
    228
    
    
    
    27(Decrease)/increase in trade accounts payable,
amount due to a related party and other current
liabilities
    
    
    (19
    )
    
    
    (2,676
    )
    
    
    1,110
    
    
    
    134Increase in income tax payable
    
    
    
    
    
    
    249
    
    
    
    
    
    
    
    Net cash used in operating activities
    
    
    (7,638
    )
    
    
    (4,767
    )
    
    
    (3,010
    )
    
    
    (364
    )Cash flows from investing activitiesSettlement of investment in subsidiaries
    
    
    (18,312
    )
    
    
    
    
    
    
    
    
    
    
    531Security trust account
    
    
    814
    
    
    
    2,275
    
    
    
    4,393
    
    
    
    Dividend income
    
    
    2
    
    
    
    295
    
    
    
    67
    
    
    
    8(Increase)/decrease funds held by related parties
for security investment purposes (note 13)
    
    
    (7,568
    )
    
    
    (2,578
    )
    
    
    1,097
    
    
    
    132Proceeds from disposal of available-for-sale
securities
    
    
    
    
    
    
    11,810
    
    
    
    4,788
    
    
    
    579Purchase of available-for-sales securities
    
    
    (9,147
    )
    
    
    (11,454
    )
    
    
    (9,443
    )
    
    
    (1,141
    )Purchases of property, plant and equipment
    
    
    (70
    )
    
    
    (29
    )
    
    
    (37
    )
    
    
    (4
    )Proceeds from disposal of property, plant and
equipment
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    Net cash (used in)/provided by investing activities
    
    
    (34,195
    )
    
    
    319
    
    
    
    765
    
    
    
    105Cash flows from financing activitiesPurchase of treasury shares
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    Effect of exchange rate changes on cash and cash
equivalents
    
    
    14
    
    
    
    (355
    )
    
    
    
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (41,822
    )
    
    
    (4,803
    )
    
    
    (2,145
    )
    
    
    (259
    )Cash and cash equivalents at beginning of year
    
    
    54,025
    
    
    
    12,203
    
    
    
    7,400
    
    
    
    894Cash and cash equivalents at end of year
    
    
    12,203
    
    
    
    7,400
    
    
    
    5,255
    
    
    
    635
 The accompanying notes are an integral part of these consolidated financial statements. F - 5




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TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Amounts in thousands)
for the years ended December 31, 2002, 2003 and 2004
 Accumulatedother
    
    
    TotalNo. of
    
    
    
    
    
    
    Accumulated
    
    
    comprehensive
    
    
    shareholdersshares
    
    
    Equity
    
    
    losses
    
    
    losses
    
    
    equityRmb
    
    
    Rmb
    
    
    Rmb
    
    
    RmbBalance at December 31, 2001
    
    
    6,895,697
    
    
    
    187,733
    
    
    
    (125,141
    )
    
    
    (70
    )
    
    
    62,522Net loss
    
    
    
    
    
    
    
    
    
    
    (15,446
    )
    
    
    
    
    
    
    (15,446
    )Purchase of treasury shares
    
    
    (10,100
    )
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (3
    )Net unrealized loss on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (587
    )
    
    
    (587
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14Balance at December 31, 2002
    
    
    6,894,497
    
    
    
    187,730
    
    
    
    (140,587
    )
    
    
    (643
    )
    
    
    46,500Net loss
    
    
    
    
    
    
    
    
    
    
    (942
    )
    
    
    
    
    
    
    (942
    )Net unrealized gain on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    401
    
    
    
    401Less: Reclassification
adjustment for loss
realized on sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    587
    
    
    
    587Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (355
    )
    
    
    (355
    )Balance at December 31, 2003
    
    
    6,894,497
    
    
    
    187,730
    
    
    
    (141,529
    )
    
    
    (10
    )
    
    
    46,191Net loss
    
    
    
    
    
    
    
    
    
    
    (10,115
    )
    
    
    
    
    
    
    (10,115
    )Net unrealized loss on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,222
    )
    
    
    (3,222
    )Balance at December 31, 2004
    
    
    6,894,497
    
    
    
    187,730
    
    
    
    (151,644
    )
    
    
    (3,232
    )
    
    
    32,854US$
    
    
    US$
    
    
    US$
    
    
    US$Balance at December 31, 2004
    
    
    
    
    
    
    22,682
    
    
    
    (18,322
    )
    
    
    (390
    )
    
    
    3,970
 The accompanying notes are an integral part of these consolidated financial statements. F - 6




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands, unless otherwise stated)  1
    
    Nature of operations and basis of presentation Tramford International Limited (Tramford) was incorporated under the laws of the British
Virgin Islands on September 19, 1995 as a holding company. The consolidated financial statements
include the accounts of the Tramford and its subsidiaries (hereinafter collectively referred to as
the Group). On 8 May 2000, Jingle Technology Limited (JTL), a 100% subsidiary of Tramford, was formed to
act as an investment holding company within the Group. Effective July 1, 2000, JTL purchased 100%
interests in BHL Networks Technology Co. Ltd. (BHLNet), which in turn holds 76% interest in
Beijing BHL Networks Technology Co. Ltd (BBHL), for a consideration of Rmb21,959. Pursuant to
agreements entered into among the Group and the vendors in September 2002, the consideration was
reduced from Rmb21,959 to Rmb20,262. BBHL is a Sino-foreign equity joint venture and is
principally engaged in the provision of information technology and network security consultancy
services and sales of computer related products in the Peoples Republic of China (the PRC). BHL
and BBHL are collectively referred to as the IT Operations. The
IT Operations continue to engage in the provision of information technology and network security
consultancy services and the development of network security software for all years presented. The
other wholly owned subsidiary of Tramford, BHL Networks Technology Company Limited (formerly Jing
Tai Industrial Investment Company Limited), acts as the treasury center for the Group. The accompanying financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP), present the consolidated
results of the operations of the Group. All intercompany balances and transactions have been
eliminated in the consolidated financial statements of the Group. The preparation of financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the reporting period.
Accounting estimates have been employed in these financial statements to determine reported
amounts, including realizability of receivables and other assets, useful lives of assets and income
taxes. Actual results could differ from those estimates. The financial information has been prepared in Renminbi (Rmb), the national currency of the
PRC and also the functional currency of the Group (see also footnote 2(d)). Unless indicated
otherwise, amounts in Renminbi have been rounded to the nearest thousand. F - 7




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  2
    
    Summary of significant accounting policies The following is a summary of significant accounting policies followed by the Group in the
preparation of the financial statements.  (a)
    
    Revenues Revenues arise from product sales and the rendering of services. Revenue is generally
recognized when all of the following criteria are met (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred or services have been rendered; (iii) the sellers price to the
buyer is fixed or determinable, and (iv) collectibility is reasonably assured. Specifically,
product sales represent the invoiced value of goods, net of discounts, supplied to customers.
Revenues are recognized upon delivery to customers and when title has passed. Rendering of
services represent fees charged on the provision of information technology and network security
consultancy services. Fees on such services are recognized upon the completion of the underlying
services and collectibility to the fees is reasonably assured.  (b)
    
    Taxation Deferred income taxes are provided using the liability method under Statement of Financial
Accounting Standards (SFAS) No.109, Accounting for Income Taxes. Under the liability method,
deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the carrying amounts of existing assets and liabilities in the
financial statements and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect
for the year in which those temporary differences are expected to be recovered or settled. The tax
consequences of these differences are classified as current or non-current based on the
classification of the related asset or liability for financial reporting. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is considered more likely than not that
some portion of, or all of, the deferred tax assets will not be realized.  (c)
    
    Concentration of credit risk and major customers The Group is engaged in the provision of information technology and network security services
to a wide range of industries and end users within the PRC. All the Groups revenue is derived
from sales to customers located in the PRC. Accordingly, the Groups trade accounts receivable are
concentrated with respect to both geography and customer. The Group performs ongoing credit evaluations of its
customers and generally does not require collateral. Approximately, 9%, 24% and 59% of the total
revenues were contributed by 3 major customers during the year ended December 31, 2004.  (d)
    
    Foreign currency transaction gains and losses and translation of foreign currencies All foreign currency transaction gains and losses are recognized as other non-operating
(expense)/income in the Statements of Operations. The Renminbi is not freely convertible into foreign currencies. The PRC Government has
instituted a single regulated floating exchange rate system principally based on market supply and
demand. Under this system, a nationwide inter-bank foreign market has been established by
designating certain banks as authorised foreign exchange banks where Renminbi can be converted into
foreign currencies subject to prior approval from the PRC State Administration of Exchange Control. The functional currency of BBHL is Renminbi. Its business is primarily conducted in China and
denominated in Renminbi. The functional currency of Tramford and its other subsidiaries is the Hong Kong dollar. The
financial statements of Tramford and these subsidiaries are translated into Renminbi, using
exchange rates in effect at period end, wherever appropriate, for assets and liabilities and
average exchange rates during each reporting period for results of operations. Adjustments
resulting from the translation of financial statements are reflected as a separate component of
shareholders equity. For the convenience of the reader, a translation of amounts from Renminbi (Rmb) into United
States Dollars (US$) has been made at the noon buying rate in New York City for cable transfer in
foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on
December 31, 2004 of Rmb 8.2765 = US$1.00. Such translations should not be construed as
representations that the Renminbi amounts represent or have been or could have been converted into
United States dollars at that or any other rate.  (e)
    
    Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated useful lives of the
respective assets. Upon retirement or sale, the cost of disposed assets and the related accumulated
depreciation are deducted from the respective accounts and the resulting gain or loss is included
as other non-operating income/(expense) in the Statement of Operations. Maintenance and repair
costs are expensed as incurred. The estimated useful lives of property, plant and equipment are as
follows: Motor vehicles
    
    5 yearsFurniture, fixtures, office and computer equipment
    
    3 years
 F - 8




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  2
    
    Summary of significant accounting policies (continued)(f)
    
    Intangible asset Intangible asset represents the technology platform for development of server switch and
network security device acquired by the Group for cash. It is recognized at cost and is amortized
on a straight-line basis over its estimated useful life of three years.  (g)
    
    Software development costs Costs that are related to the conceptual formulation and design of licensed programs are
expensed as incurred. Capitalization of costs will happen during the period when technological
feasibility of the licensed program is established and when the product is ready for general
release to the market. The annual amortization of the capitalized amounts is the greater of the
amount computed based on the estimated revenue distribution over the products revenue-producing
lives, or the straight-line method, and is applied over periods ranging up to two years commencing
when the products are generally released to the market.  (h)
    
    Goodwill Goodwill represents cost in excess of the fair value of net assets acquired and was amortized
on a straight-line basis over a period of five years prior to January 1, 2002. The Group adopted
Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002, and ceased the amortization of goodwill. Instead it is tested at least
annually for impairment.  (i)
    
    Impairment Annual impairment test for goodwill is carried out in two steps. The first step of the
impairment test which is used to identify potential impairment, compares the fair value of the
reporting unit with its carrying amount, including goodwill. The fair value is determined by the
forecasted discounted net cash inflows of the reporting unit for a period of five years. If the
carrying amount of the reporting unit exceeds its fair value, goodwill of the reporting unit is
considered impaired. The second step of the impairment test quantifies the amount of the
impairment loss by comparing the carrying amount of goodwill to its implied fair value. An
impairment loss is recorded to the extent the carrying amount of goodwill exceeds its implied fair
value. Goodwill must be tested for impairment at least annually, or more frequently if warranted.
The Group has performed the required impairment test for 2004 and impairment losses of Rmb 4,337
and Rmb 411 were, respectively, provided for the goodwill of the network security and information
technology consultancy reporting units. The carrying value of a long-lived asset is considered impaired by the Group when the
anticipated undiscounted cash flow from such asset is less than its carrying value. If an
impairment is identified, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the long-lived asset. Fair market value is determined primarily
using the anticipated cash flows discounted at a rate commensurate with the risk involved or based
on independent appraisals. Long-lived assets, including certain identifiable intangibles with finite-lives, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable.  (j)
    
    Inventories Inventories are valued at the lower of cost and net realizable value. Cost includes the
purchase cost of products at invoiced value using a first-in first-out method. Net realizable
value is determined by reference to the sales proceeds of items sold in the ordinary course of
business or to a management estimate based on prevailing market conditions.  (k)
    
    Cash and cash equivalents Cash and cash equivalents include cash on hand, demand deposits with banks and liquid
investments with an original maturity of three months or less. The carrying value of cash
equivalents approximates their fair value.  (l)
    
    Short-term investments Highly liquid investments with maturities less than one year at the time of purchase
are considered as short-term investments. The carrying amount
of the investments approximates the fair value due to their short maturity. The Group maintains
certain security investments with security firms under the name of its fellow subsidiary or related
company, which hold these investments in trust for the Group. Periodic evaluations are performed
on the relative credit standing of these investments that are considered in the Groups investment
strategy. F - 9




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  2
    
    Summary of significant accounting policies (continued)(m)
    
    Investment in securities Securities held principally for resale in the near term are classified as trading securities
upon acquisition and recorded at their fair values. Unrealized gains and losses on trading
securities are included in non-operating income and expenses. Other securities are defined as
securities available-for-sale under the provisions of Statement of Financial Accounting Standards
(SFAS) No. 115 Accounting for Certain Investments in Debt and Equity Securities.
Available-for-sale securities are carried at fair value, with unrealized gains and losses, if any,
reported, net of tax, in other comprehensive income.  (n)
    
    Earnings per share Basic earnings per share represents income available to common shareholders divided by the
weighted-average number of common stocks outstanding during the period. Diluted earnings per share
reflects additional common stocks that would have been outstanding if dilutive potential common
stocks have been issued, as well as any adjustment to income that would result from the assumed
issuance. Dilutive potential common stocks that may be issued by the Group relate solely to
outstanding stock options and bonds with stock purchase warrants, and are determined using the
treasury stock method. Effects of stock options and bonds with stock purchase warrants are
excluded from the computation if the effect would be antidilutive.  (o)
    
    Stock options The Group applies Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees and complies with the disclosure provisions of SFAS No. 123 Accounting for
Stock-Based Compensation (SFAS No. 123). In general, compensation cost is recognized based on
the difference, if any, between the fair value of the Companys shares and the exercise price as
determined on the date the option is granted. Under APB Opinion No. 25, because the exercise price
of all the options issued by the Company equals or is higher than the market price of the
underlying stock on the date of grant, no compensation expense is recognized.  (q)
    
    Recent accounting pronouncements In November 2004, the Financial Accounting Standards Board, or the FASB, issued FASB Statement
No. 151, Inventory Costsan amendment of ARB No. 43 (SFAS No. 151), which is the result of its
efforts to converge U.S. accounting standards for inventories with International Accounting
Standards. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted
material (spoilage) costs to be recognized as current-period charges. It also requires that
allocation of fixed production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Group is currently assessing the impact of this
statement on its results of operations, financial position and cash flows upon adoption and has not
yet completed the assessment. In December 2004, the FASB issued a revised SFAS No. 123R, Share-Based Payment, which
replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. This Statement establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments for goods or
services, and addresses transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entitys equity instruments or that may be settled
by the issuance of those equity instruments. The focus is on accounting for transactions in which
an entity obtains employee services in share-based payment transactions. The Statement also
eliminates the use of the intrinsic value method of accounting, as discussed in Opinion 25 and was
provided in Statement 123 as an alternative to valuation. Under Opinion 25, issuing stock options
to employees generally resulted in recognition of no compensation cost. This Statement requires
entities to recognize the cost of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards, with limited exceptions. The
original effective date was interim or annual reporting periods beginning after June 15, 2005, but
subsequently the SEC has converted this to be only applicable to annual periods beginning after
this date. The Group does not expect the adoption of SFAS No. 123R to have a material impact on
its financial position or results of operations. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment
of APB Opinion No. 29 (SFAS 153) effective for nonmonetary asset exchanges occurring in the
fiscal year beginning January 1, 2006. SFAS 153 requires that exchanges of productive assets be
accounted for at fair value unless fair value cannot be reasonably determined or the transaction
lacks commercial substance. The Group is currently assessing the impact of this statement on its
results of operations, financial position and cash flows upon adoption and has not yet completed
the assessment. In March 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS
154), which was a replacement of APB Opinion No. 20 and FAS No. 3 effective for accounting changes
made in fiscal years beginning after December 15, 2005. SFAS 154 requires restrospective
application to prior periods financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative effect of the
change. It also requires that retrospective application of a change in accounting principle be
limited to the direct effects of the change. SFAS also requires that a change in depreciation,
amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change
in accounting estimate effected by a change in accounting principle. The Group is currently
assessing the impact of this statement on our results of operations, financial position and cash
flows upon adoption and has not yet completed that assessment. F - 10




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  3
    
    Non-operating incomeNon-operating income consisted of the following: Year ended December 31,2002
    
    
    2003
    
    
    2004Rmb
    
    
    Rmb
    
    
    RmbGain on adjustment to consideration for the acquisition of
subsidiaries (note)
    
    
    1,697
    
    
    
    
    
    
    
    Realized gains on trading securities
    
    
    347
    
    
    
    8
    
    
    
    Realized gains on available-for-sale securities
    
    
    
    
    
    
    2,005
    
    
    
    100Dividend income from marketable securities
    
    
    2
    
    
    
    295
    
    
    
    67Bank interest
    
    
    169
    
    
    
    119
    
    
    
    243Compensation received from a supplier on goods returned
    
    
    182
    
    
    
    
    
    
    
    Others
    
    
    59
    
    
    
    2
    
    
    
    2,456
    
    
    
    2,429
    
    
    
    410
  Note:During the year 2002, the Group renegotiated the consideration in respect of the acquisition
of the IT Operations made in 2000. The revised consideration is Rmb20,262, representing a
discount on the original consideration of Rmb21,959. This change in consideration resulted
in the recognition of a gain of Rmb1,697 in 2002.4
    
    Non-operating expensesNon-operating expenses consisted of the following: Year ended December 31,2002
    
    
    2003
    
    
    2004Rmb
    
    
    Rmb
    
    
    RmbUnrealized loss on trading securities
    
    
    9
    
    
    
    
    
    
    
    Others
    
    
    132
    
    
    
    
    
    
    
    141
    
    
    
    
    
    
    
    
 F - 11




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  5
    
    Income tax provision Tramford was incorporated under the laws of the British Virgin Islands (BVI), and under
current BVI law, is not subject to tax on income or capital gains as it does not carry out business
in the BVI. No provision for Hong Kong profits tax was provided for the companys subsidiary operating in
Hong Kong for 2003 and 2004 as it had no estimated assessable profits arising in Hong Kong. The Companys subsidiary operating in the PRC incurred a loss and therefore no PRC income tax
was provided. Composition of income tax expense The current and deferred portions of income tax expense included in the consolidated
statements of operations and comprehensive income for the years ended December 31 are as follows: 2002
    
    
    2003
    
    
    2004Rmb
    
    
    Rmb
    
    
    RmbCurrent income tax expenses
    
    
    
    
    
    
    249
    
    
    
    Recognition of deferred tax assets
    
    
    2,560
    
    
    
    1,531
    
    
    
    2,927Change in valuation allowance
    
    
    (2,560
    )
    
    
    (1,531
    )
    
    
    (2,927
    )Income tax expenses
    
    
    
    
    
    
    249
    
    
    
    
 Reconciliation of income tax expense by applying PRC statutory Enterprise Income Tax rate Income tax expense differed from the amounts computed by applying PRC statutory Enterprise
Income Tax (EIT) rate of 33% as a result of the following: 2002
    
    
    2003
    
    
    2004Rmb
    
    
    Rmb
    
    
    RmbIncome tax credit at PRC statutory EIT rate
    
    
    (5,806
    )
    
    
    (522
    )
    
    
    (3,338
    )Effect of different taxation rate in Hong Kong
    
    
    59
    
    
    
    (474
    )
    
    
    465Income not subject to taxation
    
    
    (593
    )
    
    
    (76
    )
    
    
    (53
    )Expenses not deductible for taxation purpose
    
    
    3,780
    
    
    
    
    
    
    
    Utilization of previously unrecognized tax losses
    
    
    
    
    
    
    (192
    )
    
    
    Increase in previously recognized tax loss resulting
from an increase in tax rate
    
    
    
    
    
    
    (18
    )
    
    
    Change in valuation allowance
    
    
    2,560
    
    
    
    1,531
    
    
    
    2,926Total income tax expense
    
    
    
    
    
    
    249
    
    
    
    
 Significant components of deferred tax assets December 31,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2004Rmb
    
    
    Rmb
    
    
    RmbTax loss carryforwards
    
    
    7,199
    
    
    
    8,538
    
    
    
    11,464Less: valuation allowance
    
    
    (7,199
    )
    
    
    (8,538
    )
    
    
    (11,464
    )Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    
 Tax loss carryforwards from the Companys PRC subsidiary can be carried forward for 5 years.
As the realization of the current tax loss carryforwards credit is uncertain, a full valuation
allowance against the deferred tax assets as at December 31, 2004 has been provided. F - 12




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  6
    
    Other assets Other assets consisted of the following: December 31,
    
    
    December 31,2003
    
    
    2004Rmb
    
    
    RmbRental and utility deposits
    
    
    179
    
    
    
    129Advance to staff
    
    
    204
    
    
    
    74Prepayment for insurance
    
    
    414
    
    
    
    379Prepayment for consultancy fee
    
    
    155
    
    
    
    11Prepayment for raw materials
    
    
    
    
    
    
    100Others
    
    
    392
    
    
    
    3941,344
    
    
    
    1,087
  7
    
    Property, plant and equipment, net December 31,
    
    
    December 31,2003
    
    
    2004Rmb
    
    
    RmbComputer equipment
    
    
    1,941
    
    
    
    1,972Furniture, fixtures and office equipment
    
    
    576
    
    
    
    581Motor vehicles
    
    
    107
    
    
    
    108Less: accumulated depreciation
    
    
    (2,536
    )
    
    
    (2,612
    )88
    
    
    
    49
 Depreciation for the year ended December 31, 2002, 2003 and 2004 amounted to Rmb374 , Rmb475
and Rmb76 respectively.  8
    
    Intangible asset The intangible asset, representing the amortized cost of the network security and server
switch technology acquired in 2000, is as follows: December 31,
    
    
    December 31,2003
    
    
    2004Rmb
    
    
    RmbGross carrying amount
    
    
    4,000
    
    
    
    4,000Less: accumulated amortization
    
    
    (4,000
    )
    
    
    (4,000
    )
    
    
    
    
 Amortization expense for the years ended December 31, 2002, 2003 and 2004 amounted to
Rmb1,333, Rmb1,000 and Rmb Nil respectively. The intangible asset has been fully amortized during
the year ended December 31, 2003. F - 13




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  9
    
    Goodwill The Group recorded goodwill of Rmb16,951 in connection with the acquisition of its IT
Operations in 2000. The carrying amount of goodwill has been assigned to the network security and
information technology consultancy reporting units, which also are reportable segments. The
goodwill for the year ended December 31, 2004 is as follows: Network
    
    
    Informationsecurity
    
    
    technology
    
    
    TotalRmb
    
    
    Rmb
    
    
    RmbGoodwill acquired in 2000
    
    
    15,112
    
    
    
    1,839
    
    
    
    16,951Less: accumulated amortization prior to 2002
    
    
    (3,526
    )
    
    
    (429
    )
    
    
    (3,955
    )Impairment loss for 2002
    
    
    (7,249
    )
    
    
    
    
    
    
    (7,249
    )Balance as of December 31, 2003
    
    
    4,337
    
    
    
    1,410
    
    
    
    5,747Impairment loss for 2004
    
    
    (4,337
    )
    
    
    (411
    )
    
    
    (4,748
    )Balance as of December 31, 2004
    
    
    
    
    
    
    999
    
    
    
    999
 The network security consultancy segment was tested for impairment in the fourth quarter of
2002, after the annual forecasting process. Due to economic recession in the region, operating
profits and cash flows were lower than expected. Based on the trend, the earning forecast for the
next five years was revised. In 2002, goodwill impairment loss of Rmb7,249 was recognized in the
network security consultancy reporting unit. The fair value of that reporting unit was estimated
using present value of future cash flows. In 2003, an assessment for impairment was carried out and no further impairment was
identified. In 2004, an assessment for impairment was carried out after the annual forecasting process.
In view of the underperformance of the internet security reporting unit, the earning forecast was
revised by management. Based on the revised forecast, the present value of future cashflows of the
internet security reporting unit is lower then the carrying value of goodwill and therefore,
goodwill impairment loss of Rmb4,337 was reported. Further, an assessment for impairment was carried out for the information technology
consultancy reporting unit. During the process, the estimated selling price of the reporting unit subsequent to the
balance sheet date was compared against the carrying value of the reporting unit with a shortfall of Rmb411.
Therefore, an impairment loss of Rmb411 was recognized in the information technology consultancy
reporting unit. Refer to Note 18 for the sale of the information technology consultancy reporting
unit subsequent to December 31, 2004.  10
    
    Software development costs December 31,
    
    
    December 31,2003
    
    
    2004Rmb
    
    
    RmbSoftware development costs capitalized
    
    
    170
    
    
    
    170Less: accumulated amortization
    
    
    (170
    )
    
    
    (170
    )
    
    
    
    
 Amortization expense for the years ended December 31, 2002, 2003 and 2004 amounted to Rmb85,
Rmb85 and Rmb Nil respectively. The software development costs have been fully amortized in the
year ended December 31, 2003.  11
    
    Other liabilities and accrued expenses December 31,
    
    
    December 31,2003
    
    
    2004Rmb
    
    
    RmbDeposits received
    
    
    289
    
    
    
    1,373Accrued salaries and staff benefits
    
    
    766
    
    
    
    1,007Others
    
    
    141
    
    
    
    781,196
    
    
    
    2,458
 F - 14




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  12
    
    Loss per share Basic loss per share represents income available to common stockholders divided by the
weighted-average number of common stocks outstanding during the period. Diluted earnings per share
reflects additional common stocks that would have been outstanding if dilutive potential common
stocks have been issued, as well as any adjustment to income that would result from the assumed
issuance. Dilutive potential common stocks that may be issued by the Group relate solely to
outstanding stock options, and are determined using the treasury stock method. Effects of stock
options are excluded from the computation if the effect would be antidilutive. Basic and diluted loss per share have been calculated in accordance with SFAS No. 128 for the
years ended December 31 as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004Rmb
    
    
    Rmb
    
    
    RmbNet loss
    
    
    (15,446
    )
    
    
    (942
    )
    
    
    (10,115
    )Weighted-average shares used in computing basic
and diluted loss per share
    
    
    6,895
    
    
    
    6,894
    
    
    
    6,894Loss per share- Basic and dilutive
    
    
    (2.24
    )
    
    
    (0.14
    )
    
    
    (1.47
    )
 In 2002, 2003 and 2004, exercise of stock options would have been antidilutive and, therefore,
was not considered in the computation of diluted loss per share.  13
    
    Related party transactionsThe transactions and balances with related parties are analyzed as follows:- Year ended December 31,2002
    
    
    2003
    
    
    2004Rmb
    
    
    Rmb
    
    
    RmbTransactions with related partiesSales
    
    
    754
    
    
    
    
    
    
    
    Service fee
    
    
    41
    
    
    
    
    
    
    
    
 December 31,
    
    
    December 31,2003
    
    
    2004Rmb
    
    
    RmbBalances with related partiesFunds held by the ultimate holding company for security
investment purposes
    
    
    6,529
    
    
    
    6,529Funds held by a fellow subsidiary of the Group for security investment purposes
    
    
    4,485
    
    
    
    3,388Due from a shareholder
    
    
    
    
    
    
    30Due from fellow subsidiaries
    
    
    165
    
    
    
    164Total due from related parties
    
    
    11,179
    
    
    
    10,111
 For the years 2002, 2003 and 2004, substantially all related party transactions are entered
into with fellow subsidiaries of the Group. The balances with related parties are unsecured and interest-free, and have no fixed terms of
repayment. F - 15




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  14
    
    Retirement plans As stipulated by the regulations of PRC, the PRC subsidiary is required to make contributions
to the retirement plan at the rate of 19% of the base salaries of their staff. Contributions made
in connection with the plan, which are expensed as incurred, were Rmb233, Rmb293 and Rmb363 for the
years 2002, 2003 and 2004 respectively. The PRC subsidiary has no obligation for the payment of
pension benefits beyond the annual contributions described above.  15
    
    Share capitalShare capital of Tramford as of December 31, 2003 and 2004 was as follows: No. of sharesOrdinary shares
    
    
    AdditionalCommon
    
    
    Treasury
    
    
    
    
    
    
    with par value
    
    
    paid-instock
    
    
    stock
    
    
    Subtotal
    
    
    US$0.01 each
    
    
    capital
    
    
    TotalRmb
    
    
    Rmb
    
    
    RmbDecember 31, 2003 and 2004
    
    
    9,044,888
    
    
    
    (2,150,391
    )
    
    
    6,894,497
    
    
    
    571
    
    
    
    187,159
    
    
    
    187,730
 (a)       On October 10, 1996, a stock option plan was set up to grant options to certain
employees and directors of the Company for a maximum of 200,000 shares. The stock option plan
provides for a grant of options to employees, officers, directors and consultants of the Group. The
stock option plan is administered by the Board of Directors or a committee appointed by the Board,
which determines the terms of options grant, including the exercise price, the number of shares
subject to the option and options exercisability. The exercise price of all options granted under
the stock option plan must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the stock option plan is 10 years. Up to
December 31, 1998, no options had been granted under the stock option plan. Pursuant to a board
resolution passed on December 28, 1999, 200,000 options were granted to certain directors and
officers at that time at an exercise price of US$1.15 each. Of the 200,000 options granted,
140,000 options were still held by certain directors and officers of the Company as of December 31,
2004. These options are fully vested as of December 31, 2003 and are exercisable within ten years
commencing from December 28, 1999. Apart from 60,000 options which were forfeited upon the
resignation of the relevant directors, no other options were issued, exercised, forfeited or
expired under this stock option plan during the years ended December 31, 2002, 2003 and 2004. On September 20, 2000, another stock option plan was set up to grant options to certain
employees and directors of the Company for a maximum of 400,000 shares. This stock option plan
provides for a grant of options to employees, officers, directors and consultants of the Group. The
stock option plan is administered by the Board of Directors or a committee appointed by the Board,
which determines the terms of options grant, including the exercise price, the number of shares
subject to the option and options exercisability. The exercise price of all options granted under
the stock option plan must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the stock option plan is 10 years. No options
were granted under this plan since its inception. (b)       The Company applies Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations in accounting for its employee stock
options. Under APB Opinion No. 25, because the exercise price of all the options issued by the
Company equals or is higher than the market price of the underlying stock on the date of grant, no
compensation expense is recognized. F - 16




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  15
    
    Share capital (continued) (c)       Pro forma information regarding net income and earnings per share is required by SFAS No.
123 Accounting for Stock-Based Compensation, and is determined as if the Group had accounted for
its employee stock options under the fair value method of SFAS No. 123. The fair value of options
granted during the year ended December 31, 1999 was RMB720. The fair value for these options was
estimated at the date of grant using a Black-Scholes option valuation model with the following
weighted-average assumptions for the year ended December 31, 1999; risk-free interest rate of 5.3%;
no dividend yield; volatility factor of the expected market price of the Companys common share of
233.5%; and a weighted-average expected life of the option of ten years. However, pro forma
disclosures are not presented as there are no options granted during the three years ended December
31, 2004 as there is no pro forma impact as related to our options granted in 1999 for all periods
presented.  16
    
    Contingencies and commitmentsOperating lease commitments As of December 31, 2004, the Group had future aggregate future minimum lease payments under
non-cancelable operating leases as follows: December 312003
    
    
    2004Rmb
    
    
    RmbIn respect of land and buildings:- within one year
    
    
    477,000
    
    
    
    477,000- in the second year
    
    
    
    
    
    
    - in the third year
    
    
    
    
    
    
    - in the forth year
    
    
    
    
    
    
    - in the fifth year
    
    
    
    
    
    
    477,000
    
    
    
    477,000
 Lease rental costs incurred by the Group for the year ended December 31, 2002, 2003 and 2004
amounted to Rmb1,047, Rmb596 and Rmb519 respectively. Contingencies On 16 July 2002, an ex-shareholder of one of the Groups Beijing operating unit filed claims
against BBHL in the International Arbitration Commission for Economics in China with respect to the remaining consideration on the Groups acquisition of the operating unit.
The ex-shareholder has requested that the Commission order the Group to settle the remaining consideration of
Rmb1,800, to pay Rmb50 for delay in completion of contract and Rmb100 for legal fees incurred in connection with
this arbitration. The arbitration has been scheduled to take place in July 2005. The Group has fully provided for the claim. F - 17




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##### Table of Contents



TRAMFORD INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands, unless otherwise stated)  17
    
    Segment information For management reporting purposes, the Groups business segment results are reported to the
management in two business segments: product sales and rendering of services. These business segments
are determined based on the nature of the products and services provided by each segment. Product sales
constitute the sale of network security softwares and devices. Rendering of services represents
the provision of information technology services. Management evaluates each segments performance based upon earnings before interest expense, depreciation
and amortization charges and other income/expenses. Such measure is then adjusted to exclude items that are of
a non-recurring or unusual nature. Management believes such discussions are the most informative representation
of how management evaluates performance. Summarized financial information by business segment
for 2004, 2003 and 2002 is as follows: NetOperating
    
    
    identifiable
    
    
    Depreciationprofit/
    
    
    assets/
    
    
    and
    
    
    CapitalRevenue
    
    
    (loss)
    
    
    (liabilities)
    
    
    amortization
    
    
    expendituresRmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    RmbYear 2004Product sales
    
    
    2,720
    
    
    
    (7,798
    )
    
    
    (1,920
    )
    
    
    76
    
    
    
    Rendering of services
    
    
    3,949
    
    
    
    245
    
    
    
    301
    
    
    
    
    
    
    
    Total operating segments
    
    
    6,669
    
    
    
    (7,553
    )
    
    
    (1,619
    )
    
    
    76
    
    
    
    Corporate
    
    
    
    
    
    
    (2,868
    )
    
    
    33,473
    
    
    
    
    
    
    
    Group
    
    
    6,669
    
    
    
    (10,421
    )
    
    
    31,854
    
    
    
    76
    
    
    
    Year 2003Product sales
    
    
    8,405
    
    
    
    (2,102
    )
    
    
    3,581
    
    
    
    1,560
    
    
    
    29Rendering of services
    
    
    3,337
    
    
    
    355
    
    
    
    702
    
    
    
    
    
    
    
    Total operating segments
    
    
    11,742
    
    
    
    (1,747
    )
    
    
    4,283
    
    
    
    1,560
    
    
    
    29Corporate
    
    
    
    
    
    
    (2,265
    )
    
    
    36,161
    
    
    
    
    
    
    
    Group
    
    
    11,742
    
    
    
    (4,012
    )
    
    
    40,444
    
    
    
    1,560
    
    
    
    29Year 2002Product sales
    
    
    5,658
    
    
    
    (9,778
    )
    
    
    5,923
    
    
    
    1,633
    
    
    
    70Rendering of services
    
    
    2,625
    
    
    
    (5,085
    )
    
    
    (61
    )
    
    
    159
    
    
    
    Total operating segments
    
    
    8,283
    
    
    
    (14,863
    )
    
    
    5,862
    
    
    
    1,792
    
    
    
    70Corporate
    
    
    
    
    
    
    (5,047
    )
    
    
    35,781
    
    
    
    
    
    
    
    Group
    
    
    8,283
    
    
    
    (19,910
    )
    
    
    41,643
    
    
    
    1,792
    
    
    
    70
 The Group operates mainly in the PRC and accordingly no geographical segment information is
presented. There are no sales or other transactions between the segments. Segment assets consist
primarily of cash and cash equivalents, inventories, trade receivables, other assets and fixed
assets. Segment liabilities comprise operating liabilities. Operating profit/ (loss) of segments include goodwill impairment loss of Rmb4,337 for product
sales segment and Rmb411 for rendering of services segment.  18
    
    Subsequent events Subsequent to December 31, 2004, Tramford entered into negotiation with potential buyers to
dispose of the information technology consultancy reporting unit. Management decided to dispose
of this operating unit in February 2004 and the operating unit was disposed of in March 2005 at
a consideration of approximately Rmb1,300. There was no gain or loss arising from this transaction. Pursuant to a minute of Board of Directors dated April 14, 2005, 185,400 treasury shares of
the Company as disclosed in Note 12 to the consolidated financial statements were approved for
cancellation. F - 18