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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




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FORM 20-F


|  |  |                                                                                                                                                   
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|o |  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934                                                  
| 
|  |  | OR                                                                                                                                                
| 
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002                  
| 
|  |  | OR                                                                                                                                                
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________

|                                            |  |                               
|------------------------------------------- |  | ------------------------------
|For the fiscal year ended December 31, 2002 |  | Commission file number 1-13522

China Yuchai International Limited

(Exact Name of Registrant as Specified in Its Charter)


|                                                    |  |                                                        
|--------------------------------------------------- |  | -------------------------------------------------------
|N/A
(Translation of Registrants Name Into English) |  | Bermuda
(Jurisdiction of Incorporation or Organization)



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16 Raffles Quay #26-00
Hong Leong Building
Singapore 048581
65-6220-8411
(Address and Telephone Number of Principal Executive Offices)



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Securities registered or to be registered pursuant to Section 12(b) of the Act:

|                                          |  |                                          
|----------------------------------------- |  | -----------------------------------------
|Title of Each Class                       |  | Name of Each Exchange
on Which Registered
|                                          |  |                                          
|Common Stock, par value US$0.10 per share |  | The New York Stock Exchange              

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None
(Title of Class)

Indicate the number of outstanding shares of each of the issuers classes
of capital or common stock as of the close of the period covered by the annual
report.

As of December 31, 2002, 35,340,000 shares of common stock, par value
US$0.10 per share, and one special share, par value US$0.10 per share, were
issued and outstanding.

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.          Yes X                No

Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17       Item 18 X



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TABLE OF CONTENTS



|                                                                 |                                                                                        |  |  |  |  |  |  | 
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Certain Definitions and Supplemental Information                
|Cautionary Statements with Respect to Forward-Looking Statements
|Incorporation by Reference                                      
|Part I                                                          
|                                                                 | Item 1. Identity of Directors, Senior Management and Advisers.                        
|                                                                 | Item 2. Offer Statistics and Expected Timetable.                                      
|                                                                 | Item 3. Key Information.                                                              
|                                                                 | Item 4. Information on the Company.                                                   
|                                                                 | Item 5. Operating and Financial Review and Prospects.                                 
|                                                                 | Item 6. Directors, Senior Management and Employees.                                   
|                                                                 | Item 7. Major Shareholders and Related Party Transactions.                            
|                                                                 | Item 8. Financial Information.                                                        
|                                                                 | Item 9. The Offer and Listing.                                                        
|                                                                 | Item 10. Additional Information.                                                      
|                                                                 | Item 11. Quantitative and Qualitative Disclosure About Market Risk.                   
|                                                                 | Item 12. Description of Securities Other Than Equity Securities.                      
|Part II                                                         
|                                                                 | Item 13. Defaults, Dividend Arrearages and Delinquencies.                             
|                                                                 | Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
|                                                                 | Item 15. Controls and Procedures                                                      
|                                                                 | Item 16A. Audit Committee Financial Expert                                            
|                                                                 | Item 16B. Code of Ethics                                                              
|                                                                 | Item 16C. Principal Accountants Fees and Services                                     
|Part III                                                        
|                                                                 | Item 17. Financial Statements.                                                        
|                                                                 | Item 18. Financial Statements.                                                        
|                                                                 | Item 19. Exhibits.                                                                    
|Signatures and Certifications                                   
|Independent Auditors Report                                    
|Consolidated Statements of Income                               
|Consolidated Balance Sheets                                     
|Consolidated Statements of Cash Flows                           
|Consolidated Statements of Changes in Stockholders Equity      
|Notes to Consolidated Financial Statements                      
|Ex-8.1 Subsidiaries Of The Registrant                           
|Ex-12.1 Auditors Consent                                        
|Ex-12.2 Certification Pursuant to Section 906                   



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##### Table of Contents



TABLE OF CONTENTS

CHINA YUCHAI INTERNATIONAL LIMITED

|                                                                 |                                                                                        |  |      |    | 
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                 |                                                                                        |  | Page
|                                                                 |                                                                                        |  |     
|Certain Definitions and Supplemental Information                 |                                                                                        |  | 3    |   
|Cautionary Statements with Respect to Forward-Looking Statements |                                                                                        |  | 3    |   
|Incorporation by Reference                                       |                                                                                        |  | 4    |   
|PART I                                                           |                                                                                        |  | 4    |   
|                                                                 | Item 1. Identity of Directors, Senior Management and Advisers.                         |  |      | 4  | 
|                                                                 | Item 2. Offer Statistics and Expected Timetable.                                       |  |      | 4  | 
|                                                                 | Item 3. Key Information.                                                               |  |      | 5  | 
|                                                                 | Item 4. Information on the Company.                                                    |  |      | 17 | 
|                                                                 | Item 5. Operating and Financial Review and Prospects.                                  |  |      | 32 | 
|                                                                 | Item 6. Directors, Senior Management and Employees.                                    |  |      | 41 | 
|                                                                 | Item 7. Major Shareholders and Related Party Transactions.                             |  |      | 48 | 
|                                                                 | Item 8. Financial Information.                                                         |  |      | 51 | 
|                                                                 | Item 9. The Offer and Listing.                                                         |  |      | 57 | 
|                                                                 | Item 10. Additional Information.                                                       |  |      | 57 | 
|                                                                 | Item 11. Quantitative and Qualitative Disclosure about Market Risk.                    |  |      | 67 | 
|                                                                 | Item 12. Description of Securities Other than Equity Securities.                       |  |      | 67 | 
|PART II                                                          |                                                                                        |  | 67   |   
|                                                                 | Item 13. Defaults, Dividend Arrearages and Delinquencies.                              |  |      | 68 | 
|                                                                 | Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds. |  |      | 68 | 
|                                                                 | Item 15. Controls and Procedures.                                                      |  |      | 68 | 
|                                                                 | Item 16A. Audit Committee Financial Expert.                                            |  |      | 69 | 
|                                                                 | Item 16B. Code of Ethics.                                                              |  |      | 69 | 
|                                                                 | Item 16C. Principal Accountants Fees and Services.                                     |  |      | 69 | 
|PART III                                                         |                                                                                        |  | 69   |   
|                                                                 | Item 17. Financial Statements.                                                         |  |      | 69 | 
|                                                                 | Item 18. Financial Statements.                                                         |  |      | 69 | 
|                                                                 | Item 19. Exhibits.                                                                     |  |      | 70 | 
|Signatures and Certifications.                                   |                                                                                        |  | 72   |   





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Certain Definitions and Supplemental Information

All references to China, PRC and the State in this Annual Report are
references to the Peoples Republic of China. Unless otherwise specified, all
references in this Annual Report to U.S. dollars, dollars, US$ or $ are
to United States dollars; all references to Renminbi or Rmb are to
Renminbi, the legal tender currency of China. Unless otherwise specified,
translation of amounts from Renminbi to U.S. dollars for the convenience of the
reader has been made in this Annual Report at the rate of Rmb 8.2766 = US$1.00,
the rate quoted by the Peoples Bank of China on December 31, 2002. No
representation is made that the Renminbi amounts could have been, or could be,
converted into U.S. dollars at that rate or at any other rate.

The consolidated financial statements of China Yuchai International
Limited and its subsidiaries are presented in Renminbi. All consolidated
financial statements of the Company presented herein have been prepared in
conformity with accounting principles generally accepted in the United States
of America (US GAAP). Totals presented in this Annual Report may not
correctly total due to rounding of numbers.

As used in this Annual Report, unless the context otherwise requires, the
term the Company refers to China Yuchai International Limited and its
consolidated subsidiaries. All references herein to Yuchai are to Guangxi
Yuchai Machinery Company Limited and its consolidated subsidiaries and, prior
to its incorporation in July 1992, to the machinery business of its
predecessor, Guangxi Yulin Diesel Engine Factory (Yulin Diesel), which was
founded in 1951 and became a state-owned enterprise in 1959. In the
restructuring of Yulin Diesel in July 1992, its other businesses were
transferred to Guangxi Yuchai Machinery Holdings Company, also
sometimes referred to as Guangxi Yuchai Machinery Group Company
Limited (the State Holding
Company), which became a shareholder of Yuchai.




Cautionary Statements with Respect to Forward-Looking Statements

The Company wishes to caution readers that the forward-looking statements
contained in this Annual Report, which include all statements which, at the
time made, address future results of operations, are based upon the Companys
interpretation of factors affecting the business and operations of the Company
and its subsidiaries. The Company believes the following important factors,
among others, in some cases have affected, and in the future could affect, the
Companys actual consolidated results and could cause the Companys actual
consolidated results for 2003, and beyond, to differ materially from those
described in any forward-looking statements made by, or on behalf of, the
Company:



| |  |  | political, economic and social conditions in China, including
the Chinese governments specific policies with respect to foreign
investment, economic growth, inflation and the availability of
credit, particularly to the extent such current or future conditions
and policies affect the truck and diesel engine industries and
markets in China, the Companys diesel engine customers, the demand,
sales volume and sales prices for the Companys diesel engines and
the Companys levels of accounts receivable;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | the effects of competition in the diesel engine market on the
demand, sales volume and sales prices for the Companys diesel
engines;                                                                         
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the Companys ability to collect and control its levels of
accounts receivable;                                                                                                                               
|
| |  |  | the Companys dependence on the Dongfeng Automobile Company
and other major diesel truck manufacturers controlled by or
affiliated with the Dongfeng Automobile Company;                                      
|
| |  |  | the Companys ability to successfully manufacture and sell
its 4108, 4110, 4110Q, 4110ZQ, 4112, 6105, 6108, 6112 and
proposed 6113 diesel engines and any new products;                                       
|
| |  |  | the Companys ability to finance its working capital and
capital expenditure requirements, including obtaining any required
external debt or other financing;                                                 
|
| |  |  | the effects of inflation on the Companys financial condition
and results of operations, including the effects on Yuchais costs
of raw materials and parts and labor costs;                                  
|
| |  |  | the effects of Chinas political, economic and social
conditions on the Companys business, financial condition and
results of operations;                                                                    
|
| |  |  | the effects of uncertainties in the Chinese legal system,
which could limit the legal protections available to foreign
investors, including with respect to the enforcement of foreign
judgments in China; and
|
| |  |  | the impact on the Companys business and results of
operations as a result of Chinas membership with the World Trade
Organization.                                                                           




Incorporation by Reference

This Annual Report on Form 20-F shall be deemed to be incorporated by
reference in the Prospectus, dated August 26, 1996, included in the
Registration Statement (File No. 333-5478) on Form F-3 of the Company and to be
a part thereof from the date on which this Annual Report is furnished, to the
extent it is not superseded by documents or reports subsequently filed or
furnished.




PART I




ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.

Not Applicable.




ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.

Not Applicable.

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ITEM 3. KEY INFORMATION.

Selected Financial Data

The selected financial information set forth below should be read in
conjunction with, and is qualified in its entirety by reference to, Item 5.
Operating and Financial Review and Prospects and the Companys audited
consolidated financial statements and the related notes for the three-year
period ended December 31, 2002 included in this Annual Report. The
consolidated financial statements of the Company are prepared in conformity
with US GAAP.

The Companys sole operating asset is its 76.4% ownership interest in
Yuchai. As a result, the Companys financial condition and results of
operations depend entirely upon Yuchais financial condition and results of
operations, and, in light of recent developments described elsewhere herein,
the propriety under Chinese law of the structure of the Companys ownership
interest in and control over Yuchai (see Item 8. Financial Information  Legal
Proceedings).

The selected balance sheet data as of December 31, 2001 and 2002 and the
statement of income data and cash flow statement data of the Company set
forth below for the years ended December 31, 2000, 2001 and 2002 are derived
from the consolidated financial statements of the Company included in this
Annual Report, which have been audited by KPMG, independent public
accountants, whose audit report dated March 31, 2003, except for note 30 of the consolidated financial statements, as to which the date is July 15, 2003, includes a paragraph regarding certain subsequent events disclosed in note 30 (the Consolidated Financial Statements). The selected balance
sheet data of the Company set forth below as of December 31, 1998, 1999 and
2000 and the statement of income data and cash flow statement data for the
years ended December 31, 1998 and 1999 are derived from the consolidated
financial statements of the Company, which have been audited by KPMG, but which
are not included in this Annual Report.

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|                                                          |  |                                           |           |      |  |      |           |      |  |      |           |      |  |  |           |   |  |  |           |   |  |  |         |  
|--------------------------------------------------------- |  | ----------------------------------------- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- | ---- |  |  | --------- | - |  |  | --------- | - |  |  | ------- | -
|                                                          |  | As of and for the Year Ended December 31,
|                                                          |  |                                          
|                                                          |  | 1998                                      |           | 1999 |  | 2000 |           | 2001 |  | 2002 |           | 2002
|                                                          |  |                                           |           |      |  |      |           |      |  |      |           |     
|                                                          |  | Rmb                                       |           | Rmb  |  | Rmb  |           | Rmb  |  | Rmb  |           | US$ 
|                                                          |  |                                           |           |      |  |      |           |      |  |      |           |     
|                                                          |  | (in thousands)                           
|Statement of Income Data:                                 |  |                                           |           |      |  |      |           |      |  |      |           |      |  |  |           |   |  |  |           |   |  |  |         |  
|Net sales                                                 |  |                                           | 1,172,568 |      |  |      | 1,270,337 |      |  |      | 1,414,527 |      |  |  | 1,783,329 |   |  |  | 3,513,047 |   |  |  | 424,455 |  
|Cost of goods sold                                        |  |                                           | 772,450   |      |  |      | 828,865   |      |  |      | 960,079   |      |  |  | 1,183,403 |   |  |  | 2,371,080 |   |  |  | 286,480 |  
|                                                          |  |                                           |           |      |  |      |           |      |  |      |           |      |  |  |           |   |  |  |           |   |  |  |         |  
|Gross profit                                              |  |                                           | 400,118   |      |  |      | 441,472   |      |  |      | 454,448   |      |  |  | 599,926   |   |  |  | 1,141,967 |   |  |  | 137,975 |  
|Research and development costs                            |  |                                           | 17,304    |      |  |      | 11,328    |      |  |      | 49,011    |      |  |  | 44,721    |   |  |  | 75,532    |   |  |  | 9,126   |  
|Selling, general and administrative
expenses              |  |                                           | 282,323   |      |  |      | 298,667   |      |  |      | 298,361   |      |  |  | 243,231   |   |  |  | 426,128   |   |  |  | 51,486  |  
|Amortization of goodwill(1)                               |  |                                           | 16,859    |      |  |      | 16,859    |      |  |      | 16,859    |      |  |  | 16,859    |   |  |  |          |   |  |  |        |  
|                                                          |  |                                           |           |      |  |      |           |      |  |      |           |      |  |  |           |   |  |  |           |   |  |  |         |  
|Operating income                                          |  |                                           | 83,632    |      |  |      | 114,618   |      |  |      | 90,217    |      |  |  | 295,115   |   |  |  | 640,307   |   |  |  | 77,363  |  
|Interest expense                                          |  |                                           | 61,600    |      |  |      | 36,602    |      |  |      | 27,886    |      |  |  | 29,784    |   |  |  | 25,144    |   |  |  | 3,038   |  
|Other expenses (income), net                              |  |                                           | 4,860     |      |  |      | 4,449     |      |  |      | (1,685    | )    |  |  | (3,858    | ) |  |  | (10,287   | ) |  |  | (1,243  | )
|                                                          |  |                                           |           |      |  |      |           |      |  |      |           |      |  |  |           |   |  |  |           |   |  |  |         |  
|Income before income taxes and
minority interests         |  |                                           | 17,172    |      |  |      | 73,567    |      |  |      | 64,016    |      |  |  | 269,189   |   |  |  | 625,450   |   |  |  | 75,568  |  
|Income tax expense (benefit)                              |  |                                           | 4,134     |      |  |      | 11,217    |      |  |      | 10,682    |      |  |  | (63,584   | ) |  |  | 83,242    |   |  |  | 10,057  |  
|                                                          |  |                                           |           |      |  |      |           |      |  |      |           |      |  |  |           |   |  |  |           |   |  |  |         |  
|Income before minority interests                          |  |                                           | 13,038    |      |  |      | 62,350    |      |  |      | 53,334    |      |  |  | 332,773   |   |  |  | 542,208   |   |  |  | 65,511  |  
|Minority interests in income of
consolidated subsidiaries |  |                                           | 7,378     |      |  |      | 18,650    |      |  |      | 16,256    |      |  |  | 82,386    |   |  |  | 129,775   |   |  |  | 15,680  |  
|                                                          |  |                                           |           |      |  |      |           |      |  |      |           |      |  |  |           |   |  |  |           |   |  |  |         |  
|Net income                                                |  |                                           | 5,660     |      |  |      | 43,700    |      |  |      | 37,078    |      |  |  | 250,387   |   |  |  | 412,433   |   |  |  | 49,831  |  
|Basic and diluted earnings per share                      |  |                                           | 0.16      |      |  |      | 1.24      |      |  |      | 1.05      |      |  |  | 7.09      |   |  |  | 11.67     |   |  |  | 1.41    |  
|Weighted average number of shares
outstanding             |  |                                           | 35,340    |      |  |      | 35,340    |      |  |      | 35,340    |      |  |  | 35,340    |   |  |  | 35,340    |   |  |  | 35,340  |  
|Balance Sheet Data (at period end):                       |  |                                           |           |      |  |      |           |      |  |      |           |      |  |  |           |   |  |  |           |   |  |  |         |  
|Working capital(2)                                        |  |                                           | 529,442   |      |  |      | 539,567   |      |  |      | 804,725   |      |  |  | 1,100,462 |   |  |  | 1,340,832 |   |  |  | 162,004 |  
|Goodwill(1)                                               |  |                                           | 263,211   |      |  |      | 246,353   |      |  |      | 229,495   |      |  |  | 212,636   |   |  |  | 212,636   |   |  |  | 25,691  |  
|Total assets                                              |  |                                           | 2,710,747 |      |  |      | 2,600,306 |      |  |      | 2,770,242 |      |  |  | 3,262,868 |   |  |  | 3,985,459 |   |  |  | 481,533 |  
|Long-term debt, excluding current
installments            |  |                                           | 208,800   |      |  |      | 60,000    |      |  |      | 170,000   |      |  |  | 180,000   |   |  |  | 50,000    |   |  |  | 6,041   |  
|Minority interests                                        |  |                                           | 358,589   |      |  |      | 354,926   |      |  |      | 360,311   |      |  |  | 420,545   |   |  |  | 487,491   |   |  |  | 58,900  |  
|Net assets                                                |  |                                           | 1,482,655 |      |  |      | 1,526,355 |      |  |      | 1,560,508 |      |  |  | 1,805,045 |   |  |  | 2,161,903 |   |  |  | 261,207 |  
|Capital stock                                             |  |                                           | 30,349    |      |  |      | 30,349    |      |  |      | 30,349    |      |  |  | 30,349    |   |  |  | 30,349    |   |  |  | 3,667   |  
|Shareholders equity                                      |  |                                           | 1,482,655 |      |  |      | 1,526,355 |      |  |      | 1,560,508 |      |  |  | 1,805,045 |   |  |  | 2,161,903 |   |  |  | 261,207 |  
|Cash Flow Statement Data:                                 |  |                                           |           |      |  |      |           |      |  |      |           |      |  |  |           |   |  |  |           |   |  |  |         |  
|Capital expenditures(3)                                   |  |                                           | 7,898     |      |  |      | 32,663    |      |  |      | 14,958    |      |  |  | 43,043    |   |  |  | 174,850   |   |  |  | 21,125  |  
|Depreciation(4)                                           |  |                                           | 133,241   |      |  |      | 127,892   |      |  |      | 125,981   |      |  |  | 113,680   |   |  |  | 118,872   |   |  |  | 14,361  |  
|Statistical Data:                                         |  |                                           |           |      |  |      |           |      |  |      |           |      |  |  |           |   |  |  |           |   |  |  |         |  
|Gross margin(5)                                           |  |                                           | 34.1      | %    |  |      | 34.7      | %    |  |      | 32.1      | %    |  |  | 33.6      | % |  |  | 32.5      | % |  |  | 32.5    | %
|Operating margin(6)                                       |  |                                           | 7.1       | %    |  |      | 9.0       | %    |  |      | 6.4       | %    |  |  | 16.5      | % |  |  | 18.2      | % |  |  | 18.2    | %



---

|(1) |  | Goodwill represents the difference between the price the Company paid for
common shares of Yuchai and the fair value of its corresponding share of
Yuchais underlying net assets. The Company adopted the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets, as of January 1, 2002. Goodwill acquired in a business
combination and intangibles determined to have an indefinite useful
life are not amortized, but instead are tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. Prior
to the adoption of SFAS No. 142, goodwill was amortized over 20 years
on a straight line basis. For a discussion of goodwill, see Note 3(n) of the Notes to the Consolidated Financial Statements.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Current assets (including cash) less current liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(3) |  | Purchase of property, plant and equipment and payment for construction in
progress.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(4) |  | Depreciation of property,
plant and equipment, and
amortization of lease prepayments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(5) |  | Gross margin is gross profit as a percentage of net sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(6) |  | Operating margin is operating income as a percentage of net sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Dividends

The following table sets forth a five-year summary of dividends paid by
the Company to its shareholders and by Yuchai to the Company, respectively:

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|            |  |                  |   |                            |  |                       |   | 
|----------- |  | ---------------- | - | -------------------------- |  | --------------------- | - | 
|            |  | Dividend paid by |   | Dividend Paid by Yuchai   
|            |  | the Company to   |   |                           
|            |  | its shareholders |   | to the Company(1)         
|Period Paid |  | (per share)      |   | (in thousands)            
|            |  |                  |   |                           
|1998        |  |                  |  |                            |  |                       |  | 
|1999        |  |                  |  |                            |  | Rmb 72,282 (US$8,712)
|2000        |  | US$0.01          |   | Rmb 72,284 (US$8,732)     
|2001        |  | US$0.02          |   | Rmb 72,284 (US$8,720)     
|2002        |  | US$0.19          |   | Rmb 245,766 (US$29,694)(2)



---

|(1) |  | Dividends paid by Yuchai to the Company, as well as to other shareholders
of Yuchai, were declared in Renminbi and paid in U.S. dollars (as shown in
the parentheses) based on the exchange rates at local designated foreign
exchange banks on the respective payment dates. For dividends paid for
1999, 2000 and 2001, the exchange rate used was Rmb 8.2973 = US$1.00, Rmb
8.2781 = US$1.00 and Rmb 8.2894 = US$1.00, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The dividends declared for 2002 by Yuchai have not yet been paid by
Yuchai to the Company (see Item 8. Financial Information  Legal
Proceedings), and the U.S. dollar amount (shown in
the parenthesis) for 2002 is based on an exchange rate of 8.2766 =
US$1.00, solely for the convenience of the reader.                                                                                                                        

In March 2003, the Company declared an interim ordinary dividend of
US$0.10 per share and a special dividend of US$0.30 per share for the year
ended December 31, 2002, payable to members whose names appeared on the
Companys register of members on April 14, 2003. These dividends were paid on
May 19, 2003 from cash reserves of the Company to each of its members other
than to Coomber Investments Limited (Coomber), pending the release from
Yuchai to the Company of dividends declared for 2002, as described in Item 8.
Financial Information  Legal Proceedings.

Historical Exchange Rate Information

On July 10,
2003, the noon buying rate was
Rmb 8.2773 = US$1.00.

The following tables set forth certain information concerning exchange
rates between Renminbi and U.S. dollars for the periods indicated:

|              |  |                     |        |     |  |  |        | 
|------------- |  | ------------------- | ------ | --- |  |  | ------ | 
|              |  | Noon Buying Rate(1)
|              |  | (Rmb per US$)      
|              |  |                    
|Period        |  | High                |        | Low
|              |  |                     |        |    
|December 2002 |  |                     | 8.2775 |     |  |  | 8.277  | 
|January 2003  |  |                     | 8.2772 |     |  |  | 8.2766 | 
|February 2003 |  |                     | 8.278  |     |  |  | 8.2768 | 
|March 2003    |  |                     | 8.2777 |     |  |  | 8.2769 | 
|April 2003    |  |                     | 8.2775 |     |  |  | 8.2769 | 
|May 2003      |  |                     | 8.2771 |     |  |  | 8.2767 | 
|June 2003     |  |                     | 8.2775 |     |  |  | 8.2768 | 

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|                       |  |                     |        |            |  |      |        |     |  |  |        |  |  |  |        | 
|---------------------- |  | ------------------- | ------ | ---------- |  | ---- | ------ | --- |  |  | ------ |  |  |  | ------ | 
|                       |  | Noon Buying Rate(1)
|                       |  |                    
|Period                 |  | Period End          |        | Average(2) |  | High |        | Low
|                       |  |                     |        |            |  |      |        |    
|                       |  | (Rmb per US$)      
|1998                   |  |                     | 8.2789 |            |  |      | 8.2969 |     |  |  | 8.3180 |  |  |  | 8.2774 | 
|1999                   |  |                     | 8.2795 |            |  |      | 8.2785 |     |  |  | 8.2800 |  |  |  | 8.2276 | 
|2000                   |  |                     | 8.2774 |            |  |      | 8.2784 |     |  |  | 8.2799 |  |  |  | 8.2768 | 
|2001                   |  |                     | 8.2766 |            |  |      | 8.2772 |     |  |  | 8.2786 |  |  |  | 8.2763 | 
|2002                   |  |                     | 8.2775 |            |  |      | 8.2770 |     |  |  | 8.2775 |  |  |  | 8.2765 | 
|2003 (through July 10) |  |                     | 8.2773 |            |  |      | 8.2773 |     |  |  | 8.2780 |  |  |  | 8.2766 | 



---

|(1) |  | The noon buying rate in New York for cable transfers payable in foreign
currencies as certified for customs purposes by the Federal Reserve Bank
of New York. Since April 1994, the noon buying rate has been based on the
rate quoted by the Peoples Bank of China. As a result, since April 1994,
the noon buying rate and the Peoples Bank of China rate have been
substantially similar. The Peoples Bank of China rate at the end of 2002
was Rmb 8.2766, compared with Rmb 8.2770 for the noon buying rate
(average).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Determined by averaging the rates on the last business day of each month
during the relevant period.                                                                                                                                                                                                                                                                                                                                                                                                                          

Risk Factors

The disclosure set forth in this section was prepared pursuant to the
Plain English Rules adopted by the Securities and Exchange Commission.
References to we, us, our and our company in this section are to China
Yuchai International Limited and its consolidated subsidiaries.

Risks relating to our company and our business

We have initiated various legal and arbitrational proceedings against our sole
operating subsidiary Yuchai, as well as against Yuchais principal Chinese
shareholder, and Yuchais Chairman and legal representative. Our business, financial
condition and results of operations may be adversely affected if we
do not prevail in these proceedings.

Our sole operating asset is our ownership interest in Yuchai, and our only
sources of cash flow are our share of the dividends, if any, paid by Yuchai and
investment interest thereon. In response to difficulties with
respect to our investment in Yuchai, we have initiated legal proceedings in New
York and arbitration proceedings in London and Singapore. These proceedings,
and the events causing us to initiate them, are described under Item
8. Financial Information  Legal Proceedings.
While we expect to prevail, no assurance can be given that we will prevail in the
foregoing proceedings or that a negative outcome will not have a material adverse
effect on our financial condition, results of operations, business or
prospects.

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We may not be able to fully exercise our
controlling interest in Yuchai.

Although we own 76.4% of Yuchais shares, we require the cooperation of
Yuchais Chinese shareholders in the daily management and
operation of Yuchai to fully exercise our controlling interest in Yuchai. We also need the assistance and cooperation of the State Holding Company in
dealing with various matters, including the implementation of corporate
governance procedures, the payment of dividends, the holding of Yuchai board
meetings and the resolution of employee-related matters. Moreover, as described under Item 8.
Financial Proceedings  Legal Proceedings, various Chinese government agencies have
recently alleged that our share ownership in Yuchai may not be in conformity with Chinese law.
It appears that affiliates of the State Holding Company may have initiated these allegations as
a means to limit our rights to exercise control over Yuchai. While we
expect to prevail, if we cannot satisfactorily resolve the issues
raised by the various Chinese governmental agencies relating to our
share ownership in Yuchai, or if our current disagreements with Yuchais Chinese
shareholders continue, then we cannot assure you that we will be able to fully exercise our controlling interest in Yuchai and
this could have a material adverse effect on our financial condition, results of operations,
business or prospects, including our inability to consolidate
Yuchais financial statements.

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Our sales are concentrated among
members of the Dongfeng Group. Any significant decrease in sales to the Dongfeng Group may have a material adverse effect on our business, financial condition and result of operations.

Our sales are concentrated among the Dongfeng Group, which includes the
Dongfeng Automobile Company, one of the largest state-owned
automobile companies in China, and other major diesel truck manufacturers
controlled by or affiliated with the Dongfeng Automobile Company. In
2002, the Dongfeng Group accounted for 45% of our gross sales and included our three largest customers:
Liuzhou Dongfeng Automobile, Hubei Dongfeng Automobile and Dongfeng Special
Automobile. Although we consider our relationships with the Dongfeng Group
to be good, the loss of one or more of the companies within the Dongfeng Group as a customer would have a material adverse effect on our business,
financial condition and results of operations.

The Dongfeng Group also competes with us in the diesel engine market in
China. Although we believe that the companies within the Dongfeng Group
generally make independent purchasing decisions based on end-user preferences,
we cannot assure you that truck manufacturers
affiliated with the Dongfeng Automobile Company will not
preferentially purchase diesel engines manufactured by companies
within the Dongfeng Group over those manufactured by us.

Competition in China from other diesel engine manufacturers may adversely affect our business, financial condition and results of operations.

The diesel engine industry in China is highly competitive. We compete
with many other domestic companies, most of which are state-owned enterprises.
Some of our competitors have formed joint ventures with or have technology
assistance relationships with foreign diesel engine manufactures or foreign
engine design consulting firms and use foreign technology that is more advanced
than ours. We expect competition to intensify as a result of:



| |  |  | improvements in competitors products;                      
| | - |  | ------------------------------------------------------------
|
| |  |  | increased production capacity of competitors;               
|
| |  |  | increased utilization of unused capacity by competitors; and
|
| |  |  | price competition.                                          

In addition, if import restrictions on motor vehicles and motor vehicle
parts are reduced, foreign competition could increase significantly. See
Risks relating to Mainland China  The admission of China into the World Trade
Organization could lead to increased foreign competition.

In the medium-duty diesel engine market, our 6108 medium-duty engine,
introduced in 1997, has been able to compete effectively with the 6110
medium-duty engine offered by our competitors. We cannot assure you, however,
that we will be able to maintain or improve our current market share or develop
new markets for our medium-duty diesel engines.

In the heavy-duty diesel engine market, we introduced the 6112 heavy-duty
engine in late 1999. Due to a delay in the commercial production of the 6112
engine, however, we were not able to benefit from the competitive advantages of
an early entry into the domestic market for heavy-duty engines. Moreover, the
market for heavy-duty diesel engines in China is price-sensitive, and customer
acceptance of the 6112 engines pricing structure requires considerable
marketing efforts by our company. As a

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result, we lowered our expectations for future sales volume and profitability of the 6112 engine. In 2001, the sales
volume of the 6112 engine was in line with our revised expectations, and the
sales in 2002 increased to 15,371 units. However, we cannot assure you that we will be
able to compete successfully in the heavy-duty diesel engine market in China
with the existing producers or any new entrants.

We have commenced engine development work on the proposed new 6113
heavy-duty engine, which we anticipate will have a rated power in excess of 350
horsepower. We expect initial production of this new 6113 engine to commence
in 2004, however, we cannot assure you that we will be able to commence
production as expected, or that such engines will be able to compete
with other heavy-duty engines producers or retailers in China.

In the light-duty diesel engine market, our 4108, 4110 and 4112 light-duty
engines introduced in 2000 were met with weak consumer demand due to strong
competition, minor technical problems and a high pricing structure. Although
we have had an increase in sales of our 4-series engines in 2002, we cannot
assure you that we will be able to continue to improve our market share for
light-duty diesel engines, and we may, in the future, decide to cease
production of one or more of the models we are currently producing.

Our long-term business prospects will depend largely upon our ability to
develop and introduce new or improved products at competitive prices. Our
competitors in the diesel engine markets may be able to introduce new or
improved engine models that are more favorably received by customers.
Competition in the end-use markets, mainly the truck market, may also lead to
technological improvement and advances that render our current products
obsolete at an earlier than expected date, in which case we may have to
depreciate or impair our production equipment more rapidly than planned.
Failure to introduce, or delays in the introduction of, new or improved
products at competitive prices could have a material adverse effect on our
business and prospects.

Our exposure to the Dongfeng Group has had, and could continue to have, a material adverse effect on our business, financial condition and results of operation.

We are highly dependent on the purchases made by the Dongfeng Group and
have significant exposure to their liquidity arising from the high level of
accounts receivable from them. We cannot assure you that the Dongfeng Group
will be able to repay all the money they owe to us. In addition, the Dongfeng Group may not be able to continue purchasing the same volume of products
from our company, which would significantly reduce our overall sales volume.

Our business, financial condition and results of operations may be adversely affected to the extent we are unable to continue our sales growth or adequately
manage our growth.

We have achieved consistent growth in net sales during the last two fiscal
years, with net sales increasing by 26.1% to Rmb 1,783.3 million in 2001 and by
97.0% to Rmb 3,513.0 million in 2002. We cannot assure you that we can
continue to increase our net sales or maintain our present level of net sales.
In particular, we may not be able to increase our net sales to levels more
appropriate for our levels of production capacity (production
capacity was estimated to be approximately 200,000 units at the end of 2002), fixed assets, expenses
(including factory overhead, direct labor, depreciation, selling, general
administrative and interest expenses) and capital expenditures. Moreover, our
future growth is dependent in large part on factors beyond our control, such as
continued economic growth in China.

In addition, we cannot assure you that we will be able to properly manage
any future growth, including:



| |  |  | obtaining the necessary supplies;                                       
| | - |  | ------------------------------------------------------------------------
|
| |  |  | hiring and training skilled production workers and management personnel;

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| |  |  | manufacturing and delivering products for increased orders in a timely manner;
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | maintaining quality standards and prices; and                                 
|
| |  |  | controlling production costs.                                                 

Furthermore, we have acquired in the past, and may acquire in the future,
equity interests in engine parts suppliers. If we are unable to
effectively manage or assimilate these acquisitions, our business and
prospects could be adversely affected. See Item 4.
Information on the Company  Business Overview  Manufacturing.

The diesel engine business in China is dependent in large part on the performance of the Chinese economy, as well as Chinese government policy. As a
result, our business and prospects will be adversely affected by slowdowns in
the Chinese economy, as well as Chinese government policies that de-emphasize
the use of diesel engines.

During periods of economic expansion, the demand for trucks, construction
machinery and other applications of diesel engines generally increases.
Conversely, during economic slowdowns the diesel engine industry is generally
adversely affected by a decline in demand. As a result, the performance of the
Chinese economy will affect, to a significant degree, our business and
prospects. For example, the various austerity measures taken by the Chinese
government in recent years to regulate economic growth and control inflation
significantly weakened demand for trucks in China. In particular, austerity
measures that restricted access to credit and slowed the rate of fixed
investment (including infrastructure development) adversely affected demand
for, and production of, trucks and other commercial vehicles. These adverse
market conditions, together with increased competition in the diesel engine
market, resulted in various degrees of financial and marketing difficulties for
diesel engine producers, including our company.

The business and prospects for the diesel engine industry, and thus the
business and prospects of our company, may also be adversely affected by
Chinese government policy. For example, in 1998, the Chinese government
announced a major initiative to boost consumer demand through investments in
infrastructure projects and increased availability of bank credit. As a
result, demand for trucks and other commercial vehicles, and thus demand for
diesel engines, continued to increase from 2000 to 2002. However, we cannot
assure you that the Chinese government will not change its policy in the future
to de-emphasize the use of diesel engines, and any such change will adversely
affect our business, financial condition and results of operations.

If we are not able to continuously improve our existing engine products and develop new diesel engine products, we may become less competitive, and our
business and prospects will be adversely affected.

As the Chinese automotive industry continues to develop, we will have to
continuously improve our existing engine products and develop new diesel engine
products in order to remain competitive. As a result, our long-term business
prospects will largely depend upon our ability to develop and introduce new or
improved products at competitive prices. Future products may utilize different
technologies and may require knowledge of markets that we do not currently
possess. Moreover, our competitors may be able to introduce new or improved
engine models that are more favorably received by customers than our products.
Any failure by our company to introduce, or any delays in the introduction of,
new or improved products at competitive prices could have a material adverse
effect on our business and prospects.

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We are dependent on our suppliers for most of the parts and components used to produce our engines. To the extent we are unable to obtain an adequate supply of high-quality parts and components on a timely basis, or at all, our business, financial condition and results of operations will be adversely
affected.

We are dependent on our suppliers for most of the parts and components
used to produce our engines, including connecting rods, starters, air
compressors, gear boxes and pistons. Although we manufacture a portion of the
engine blocks, cylinder heads, crankshafts and camshafts we require, have
acquired ownership interests in some of our suppliers and have
established new
companies involved in the manufacture and sale of spare parts and components,
we continue to rely on third-party suppliers for a substantial portion of these
main components. As a result, the quality of our engines is dependent in part
upon our ability to control the quality of supplier parts and components. We
cannot assure you that we will be able to obtain an adequate supply of
high-quality parts and components on a timely basis or at all. Although we
generally purchase supplies from at least two sources, an interruption in
supplies from a major supplier could result in production delays while we seek
to obtain additional supplies from alternative sources. Our business,
financial condition and results of operations will be adversely affected to the
extent we are unable to obtain the necessary engine parts and components on a
timely basis or at all. See Item 4. Information on the Company  Business
Overview  Manufacturing.

We may be unable to obtain sufficient financing to fund our capital requirements, which could limit our growth potential.

We believe that our cash from operations, together with any necessary
borrowings, will provide sufficient financial resources to meet our projected
capital and other expenditure requirements. If we have underestimated our
capital requirements or overestimated our future cash flows, additional
financing may be required. Financing may not be available to us on acceptable
terms or at all. Our ability to obtain external financing is subject to
various uncertainties, including our results of operations, financial condition
and cash flow, economic, political and other conditions in Mainland China, the
Chinese governments policies relating to foreign currency borrowings and
the condition of the Chinese and international capital markets. If adequate
capital is not available, our business and prospects could be adversely
affected.

Our controlling shareholders interests may differ from those of our other shareholders.

Our ultimate parent company is Hong Leong Asia Ltd., or HLA, which
indirectly holds 29.3% of the outstanding shares of our common stock, as well
as a special share that entitles it to elect a majority of our directors. HLA
controls us through its wholly-owned subsidiary, Hong Leong (China) Ltd., or
HLC, and through Hong Leong Technology Systems Pte Ltd., or HLT, a wholly-owned
subsidiary of HLC, as well as through other subsidiaries of HLA. HLT owns approximately 22.2% of the outstanding shares of
our common stock and is the registered holder of our special share. Prior to
August 2002, we were controlled by Diesel Machinery (BVI) Limited, or DML,
which, until its dissolution, was a holding company controlled by HLC and
was the prior owner of our special share. Through HLTs stock ownership
and various agreements among shareholders, HLA is able to
effect most corporate transactions without the concurrence of any of our other
shareholders. See Item 7. Major Shareholders and Related Party Transactions
 Related Party Transactions  Shareholders Agreement. In addition, our
shareholders do not have cumulative voting rights. We cannot assure you that
HLAs actions will be in the best interests of our other
shareholders. See also Item 6. Directors, Senior Management and Employees 
Compensation  Yuchai.

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We could be exposed to the impact of interest rates and foreign currency movements
with respect to our future borrowings. In addition, a devaluation of the Renminbi
will increase the Renminbi cost of repaying our foreign currency denominated
indebtedness and, therefore, could adversely affect our business, financial
condition and results of operations.

A portion of our borrowings in the future may be structured on a floating
rate basis and denominated in U.S. dollars. An increase in interest rates, or
fluctuations in exchange rates between the Renminbi and other currencies, may
increase our borrowing costs or the availability of funding and could affect
our business, financial condition and results of operations. In particular,
our business, financial condition and results of operations could be adversely
affected by a devaluation of the Renminbi.

The value of the Renminbi is subject to changes in Chinese government
policies and to international economic and political developments. Although
the official exchange rate for the conversion of Renminbi to U.S. dollars has
been stable, with Renminbi appreciating slightly against the U.S. dollar in
recent years, the exchange rate of the Renminbi could become volatile against the
U.S. dollar or other currencies. Since 1994, the conversion of Renminbi into
Hong Kong and United States dollars has been based on rates set by the Peoples
Bank of China, which are set daily based on the previous days Chinese interbank
foreign exchange market rate and current exchange rates on the world financial
markets. The Chinese government has stated publicly that it intends to make the
Renminbi freely convertible in the future. However, we cannot predict when the
Chinese government will allow free conversion of the Renminbi into foreign
currency, and we cannot assure you that the Chinese government will not take
steps that will cause the Renminbi to devalue. Substantially all of our
operating revenue is denominated in Renminbi, while a major portion of our
capital expenditures is denominated in U.S. dollars and Euro dollars. Since we
may not be able to hedge effectively against Renminbi devaluations, future
movements in the exchange rate of Renminbi and other currencies could have an
adverse effect on our financial condition and results of operations.

Risks relating to Mainland China

Substantially all of our assets are located in Mainland China, and
substantially all of our revenue is derived from our operations in Mainland
China. Accordingly, our business, financial condition and results of
operations are subject, to a significant degree, to economic, political and
legal developments in Mainland China. The economic system of Mainland China differs
from the economies of most developed countries in many respects, including
government investment, the level of development, control of capital investment,
control of foreign exchange and allocation of resources.

Adverse changes in the economic policies of the Chinese government could have a
material adverse effect on the overall economic growth of Mainland China, which
could reduce the demand for our products and adversely affect our competitive
position.

Since the late 1970s, the Chinese government has been reforming the
Chinese economic system from a planned economy to a market-oriented economy.
In recent years, the Chinese government has implemented economic reform measures
emphasizing decentralization, utilization of market forces in the development
of the Chinese economy and a higher level of management autonomy. These reforms
have resulted in significant economic growth and social progress, but the
growth has been uneven both geographically and among various sectors of the
economy. Economic growth has also been accompanied by periods of high
inflation. The Chinese government has implemented various policies from time to
time to restrain the rate of such economic growth, control inflation and
otherwise regulate economic expansion. In addition, the Chinese government has
attempted to control inflation by controlling the prices of basic commodities.
Severe measures or other actions by the Chinese government, such as placing
additional controls on the prices of diesel and diesel-using products, could
restrict our business operations and

14



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adversely affect our financial position. Although we believe that the economic reforms and macroeconomic policies and
measures adopted by the Chinese government will continue to have a positive
effect on economic development in Mainland China and that we will continue to
benefit from these policies and measures, these policies and measures may, from
time to time, be modified or reversed. Adverse changes in economic and social
conditions in Mainland China, in the policies of the Chinese government or in
the laws and regulations in Mainland China, could have a material adverse
effect on the overall economic growth of Mainland China and in infrastructure investment
in Mainland China. These developments could adversely affect our financial
condition, results of operations and business, by reducing the demand for our
products, for example.

Adverse economic developments in China or elsewhere in the Asian region could
have a material adverse effect on our business, financial condition and results
of operations.

Many Asian countries have experienced significant adverse changes
in economic conditions, including substantial depreciation in currency exchange
rates, increased interest rates, reduced economic growth rates, corporate
bankruptcies, declines in the market values of shares listed on stock
exchanges, decreases in foreign currency turnover and government-imposed
austerity measures. To date, Chinas economy has been affected to a lesser
extent than most other major Asian countries. However, we cannot assure you
that Chinas economy will not suffer more serious difficulties in the future.
Demand for trucks, construction machinery and other applications of diesel
engines generally increases during periods of economic expansion and decreases
during periods of economic slowdown. In the event that adverse economic
developments occur in China, our sales may decrease and our business, financial
condition and results of operations could therefore suffer.

The Chinese legal system embodies uncertainties, which could limit the legal
protections available to foreign investors.

The Chinese 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 Chinese government began to promulgate
a comprehensive system of laws and regulations governing economic matters in
general e.g., including with respect to the corporate organization and
governance, foreign investments, commerce, taxation and trade. Legislation
over the past 20 years has significantly enhanced the protections afforded to
various forms of foreign investment in Mainland China. However, these laws, regulations and legal
requirements are relatively recent, and their interpretation and enforcement
involve uncertainties, which may limit the legal protections available to
foreign investors.

The Chinese government recently underwent substantial reforms after the
meeting of the National Peoples Congress in March 2003. The
Chinese government
has reiterated its policy of furthering reforms in the socialist market
economy. No assurance can be given that these changes will not have an adverse
effect on business conditions in China generally or on our business in
particular.

We may not freely convert Renminbi into foreign currency, which could limit our
ability to obtain sufficient foreign currency to satisfy our foreign currency
requirements or to pay dividends to shareholders.

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Substantially all of our revenues and operating expenses are generated by
our Chinese operating subsidiary and are denominated in Renminbi, while a
portion of our capital expenditures and indebtedness is, or in the future may
be, denominated in US dollars and other foreign currencies. The Renminbi is
currently freely convertible under the current account, which includes
dividends, trade and service-related foreign exchange transactions, but not
under the capital account, which includes foreign direct investment, except
with the prior approval of the State Administration for Foreign Exchange, or
SAFE.

Our Chinese operating subsidiary, as a foreign invested enterprise, may
purchase foreign currency without the approval of SAFE for settlement of
current account transactions, including payment of dividends, by providing
commercial documents evidencing these transactions. Our Chinese operating
subsidiary may also retain foreign exchange in its current account (subject to
a cap approved by SAFE) to satisfy foreign currency liabilities or to pay
dividends. However, the relevant Chinese government authorities may limit or
eliminate our Chinese operating subsidiarys ability to purchase and retain
foreign currencies in the future. Our Chinese operating subsidiary, therefore,
may not be able to obtain sufficient foreign currency to satisfy its foreign
currency requirements to pay dividends to us for our use in making any future
dividend payments or to satisfy other foreign currency payment requirements.
Foreign currency transactions under the capital account are still subject to
limitations and require approvals from SAFE. This could affect our Chinese
operating subsidiarys ability to obtain foreign currency through debt or
equity financing, including by means of loans or capital contributions from us.

The admission of China into the World Trade Organization could lead to
increased foreign competition.

As a result of China becoming a member of the World Trade Organization, or
WTO, import restrictions on both motor vehicle components, including diesel
engines, and motor vehicles are expected to be gradually reduced. The WTO also
requires China to lower its import tariffs as a condition for membership.
Reduced import restrictions and/or lower tariffs may lead to increased imports
of foreign diesel engines and therefore lead to increased competition in the
domestic diesel engine markets. Similarly, reduced import restrictions and/or
lower tariffs on automobiles may affect the competition in the end-use markets
of our customers and indirectly affect our sales to such customers. Currently,
China is encouraging foreign investments into the motor vehicle engine
manufacturing industry.

The recent outbreak of severe acute respiratory syndrome (SARS) in various
parts of China and other countries may materially and adversely affect our
business and operations, as well as our financial conditions and results of
operations.

In March 2003, several countries, including China, experienced an outbreak
of a new and highly contagious form of atypical pneumonia now known as severe
acute respiratory syndrome, or SARS. The severity of the outbreak in certain
municipalities, such as Beijing, and provinces, such as Guangdong Province, has
affected general commercial activity. According to the World Health
Organization, over 8,460 cases of SARS and more than 790 deaths had been
reported in over 30 countries as of June 17, 2003. The recent SARS epidemic in China will likely have an adverse impact on
the sale of engines in 2003. We cannot predict at this time the
extent of the adverse impact which this SARS outbreak could have on the Chinese economy and us. The SARS outbreak could
significantly disrupt Yuchais ability to adequately staff its business and may
generally disrupt operations. Furthermore, this outbreak could severely
restrict the level of economic activity in affected areas, which could have a material adverse effect on our financial condition, results of operations, business or prospects.

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ITEM 4. INFORMATION ON THE COMPANY.

History and Development

The Company

The Company is a Bermuda holding company established in April 1993 to own
a controlling interest in Yuchai and currently owns, through six wholly-owned
subsidiaries, 76.4% of the outstanding common shares of Yuchai (Yuchai
Shares). The Company operates under The Companies Act 1981 of Bermuda. The
principal executive offices of the Company are located at 16 Raffles Quay
#26-00, Hong Leong Building, Singapore 048581. The Companys telephone number
is +65-6220-8411.

Until August 2002, the Company was controlled by Diesel Machinery (BVI)
Limited (DML), a company that was 53% owned by Hong Leong Asia Ltd. (HLA)
through its wholly-owned subsidiary, Hong Leong (China) Ltd.
(HLC). HLC owns Hong Leong Technology Systems Ptd. Ltd.
(HLT), which held shares in the Company through DML. DML was also 47% owned by China Everbright Holdings
Company Limited (EB Holdings) through its wholly-owned subsidiary, Coomber
Investments Ltd. (Coomber). HLA, a company listed on the Singapore Stock
Exchange, is part of the Hong Leong Group, which was founded in 1941 by the
Kwek family of Singapore and is one of the largest privately-controlled
business groups in Southeast Asia. EB Holdings is a state-owned enterprise of
China. In 2002, EB Holdings initiated court proceedings to effect a
liquidation of DML. As a result of the liquidation, HLC acquired the special
share of the Company, which entitles HLC to elect a majority of the directors
of the Company and veto any resolution of shareholders of the Company. See
Item 7. Major Shareholders and Related Party Transactions  Major
Shareholders. EB Holdings sold its shareholding in Coomber,
which held EB Holdings shares in the Company, in October
2002 to Goldman Industrial Limited (Goldman), and EB Holdings is no longer a
shareholder of the Company. Goldman is a subsidiary of Zhong Lin Development
Company Limited (Zhong Lin), an investment vehicle of the city government of Yulin in
Guangxi, China. See Item 7. Major Shareholders and Related Party Transactions
 Major Shareholders and Item 8. Financial Information  Legal Proceedings.

HLA provides certain management, financial planning and other services to
Yuchai and has designated two senior managers to work full-time at Yuchais
principal manufacturing facilities in Yulin City as part of Yuchais day-to-day
management team. Until the end of May 2003, these two senior managers were stationed at
Yuchais premises. However, in response to the Company initiating legal
proceedings against Yuchai, Yuchais management decided to exclude these two
senior managers from Yuchais premises. See Item 8. Financial Information 
Legal Proceedings.

The Companys sole operating asset is its ownership interest in Yuchai,
and its only sources of cash flow are its share of the dividends, if any, paid
by Yuchai and investment interest thereon. The following is primarily a
discussion of the business of Yuchai.

Yuchai

Yuchai is one of the largest medium-duty diesel engine manufacturers in
China and also produces diesel power generators and diesel engine parts.

Yuchai is located in Yulin City, Guangxi Zhuang Autonomous Region in
southern China, approximately 280 miles west of Hong Kong. With a population
of approximately 3.0 million, greater Yulin City is believed to
be the sixth largest city in
Guangxi Zhuang Autonomous Region.

17



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##### Table of Contents



Yuchai was founded in 1951 and became a state-owned enterprise in 1959.
Prior to 1984, Yuchai was a small producer of low-power diesel engines for
agricultural machinery. In 1984, Yuchai introduced the earliest model of its
6105 medium-duty diesel engine for medium-duty trucks. In 1989, Yuchai became
one of Chinas 500 largest industrial enterprises in terms of profitability and
tax contribution. In July 1992, in order to raise funds for further expansion,
Yuchai became the first state-owned enterprise in the Guangxi Zhuang Autonomous
Region to be restructured into a joint stock company.

As a result of this restructuring, Yuchai was incorporated as a joint
stock company in July 1992 and succeeded to the machinery business of Yulin
Diesel, and all of Yulin Diesels businesses, other than its machinery
business, as well as certain social service related operations, assets,
liabilities and employees (for example, cafeterias, cleaning and security
services, a hotel and a department store), were transferred to the State
Holding Company. The State Holding Company also became the majority
shareholder of Yuchai through its ownership stake of approximately 110 million
shares of Yuchai (State Shares). The State Holding Company is owned by the
Guangxi local government. In connection with its incorporation, Yuchai also
issued 80 million shares to various Chinese institutional investors (Legal
Person Shares).

In May 1993, in order to finance further expansion, Yuchai sold shares to
the Company and became a Sino-foreign joint stock company.

The initial shareholders of the Company, consisting of a subsidiary of
HLC, Sun Yuan Overseas (BVI) Ltd. (Sun Yuan BVI), the Cathay Investment Fund,
Limited (Cathay), GS Capital Partners L.P. (GSCP) and Coomber, then a
wholly-owned subsidiary of EB Holdings and, thus, controlled by China
Everbright International Limited (China Everbright International), made their
initial investments in Yuchai in May 1993, when their respective wholly-owned
subsidiaries purchased for cash 200 million newly-issued shares (51.3% of the
then-outstanding Yuchai Shares). These shareholders exchanged with the Company
their shareholdings in their wholly-owned subsidiaries, six companies which
held Foreign Shares of Yuchai, for 20 million shares of the Companys common
stock, par value US$0.10 per share (Common Stock) (after giving effect to a
10-for-1 stock split in July 1994 (the Stock Split)). In connection
therewith, Yuchai became a Sino-foreign joint stock company and became subject
to the laws and regulations relating to joint stock limited liability companies
and Sino-foreign joint venture companies in China. Foreign Shares may be held
by and transferred to non-Chinese legal and natural persons, subject to
approval of the Ministry of Commerce (MOC), the successor entity of the
Ministry of Foreign Trade and Economic Cooperation of China (MOFTEC).
Foreign Shares are entitled to the same economic rights as State Shares and
Legal Person Shares. State Shares are shares purchased with state assets by
government departments or organs authorized to represent state investment.
Legal Person Shares are shares purchased by Chinese legal persons or
institutions or social groups with legal person status and with assets
authorized by the state for use in business.

In November 1994, the Company
purchased from an affiliate of China
Everbright 78,015,500 Foreign Shares in exchange for the issuance of 7,801,550
shares of Common Stock (after giving effect to the Stock Split) (the China
Everbright Purchase). The 78,015,500 Foreign Shares of Yuchai held by Earnest Assets Ltd, a
subsidiary of EB Holdings and China Everbright before its sale to the Company,
had been originally issued as Legal Person Shares and State Shares and were
converted to Foreign Shares, pursuant to approvals granted by MOFTEC.
As a result, the Company became the owner of each of these six companies:
Hong Leong Technology Systems Ltd., Tsang & Ong Nominees (BVI) Ltd., Cathay Diesel Holdings Ltd., Goldman
Sachs Guangxi Holdings (BVI) Ltd., Youngstar Holdings Ltd. and Earnest Assets
Ltd.


18



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##### Table of Contents



In December 1994, the Company sold 7,538,450 shares of Common Stock in its
initial public offering (IPO) and used substantially all of the proceeds to finance
its six wholly-owned subsidiaries purchase of 83,404,650 additional Foreign
Shares from Yuchai.

In connection with the Companys purchase, through its six wholly-owned
subsidiaries, of additional Foreign Shares from Yuchai with proceeds of its
IPO, Yuchai offered additional shares pro rata to its other
existing shareholders (30 shares for each 100 shares owned) in accordance with
such shareholders pre-emptive rights, and each of the Companys subsidiaries was
able to acquire these additional Yuchai Foreign Shares. Such pro rata offering
(including the offering to the Company) is referred to herein as the Yuchai
Offering. Certain Legal Person shareholders subscribed for additional shares
in the Yuchai Offering. The State Holding Company informed Yuchai at the time
that it would not subscribe for any of its portion of Yuchai Shares (31,345,094
shares) in the Yuchai Offering. In order to obtain MOFTEC approval of the
Yuchai Offering, the State Holding Company was given the right by Yuchais
Board of Directors to subscribe for approximately 31 million shares of Yuchai
at a price of Rmb 6.29 per share at any time prior to December 1998. This was
because provisional regulations of the State Administration Bureau of State
Property (SABSP) and the State Committee of Economic System Reform (SCESR),
published in November 1994, imposed on any holder of state-owned shares certain
obligations to protect its interest in any share offering. Under such
regulations, the State Holding Company could have been required to subscribe
for Yuchai Shares in the Yuchai Offering. Yuchais shareholders subsequently
agreed to extend the duration of such subscription right to March 31, 2002 (the
exercise of which would have reduced the Companys ownership of Yuchai from
76.4% to 71.7%). The State Holding Company informed the shareholders of Yuchai
that it had determined not to subscribe for additional Yuchai Shares and this
determination was minuted by the Yuchai Board of Directors on November 1, 2002.
However, given the November 1994 provisional regulations of the SABSP and the
SCESR, the SABSP, the SCESR and/or the MOC may take action against the State
Holding Company, and there can be no assurance that any such action would not,
directly or indirectly, have a material adverse effect on Yuchai or the Company.

Capital Expenditures

Capital expenditures for routine upgrades to, and replacement of,
equipment, plant and property were Rmb 15.0 million, Rmb 43.0 million and Rmb
174.9 million in 2000, 2001 and 2002, respectively. The Company funded its
capital expenditures primarily from funds from operations generated by Yuchai
and, when necessary, from bank loans incurred by Yuchai. The Company incurred
additional capital expenditures in 2002 due to the 4-series light-duty diesel
engine series and the commencement of construction of the second foundry to
produce engine blocks to meet its expected increased unit production. The
Companys capital expenditures for 2003 are estimated to exceed Rmb 200.0
million, most of which is expected to be used to complete construction of the
second foundry and the construction of a production line for 6113 engines. The Company expects that it will be able to continue to fund its capital expenditure in 2003 in the same manner as in prior years, as described above and under Item 5. Operating and Financial Review and
Prospects  Liquidity and Capital Resources.

19



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##### Table of Contents



Business Overview

Product Development

Overview

The general market demand for trucks and buses has contributed to Yuchais
significant growth since 2001, with the continued expansion of the highways and
toll roads in China. The Company expects heavy-duty trucks to become an
increasingly important means of freight transportation as road conditions and
infrastructure in China improve. Both medium-duty and heavy-duty trucks are
increasingly fitted with diesel engines because of their higher power, fuel
efficiency and reliability as compared to gasoline engines. In addition, the
Chinese government had announced as a policy objective in 1994 that motor
vehicles weighing five tons or more should principally have diesel engines
after 2000.

To take advantage of anticipated growth in demand for diesel engines in
China, Yuchai substantially expanded its manufacturing facilities from their
production capacity of 37,000 units of medium-duty diesel engines in 1993 to
approximately 140,000 units of medium-duty diesel engines and 50,000 units of
heavy-duty diesel engines in 1996. In response to the introduction of high
power medium-duty engines introduced by its competitors in 1995, Yuchai began
commercial production of the 6108 medium-duty engine in the third quarter of
1997. In addition, Yuchai began trial production of its 4-Series engines (as
defined in Item 4. Information on the Company  Business Overview  Product
Development  4-Series Light-Duty Diesel Engines) in late 1999 and commenced
commercial production of these engines in 2000. Due to strong competition,
quality defects and a high pricing structure, sales of the 4-Series engines
were weak in 2000, but improved in 2001 and 2002, with the total number of
units sold reaching 4,747 units and 20,735 units, respectively. Yuchai also
commenced trial marketing of the 6112 heavy-duty engine in early 1999 and began
commercial production of these engines in the second half of 1999. The quality
of the 6112 engine has improved significantly due to the improvements made in
the past two years, which the Company believes has translated into higher
sales. In addition, continued economic growth in China, together with the
development of new highway infrastructure, has resulted in greater demand for
long-haul, heavy-duty trucks. As a result, sales of the 6112 engine increased
from 2,651 units in 2000 to 6,737 units in 2001 and 15,371 units in 2002.

6105QC Medium-Duty Diesel Engines

The 6105QC medium-duty engine was historically Yuchais primary product
and was principally installed in medium-duty trucks. However, in response to
the introduction of high-power medium-duty engines by its competitors in 1995,
Yuchai has been increasing its production and sales efforts on the 6108
medium-duty engine. In 2001, Yuchai produced 31,245 units of the 6105 engine,
or 39.7% of Yuchais total production volume of 78,800 units for that year.
Yuchai produced 39,644 units of the 6105 engine in 2002, representing 27.4% of
Yuchais total production volume of 144,463 units for that year. The Company
expects the 6108 engine to eventually replace the 6105 engine as Yuchais
primary product. See  Products  Medium-Duty Diesel Engines  6105 Engines.

6108 Medium-Duty Diesel Engines

The 6108 medium-duty engine is an overall improvement over the 6105QC
medium-duty engine. In particular, the Company expects the 6108 engine to
enhance Yuchais competitiveness in the medium-duty diesel engine market in
China. In 2001 and 2002, unit sales of the 6108 engine exceeded unit sales of the 6105
engine. The 6108 engine has become Yuchais
primary product. See  Products  Medium-Duty Diesel Engines  6108
Engines.

20



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In 2001, Yuchai produced 33,062 units of the 6108 engine, or 42.0% of
Yuchais total production volume of 78,800 units for the year. Yuchai produced
61,950 units of the 6108 engine in 2002, representing 42.9% of Yuchais total
production volume of 144,463 units for the year.

6112 Heavy-Duty Diesel Engines

In 1992, Yuchai purchased from an affiliate of Ford Motor Company in
Brazil the production line machinery for manufacturing 6112 heavy-duty engines
and moved the production line machinery to a factory in China (the 6112 Engine
Factory). The facilities were designed to have a production capacity of
approximately 50,000 units of the 6112 engine per year and could support
production of medium-duty engines when necessary. In addition, the facilities
could also perform product testing, production equipment repair and
maintenance, factory automation and other support functions.

The 6112 Engine Factory was completed in 1995 and commercial production
was scheduled to commence in late 1997. However, primarily as a result of the
unreliable quality of key engine components supplied by domestic component
manufacturers, the 6112 engine encountered significant technical problems
during initial road testing, and did not perform satisfactorily under harsh
environmental conditions. Yuchai was able to resolve these technical problems
and commence trial marketing of the 6112 engine in early 1999. Commercial
production of these engines began in the second half of 1999. Due to the delay
in commencement of commercial production, however, Yuchai was not able to
benefit from the competitive advantages of an early entry into the domestic
market for heavy-duty engines. Consequently, the volume of sales and
profitability of the 6112 engine had been lower than previously expected.
However, during 2002, the volume of sales of the 6112 engine had increased
steadily to over 1,000 units per month, reaching 15,371 units in 2002. This
increase reflects better than expected customer acceptance of the 6112 engine.
See  Products  Heavy-Duty Diesel Engines.

In 2001, Yuchai produced 8,134 units of the 6112 engine, or 10.3% of
total production volume of 78,800 units for the year. Yuchai produced 17,201 units of the 6112 engine in 2002, representing
11.9% of Yuchais total production volume of 144,463 units for that year.

4-Series Light-Duty Diesel Engines

The 4-Series light-duty engines comprise of the 4108, 4110, 4110Q, 4110ZQ
and 4112 engines (collectively, the 4-Series engines). See  Products 
Light-Duty Diesel Engines.

The 4110Q and 4110ZQ engines were developed to allow Yuchai to compete in
the light-duty diesel engine market. Trial production of the 4110 engines
commenced in late 1999. Sales of the 4110 engines in 2000 were weak due to
strong competition, minor technical problems and a high pricing structure.
Yuchai is working on eliminating these problems and does not expect sales of the
4110 engines to increase significantly until the quality of the engine
improves.

The 4108 engine was based on the 6105QC and the 6108 engines. The 4108
engine is designed for light trucks and passenger vehicles. Trial production
of the 4108 engine started in the third quarter of 2000, and commercial
production of the 4108 engine began in 2001. The 4112 engine was primarily
based on the 6112 engine. The 4112 engine is designed for use in light- to
medium-duty cargo trucks and buses. The 4112 engine also features a low
emission level that is compliant with Euro 1 standards. Trial production of
the 4112 engine started in early 2001 and commercial production of the 4112
engine began in late 2001. Both the 4108 and 4112 engines are experiencing
minor technical problems and are facing strong competition.

In 2001, Yuchai produced 6,359 units of 4-series engines, or 8.0% of
total production volume of 78,800 units for the year. Yuchai produced 23,773 units of the 4-Series engines in 2002,
representing 16.5% of Yuchais total production volume of 144,463 units for that year.

21



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Products

Yuchai primarily manufactures and sells diesel engines for medium-duty
trucks in China. Yuchais primary products are its 6105QC and 6108 medium-duty
engines, which are principally used in medium-duty trucks with a load capacity
of five to seven tons. In addition, Yuchai also offers the 4-Series light-duty
engines and the 6112 heavy-duty engines. See  Product Development. The
following table sets forth the technical specifications of the 6105QC engine,
the 6108 engine, the 6112 engine and the 4110ZQ engine:

|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|------------------------------------ |  | ----------------------------------------- |  | ----------------------------------------- |  | ----------------------------------------------------------------------- |  | --------------------------------------------------------
|Type and Technical                   |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Specifications                       |  | 6105QC Engine                             |  | 6108 Engine                               |  | 6112 Engine*                                                            |  | 4110ZQ Engine                                           
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Type                                 |  | 4-stroke, water cooling,
in-line vertical |  | 4-stroke, water cooling,
in-line vertical |  | 4-stroke,
turbo-charged,
inner-cooling, water
cooling, in-line
vertical |  | 4-stroke,
turbo-charged,
water-cooling,
in-line vertical
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Rated Power                          |  | 143 horsepower (105.1kw)                  |  | 160 horsepower (118 kw)                   |  | 270 horsepower (199 kw)                                                 |  | 136 horsepower (100kw)                                  
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Number of Cylinders                  |  | 6                                         |  | 6                                         |  | 6                                                                       |  | 4                                                       
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Cylinder Displacement                |  | 6.494L                                    |  | 6.871 L                                   |  | 7.8L                                                                    |  | 4.257L                                                  
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Rated Speed                          |  | 2800 r/min                                |  | 2800 r/min                                |  | 2400 r/min                                                              |  | 2800 r/min                                              
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Maximum Torque                       |  | 402 N.m                                   |  | 450 N.m                                   |  | 980 N.m                                                                 |  | 392 N.m                                                 
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Speed at Maximum Torque              |  | 1600-1900 r/min                           |  | 1600-1900 r/min                           |  | 1500 r/min                                                              |  | 1600-1800 r/min                                         
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Bore x Stroke                        |  | 105 x 125 mm                              |  | 108 x 125 mm                              |  | 112 x 132 mm                                                            |  | 110 x 112 mm                                            
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Minimum Fuel Consumption             |  | < 228.5 g/kw.h                            |  | < 228.5 g/kw.h                            |  | < 200 g/kw.h                                                            |  | < 248 g/kw.h                                            
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Consumption Ratio
of Oil to Fuel     |  | < 1%                                      |  | < 1%                                      |  | < 0.5%                                                                  |  | < 0.5%                                                  
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Noise                                |  | < 117 dB(A)                               |  | < 117 dB(A)                               |  | < 98 dB(A)                                                              |  | < 115 dB(A)                                             
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Smoke                                |  | < 4 Bosch                                 |  | < 3.5 Bosch                               |  | < 3 Bosch                                                               |  | < 3.5 Bosch                                             
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Net Machine Weight                   |  | 550 kg                                    |  | 550 kg                                    |  | 642 kg                                                                  |  | 380 kg                                                  
|                                     |  |                                           |  |                                           |  |                                                                         |  |                                                         
|Dimensions
(length x width x height) |  | 1234 x 701 x 1000 mm                      |  | 1234 x 701 x 1000 mm                      |  | 1224 x 815 x 986 mm                                                     |  | 863 x 664 x 843 mm                                      



---

|* |  | Yuchais 6112 engines have a rated power ranging from 190 to 270
horsepower. The technical specifications set forth for the 6112 engine
in the table are for the 6112 engine with 270 horsepower.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Diesel engines are commonly referred to by a four-digit numerical name,
such as 6108 or 6112. The first digit refers to the number of cylinders and
the last three digits refer to the cylinder bore diameter in millimeters. In
addition, the numerical name is often followed by a letter indicating the
design and use (for example, Q for motor vehicles).

Besides diesel engines, Yuchai also produces a limited number of diesel
power generators and diesel engine parts. The following table sets forth a
breakdown of Yuchais sales by major product category for each of the three
years ended December 31, 2000, 2001 and 2002, respectively:

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|                        |          |           |         |                |           |      |     |           |       |           |     |        |        |                |        |           |           |       |     |      |     |   |     |                |        |       |        |           |           |  |     |      |       |   |     |        |         | 
|----------------------- | -------- | --------- | ------- | -------------- | --------- | ---- | --- | --------- | ----- | --------- | --- | ------ | ------ | -------------- | ------ | --------- | --------- | ----- | --- | ---- | --- | - | --- | -------------- | ------ | ----- | ------ | --------- | --------- |  | --- | ---- | ----- | - | --- | ------ | ------- | 
|                        |          |           |         | 2000           |           | 2001 |     | 2002     
|                        |          |           |         |                |           |      |     |          
|                        |          |           |         |                |           |      |     | % of      |       | Units     |     |        |        |                |        | % of      |           | Units |     |      |     |   |     | % of           |        | Units
|Product                 |          | Net Sales |         | Net Sales      |           | Sold |     | Net Sales |       | Net Sales |     | Sold   |        | Net Sales      |        | Net Sales |           | Sold 
|                        |          |           |         |                |           |      |     |           |       |           |     |        |        |                |        |           |           |      
|                        |          |           |         | Rmb            |           |      |     |           |       |           |     |        |        | Rmb            |        |           |           |       |     |      |     |   |     | Rmb            |        |       |        |           |           |  |     |     
|                        |          |           |         | (in thousands) |           |      |     |           |       |           |     |        |        | (in thousands) |        |           |           |       |     |      |     |   |     | (in thousands) |        |       |        |           |           |  |     |     
|Diesel engines          |          |           |         |                |           |      |     |           |       |           |     |        |        |                |        |           |           |       |     |      |     |   |     |                |        |       |        |           |           |  |     |      |       |   |     |       
|                        | 6105QC   |           |         | 577,197        |           |      |     | 40.8      | %     |           |     | 29,792 |        |                |        | 581,086   |           |       |     | 32.6 | %   |   |     | 31,001         |        |       |        | 706,442   |           |  |     | 20.1 | %     |   |     | 36,135 |        
|                        | 6108     |           |         | 554,699        |           |      |     | 39.2      | %     |           |     | 24,323 |        |                |        | 713,369   |           |       |     | 40.0 | %   |   |     | 31,667         |        |       |        | 1,602,545 |           |  |     | 45.6 | %     |   |     | 58,042 |        
|                        | 6112     |           |         | 136,909        |           |      |     | 9.7       | %     |           |     | 2,651  |        |                |        | 317,141   |           |       |     | 17.8 | %   |   |     | 6,737          |        |       |        | 753,559   |           |  |     | 21.5 | %     |   |     | 15,371 |        
|                        | 4-Series |           |         | 17,338         |           |      |     | 1.2       | %     |           |     | 1,175  |        |                |        | 74,236    |           |       |     | 4.2  | %   |   |     | 4,747          |        |       |        | 376,931   |           |  |     | 10.7 | %     |   |     | 20,735 |        
|Diesel power
generators |          |           | 4,357   |                |           |      | 0.3 | %         |       |           | 130 |        |        |                | 2,378  |           |           |       | 0.1 | %    |     |   | 62  |                |        |       | 5,103  |           |           |  | 0.2 | %    |       |   | 101 |       
|Other(1)                |          |           | 124,027 |                |           |      | 8.8 | %         |       |           | N/A |        |        |                | 95,119 |           |           |       | 5.3 | %    |     |   | N/A |                |        |       | 68,467 |           |           |  | 1.9 | %    |       |   | N/A |       
|                        |          |           |         |                |           |      |     |           |       |           |     |        |        |                |        |           |           |       |     |      |     |   |     |                |        |       |        |           |           |  |     |      |       |   |     |        |        
|                        |          | Total     |         |                | 1,414,527 |      |     |           | 100.0 | %         |     |        | 58,071 |                |        |           | 1,783,329 |       |     |      | 100 | % |     |                | 74,214 |       |        |           | 3,513,047 |  |     |      | 100.0 | % |     |        | 130,384 | 
|                        |          |           |         |                |           |      |     |           |       |           |     |        |        |                |        |           |           |       |     |      |     |   |     |                |        |       |        |           |           |  |     |      |       |   |     |        |        



---

|(1) |  | Includes diesels engine parts and industrial engines. Figures for the number of units sold for this category are not
readily available.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------

Medium-Duty Diesel Engines

6105 Engines

The 6105QC medium-duty engine, traditionally Yuchais principal product,
is a six-cylinder, four-stroke engine that offers up to 143 horsepower, and is
principally installed in medium-duty trucks. Yuchai believes that its 6105
engine has a reputation for fuel efficiency, low noise levels, firm uphill
traction and reliability. Yuchai also believes that its manufacturing quality
control and the design of its engine blocks, which are thicker than those of
its major domestic competitors as well as leading international manufacturers,
make its engines more durable.

In response to the introduction of high-power medium-duty engines by its
competitors in 1995, Yuchai began development of its 6108 medium-duty engine.
Commercial production of the 6108 engine began in the third quarter of 1997,
and in 2002 unit sales of the 6108 engine exceeded unit sales of the 6105
engine. The 6108 engine has replaced the 6105
engine as Yuchais primary product.

6108 Engines

The 6108 engine offers improved overall performance compared to the 6105
engine, principally because of greater horsepower, increased reliability and
improved acceleration. Commencing in the third quarter of 1997, Yuchai began
offering the 6108 engine to its customers as a premium model, along-side its
standard 6105QC engine, and plans to eventually replace the 6105 engine with
the 6108 engine. Yuchais existing and planned production facilities for
medium-duty diesel engines are designed to be capable of producing 6108 engines
without major modification.

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##### Table of Contents



Yuchai sells its 6108 engine to the same customers which previously bought
its 6105QC engines. Although the increased competition in the medium-duty
diesel market and Yuchais delay in commercially introducing the 6108 engine
had adversely affected Yuchais market share, through an aggressive marketing
program, Yuchai was able to increase its unit sales of the 6108 engine by 41.1%
to 24,323 units in 2000 from 1999 and by 30.2% to 31,667 units in 2001 from
2000. Unit sales of the 6108 further increased to 58,042 units in 2002,
representing an increase of 83.3% over 2001. There can be no assurance,
however, that Yuchai will be able to maintain or improve its current market
share or develop new markets for the 6108 engine. See Item 5. Operating and
Financial Review and Prospects  Operating Results  Overview.

An important part of Yuchais business strategy is to continually achieve
higher standards of quality in its diesel engines. Yuchai believes that its
engines have an established reputation among truck manufacturers and end-users
for durability and quality. Due to poor road conditions, lack of engine
maintenance by end-users and the common practice of overloading trucks in
China, Yuchai believes that the reliability and durability of its engines are
critical factors in maintaining competitiveness. By further improving the
reliability and overall quality of its engines and controlling the costs of
production, Yuchai believes it can command higher prices for its engines than
its competitors and remain competitive in China.

Heavy-Duty Diesel Engines

The 6112 heavy-duty engine is a six-cylinder, four-stroke engine with a
rated power ranging from 190 to 270 horsepower. Primarily as a result of
unreliable key engine components supplied by domestic component manufacturers,
the 6112 engine encountered significant technical problems during initial road
testing and failed to perform satisfactorily under harsh environmental
conditions. Although commercial production of the 6112 engine was delayed
beyond the previously scheduled date, Yuchai was able to resolve these
technical problems and commence trial marketing of the engine in early 1999.
Commercial production of these engines began during the second half of 1999.
In 2000 and 2001, Yuchai produced 3,300 and 8,134 units of the 6112 engine,
respectively. In 2002, Yuchai produced 17,011 units of the 6112 engine. See
Item 5. Operating and Financial Review and Prospects  Operating Results 
Overview. With the higher levels of acceptance by customers, 6112 engine unit
sales have increased in 2002 as compared to 2001.

Light-Duty Diesel Engines

The 4-Series engines utilize much of the same technology as the 6112
heavy-duty engine, modified to produce short-range and reduced cylinder engines
for lightweight cars and trucks. Despite their relatively small size (less
than half the size of the 6112 engine), they have the advantages of the 6112
engine, including, reliability, high performance and a long life span. Due to
its versatility, the 4110Q engine is suitable for light vehicles and
agricultural trucks. The 4110ZQ engine, with features such as a low emission
level that is compliant with Euro 1 standards and low noise levels, is ideal
for light commercial vehicles and medium-size passenger vehicles. Trial
production of the 4-Series engines commenced in late 1999. In 2000, due to
strong competition in the light-duty diesel engine market, minor technical
problems and the high pricing structure of the 4-Series engines, only 1,175 of
the 2,220 units which it produced were sold. In 2001, Yuchai produced less
than 7,000 units and sold fewer than 5,000 units in 2001, while working on
resolving the technical problems. In 2002, Yuchai achieved sales of
20,735
units, which is a significant increase compared to 2001.

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Other Products

Diesel Power Generators

Yuchai produces diesel power generators which are primarily used in the
construction and mining industries. The diesel power generators offer a rated
power of 12 kilowatts to 160 kilowatts. Yuchais diesel power generators use
both the 6105 and 6108 medium-duty engines as their power source.

Diesel Engine Parts

Yuchai supplies diesel engine parts to its nationwide chain of customer
service stations. Although sales of diesel engine parts do not constitute a
major percentage of Yuchais net sales, the availability of such parts to its
customers and to end-users through its nationwide chain of customer service
stations is an important part of Yuchais customer service program.

Sales, Marketing and Services

Sales and Marketing

Yuchai distributes most of its engines directly to auto plants and
retailers from its primary manufacturing facilities in Yulin City. In
addition, Yuchai operates 28 regional sales offices in major geographic regions
in China. With a sales force of approximately 470 persons nationwide, Yuchai
provides a comprehensive range of services to its customers, including
dispatching engineers to provide on-site assistance to major customers in the
resolution of technical problems.

Yuchai promotes its products primarily through television commercials,
advertisements in newspapers and industry journals. Since 1993, Yuchai has
been sponsoring an annual program, User Service Week, during which Yuchai
provides its customer service stations with information brochures, customer
suggestion cards for the improvement of Yuchais service and small gifts for
end-users. In connection with this promotion, Yuchais customer service
stations also perform minor repairs on end-users diesel engines free of
charge. Yuchai believes that its promotional efforts are unusual for an
automotive component company in China and lead to greater brand name
recognition among end-users.

Advertising expenses increased by 79.2% in 2002 to Rmb 31.9
million from Rmb 17.8 million in 2001. On the other hand, due to significant
increases in sales, sales commissions increased to Rmb 17.7 million in 2002
compared to Rmb 12.6 million in 2001.

Yuchai believes that proximity to its factories in Yulin City is an
important factor in the geographical make-up of its customers. Due in part to
transportation and shipping costs, a substantial majority of Yuchais engines
are sold to customers in southern and central eastern China. Yuchai currently
exports a minor portion of its diesel engines to Vietnam, and Yuchai is
exploring opportunities to export its diesel engines to other developing
countries.

Yuchais sales are concentrated among Dongfeng Group, one of the largest state-owned automobile companies in China, and
other major diesel truck manufacturers controlled by or affiliated with
Dongfeng Group. Sales to the Dongfeng Group accounted for approximately 54.0% and 45.0% of Yuchais total net sales
2001 and 2002, respectively. Dongfeng is also a major competitor of Yuchai.
See  Competition.

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Yuchai has been continuing its sales efforts to retailers and end-users of
diesel engines. Yuchai seeks to convince end-users of gas engine trucks to
replace their gas engines with Yuchai diesel engines by advertising the
advantages of diesel engines. Such sales of replacement engines are generally
made through customer service centers at a retail price, which is higher than
the sales price to truck manufacturers.

Prior to delivery, customer orders with Yuchai are subject to cancellation
by either Yuchai or the customers under the terms of the sales contracts. As
part of the continuing efforts to control the level of its trade accounts
receivable, Yuchai does not expect to fill all contracted customer orders.
There can be no assurance that such cost-controlling measures will successfully
control Yuchais trade receivable balance, or that they will not adversely affect
the future purchase decisions of Yuchais customers. Yuchai had net trade
accounts receivable of Rmb 773.8 million as of December 31, 2001, representing
39.5% of Yuchais total current assets at the same date. As of December 31,
2002, Yuchai had net trade accounts receivable of Rmb 1,003.1 million,
representing 38.2% of Yuchais total current assets as of the same date.

Customer Service

Yuchai believes that customer service is an important part of maintaining
its market competitiveness. In addition to various services provided initially
at its sales offices, Yuchai has a nationwide network of over 450 authorized
service stations that provide repair and maintenance services, spare parts,
retrofitting services and training to Yuchais customers. To ensure a
consistently high level of service, Yuchai trains the technicians at each of
these service stations. In addition, Yuchai also owns and operates over 30
repair training centers.

Yuchais customer service program emphasizes a fast turnaround time on
repair requests. As part of this policy, Yuchai supplies authorized service
stations with spare parts for repairs and requires these service stations to
provide on-site assistance at the customers place of business within 24 to 48
hours, depending on the customers location.

Yuchai provides a repair and replacement warranty for all of its engines.
Prior to 1993, Yuchais warranty was for 12 months or 30,000 kilometers. In
September 1993, Yuchai extended its warranty to 18 months or 50,000 kilometers
and, in September 1994, Yuchai further extended its warranty from a period of
12 months or 120,000 kilometers to a warranty period of 18 months or 180,000
kilometers, whichever is lower. For the years ended 2000, 2001 and 2002,
warranty costs represented approximately 2.0%, 3.3% and 3.5% of net sales,
respectively.

Manufacturing

Yuchais primary manufacturing facilities are located in Yulin City in the
Guangxi Zhuang Autonomous Region. The principal production land area currently
occupies approximately 960,900 square meters, including the existing production
factory for the 6105QC medium-duty engines, the existing production factory for
the 6108 medium-duty engine (the 6108 Engine Factory), the 6112 Engine
Factory and various testing and supporting facilities. In 2002, the annual
production capacity of Yuchais manufacturing facilities was approximately
140,000 units of medium-duty diesel engines and 60,000 units of heavy-duty and
light-duty diesel engines. Yuchai operated at less than full capacity in 2002.

Yuchais production process involves the manufacture of key components and
the assembly of the diesel engine from components and parts internally
manufactured or purchased from third parties. Yuchai manufactures a
substantial portion of the key components of its diesel engines, including the
engine block, cylinder heads, crankshaft and camshaft. Yuchai cast and molded
approximately 151,000 engine blocks in 2002, satisfying approximately 90% of
its engine block needs in 2002. When necessary, Yuchai is able to

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purchase additional engine blocks from a domestic foundry under an existing requirement
contract. Yuchai/ASIMCO Components Company Limited (Yuchai/ASIMCO) is one of
Yuchais principal suppliers of fuel injection pumps through two
of its related companies. Yuchai purchases the
remaining parts and components for its 6105 engines as well as raw materials,
principally steel and cast iron, from domestic suppliers. Yuchai does not
believe that it is dependent on any one supplier as it generally purchases
supplies from at least two sources (except with respect to engine blocks where
Yuchai currently has a purchase arrangement only with the domestic foundry
referred to above). In addition, the prices of raw materials are not volatile.
Yuchai manufactures internally the same key components for its 6108 engine as
it does for the 6105 engine and purchases the remaining parts and components
for its 6108 engine from domestic suppliers. The main parts for the 6112
heavy-duty engine, which are the engine blocks, cylinder heads, crankshaft and
fuel pumps, are imported from foreign suppliers and the other parts are
purchased from domestic suppliers.

To ensure that its standards and specifications are met, Yuchai conducts
routine checks at each stage of the production process, tests each diesel
engine prior to delivery to the customer, and inspects all raw materials, parts
and components purchased from suppliers to ensure that they meet Yuchais
requirements. To ensure the safety of its workers, Yuchai has established a
safety department to supervise the proper use of equipment, prevent fire and
explosions and promote safe practices and procedures in the workplace.

Yuchai/ASIMCO is a joint venture between Yuchai and a subsidiary of Asian
Strategic Investments Corporation (ASIMCO) that invests in factories in China
that produce parts and components for diesel engines. ASIMCO is a joint
venture among The Pacific Alliance Group Limited, Dean Witter Capital
Corporation and TCW Capital Investment Corporation. As of December 31, 2002,
Yuchai had contributed Rmb 5.7 million to the joint venture and owned a 4.73%
interest in the common stock of the joint venture.

During 2000, at the
State Holding Companys initiative, Yuchai established two new companies involved in the manufacture and sale of spare parts and
components for diesel engines in China. Yuchai contributed a total of Rmb 105
million in assets to the companies and received equity interests of 71.8% and
97.0%, respectively, in the two companies. During 2002, Yuchai increased its
equity interest in Guangxi Yulin Yuchai Machinery Spare Parts Manufacturing
Company Limited, the subsidiary involved in the manufacture of spare
parts,
from 97% to 97.1% by an additional contribution of Rmb 4.3 million. The State
Holding Company owns the remaining equity interests in the companies. Yuchai
established these new companies to ensure access to a consistent and quality
supply of spare parts and components for its diesel engines and to improve the
quality of its customer service by maintaining a regular supply of these spare
parts. The establishment of these companies by Yuchai was initially not made with
the requisite corporate approvals, but was subsequently ratified by the Board
of Directors of Yuchai in October 2001.

Seasonality

Yuchais business generally is not seasonal. However, Yuchais results of
operations in the first quarter of each year are affected by the Chinese New
Year holiday period in January or February during which Yuchais factories are
closed for approximately two weeks. The operations of Yuchais customers are
also closed during the holiday period. As a result, production and sales in
the first quarter of a year generally have been lower than in other quarters,
after adjusting for increases in production capacity.

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Trademarks

Yuchai owns and maintains Chinese trademark registrations of its principal
trademarks. Yuchai believes that its logo is well recognized as a quality
brand in China. As Yuchai currently sells most of its products in the domestic
market, registration of its principal trademarks is not maintained in countries
outside China. Yuchai has not been involved in any material claim or dispute
in relation to trademarks or other intellectual property rights and, to the
best of Yuchais knowledge, no such claim or dispute is pending or threatened.

Competition

The diesel engine industry in China is highly competitive. Yuchai
believes, based on internal studies, that competition is based primarily on
performance, quality, price and after-sale service, and secondarily on noise,
size and weight. Yuchai believes that its engines have a strong reputation
among truck manufacturers and consumers for leading performance and
reliability. In addition, Yuchai believes that its after-sale service to
end-users of Yuchai engines, conducted through a nationwide network of over 450
authorized service stations and 30 Yuchai-owned repair training centers, gives
Yuchai a competitive advantage over other diesel engine producers.

Most of Yuchais major domestic competitors are state-owned enterprises.
Dongfeng, which is a major competitor of Yuchai and which controls two of
Yuchais largest competitors, is also one of Yuchais major customers and
controls Yuchais other major customers, accounting in the aggregate for
approximately 45.0% of Yuchais total net sales in 2002. Some of Yuchais
competitors have formed joint ventures with, or have technology assistance
arrangements with, foreign diesel engine manufacturers or engine design
consulting firms, and use foreign technology that is more advanced than
Yuchais technology. Yuchai believes several of its major competitors, as
Yuchai itself, have substantial unused production capacity. Yuchai expects
competition to intensify as a result of, among other things, improvements in
competitors products, increased production capacity of competitors, increased
utilization of unused capacity by competitors and price competition.

In the medium-duty diesel engine market, Yuchais 6105 and 6108 engines
compete primarily against the 6110 engines produced by a number of Yuchais
competitors. Initially, the introduction of the 6110 engine in 1995 had put
considerable pressure on Yuchais competitiveness in the medium-duty diesel
market because it offered greater horsepower than Yuchais 6105 engine.
However, the commercial introduction of the 6108 engine in 1997 by Yuchai,
which offers substantially the same horsepower as the 6110 engine, has allowed
Yuchai to compete effectively in the medium-duty diesel engine market. In
competing with the 6110 engine, Yuchai focuses on the quality and price of, and
the after-sales service on, the 6108 engine. There can be no assurance,
however, that Yuchai will be able to maintain or improve its current market
share or develop new markets for its medium-duty diesel engines.

In addition, Yuchai commenced trial marketing of its 6112 heavy-duty
engine in early 1999, and began commercial production of these engines in the
second half of 1999. Due to the delay in commercial production of the 6112
engine until 1999, however, Yuchai was not able to benefit from the competitive
advantages of an early entry into the domestic market for heavy-duty engines.
Moreover, the market for heavy-duty diesel engines in China is relatively price
sensitive, and customer acceptance of the 6112 engines pricing structure
requires considerable marketing efforts by Yuchai. As a result, the Company
lowered its expectations for future sales volume and profitability of the 6112
engine. In 2002, the sales volume of the 6112 engine was 15,371 units, which
was in line with the Companys expectations. However, there can be no assurance
that Yuchai will be able to compete successfully in the heavy-duty diesel
engine market in China with the existing producers or any new entrants.

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Yuchai also faces intense competition in the light-duty diesel engine
market. In this market, Yuchai competes primarily against Wuxi Diesel Engine
Factory First Auto Group and Dalian Diesel Engine Factory First Auto Group
(collectively, the First Auto Group). As Yuchai is a late entrant into the
light-duty diesel engine market relative to the First Auto Group, it will be
difficult for Yuchai to become a major market leader in the short-term.

As the Chinese automotive industry develops, Yuchai will have to
continuously improve its existing engine products and develop new diesel engine
products in order to remain competitive. Consequently, Yuchais long-term
business prospects will largely depend upon its ability to develop and
introduce new or improved products at competitive prices. Future products may
utilize different technologies and may require knowledge of markets that Yuchai
does not currently possess. Currently, Yuchai is heavily dependent on foreign
engine design consulting firms and foreign engine manufacturers for
technological assistance in improving its products and developing new products,
and expects such dependency to continue. The introduction of new diesel engine
products will also require significant capital expenditures, such as purchases
of foreign manufacturing equipment and technologies. In addition, Yuchais
competitors in the diesel engine markets may be able to introduce new or
improved models that are more favorably received by customers than Yuchais
products. Competition in the end-use markets, mainly the truck market, may
also lead to technological improvement and advances that render Yuchais
current products obsolete at an earlier than expected date, in which case
Yuchai may have to depreciate or impair its production equipment more rapidly
than planned. Failure to introduce, or delays in the introduction of, new or
improved products at competitive prices could have a material adverse effect on
the business and prospects of Yuchai.

The admission of China into the World Trade Organization (the WTO),
which regulates trading among its member states, could lead to increased
foreign competition for Yuchai. As a result of China becoming a member of the
WTO, import restrictions on both motor vehicle components, including diesel
engines, and motor vehicles are expected be reduced. China is also required to
lower its import tariffs as a condition for membership in the WTO. Reduced
import restrictions and/or lower tariffs may lead to increased imports of
foreign diesel engines and, therefore, to increased competition in the domestic
diesel engine markets. Similarly, reduced import restrictions and/or lower
tariffs on automobiles may affect the competition in the end-use markets of
Yuchais customers and indirectly affect Yuchais sales to such customers.
Currently, China is encouraging foreign investments into the motor vehicle
engine manufacturing industry. Yuchai has been in discussions with potential
foreign diesel engine manufacturers on a possible strategic joint venture to
develop and manufacture new diesel engines.

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Organizational Structure

The following chart illustrates the organizational structure of the
Company and Yuchai, and is based on information generally known to
Company or otherwise disclosed in filings made with the Securities and Exchange Commission (S.E.C.) (see
also Item 7. Major Shareholders and Related
Parties  Major Shareholders).

(ORGANIZATIONAL STRUCTURE)

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Regulatory and Related Matters

Governance, Operation and Dissolution of Yuchai

Governance, operation and dissolution of Yuchai are governed by laws and
regulations of China relating to both joint stock limited liability companies
and Sino-foreign joint venture companies, as well as by Yuchais Articles of
Association.

Yuchai is subject to the Sino-Foreign Equity Joint Venture Enterprise
Labor Management Regulations. Under these regulations, management may hire and
discharge employees and make other determinations with respect to wages,
welfare, insurance and employee discipline.

Chinese laws and regulations applicable to a Sino-foreign joint stock
company require that, before Yuchai distributes profits, it must: (i) satisfy
all tax liabilities; (ii) recover losses in previous years; and (iii) make
contributions to certain statutory reserves in an amount equal to at least 15%
of net income for the year determined in accordance with generally accepted
accounting principles in China (PRC GAAP).

Pursuant to Chinese law and Yuchais Articles of Association, Yuchai may
be dissolved upon the occurrence of certain events, including force majeure,
severe losses, lack of supply of necessary materials or other events that
render Yuchai unable to continue its operations. Upon dissolution, Yuchai will
form a liquidation committee. Final dissolution is subject to government
review and approval.

Allegations of
irregularities have recently been raised regarding the status of
the Companys ownership of and rights of control over Yuchai. The Company
believes that such allegations are based on an inaccurate
understanding of the structure of the Companys ownership of and
rights of control over Yuchai. The Company further believes that Yuchais
ownership structure has been validly approved by the relevant
Chinese authorities, and the Company is taking steps to communicate
to the relevant Chinese government agencies the reasons for its belief in
respect thereof. See Item 8. Financial
Statements  Legal Proceedings.

Property, Plants and Equipment

Yuchais headquarters is located in Yulin City in the Guangxi Zhuang
Autonomous Region. Yuchai has the right to use approximately 1.5 million
square meters of land, which is currently used primarily for the production of
diesel engines and employee housing. The principal production land area for
the manufacture of diesel engines currently occupies approximately 960,900
square meters, including a building for the current 6105QC manufacturing
facilities and recently completed facilities occupying approximately 620,000
square meters that comprise the 6108 Engine Factory, the 6112 Engine Factory,
administrative offices and technical operations space. In addition, Yuchai
leases a sales office and an office for supplies near its headquarters and 28
other regional sales offices.

Environmental Matters

China adopted its Environmental Protection Law in 1989, and the State
Council and the State Environmental Protection Agency promulgate regulations as
required from time to time. The Environmental Protection Law addresses issues
relating to environmental quality, waste disposal and emissions, including air,
water and noise emissions. Environmental regulations have not had a material
impact on Yuchais results of operations. Yuchai delivers, on a regular basis,
burned sand and certain other waste products to a waste disposal site approved
by the local government and makes payments in respect thereof. Yuchai expects
that environmental standards and their enforcement in China will, as in many
other countries, become more stringent over time, especially as technical
advances make achievement of higher standards more feasible. Yuchai has built
an air filter system to reduce the level of dust and fumes resulting from its
production of diesel engines.

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto contained in this
Annual Report. The consolidated financial statements of the Company are
prepared in conformity with US GAAP. The Company consolidates Yuchai into its
financial statements.

The Companys sole operating asset is its 76.4% ownership interest in
Yuchai. As a result, the Companys financial condition and results of
operations depend entirely upon Yuchais financial condition and results of
operations. The Company acquired its initial 51.3% interest in Yuchai
effective April 1, 1993, increased its interest to 71.4% in November 1994
through the China Everbright Purchase and then to 76.4% in December 1994 by
purchasing additional Yuchai Shares with the net proceeds of its initial public
offering. The Companys historical results of operations differ from those of
Yuchai, primarily as a result of amortization of goodwill prior to 2002 which arose in
connection with the three acquisitions, additional operating expenses and the
minority interest of other Yuchai shareholders in Yuchais income.

Operating Results

Overview

The various austerity measures taken by the Chinese government in recent
years to regulate economic growth and control inflation significantly weakened
demand for trucks in China. In particular, austerity measures that restricted
access to credit and slowed the rate of fixed investment (including
infrastructure development) adversely affected demand for, and production of,
trucks and other commercial vehicles. Such market conditions, together with
increased competition in the diesel engine market, resulted in various degrees
of financial and marketing difficulties for diesel engine producers, including
the Company. However, the Chinese government announced in 1998 a major
initiative to boost consumer demand through investments in infrastructure
projects, including the construction of highways and tollways, and also through
increased availability of bank credit. As a result, demand for trucks and
other commercial vehicles, and thus demand for diesel engines has been
increasing annually since 1999.

Due to the increased demand for commercial vehicles in China during 2002,
the Companys net sales in 2002 increased by 97.0% to Rmb 3,513 million
compared to Rmb 1,783 million in 2001. This increase was primarily a result of
increased unit sales of diesel engines achieved through the Companys
aggressive marketing program and an increase in the average selling price per
unit. The Company had income before minority interests of Rmb 542.2 million in
2002 compared to income before minority interests of Rmb 332.8 million in 2001.
The increase in income before minority interests was primarily due to increase
in sales volume. Sales of the 6108 and the 6112 medium-duty and heavy-duty
engines accounted for 45.6% and 21.5%, respectively, of the Companys net sales
in 2002.

In 2002, the Company continued its efforts to control production costs and
operating expenses. However, a large portion of the Companys costs and
expenses relate to fixed costs incurred in connection with the production of
its diesel engines, which may limit the Companys ability to significantly
reduce its costs and expenses. The Companys cost of goods sold mainly includes cost
of materials consumed, factory overhead, direct labor and depreciation. The Company analyzes its cost of goods sold based on its cost
of manufacturing for each period. Cost of manufacturing for each period equals
cost of goods sold for the period plus or minus the change in period end
finished goods inventory. In 2002, cost of materials consumed accounted for
approximately 77.2% of the cost of manufacturing. The Companys selling,
general and administrative (SG&A) expenses include advertising expenses,
provision for doubtful accounts, salaries and wages, sales commission expenses
and a large number of smaller expenses.

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The Company had effective income tax rates of 16.7%, (23.7%) and 13.3% in
2000, 2001 and 2002, respectively. Yuchai was subject to PRC income tax at a
rate of 24% of its income determined in accordance with PRC GAAP in 1993 prior
to the restructuring. After becoming a Sino-foreign joint stock company, it
was exempt from PRC income tax in 1994 and 1995. Under current laws, Yuchai is
subject to PRC income tax at a rate of 7.5% for each of the three years from
1996 to 1998 and a rate of 10% for each of the three years from 1999 to 2001.
Since January 1, 2002, Yuchai is subject to tax at a rate of 15% so long as it
continues to qualify as a foreign-invested enterprise eligible for tax
reductions under PRC income tax law. In addition to the PRC income tax, Yuchai
has been subject to value-added taxes on its sales since January 1, 1994.
Dividends received by the Company from Yuchai can be remitted from China
without any PRC taxation under current Chinese law. See Item 10. Additional
Information  Taxation  Peoples Republic of China Taxation.

The Company commenced trial marketing of its 6112 heavy-duty engine in
early 1999, and began commercial production of these engines during the second
half of 1999. Due to the delay in commercial production of the 6112 engine
until 1999, however, the Company was not able to benefit from the competitive
advantages of an early entry into the domestic market for heavy-duty engines.
Moreover, the market for heavy-duty diesel engines in China is relatively price
sensitive, and customer acceptance of the 6112 engines pricing structure
requires considerable marketing efforts by the Company. Despite the high costs
incurred in the production of the 6112 engine, with more emphasis on promotion
and better customer acceptance, the Company currently has no plans to reduce
the price of the 6112 engine. With increasing customer acceptance of the 6112
engine in late 2001 and 2002, the Company expects future sales volume and
profitability of the 6112 engine to increase. The sales volume of the 6112
engine has improved significantly, however, there can be no assurance that the
Company will be able to compete successfully in the heavy-duty diesel engine
market in China with the existing producers or any new entrants.

The Companys future financial condition and results of operations could
be adversely affected as a result of China becoming a member of the WTO. See
Item 3. Key Information  Risk Factors. Currently, China is encouraging
foreign investments into the motor vehicle engine manufacturing industry.
However, the Company believes that foreign competition as a result of China
becoming a member of the WTO is not a major competitive concern because, among
other reasons, (i) foreign diesel engines are not generally price competitive,
(ii) foreign producers do not have the sales and distribution network or
service and parts center infrastructure of Chinese producers and (iii) while
Chinas import tariffs on motor vehicle components may be lowered, China has
indicated that it does not intend to eliminate such tariffs.

The recent SARS epidemic in China will likely have an adverse impact on
the sale of engines in 2003. The Company cannot predict at this time the
effect this outbreak of a new and highly-contagious form of atypical pneumonia
could have on the Chinese economy and the Company. The SARS outbreak could
significantly disrupt Yuchais ability to adequately staff its business and may
generally disrupt operations. Furthermore, this outbreak could severely
restrict the level of economic activity in affected areas, which may in turn
affect Yuchais business and prospects.

The following table sets forth the percentages of net sales of certain
income and expense items of Yuchai for the last three fiscal years ended
December 31, 2000, 2001 and 2002, respectively:

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|                                                          |  |                         |       |      |  |      |       |   |  |  |      |  
|--------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ---- | -
|                                                          |  | Percentage of Net Sales
|                                                          |  |                        
|                                                          |  | Year Ended December 31,
|                                                          |  |                        
|                                                          |  | 2000                    |       | 2001 |  | 2002
|                                                          |  |                         |       |      |  |     
|Net sales                                                 |  |                         | 100.0 | %    |  |      | 100.0 | % |  |  | 100  | %
|Cost of goods sold                                        |  |                         | 67.9  |      |  |      | 66.4  |   |  |  | 67.5 |  
|Gross profit                                              |  |                         | 32.1  |      |  |      | 33.6  |   |  |  | 32.5 |  
|Research and development costs                            |  |                         | 3.5   |      |  |      | 2.5   |   |  |  | 2.2  |  
|Selling, general and administrative expenses              |  |                         | 21.1  |      |  |      | 13.6  |   |  |  | 12.1 |  
|Amortization of goodwill                                  |  |                         | 1.2   |      |  |      | 0.9   |   |  |  |     |  
|Operating income                                          |  |                         | 6.4   |      |  |      | 16.5  |   |  |  | 18.2 |  
|Interest expense                                          |  |                         | 2.0   |      |  |      | 1.7   |   |  |  | 0.7  |  
|Other (income), net                                       |  |                         | (0.1  | )    |  |      | (0.2  | ) |  |  | (0.3 | )
|Income before income taxes and minority
interests         |  |                         | 4.5   |      |  |      | 15.0  |   |  |  | 17.8 |  
|Income tax expense (benefits)                             |  |                         | 0.7   |      |  |      | (3.6  | ) |  |  | 2.4  |  
|Income before minority interests                          |  |                         | 3.8   |      |  |      | 18.6  |   |  |  | 15.4 |  
|Minority interests in income of consolidated
subsidiaries |  |                         | 1.2   |      |  |      | 4.6   |   |  |  | 3.7  |  
|                                                          |  |                         |       |      |  |      |       |   |  |  |      |  
|Net income                                                |  |                         | 2.6   | %    |  |      | 14.0  | % |  |  | 11.7 | %
|                                                          |  |                         |       |      |  |      |       |   |  |  |      |  

Critical Accounting Policies

The preparation of financial statements requires the Companys management
to make decisions based upon estimates, assumptions and factors that it
considers relevant to the circumstances. The Company believes that of its
principal accounting policies, as set forth in Note 3 to the Consolidated
Financial Statements, the following involve a higher degree of judgment and
estimation.

Accounts Receivable

The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
If the financial condition of our customers were to deteriorate or if other
conditions arose, resulting in an impairment of their ability or intention to
make payments, additional allowances may be required. The allowance for
doubtful accounts is estimated based on the age of the receivable and
managements assessment of each customer. The actual level of bad debts,
however, may differ materially from the allowances for doubtful accounts stated
in the balance sheet.

Inventory

The Companys inventories are valued at lower of cost or net realizable
value at the balance sheet date. Net realizable value represents the estimated
selling price less costs to be incurred in selling the inventories. Net
realizable value is estimated based on the age and market condition of
inventories. However, depending on actual market condition, future product
enhancement and development, the actual net realizable value may differ
materially from the amounts stated in the balance sheet.

Warranty

The Company provides for a warranty period on various products during
which the Company provides free repair and replacement. Provisions for
estimated expenses related to product warranties are made at the time products
are sold. These estimates are established using historical information on the
nature, frequency and average cost of warranty claims. The Company actively
studies trends of warranty claims and takes action to improve vehicle quality
and minimize warranty claims. The Company believes

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that the warranty reserve is appropriate. However, actual claims incurred
could differ from the original estimates.

Deferred Tax Assets

The Company recognizes deferred tax assets and liabilities for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets are
reduced by a valuation allowance to the extent the Company concludes it is more
likely than not that the assets will not be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
forecasted taxable income in future years in which those temporary differences
are expected to be recovered or settled. The Company believes that the
forecasted taxable income in future years are appropriate. However, forecasted
taxable income may significantly differ from actual taxable income in future
years, which may result in material revisions to the valuation allowance for
deferred tax assets.

Long-Lived Assets

The Company reviews the carrying amount of its long-lived assets,
including goodwill and other intangible assets, when events and circumstances
warrant such a review. This review is performed using estimates of future cash
flows. If the carrying amount of a long-lived asset is considered impaired, an
impairment charge is recorded for the amount by which the carrying amount of
the long-lived asset exceeds its fair value. The Company believes that the
estimates of future cash flows and fair value are reasonable. However, changes
in estimates of such cash flows and fair value could affect the evaluations.

Goodwill

Goodwill and
indefinite lived intangible assets are not subject
to amortization, however they are tested annually for impairment,
and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An
impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value.

2002 Compared to 2001

Net sales increased
by 97.0% to Rmb 3,513.0 million (US$424.4 million) in 2002 compared to
Rmb 1,783.3 million in 2001. The increase in net sales was primarily due to
higher sales volume due to more aggressive marketing programs. Unit sales of diesel engines increased by 75.7% to 130,384 units
in 2002 from 74,214 units in 2001.

Cost of goods sold
increased by 100.4% to Rmb 2,371.1 million (US$286.5 million) in 2002 from
Rmb 1,183.4 million in 2001, and increased as a percentage of net sales to
67.5% in 2002 from 66.4% in 2001. Cost of manufacturing increased by 88.9% to
Rmb 2,549.1 million (US$307.9 million) in 2002 from Rmb 1,349.4 million in 2001, while cost of
manufacturing as a percentage of net sales decreased to 72.6% from 75.7% in
2001. This percentage increase was primarily attributable to the higher number
of 6112 heavy-duty engines sold. The 6112 heavy-duty engines have a higher
cost of manufacturing as their components include imported parts that are
relatively more expensive. Cost of materials consumed in costs of
manufacturing increased by 88.4% to Rmb 1,969.1 million (US$237.9 million) in 2002 from Rmb
1,045.4 million in 2001, while cost of materials consumed as a percentage of
net sales decreased to 56.1% in 2002 from 58.6% in 2001. Factory overhead
(which does not include depreciation and salaries) included in cost of
manufacturing increased by 180.3% to Rmb 312.3 million (US$37.7 million) in 2002 from Rmb 111.4
million in 2001, while factory overhead as a percentage of net sales increased
to 8.9% in 2002 from 6.3% in 2001. Depreciation included in cost of
manufacturing increased to Rmb 92.3 million (US$11.2 million) from Rmb 91.6 million in 2001.
Depreciation as a percentage of net sales decreased to 2.6% in 2002 from 5.1%
in 2001.

Gross profit
increased by 90.4% to Rmb 1,142.0 million (US$137.9 million)
in 2002 from Rmb
599.9 million in 2001. Gross profit margin (gross profit divided by net sales)
decreased to 32.5% in 2002 compared to 33.6% in 2001, reflecting a shift in the
sales mix. In 2002, the Company sold more 6112 engines and 4-Series
engines, where the margin is
lower.

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SG&A expenses (excluding research and development) increased by 75.2% to
Rmb 426.1 million (US$51.5 million) in 2002 from Rmb 243.2 million in 2001 and decreased as a
percentage of net sales from 13.6% in 2001 to 12.1% in 2002. This
increase in SG&A was primarily due to the increase in sales. Research and development
expenses increased to Rmb 75.5 million (US$9.1 million) in 2002 from Rmb 44.7 million in 2001.
Such increased expenses were primarily due to the development of the 6113
engine and Euro 2 compliance. Advertising expenses included in
SG&A increased by 79.2% to Rmb 31.9 million
(US$3.9 million) in 2002 from Rmb 17.8
million in 2001. Advertising expenses as a
percentage of net sales decreased to 0.9% in 2002 from 1.0% in 2001. Sales
commission expenses included in SG&A expenses increased by 40.5% to Rmb 17.7
million (US$2.1 million) in 2002 from Rmb 12.6 million in 2001. Sales commission expenses as a
percentage of net sales decreased to 0.5% in 2002 from 0.7% in 2001. The
decreases in advertising and sales commission expenses reflected primarily
lower costs incurred for the promotion of the 6112 and 4-Series engines in
2001. Salaries and wages as a percentage of net sales increased to 2.6% in
2002 compared to 2.2% in 2001, due primarily to an increase in production.
Amortization of goodwill was nil in 2002 and Rmb 16.9 million in 2001.

As a result of the
foregoing, profits from operations increased to Rmb 640.3 million
(US$77.4 million) in 2002 compared to Rmb 295.1 million in 2001.

Interest expenses decreased by 15.6% to
Rmb 25.1 million (US$3.0 million)
in 2002 from Rmb 29.8 million in 2001, primarily due to the
decrease in interest rate during the year.

Income before income taxes and minority interests in 2002 was
Rmb 625.5 million (US$75.7 million), as compared to Rmb 269.2 million in 2001. Income tax expenses in 2002
was Rmb 83.2 million (US$10.1 million) compared to income tax credit of Rmb 63.6 million in 2001.
The income tax credit in 2001 was primarily due to the release of valuation
allowance against deferred tax assets. The Company believes that, having
considered the expected future taxable profits of Yuchai, it is more likely
than not that the deferred tax assets will be recoverable. See  Critical
Accounting Policies. Yuchai was subject to PRC income tax at a rate of 10% in
2000 and 2001, and 15% in 2002.

As a result of the foregoing factors, the Company had income before
minority interests of Rmb 542.2 million (US$65.5 million) in 2002 compared to Rmb 332.8 million
in 2001, and net income of Rmb 412.4 million (US$49.8 million) in 2002 compared to Rmb 250.4
million in 2001.

In light of the market conditions for diesel engines currently prevailing
in China, the Company has continued to implement measures to control production
costs and operating expenses. The Company has also continued to implement
measures to monitor its customers receivable balances and to control credit
risks. There can be no assurance that such measures will be sufficient to
improve the Companys financial condition and results of operations. See
Cautionary Statements with respect to Forward-Looking Statements.

2001 Compared to 2000

Net sales increased by 26.1% to Rmb 1,783.3 million (US$215.5 million) in
2001 compared to Rmb 1,414.5 million in 2000. The increase in net sales was
primarily due to higher sales to the Dongfeng Group. Unit sales of diesel
engines increased by 27.5% to 74,214 units in 2001 from 58,071 units in 2000.
This increase was principally a result of increased sales of the 6108 and the
6112 engines.

The cost of goods sold increased by 23.3% to Rmb 1,183.4 million (US$143.0
million) in 2001 from Rmb 960.1 million in 2000 and decreased as a percentage
of net sales to 66.4% in 2001 from 67.9% in 2000. The cost of manufacturing
increased by 35.1% to Rmb 1,349.4 million (US$163.0 million) in

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2001 from Rmb 998.5 million in 2000, while the cost of manufacturing, as a percentage of net
sales, increased to 75.7% in 2001 from 70.6% in 2000. This percentage increase
was primarily attributable to the higher number of 6112 heavy-duty engines
sold. The 6112 heavy-duty engines have a higher cost of manufacturing as their components include imported parts that are
relatively more expensive. The cost of materials consumed in the costs of
manufacturing increased by 48.8% to Rmb 1,045.4 million (US$126.3 million) in
2001 from Rmb 702.7 million in 2000, while the cost of materials consumed as a
percentage of net sales increased to 58.6% in 2001 from 49.7% in 2000. Factory
overhead (which does not include depreciation and salaries) included in the
cost of manufacturing increased by 41.9% to Rmb 111.4 million (US$13.5 million)
in 2001 from Rmb 78.5 million in 2000, while factory overhead as a percentage
of net sales increased to 6.3 % in 2001 from 5.5% in 2000. Depreciation
included in the cost of manufacturing decreased to Rmb 91,612 million (US$11,069
million) in 2001 from Rmb 101.3 million in 2000. Depreciation as a percentage
of net sales decreased to 5.1 % in 2001 from 7.2% in 2000.

Gross profit increased by 32.0% to Rmb 599.9 million (US$72.5 million) in
2001 from Rmb 454.4 million in 2000. Our gross profit margin (gross profit
divided by net sales) increased to 33.6% in 2001 compared to 32.1% in 2000,
reflecting primarily the higher profit margin of the 6108 and 6105 medium-duty
engines, which stood at 41.0% and 51.0%, respectively.

SG&A expenses decreased by 18.5% to Rmb 243.2 million (US$29.4 million) in
2001 from Rmb 298.4 million in 2000 and decreased as a percentage of net sales
from 21.1% in 2000 to 13.6% in 2001. This percentage decrease was primarily due
to the write-back of bad debt provisions relating to the accounts of
the Dongfeng Group. The write-back was principally a result of an improvement in the
Dongfeng Groups repayment history during 2001. See   Critical Accounting
Policies. Research and development expenses decreased to Rmb 44.7 million
(US$5.4 million) in 2001 from Rmb 49.0 million in 2000. Such decreased
expenses were primarily due to lower spending on the development of the 6112
heavy-duty engine and the 4-Series engines in 2001. Advertising expenses
included in SG&A decreased by 20.2% to Rmb 17.8 million (US$2.2 million) in
2001 from Rmb 22.4 million in 2000. Advertising expenses, as a percentage of
net sales, decreased to 1.0% in 2001 from 1.6% in 2000. Sales commission
expenses (excluding advertising expenses) included in SG&A expenses decreased
by 30.4% to Rmb 12.6 million (US$1.5 million) in 2001 from Rmb 18.1 million in
2000. Sales commission expenses, as a percentage of net sales, decreased to
0.7% in 2001 from 1.3% in 2000. The decreases in advertising and sales
commission expenses reflected primarily, lower costs incurred for the promotion
of the 6112 and 4-Series engines in 2001. In 2000 and 2001, the Company
provided an additional allowance of Rmb 29.3 million and wrote back an
allowance of Rmb 36.6 million (US$4.4 million), respectively, for trade
accounts receivable, principally relating to the Dongfeng Group. Such
allowances were included as part of SG&A expenses. Salaries and wages, as a
percentage of net sales, decreased to 2.2% in 2001 compared to 2.5% in 2000,
due primarily to a decrease in the number of employees. Amortization of
goodwill was Rmb 16.9 million (US$2.0 million) in 2001 and Rmb 16.9 million in
2000.

As a result of the foregoing, operating income increased to Rmb 295.1
million (US$35.7 million) in 2001 compared to Rmb 90.2 million in 2000

Interest expenses increased by 6.8% to Rmb 29.8 million (US$3.6 million)
in 2001 from Rmb 27.9 million in 2000, primarily due to the funding of higher
capital requirements arising from higher sales during the year.

Income before income taxes and minority interests in 2001 were Rmb 269.2
million (US$32.5 million), as compared to Rmb 64.0 million in 2000. Income tax
credit in 2001 was Rmb 63.6 million (US$7.7 million) compared to income tax
expenses of Rmb 10.7 million in 2000. Income tax credit in 2001
was primarily due to the release of valuation allowance against deferred tax

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assets. Yuchai was
subject to PRC income tax at a rate of 10% from 1999 through 2001.

As a result of the foregoing factors, the Company had income before
minority interests of Rmb 332.8 million (US$40.2 million) in 2001 compared to
Rmb 53.3 million in 2000 and net income of Rmb 250.4 million (US$30.3 million)
in 2001 compared to Rmb 37.1 million in 2000.

Inflation

The general annual inflation rate in China was approximately 0.4%, 0.1%
and (0.1)% in 2000, 2001 and 2002, respectively. The Companys results of
operations may be affected by inflation, particularly rising prices for parts and
components, labor costs and other operating costs.

Foreign Currency Fluctuations

The Company is exposed to foreign currency risk as a result of having to
obtain certain key components used in the manufacturing of the 6112 engines
from overseas suppliers. As of December 31, 2002, the Company did not have any
loans denominated in a foreign currency. See Item 3. Key
Information  Risk
Factors.

Liquidity and Capital Resources

The Companys primary sources of cash are funds from operations generated
by Yuchai and debt financing incurred by Yuchai. The Companys operations
provided cash in 2001 and 2002. In 2002, the Companys primary cash
requirements were for working capital to finance accounts receivable,
inventories and capital expenditures to complete the expansion of production
capacity. The Company believes that its working capital is sufficient for its
requirements over the next year. Factors which may affect the Companys
ability to generate funds from operations include increased
competition (including as a result of Chinas admission to the
WTO),
fluctuations in customer demand for the Companys products, the status of the Companys investment in Yuchai under Chinese law, and
the Companys ability to collect and control its level of accounts receivable.

If the Company is
considered on a stand alone basis without taking into account the
financial contribution of Yuchai to the Company by way of dividends,
the Company would have approximately US$10.0 million in cash, which
the Company considers would be sufficient to meet the Companys
operational requirements over the next year. Such requirements would
likely be related to employee expenses and professional expenses
incurred in the running of the Company as a holding company,
including meeting its SEC disclosure and New York Stock Exchange
(NYSE) listing obligations.
The Company believes that if the Company is considered on a stand
alone basis without its investment in Yuchai, the Company would find
it difficult to raise new capital (either debt or equity) on its own.

In 2002, the Company had positive net cash inflow from operating
activities of Rmb 659.5 million, compared to positive net cash inflow from
operating activities of Rmb 59.3 million in 2001. This increase in operating
cash inflow was primarily due to an increase in sales and profit in 2002.

The Companys working capital as of December 31, 2002 was Rmb 1,340.8
million compared to Rmb 1,100.5 million as of December 31, 2001. The increase
in working capital was primarily due to an increase in trade accounts
receivable as a result of significant increase in sales in 2002, and an
increase in inventories resulting from the Companys expectation of higher
sales in 2003. The Companys total liabilities increased by 28.8% to Rmb
1,336.1 million from Rmb 1,037.3 million, primarily as a result of higher
accounts payable due to higher volume of purchase of raw materials and
components to meet expected higher sales in 2003. As of December 31, 2002, the
Company had long-term debt, including current installments, totaling Rmb 180.0
million, of which Rmb 50.0 million will mature in 2004. The Company had short term debt totalling Rmb 135.0 million as of December 31, 2002.

The Companys capital expenditures were Rmb 174.9 million in 2002 and Rmb
43.0 million in 2001. As of December 31, 2002, the Company had authorized and contracted for capital expenditure for improvement to existing production facilities in the amount of Rmb 72.1 million. As the Companys business continues to grow, it will
also require additional funds for increased working capital requirements,
including to finance increased accounts receivable. The Company expects to
fund its capital expenditures and working capital requirements primarily from
funds from operations generated by Yuchai and, to the extent that is
insufficient, from bank loans incurred by Yuchai. Yuchais ability to obtain
financing is limited by government regulation and a general shortage of debt
and equity

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financing in China. Any additional capital contribution by the
Company to Yuchai would require, among other things, the approval of
the MOC,
which has broad discretion with respect to such approval.

As part of its business strategy, the Company seeks opportunities to
invest through Yuchai in domestic manufacturers of diesel engine parts and
components. The Company may also acquire indirectly through Yuchai interests
in other related automotive businesses, including truck manufacturers. The Company may make such investments and acquisitions with funds provided by
operations, future debt or equity financings or a combination thereof.

The following table sets forth information on the Companys material
contractual obligation payments for the periods indicated as of December 31,
2002:

|                        |       |       |                        |        |  |           |           |           |  |         |    |     |  |  |   |   |           |  |   |   | 
|----------------------- | ----- | ----- | ---------------------- | ------ |  | --------- | --------- | --------- |  | ------- | -- | --- |  |  | - | - | --------- |  | - | - | 
|                        |       |       | Payments Due by Period
|                        |       |       |                       
|                        |       |       |                        |        |  |           | Less than |           |  |         |    |     |  |  |   |   | More than
|Contractual Obligations |       | Total |                        | 1 Year |  | 1-3 Years |           | 4-5 Years |  | 5 Years
|                        |       |       |                        |        |  |           |           |           |  |        
|                        |       |       | (in Rmb millions)     
|Long-Term Debt          |       |       | 180                    |        |  |           | 130       |           |  |         | 50 |     |  |  |  |   |           |  |  |  
|Equipment               |       |       | 72                     |        |  |           | 72        |           |  |         |   |     |  |  |  |   |           |  |  |  
|Purchase Obligations    |       |       | 386                    |        |  |           | 289       |           |  |         | 97 |     |  |  |  |   |           |  |  |  
|                        |       |       |                        |        |  |           |           |           |  |         |    |     |  |  |   |   |           |  |   |  
|                        | Total |       |                        | 638    |  |           |           | 491       |  |         |    | 147 |  |  |   |  |           |  |   |  | 
|                        |       |       |                        |        |  |           |           |           |  |         |    |     |  |  |   |   |           |  |   |  

The following table sets forth information on the Companys other
commercial commitments for the periods indicated as of December 31, 2002:

|                 |       |           |                       |           |  |           |   |           |  |              |   |   |  |  |   |   |  |  |   |   | 
|---------------- | ----- | --------- | --------------------- | --------- |  | --------- | - | --------- |  | ------------ | - | - |  |  | - | - |  |  | - | - | 
|                 |       |           | Amount of Commitment 
|                 |       |           | Expiration Per Period
|                 |       |           |                      
|                 |       |           | Total                 |           |  |           |   |           |  |              |   |   |  |  |   |   |  |  |  
|Other Commercial |       | Amounts   |                       | Less than |  |           |   |           |  |              |   |   |  |  |   |  
|Commitments      |       | Committed |                       | 1 Year    |  | 1-3 Years |   | 4-5 Years |  | Over 5 years
|                 |       |           |                       |           |  |           |   |           |  |             
|                 |       |           | (in Rmb millions)    
|Line of Credit   |       |           | 1                     |           |  |           | 1 |           |  |              |  |   |  |  |  |   |  |  |  |  
|                 | Total |           |                       | 1         |  |           |   | 1         |  |              |   |  |  |  |   |  |  |  |   |  | 

As of December 31, 2002, the Company had no off-balance sheet financing
arrangements and no outstanding OTC commodity contracts.

Recently Issued Accounting Standards

Statement of Financial Accounting Standards (SFAS) No. 143

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143
requires the Company to record the fair value of an asset retirement obligation
as a liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development and/or normal use of the assets. The
Company is also required to record a corresponding asset, if any, that is
depreciated over the life of the asset. Subsequent to the initial measurement
of the asset retirement obligation, the obligation will be adjusted at the end
of each period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. The Company is

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required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected
to have a material effect on the Companys Consolidated Financial Statements.

SFAS No. 145

In April 2002, the
FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part
of the risk management strategy of many companies. SFAS No. 145 also amends
SFAS No. 13 to require sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback
transactions. The provisions of the Statement related to the rescission of SFAS No. 4 were applied in 2002. The provisions
of the Statement related to SFAS No. 13 were effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did not have a material effect on
the Companys Consolidated Financial Statements.

SFAS No. 146

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002. The adoption of
SFAS No. 146 is not expected to have a material effect on the Companys
Consolidated Financial Statements.

Interpretation No. 45

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued, including warranty obligation. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of
the Interpretation are applicable to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods that end after December 15, 2002. Other than product warranties, which are disclosed pursuant to the Interpretation, the Company
has not issued any guarantees as at December 31, 2002, therefore, the application of Interpretation No. 45 was not expected to have a material effect on the
Companys Consolidated Financial Statements.

SFAS No. 148

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. The board of directors of the Company has not granted any
stock options to the employees, therefore, the adoption of SFAS No. 148 is not
expected to have a material effect on the Companys Consolidated Financial Statements.

Interpretation No. 46

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation

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is not expected to have a material effect on the Companys Financial Statements. The
Interpretation requires certain disclosures in financial statements issued
after January 31, 2003 if it is reasonably possible that the Company will
consolidate or disclose information about variable interest entities when the
Interpretation becomes effective. The Interpretation applies in the
first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1,
2003. The
Company is currently assessing the effect that the application of
this Interpretation will have on its Consolidated Financial
Statements.

SFAS No. 149

In April 2003, the FASB issued SFAS No. 149,
Accounting for Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133. This Statement amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for
hedging activities under SFAS No. 133 (Accounting for Derivative
Instruments and Hedging Activities). SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. All
provisions of SFAS No. 149 will be applied prospectively. The
Company is currently assessing the effect that the application of
SFAS No. 149 will have on its Consolidated Financial Statements.

SFAS No. 150

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 establishes standards for
the classification and measurement of certain financial instruments
with characteristics of both liabilities and equity, and requires the
classification of a financial instrument that is within its scope as
a liability (or an asset in some circumstances). SFAS No. 150 is
effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The
Company is currently assessing the effect that the application of
SFAS No. 150 will have on its Consolidated Financial Statements.

Research and Development

The Company has committed substantial resources to continually improve the
technology of its products. The Companys internal development effort focuses
primarily on improving manufacturing processes and adapting foreign technology
to the Chinese market. In addition, the Company plans to continue to acquire
advanced technology from Chinese research institutes, foreign engine design
consulting firms and foreign diesel engine and engine parts manufacturers. As
of December 31, 2002, the Company employed over 1,350 engineers, approximately
274 of whom were devoted to research and development, product enhancement and
new designs. In 2000, 2001 and 2002, the Company spent approximately Rmb 49.0
million, Rmb 44.7 million and Rmb 75.5 million, respectively, on research and
development. The Company has been able to control research and development
expenses due to the relatively low salary levels of engineers in China.




ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

Directors and Senior Management

The Board of Directors of
the Company consists of eleven members. Currently, there are seven members
elected to and serving on the Companys Board of Directors, with four
vacancies. Pursuant to the Shareholders Agreement (as defined in Item 7.
Major Shareholders and Related Party Transactions  Related Party Transactions
 Shareholders Agreement), HLC is entitled to designate six directors and
Cathay is entitled to designate one director. Until October 2002, China
Everbright was entitled to designate two directors; however, upon the sale of
all of its shares in the Company held through Coomber in October 2002, China
Everbrights designation rights were terminated. In accordance with the
Shareholders Agreement, the Chief Executive Officer of Yuchai is also a member
of the Companys Board of Directors. HLC has designated Messrs. Wrixon
Gasteen, Gan Khai Choon, Gao Jia Lin, Kwek Leng Peck and Wong Hong Ren as its
directors, and Cathay has designated Mr. Paul Wolansky as its director.
China Everbrights designee directors, Messrs. Yang Bin and Yang Yongsheng,
resigned in connection with China Everbrights sale of Coomber in October 2002.

The directors and
executive officers of the Company as of June 30, 2002 are identified
below.

|                              |  |                             |  |                       |      | 
|----------------------------- |  | --------------------------- |  | --------------------- | ---- | 
|                              |  |                             |  | Year First Elected or
|                              |  |                             |  | Appointed Director   
|Name                          |  | Position                    |  | or Officer           
|                              |  |                             |  |                      
|Wrixon Frank GASTEEN(1)(2)(4) |  | President and Director      |  |                       | 2002 | 
|GAO Jia Lin(1)(4)             |  | Vice President and Director |  |                       | 1995 | 
|WANG Jianming(1)              |  | Director                    |  |                       | 2001 | 
|Paul WOLANSKY(1)(2)(3)        |  | Director                    |  |                       | 1997 | 
|WONG Hong Ren(1)(3)(4)        |  | Director                    |  |                       | 1994 | 
|GAN Khai Choon(1)             |  | Director                    |  |                       | 1995 | 
|KWEK Leng Peck(1)(2)(3)       |  | Director                    |  |                       | 1994 | 
|Philip TING Sii Tien          |  | Chief Financial Officer     |  |                       | 1994 | 
|Ira Stuart OUTERBRIDGE III    |  | Secretary                   |  |                       | 2001 | 



---

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|(1) |  | Also a director of Yuchai.           
|--- |  | -------------------------------------
|(2) |  | Member of the Audit Committee.       
|(3) |  | Member of the Compensation Committee.
|(4) |  | Member of the Special Committee.     

Mr. Wrixon Frank Gasteen is the President of the Company and a Director of
Yuchai. He is also a director of Xinfei-Electric and various building
materials companies within the Hong Leong Group. Prior to joining the Hong
Leong Group, Mr. Gasteen was the executive director of Quantum Explosives Pte.
Ltd. Mr. Gasteen served as principal consultant to Kerrix Consulting from 1998
to 1999, managing director of The Brandnam Group from 1993 to 1998, business
development manager of CSR Limited from 1992 to 1993 and divisional manager of
CSR Humes Pty Limited from 1989 to 1992. Mr. Gasteen has managed businesses in
manufacturing, building and construction materials, mining and service
industries. Mr. Gasteen holds a bachelor of engineering (honors) degree from
the University of Queensland and a master of business administration (with
distinction) from the University of Geneva.

Mr. Gao Jia Lin
is the Vice-President and a Director of the Company and Deputy Chairman and a Director of Yuchai. He has a
mechanical engineering degree from Qinghua University, and joined Hong Leong
(China) Ltd. in 1982. He is currently the Group Business Development Manager
of Yuchai.

Mr. Wang
Jianming is a Director of Yuchai. Mr. Wang was the Chairman
and a Director of Yuchai from 1994 to 2000 and the Chief Executive Officer
of Yuchai from 1993 to 2000. Mr. Wang was re-appointed a Director of the
Company and the Chairman and Chief Executive Officer of Yuchai on October 29,
2001. At the annual general meeting of shareholders of the Company
held on July 9, 2003, Mr. Wang was not reelected as Director of the Company. Mr. Wang is also the legal personal representative of Yuchai. Mr. Wang is a graduate of Shanghai
Communications University. The Company has initiated various legal proceedings against Mr. Wang,
including arbitration proceedings in Singapore for breach of his November 2001
Employment Agreement with the Company, breach of his fiduciary duties and fraud
arising from his repeated failure to comply with the instructions of the
Companys Board of Directors. Notice of termination of his employment as Chief
Executive Officer of Yuchai was given to Mr. Wang by the Company on May 19,
2003, effective July 18, 2003, pursuant to the terms of his Employment
Agreement with the Company. Mr. Wang has disputed the effectiveness of such
notice (see  Compensation  Yuchai below and Item 8. Financial
InformationLegal Proceedings).

Mr. Paul Wolansky is a Director of both the Company and Yuchai. He is
currently a managing director of New China Management Corporation. He holds a
bachelors degree from Amherst College, a law degree from Harvard Law School
and is a member of the New York State Bar.

Mr. Wong Hong Ren has been a Director of the Company since 1994. He has
also been a Director of Yuchai since 1993. Since 1988, he has served as Group
Investment Manager of Hong Leong Management Services Pte. Ltd. in Singapore.
Prior to his joining the Hong Leong Group in January 1988, Mr. Wong was
Director and General Manager (Investment and Property) of Haw Par Brothers
International Ltd. and Director of Investment with Royal Trust Asset Management
Pte. Ltd. and First Capital Corporation Ltd., where he was actively involved in
management of the companies funds in international equities.

Mr. Gan Khai Choon is a Director of both the Company and Yuchai. He is
currently the managing director of Hong Leong International (Hong Kong)
Limited. He holds a bachelors degree (economics honours) from the University
of Malaya.

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Mr. Kwek Leng Peck is a Director of both the Company and Yuchai. Mr. Kwek
is a member of the Kwek family, which controls the Hong Leong Group. Mr. Kwek
serves as Executive Director of the Hong Leong Group, and has over 20 years of
experience in trading, manufacturing, property development, hotel operations,
corporate finance and management. Mr. Kwek holds directorships on the boards
of several Hong Leong Group companies, including HLA, City Developments
Limited, HLC, Hong Leong Finance Limited, Hong Leong Foundation, Hong Leong
Holdings Ltd. and CDL Hotels International Limited.

Mr. Philip Ting Sii Tien has been the Chief Financial Officer of the
Company since 1994. He was appointed Chief Financial Officer of HLA in 1994.
In 1997, he became the Chief Financial Officer for Hong Leong (China) Ltd.
Prior to joining HLA, from 1993 to 1994, Mr. Ting served as Regional Controller
of Quantum Asia Pacific, Singapore, a leading disk drive manufacturer. Mr.
Ting served as Regional Controller of Black & Decker Asia Pacific Pte. Ltd.
(Singapore) from 1990 to 1993 and as Controller of Deutsche Bank (Singapore)
from 1987 to 1989. Mr. Ting is an Associate Member of the Institute of
Chartered Accountants in England and Wales.

Mr. Ira Stuart Outerbridge III is the Secretary of the Company. Mr.
Outerbridge is a graduate of the University of North Carolina at Chapel Hill
and is a fellow of the Institute of Chartered Secretaries and Administrators.
He joined Codan Services Limited as a Corporate Manager in February 1996.

Audit Committee

The members of the Audit Committee are Messrs. Kwek Leng Peck, Paul Wolansky and
Wrixon Gasteen. The Audit Committee oversees the actions of the Companys
independent public accountants and reviews the Companys internal accounting
procedures.

Compensation Committee

The members of the Compensation Committee are Messrs. Kwek Leng Peck, Paul
Wolansky and Wong Hong Ren. The Compensation Committee administers the
Companys Stock Option Plan. See  Stock Option Plan for further details.

Special Committee

The members of the Special Committee are Messrs. Wrixon Gasteen, Wong Hon Ren and
Gao Jia Lin. The Special Committee was established in response to the difficulties which
the Company has faced with respect to its investment at Yuchai, and is not a permanent
committee of the Companys Board of Directors. The Special Committee is authorized to
investigate, consider and cause the Company to undertake steps, including legal action if necessary,
to attempt to remedy these difficulties, as described under Item 8. Financial Proceedings  Legal Proceedings.

Directors and Executive Officers of Yuchai

The Board of Directors of Yuchai consists of thirteen members. Currently,
there are ten members elected to and serving on Yuchais Board of Directors,
with three vacancies. Yuchais Articles of Association entitle the Company (as
the indirect holder of the Foreign Shares) to designate nine directors and
entitle the Chinese shareholders to designate four directors. Pursuant to and
subject to the conditions in the Shareholders Agreement described under Item
7. Major Shareholders and Related Party Transactions, and by virtue of the
Special Share, HLC is entitled to designate six of the nine Yuchai directors
designated by the Company, and Cathay is entitled to designate one such
director. Until October 2002, China Everbright was entitled to
designate the other two
directors; however, upon the sale of all of its shares in the Company in
October 2002, China Everbrights designation rights were terminated. HLC has
designated Messrs. Gan Khai Choon, Gao Jia Lin, Kwek Leng Peck, Wong Hong Ren
and Wrixon Gasteen as its directors, and Cathay has designated Mr. Paul
Wolansky as its director. China Everbrights designee directors, Messrs. Yang
Bin and Yang Yongsheng, resigned in connection with China Everbrights sale of
Coomber to Goldman in October 2002. Pursuant to the Shareholders Agreement and
the By-laws of the Company, the Yuchai directors designated by the Company will
vote as a block in accordance with the vote of the majority of such directors.

The directors and executive officers of Yuchai as of June 30, 2002 are identified
below.

|                        |  |                                           |  |                       |      | 
|----------------------- |  | ----------------------------------------- |  | --------------------- | ---- | 
|                        |  |                                           |  | Year First Elected or
|                        |  |                                           |  | Appointed Director   
|Name                    |  | Position                                  |  | or Officer           
|                        |  |                                           |  |                      
|WANG Jianming(1)        |  | Chairman of the Board of Directors        |  |                       | 1993 | 
|GAO Jia Lin(1)          |  | Deputy Chairman of the Board of Directors |  |                       | 1995 | 
|GAN Khai Choon(1)       |  | Director                                  |  |                       | 1995 | 
|KWEK Leng Peck(1)       |  | Director                                  |  |                       | 1993 | 
|Paul WOLANSKY(1)        |  | Director                                  |  |                       | 1997 | 
|WANG Li                 |  | Director                                  |  |                       | 1993 | 
|Wrixon Frank GASTEEN(1) |  | Director                                  |  |                       | 2001 | 

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|                 |  |                              |  |                       |      | 
|---------------- |  | ---------------------------- |  | --------------------- | ---- | 
|                 |  |                              |  | Year First Elected or
|                 |  |                              |  | Appointed Director   
|Name             |  | Position                     |  | or Officer           
|                 |  |                              |  |                      
|WONG Hong Ren(1) |  | Director                     |  |                       | 1993 | 
|LI Tiansheng     |  | General Manager and Director |  |                       | 2001 | 
|ZENG Shiqiang    |  | Director                     |  |                       | 1998 | 
|LIANG Weijian    |  | Deputy General Manager       |  |                       | 1992 | 
|YANG Jianjun     |  | Deputy General Manager       |  |                       | 1997 | 
|YANG Weizhong    |  | Chief Accountant             |  |                       | 1992 | 
|SHEN Jie         |  | Chief Engineer               |  |                       | 2002 | 
|HOH Weng Ming    |  | Financial Controller         |  |                       | 2002 | 



---

|(1) |  | Also a Director of the Company.
|--- |  | -------------------------------

For information about Messrs. Wang Jianming, Gan Khai Choon, Gao Jia Lin,
Kwek Leng Peck, Paul Wolansky, Wrixon Frank Gasteen and Wong Hong Ren, see 
Directors and Executive Officers of the Company. For additional information
regarding Mr. Wang Jianmings current employment status with the Company, see
 Compensation  Yuchai and Item 8. Financial Information  Legal
Proceedings.

Mr. Li Tiansheng is a Director and Deputy General Manager of Yuchai. He
previously served as the principal coordinator for liaison with Chinese
government agencies, banks and tax department.

Ms. Wang Li is a Director of Yuchai. She has held positions as the
Executive Director of Chinas Stock Exchange Executive Council (SEEC), the
Managing Director of SEEC Holdings Limited (SEEC Holdings), Executive Vice
President of Chinas CITIC Industrial Bank and as a director of a Canadian
company, China Ventures Inc.

Mr. Zeng
Shiqiang is a Director of Yuchai and Assistant to the Chairman of the
State Holding Company. He previously held the
position of Chief Accountant at Yuchai.

Mr. Liang Weijian serves as Deputy General Manager in charge of parts and
supplies. Prior thereto, he served as Deputy Factory Manager of Yuchai and
prior to that, he held the posts of Auto Branch Factory Manager, Technological
Equipment Branch Factory Manager and General Engineering Office Director.

Mr. Yang Jianjun is the Deputy General Manager and is in charge of sales
and marketing. Prior to joining Yuchai, he was Vice-Mayor of Yulin City.

Mr. Yang Weizhong joined Yuchai in 1969. He has been the Chief Accountant
since 1993. Prior thereto, he served as Assistant Chief of Yuchais Finance
Division.

Mr. Shen Jie is the Chief Engineer and is responsible for all matters
relating to engine design, testing and quality control. He joined Yuchai over
20 years ago as an engineer.

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Mr. Hoh Weng Ming is the Financial Controller assigned from the Company to
assist in the financial administration, budgeting and planning of Yuchais
financial matters. Mr. Hoh holds a Bachelor of Commerce degree and Masters of
Business Administration from New Zealand and is a member of the Institute of
Chartered Accountants in New Zealand.

Pursuant to Yuchais Articles of Association, Yuchais shareholders have
authority over all matters of importance relating to Yuchai, including: (i) the
review and approval of reports submitted by the Board of Directors of Yuchai;
(ii) the approval of Yuchais plans for distribution of profits and recovery of
losses; (iii) the approval of Yuchais annual capital and operating budget and
year-end financial statements; (iv) the issuance of new common shares or other
securities, the increase in the scope of any subscription of shares and the
transfer procedures for Yuchais share certificates; (v) the nomination,
election, dismissal and compensation of members of the Board of Directors; and
(vi) significant sales or purchases of assets, or any division, merger,
acquisition, termination, liquidation or other major corporate action of
Yuchai. Yuchai shareholders are entitled to preemptive rights to subscribe pro
rata in accordance with their ownership percentage for any new Yuchai
shares or other equity interests
offered by Yuchai at a price and on terms at least equivalent to those offered
to new subscribers.

Yuchais Board of Directors reports directly to the shareholders of Yuchai
and is the principal executive authority responsible for major decisions
relating to Yuchai, including: (i) the execution of resolutions adopted by the
shareholders; (ii) the formulation and review of Yuchais development plans;
(iii) the review of Yuchais annual business plans; (iv) the review of Yuchais
financial budget, final accounts, dividend distribution plan, plans for
issuances of Yuchai Shares and plans for merger, division and transfer of
assets; (v) the election and dismissal of the Chief Executive Officer; (vi) the
adoption of various corporate policies and rules; (vii) the appointment and
dismissal of senior executive officers as recommended by the Chief Executive
Officer; (viii) major external matters; (ix) sales, purchases, transfers and
leases of material assets with a value in excess of US$3 million and which are
not contemplated in Yuchais approved budgets; and (x) any other matters that
may be determined by the Board of Directors in accordance with Yuchais
Articles of Association.

In order to further
strengthen its level of corporate governance, the company recently
sought to cause Yuchai to adopt comprehensive corporate
governance guidelines, which seek to put procedures in place to improve the
management and corporate governance of Yuchai. These corporate governance
guidelines were unanimously approved by Yuchais Board of Directors on November
1, 2002. At that Board meeting, Wang Jianming, as Chairman and legal
representative of Yuchai, assured the Board that amendments to Yuchais Articles of Association required in order
to adopt and fully implement these guidelines would be
submitted to the relevant Chinese governmental authorities for approval
immediately following that meeting. The Articles of Association have
not yet been amended as Wang Jianming has taken no steps to obtain
the necessary government approvals, and, as such, the guidelines have not yet been officially implemented.

Pursuant to Yuchais Articles of Association, the Board of Directors of
Yuchai consists of thirteen directors appointed for three-year terms. So long
as the present ratio of Foreign Shares to the total number of State Shares and
Legal Person Shares of Yuchai remains unchanged, a total of nine directors
shall be elected from nominees of holders of Foreign Shares and a total of four
directors shall be elected from nominees of holders of State Shares and Legal
Person Shares. Actions generally may be taken by a majority vote of the
directors present at a meeting at which a quorum is present. Attendance of at
least seven directors (at least four representing holders of Foreign Shares and
at least three representing holders of State Shares or Legal Person Shares)
constitutes a quorum.

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The Company is entitled under Yuchais Articles of Association to elect
nine of Yuchais thirteen directors, thereby entitling it to effect all major
decisions relating to Yuchai. A two-thirds vote of the outstanding shares at a
shareholders meeting at which a quorum is present is required for major
corporate actions, such as an amendment to Yuchais Articles of Association,
significant sales or purchases of assets or a division, merger, acquisition or
liquidation of Yuchai, or issuances of new common shares or other securities of
Yuchai. Attendance of shareholders representing at least two-thirds of the
outstanding Yuchai Shares constitutes a quorum for shareholder meetings
considering such major corporate actions.

However, although the Companys nominees constitute a majority of the
Board of Directors of Yuchai, no Board of Directors' meeting has been
held since November 2002. Due to the stringent quorum
requirements set forth in Yuchais Articles of Association, three of the four
directors elected by holders of State Shares or Legal Person Shares are
required to attend, in order for quorum to be achieved, and as a result Board of Directors
meetings to be held. There is no provision in Yuchais Articles of Association
providing for circumstances in which quorum for a Board of Directors meeting is
not met, nor are there provisions pursuant to which shareholders can compel
the occurrence of a directors meeting. See also Item 8. Financial
Information  Legal Proceedings.

Yuchais management consists of a Chief Executive Officer, a General
Manager and several Deputy General Managers, other senior officers designated
by the board of directors and two senior managers designated by the Company.
Yuchais management handles daily operations and implements the corporate
policies under the direction and guidance of the Board of Directors of the
Company. In November 2001, Mr. Wang Jianming entered into a new contract of
employment with the Company, pursuant to which he was appointed as Chief
Executive Officer of Yuchai. However, the Company has terminated Mr. Wang Jianmings employment
thereunder, effective July 18, 2003, for breach of his November
2001 Employment Agreement, breach of his fiduciary duties and fraud
arising from his repeated failure to comply with the instructions of
the Companys Board of Directors. See   Compensation  Yuchai and Item
8. Financial Statements  Legal Proceedings.

Yuchais Board of Directors has established an Investment Review
Committee, which is responsible for reviewing the necessity and feasibility of
investment projects and making recommendations to the Board of Directors.
Investment decisions are made by a two-thirds vote of the Board of Directors.

Compensation

Company

For 2002, HLA charged Yuchai a management fee of US$500,000 for management
services, including the services of the Companys President and Chairman and
the Companys Chief Financial Officer each of whom are employees of HLA. The Company did not pay any additional
compensation to its directors and executive officers. See Item 7. Major
Shareholders and Related Party Transactions.

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Yuchai

The aggregate amount of compensation paid by Yuchai to all directors and
executive officers of Yuchai during 2002 was approximately Rmb 28.8 million
(US$3.5 million). Yuchai has a management bonus plan for its executive,
mid-level and junior officers under which annual incentive bonuses in an
aggregate amount equal to 5.5% (3.5% for executive officers
(allocated as 2.5% for
the Chief Executive Officer and 1.0% for other executive officers) and 2.0% for
mid-level and junior officers and employees) of Yuchais after-tax profit must
be paid if Yuchai achieves the after-tax profit approved in the annual budget
by Yuchais board of directors or, in the case of certain bonuses, if Yuchai
achieves 80% of such budgeted after-tax profit. In addition, Yuchais officers
participate in an incentive pay program which is available to all employees and
is based on performance and productivity.

There are no benefits provided to the directors of the Company or Yuchai
upon their termination of employment.

Pursuant to an Appointment Agreement, the Company appointed Mr. Wang
Jianming as Chief Executive Officer of Yuchai for a term of six years beginning
in May 1993. Mr. Wangs employment as Chief Executive Officer of Yuchai was
subsequently renewed for a one-year period which ended on May 17, 2000. On
October 26, 2001, the Company entered into a new employment contract with Mr.
Wang. Under the terms of the contract, Mr. Wang agreed to serve as a Director
of the Company and the Chief Executive Officer of Yuchai for a period of three
years beginning on November 1, 2001. The Company agreed to pay Mr. Wang a
monthly base salary or Rmb 40,000 and an incentive bonus based on the sales and
net after tax profit of Yuchai, as well as other performance criteria. The
contract is terminable by either party upon 60 days notice, and such notice
was given by the Company to Mr. Wang on May 19, 2003,
effective July 18, 2003, for breach of his November 2001
Employment Agreement, breach of his fiduciary duties and fraud
arising from his repeated failure to comply with the instructions of
the Companys Board of Directors. Mr. Wang has
disputed the effectiveness of this notice of termination. See Item 8.
Financial Information  Legal Proceedings.

Employees

As of December 31, 2002, Yuchai employed approximately 6,918 people
nationwide. Approximately 470 employees work at authorized customer service
stations and sales offices. Yuchai provides its employees with a fixed base
salary and a bonus that is determined by the employees performance and
productivity. Yuchai also provides its employees with housing and meal
subsidies and medical insurance. In the year ended December 31, 2002, the
average annual base salary and bonus of an employee was approximately Rmb
27,000 (US$3,262), an increase of approximately 108% from the previous year.
Yuchai has not experienced any strikes or similar significant work stoppages.
Yuchai believes that its employee relations are good.

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Share Ownership

Stock Option Plan

The Company had granted stock options to purchase an aggregate of
1,850,522 shares of Common Stock at an exercise price of $7.80 per share to
certain executive officers of the Company and Yuchai. Such stock options
expired in December 1999 without any having been exercised.

The Company has also adopted a Stock Option Plan (the Plan) to award
stock options to key employees and outside directors. The Plan is administered
by the Compensation Committee. The Compensation Committee has the absolute
discretionary authorities to administer and interpret the plan, including the
sole authority to determine who of those eligible will be granted stock
options, when such options will be granted, the terms of such options and the
number of shares for which options will be granted. Members of the
Compensation Committee are not eligible to receive stock options under the
Plan. The exercise price of each stock option will be determined by the
Compensation Committee but may not be less than the fair market value of the
Companys common stock on the date the option is granted, as determined by the
Compensation Committee. The maximum number of shares of the Companys common
stock that may be purchased pursuant to stock options granted under the Plan is
750,000 shares. The Plan will expire in 2004 unless terminated earlier by the
Board of Directors. As of December 31, 2002, no options had been granted under
the Plan.




ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

Major Shareholders

The following table sets forth certain information regarding ownership of
the Companys shares of Common Stock as of June 13, 2003 by
all persons who are known to the Company to own five percent (5%) or more of
the outstanding shares of Common Stock.

|                                                                       |  |              |            |                |  |  |      | 
|---------------------------------------------------------------------- |  | ------------ | ---------- | -------------- |  |  | ---- | 
|                                                                       |  | Shares Owned
|                                                                       |  |             
|Identity of Person or Group                                            |  | Number       |            | Percentage (%)
|                                                                       |  |              |            |               
|Hong Leong Asia Ltd. (HLA)(1)                                        |  |              | 10,240,900 |                |  |  | 29.3 | 
|The
Yulin City Government(2)                                           |  |              | 8,601,550  |                |  |  | 24.3 | 
|The Cathay Investments Fund, Limited                                   |  |              | 4,600,000  |                |  |  | 13.0 | 
|R.B.
Haave Associates, Inc.(3)                                         |  |              | 3,458,300  |                |  |  | 9.79 | 
|RS
Investment Management Co. LLC
and RS Investment Management, L.P.(4) |  |              | 1,981,601  |                |  |  | 5.60 | 



---

|(1) |  | Information based upon a report on Schedule 13D jointly filed by HLA and
its wholly-owned subsidiaries, HLC, HLT, Flite Technology Industries Ptd.
Ltd. (FTI) and Lydale Pte. Ltd. (LPL), with the SEC on July 9, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Information based on a report on
Schedule 13D filed by Coomber, Goldman,
Zhong Lin and the State Holding Company, with the SEC on December 16, 2002, as amended on June 23,
2003 and July 9, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(3) |  | Information based on a report on
Schedule 13G filed by R.B. Haave Associates Inc., a
Delaware Corporation, with the SEC on March 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(4) |  | Information based on a report on
Schedule 13G jointly filed by RS Investment Management Co.
LLC, a Delaware limited liability company, and RS Investment Management,
L.P., a California limited partnership, with the SEC on
February 8, 2002. Each of RS Investment Management Co. LLC
and RS Investment, L.P. has beneficial ownership of 1,981,601
shares of common stock. RS Investment Management Co. LLC and
RS Investment Management, L.P. constitute a group within the
meaning of Rule 13d-1(b)(1)(ii)(J) under the Securities Exchange
Act of 1934, as amended, and have shared voting and dispositive power
over 1,981,601 shares of common stock.

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HLA exercises control over and is the beneficial owner of approximately
29.3% of shares of the Companys Common Stock through its wholly-owned
subsidiaries: HLC, HLT, FTI and LPL. HLC directly owns 194,805 shares, or
0.6%, of the Companys Common Stock, and HLT directly owns 7, 831,169 shares,
or 22.1%, of the Companys Common Stock. HLAs subsidiaries FTI and LPL own
74,026 shares, or 0.2%, and 2,253,600 shares, or 6.4%, of the Companys
Common Stock, respectively. See   Related Party Transactions  Shareholders
Agreement.

On
June 23, 2003, Coomber, Goldman, Zhong Lin, the State Holding
Company and certain individuals filed an amended Schedule 13D
reporting beneficial ownership of 8,601,550 shares, or 24.3%, of the
Company. This Schedule 13D amended and restated in its entirety
the Schedule 13D dated November 13, 2002 and filed
December 16, 2002, which reported beneficial ownership by
Coomber and Goldman of 8,601,550 shares of the Company (the
Coomber Shares). This Schedule 13D reports
beneficial ownership of the Coomber Shares by (i) Coomber, a
wholly-owned subsidiary of Goldman, and the record holder of such
8,601,550 shares of the Company; (ii) Goldman, a company owned
by Qin Xiaocong, Zhu Guoxin and Yuan Xucheng, each of whom holds
their respective shares in Goldman on trust for the benefit Zhong
Lin; (iii) Zhong Lin, a company owned by Qin Xiaocong and Zhu
Guoxin, each of whom holds their respective shares in Zhong Lin on
trust for the benefit of the Yulin City Government; and (iv) the
State Holding Company, which, acting under the direction of the
Yulin City Government, financed Goldmans purchase of the Coomber
Shares from China Everbright in October 2002. Qin Xiaocong, Zhu
Guoxin and Yuan Xucheng reported but disclaimed beneficial ownership.
This Schedule 13D also reports that the ultimate beneficial
owner of the Coomber Shares is the Yulin City Government, and
discloses certain financing and control arrangements with respect to
the Coomber Share acquisition, as well as the Yulin City
Governments intentions with respect to the Company. On July 9, 2003, this Schedule 13D was further amended.

As of the record date on
June 12, 2003, there were 17,335,623 shares of Common Stock, or
49.05% shares of Common
Stock, held of record by 134 persons with registered addresses in the United
States.

The Company is not aware of any arrangement which may, at a subsequent
date, result in a change of control of the Company other than as described
below under  Shareholders Agreement.

The Special Share

The Special Share entitles the holder thereof to elect a majority of the
directors of the Company. In addition, no shareholders resolution may be passed
without the affirmative vote of the Special Share, including any resolution to
amend the Memorandum of Association or By-laws of the Company. The Special
Share is not transferable except to HLA, HLC or any of its affiliates. In 1994,
the Company issued the Special Share to DML, a holding company of the Company
then controlled by Hong Leong Corporation Limited, now known as Hong Leong
(China) Limited, or HLC. During 2002, following the decision of the
shareholders of DML to dissolve DML, DML redeemed all of the redeemable stock
issued by it to its shareholders. Per the DML Shareholders Agreement, DML
transferred all its shares of the Company to its shareholders, which included
HLA, HLC and their wholly-owned subsidiaries. Because EB Holdings, an
affiliate of China Everbright, was the shareholder of DML which gave notice of
the dissolution of DML, the Special Share was transferred from DML to HLT, an
affiliate of HLA, pursuant to the terms of the DML Shareholders Agreement, as
amended on January 21, 2002 and on May 17, 2002.

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The Companys By-Laws provide that the Special
Share shall cease to carry any rights in the event that, if HLC and its affiliates own the Special
Share, HLC and its affiliates cease to own, directly or indirectly, at least 7,290,000 shares of
Common Stock (or such equivalent number upon a consolidation or subdivision of shares of Common
Stock), or if China Everbright and its affiliates own the Special Share, China Everbright
and its affiliates cease to own, directly or indirectly, at least 6,570,000 shares of Common
Stock (or such equivalent number upon a consolidation or subdivision of shares of Common Stock).
The By-laws also provide for circumstances in which DML holds the Special Share; however, DML
was dissolved in 2002. HLT, an affiliate of HLC, holds the Special
Share in addition to 7,831,169 shares of Common Stock, which is greater than
the number stipulated in the provisions of the Companys By-Laws set forth
above.

Related Party Transactions

Shareholders Agreement

HLC, China Everbright, Cathay, GSCP, the Sun Yuan Shareholders (14
shareholders who initially invested in the Company through Sun Yuan BVI) and
the Company entered into an amended and restated Shareholders Agreement (the
Shareholders Agreement) in 1994, which provides for certain matters relating
to the management of the Company and Yuchai and the ownership of the Companys
Common Stock. The Shareholders Agreement provides that the Board of Directors
of the Company will consist of eleven directors, the Controlling Shareholder
(as described below) will be entitled to designate six directors, the Major
Shareholder (as described below) will be entitled to designate two directors,
and each of Cathay and GSCP will be entitled to designate one director and the
Chief Executive Officer of Yuchai will initially be the other director. The
Shareholders Agreement also provides that the Controlling Shareholder will be
entitled to designate five of the nine Yuchai directors designated by the
Company, the Major Shareholder will be entitled to designate two such directors
and each of Cathay and GSCP will be entitled to designate one such director.
Under the Shareholders Agreement, the nine Yuchai directors designated by the
Company will vote as a block in accordance with the vote of the majority of
such nine directors. The Shareholders Agreement provides that the Controlling
Shareholder will be the person holding the Special Share, provided that at all times
the Controlling Shareholder will be either HLC or China Everbright, and the
other will be the Major Shareholder. Since the Companys initial public
offering in 1994, HLC has been the Controlling Shareholder and China Everbright
has been the Major Shareholder. However, in October 2002, China Everbright
sold all of its shares in the Company to Goldman in October 2002 and is no
longer the Major Shareholder of the Company. The Shareholder Agreement
provides that if any shareholder (other than the Controlling Shareholder)
ceases to own at least 4% of the Companys Common Stock, such shareholder shall
no longer be entitled to designate any directors. Accordingly, China
Everbright no longer has director designation rights. The Shareholders
Agreement also provides that, so long as HLC is the Controlling Shareholder,
Yuchai or the Company will pay HLC an annual management fee of not less than
US$500,000 for management services provided by HLC, including the services of
the Companys President and Chief Financial Officer. The Shareholders
Agreement will terminate upon the occurrence of an event resulting in the
Special Share ceasing to carry any rights.

In addition to the Shareholders Agreement, HLC, China Everbright and DML
had entered into a Subscription and Shareholders Agreement (the DML
Shareholders Agreement), which provided for certain matters relating to the
management of DML, the Company and Yuchai and the ownership of DML stock. The
DML Shareholders Agreement provided that HLC would control DML, provided,
however, that if HLC and its affiliates ceased to own directly or through DML
at least 7,290,000 shares of Common Stock when China Everbright and its
affiliates own directly or through DML at least 6,570,000 shares of Common
Stock, China Everbright would control DML. The DML Shareholders Agreement
provided that all rights of the Special Share held by DML would be exercised as
directed by the shareholder that controls

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DML. With the dissolution of DML and the sale by China Everbright of all
of its shares in the Company to Goldman in October 2002, the DML Shareholders
Agreement no longer directly affects the Company.

Registration Rights Agreement

Pursuant to a Registration Rights Agreement (the Registration Rights
Agreement), the Company has granted two demand registration rights to each
of HLC, China Everbright, Cathay, GSCP and the Sun Yuan Shareholders (the
Selling Stockholders) requiring the Company, subject to certain conditions,
to use its best efforts to prepare and file a registration statement on behalf
of such shareholder under the Securities Act and to use its best efforts to
qualify the shares for offer and sale under any applicable U.S. state
securities laws. Expenses incurred in connection with one demand registration
for each such shareholder will be borne by the Company, and the Company and
Yuchai will be required to indemnify the underwriters in connection with any
demand registration. The Registration Rights Agreement also grants each such
shareholder certain piggyback registration rights entitling each shareholder
to sell Common Stock in any registered offerings of equity securities of the
Company, for the account of the Company or on behalf of its security holders.
China Everbright, GSCP and the Sun Yuan shareholders are no longer shareholders
of the Company.

Pursuant to the demand registration rights, the Company filed a
Registration Statement (Registration No. 333-5478) on Form F-3 (the
Registration Statement) with the SEC on
August 26, 1996, registering an aggregate of 12,332,443 shares of the Companys
Common Stock for sale by the Selling Stockholders from time to time, depending
on market conditions and other factors, in one or more transactions on the
NYSE, in the over-the-counter market or otherwise, at market prices prevailing
at the time of sale, at negotiated prices or at fixed prices.

Other Transactions

During 2002, HLA charged Yuchai a management fee of US$500,000 for
management, financial planning and control and other services, including the
services of the Companys President and Chairman and its Chief Financial
Officer, each of whom are employees of HLA. Such charges represent HLAs estimated direct costs of providing
these services.

During 2002, the State Holding Company charged Yuchai Rmb 24.2 million
(US$2.9 million) for certain general and administrative expenses on an actually
incurred basis. The Company believes that the expenses charged to Yuchai by
the State Holding Company would not have been materially different on a stand
alone basis because Yuchai could provide these services for itself at
approximately the same cost.

The Company has undertaken other significant business transactions with related parties during the three years ended December 31, 2002,
as set forth under Note 24 to the Companys Consolidated Financial Statements.




ITEM 8. FINANCIAL INFORMATION.

Consolidated Financial Statements

See Item 18. Financial Statements.

Legal Proceedings

Other than as described below, neither the Company nor its sole operating
subsidiary, Yuchai, is involved in any material legal proceedings that the
Company believes would, individually or taken as whole, adversely affect the
financial condition or results of operations of the Company.

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The Company has had difficulties in
obtaining the cooperation of the State Holding Company and Mr. Wang Jianming in
the daily management and operation of Yuchai. The State Holding Company is a minority shareholder of Yuchai and is
wholly-owned by the municipal government of Yulin City in the Guangxi Zhuang Autonomous
Region. Mr. Wang is the Chairman, legal representative and Chief Executive
Officer of Yuchai and a director of the Company, as well as the Chairman and
legal representative of the State Holding Company. Most notably, these
difficulties are with respect to implementation of the decisions of
the Companys Board of Directors with respect to certain corporate governance and capital
expenditures at Yuchai and the payment to the Company of its share of the
dividends declared by Yuchais shareholders in August 2002.

On 23 August 2002, Yuchais Board of Directors and shareholders approved
the payment of a final dividend for 2001 and an interim dividend for 2002
totaling Rmb 321.6 million (US$38.9 million) (the August 2002 Dividend), of
which the Companys share amounts to Rmb 245,687,110 (US$29.6 million).
Although the dividends due to the State Holding Company have been fully paid,
and the dividends due to the other Chinese shareholders of Yuchai have been
either fully or partially paid, the dividends due to the Company to date have
not.

Since September 2002, the Company has used various avenues to attempt to
cause Yuchai to release its share of the August 2002 Dividend and to remedy the
other difficulties it has faced with respect to its investment at Yuchai. As
these difficulties remained to be resolved, the Board of Directors of the
Company established a Special Committee, comprising three directors of the
Company, and authorized it to investigate, consider and cause the Company to
undertake steps, including legal action if necessary, to attempt to remedy
these difficulties. The Special Committee subsequently advised the Company
that it believes that the delay in the payment of the August 2002 Dividend to
the Company may in part be caused by Mr. Wang acting together with
Goldman, Zhong Lin and the Yulin City Government, as detailed below.

The Company received a letter from Zhong Lin in November 2002 claiming
that it had acquired shares in Yuchai that had previously been owned by China
Everbright. Zhong Lin demanded payment to itself of what would have been China
Everbrights portion of the August 2002 Dividend. The Company advised Zhong
Lin that China Everbright had been an indirect shareholder of the Company, and
not of Yuchai, and that shareholders of the Company were not entitled to direct
payment of dividends from Yuchai. The Company subsequently confirmed from a
Schedule 13D filed by Coomber and Goldman in December 2002 that Coomber, a wholly-owned
subsidiary of China Everbright and the record holder of China Everbrights
shares in the Company, had in fact been acquired from China Everbright by
Goldman.

In March 2003, Mr. Wang forwarded to the Company a letter from Goldman
demanding that the Company agrees in advance to remit within one month of
receiving its share of the August 2002 Dividend all or substantially all of
that amount to its shareholders and to appoint two named individuals to the
Companys Board of Directors. Although the letter was from Goldman, Mr. Wang
referred to these individuals as directors nominated by Zhong Lin. Mr. Wang
suggested that Zhong Lin had complained to the Guangxi provincial authorities
that certain aspects of the foreign ownership of and rights of control over Yuchai had not
been properly approved. Mr. Wang further suggested that only if Zhong Lins
demands were met could the Company expect that the question of the payment of
the Companys share of the August 2002 Dividend might be addressed by the
Chinese shareholders.

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The Company repeatedly reminded Mr. Wang of his duties as Chief
Executive Officer of Yuchai to ensure that the August 2002 Dividend be paid to
Yuchais shareholders. The Company also repeatedly reminded Mr. Wang of his
duties as a director of the Company and of Yuchai. Mr. Wang nonetheless
continued to withhold payment of the Companys share of the August 2002
Dividend. The Company also repeatedly demanded information from Mr. Wang
concerning his interests in Zhong Lin and/or Goldman. The Company also
requested Goldman to provide information concerning its relationship to Zhong
Lin, Mr. Wang and the Guangxi provincial government. Neither Mr. Wang nor
Goldman provided any such information. On April 23, 2003, Mr. Wang
informed the Company that he had no obligation to provide the requested
information.

Following numerous attempts to remedy these difficulties, the Special
Committee determined that the Company take the actions described below.

In New York, the Company initiated civil proceedings in United States
federal court against Coomber, Goldman, Zhong Lin and Mr. Wang with respect to
certain deficiencies in the Schedule 13D dated November 13, 2002 and filed
December 16, 2002 reporting beneficial ownership by Coomber and Goldman of
8,601,550 shares of the Company. The civil proceedings sought to compel,
among other things, disclosure of the identity of all the beneficial owners of
these shares of the Company, as well as those parties intentions with respect
to the Company, and to enjoin further acquisitions of shares of the Company by
Coomber, Goldman, Zhong Lin and Mr. Wang until at least such time as the
Schedule 13D had been corrected. A temporary restraining order was
entered on May 19, 2003, temporarily enjoining further acquisitions of the Companys shares by
Coomber, Goldman, Zhong Lin and Mr. Wang or parties acting in concert with
them.

On June 23, 2003, Coomber, Goldman, Zhong Lin, the State Holding Company
and certain individuals filed an amended and restated Schedule 13D reporting
beneficial ownership of 8,601,550 shares, or 24.3%, of the Company, originally
dated November 13, 2002 and filed December 16, 2002. Through this amended
Schedule 13D, the Company learned that Goldman, which owns Coomber, is a
wholly-owned subsidiary of Zhong Lin. Furthermore, the amended Schedule 13D
also reported that Zhong Lin is financed by the State Holding Company, that the State Holding Company is also
wholly-owned and controlled by the municipal government of Yulin City (Yulin City Government), and that Zhong Lin is controlled by the Yulin City Government. On July 9, 2003, this Schedule 13D was further amended.

The temporary restraining order remained in effect
until the preliminary injunction hearing was held on July 2, 2003, at which the
court dissolved the temporary restraining order on the basis that the
amended Schedule 13D, described above, had sufficiently corrected their prior reporting
violations. The Company is reviewing the assertions and documents contained in
the defendants amended Schedule 13D and intends to take all appropriate steps to
cause the defendants to comply with their disclosure obligations.

In London, the Company initiated arbitration proceedings against Yuchai,
the State Holding Company and Mr. Wang with respect to the non-payment of the
pro rata share of the August 2002 Dividends to each of the six subsidiaries
through which the Company holds its shares in Yuchai, as well as a
determination that Yuchais Articles of Association have been violated. The
proceedings seek to cause Yuchai to release payment of RMB 245,765,702 (US$29.7
million) in dividends owed to the Company, in accordance with the Companys
rights as a shareholder under Yuchais Articles of Association. In the respondents response and counter-claim, the respondents
acknowledge Yuchais obligation to pay the Company its pro-rata share of the
August 2002 Dividend. The response and counter-claim also states that Yuchai
has segregated sufficient funds to pay the Company its pro-rata share of the
August 2002 Dividend, that the funds are currently held in time deposit
accounts in China, and that Yuchai has been and remains fully prepared to pay
those dividends to the Company. However, the response and counter-claim
asserts that Yuchai is not currently at liberty to pay the dividends until
certain alleged Chinese law irregularities arising from the structure of the
Companys ownership of and rights of control over Yuchai are remedied. Their response
also requests that the State Holding Company and Mr. Wang be dismissed from the
proceedings. For the reasons
outlined below, the Company disputes these assertions, and intends to respond
to such counter-claims after the formation of the arbitral tribunal.

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In Singapore, the Company initiated arbitration proceedings against Mr.
Wang, as Chief Executive Officer of Yuchai, for breach of his November 1, 2001
Employment Agreement with the Company, breach of his fiduciary duties and fraud
arising from his repeated failure to comply with the instructions of the
Companys Board of Directors, including with respect to capital expenditures,
corporate governance, use of corporate assets and the non-payment of dividends
owed to the Company. The Company also filed a complaint with the appropriate
Chinese authorities. Mr. Wang has filed a response to the Companys request for arbitration and counter-claimed US$2.6 million in bonus payments for the period 1995 to 2002. In connection with the arbitration proceedings, the
Company served notice on Mr. Wang on May 19, 2003 to terminate his employment
as Chief Executive Officer of Yuchai, effective July 18, 2003, in accordance
with the notice period specified in Mr. Wangs Employment Agreement. Mr. Wang
has subsequently disputed the effectiveness of such notice and denied the
validity of his Employment Agreement with the Company, pursuant to which such
notice was given. Mr. Wang asserts that termination of his employment as Chief
Executive Officer of Yuchai can only be effected by a board resolution of the
Yuchai board of directors. However, Mr. Wang is refusing to hold a
meeting of the Yuchai board of directors at this time, in violation of the
requirements of Article 36 of Yuchais Articles of Association, including that
a board of directors meeting be held at least once every six months and that a
meeting be held upon a request being made by more than one-third of the
directors. The Board of the Directors of the Company passed a resolution on July 9, 2003
determining that Mr. Wang had committed a penalty
breach of his November 1, 2001 Employment Agreement with the Company.

After
the Company initiated the legal proceedings outlined above, two senior managers of the Company,
who have been seconded to Yuchai, were excluded from the premises and
denied access to certain operating and financial information with respect to
Yuchai, which they had regularly received. For the past 10 years, pursuant to
resolutions of the Yuchai board of directors and other contractual
arrangements, representatives of the Company have been stationed at Yuchais
offices to monitor Yuchais performance, books, records and to provide the
Company with access to records necessary for it to comply with U.S. securities
laws and financial reporting. The Company believes that this recent
action by Yuchai management to
lock out the Companys representatives is improper and contravenes resolutions
of Yuchais board of directors authorizing the presence of these secondees at
Yuchai. The Company has attempted to have these two senior managers
reinstated, but has been unsuccessful to date. However, alternative
arrangements satisfactory to the Company have been put in place to
allow the Company to continue to monitor Yuchais performance,
books, records and to provide the Company with access to records
necessary for it to comply with U.S. securities laws and financial
reporting.

On June 16, 2003, the Company received from Yuchai copies of
recent letters from various Chinese government agencies stating that the
transfer of ownership of shares with respect to Yuchai in November 1994, in
connection with the Companys IPO, was not validly
approved by the Chinese authorities, and that as a result its exercise of control over Yuchai has been improper. The
background to and contents of such correspondence is described below.

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Following
approaches by the provincial government of the Guangxi Zhuang
Autonomous Region, at the initiation of the Yulin City Government,
the MOC in Beijing wrote a letter
dated dated April 17, 2003 agreeing with the Guangxi
Government that the November 1994 transfer by the owners of Yuchais six
foreign shareholders of the owners equity interests in such six foreign
shareholders to the Company, in exchange for shares of the Company in
anticipation of the Companys IPO, was not in conformity with the conditions
set by MOFTEC in an approval which it had issued in June 1994. The June 1994 approval had specifically named six foreign shareholders and authorized
them to own 76.4% of the shares of Yuchai (which have remained the same six
foreign shareholders of Yuchai until today), and all of the Yuchai shares held
by such foreign shareholders were designated as foreign investment shares.
The MOC requested the Guangxi
Government to advise the Chinese and foreign shareholders of Yuchai to
promptly rectify these matters and to resolve the related issues in an
appropriate manner.

In response, the Guangxi
Government then appears to have sent a letter
dated May 22, 2003 to the Yulin City Government advising
them of the MOCs response and similarly requesting the Yulin City Government to
cause the Chinese and foreign shareholders of Yuchai to promptly rectify the
irregularities in the equity transfer process and to resolve the related
issues in an appropriate manner. Apparently,
the Yulin City Government, on behalf of Yuchai, has set a two month
period commencing June 10, 2003 within which the
Chinese and foreign shareholders are required to remedy these irregularities.

Based on advice from its special Chinese counsel, the Company believes
that this recent correspondence is based on an incorrect understanding of the
facts and circumstances of the November 1994 share transfers and an incorrect
interpretation of the language of the June 1994 approval. The Company further
believes, similarly based on advice from its special Chinese counsel, that
Yuchais ownership structure has been validly approved by the relevant Chinese
authorities, and that the Companys share of the August 2002 Dividend is
properly due and owing. In addition, legal opinions were given at the time of
the Companys IPO stating that all necessary approvals had been granted and
that Yuchais ownership structure was valid under Chinese law. The Company has
written to various Chinese government agencies to communicate its beliefs in
this respect, and the Company is also actively taking steps to arrange meetings
with appropriate officials in China to clarify the basis for this recent
correspondence.

Yuchais current ownership structure had been unchallenged since it was
established almost nine years ago, and payments have been made by Yuchai to the
Company for each dividend declared prior to

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the August 2002 Dividend. The Company believes that no changes have occurred
in the ownership structure that would invalidate the Chinese governmental
approvals that were obtained in 1994.

The Company is continuing in its efforts to obtain the assistance of the
relevant government authorities in China for a comprehensive resolution of the
matters in dispute. See also the first and second risk factors set forth under Item 3. Risk FactorsRisks
Relating to our Company and our Business relating to the Company's various legal and
arbitrational proceedings and the Company's exercise of control over Yuchai.

Other Legal Proceedings

Yuchai is involved in legal proceedings instituted by the Yulin Road
Bureau against Yuchai and Naning Hengji, an unrelated third party. In these
proceedings, the Yulin Road Bureau has sought payment of RMB 7.3 million
(US$0.9 million) from Yuchai and Naning Hengji, as the construction cost of a
road built by Yulin Road Bureau near Yuchais factory. At trial, a Yulin court
ordered Yuchai and Naning Hengji to pay Rmb 4.6 million (US$0.5
million) to the Yulin Road Bureau. Yuchai has appealed this decision to a
Guangxi court and is awaiting the outcome of this appeal. The Company has made
a provision of Rmb 4.6 million, which has been included in Selling, General
and Administrative Expense and Accrued Expense and Other Liabilities in
2002.

Policy on Dividend Distributions

The Companys principal source of cash flow is its share of the dividends,
if any, paid by Yuchai to the Company, as described under Item 5.
Liquidity and Capital Resources.

Chinese laws and regulations applicable to a Sino-foreign joint stock
company require that before Yuchai distributes profits, it must: (i) satisfy
all tax liabilities; (ii) recover losses in previous years; and (iii) make
contributions to certain statutory reserves in an amount equal to at least 15%
of net income for the year determined in accordance with PRC GAAP.

Any determination by Yuchai to declare a dividend will be at the
discretion of Yuchais shareholders and will be dependent upon Yuchais
financial condition, results of operations and other relevant factors.
Yuchais Articles of Association provide that dividends may be paid once a
year. To the extent Yuchai has foreign currency available, dividends declared
by shareholders at a shareholders meeting to be paid to holders of Foreign
Shares (currently only the Company) will be payable in foreign currency, and
such shareholders will have priority thereto. If the foreign currency
available is insufficient to pay such dividends, such dividends may be payable
partly in Renminbi and partly in foreign currency. Dividends allocated to
holders of Foreign Shares may be remitted in accordance with the relevant
Chinese laws and regulations. In the event that the dividends are distributed
in Renminbi, such dividends may be converted into foreign currency and remitted
in accordance with the relevant Chinese laws, regulations and policies.

See also Item 8. Financial InformationLegal Proceedings and Item 13. Defaults, Dividend Arrearages and Delinquencies.

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ITEM 9. THE OFFER AND LISTING.

Since December 16, 1994, the Common Stock has been listed and traded on
the New York Stock Exchange (the NYSE) under the symbol CYD. The Common
Stock is not listed on any other exchanges within or outside the United States.

The high and low sales prices for shares of the Common Stock on the NYSE
for the periods indicated were as follows:

|                             |  |      |       |     |  |  |       | 
|---------------------------- |  | ---- | ----- | --- |  |  | ----- | 
|                             |  | US$  |       | US$
|                             |  |      |       |    
|Period                       |  | High |       | Low
|                             |  |      |       |    
|1998                         |  |      | 3.125 |     |  |  | 0.375 | 
|1999                         |  |      | 2.875 |     |  |  | 0.375 | 
|2000                         |  |      | 2.000 |     |  |  | 0.875 | 
|2001                         |  |      | 1.150 |     |  |  | 0.300 | 
|2002                         |  |      | 5.95  |     |  |  | 0.95  | 
|2003
(through July 10, 2003) |  |      | 9.20  |     |  |  | 4.45  | 

|                    |  |      |       |     |  |  |       | 
|------------------- |  | ---- | ----- | --- |  |  | ----- | 
|                    |  | US$  |       | US$
|                    |  |      |       |    
|Period              |  | High |       | Low
|                    |  |      |       |    
|2001 First Quarter  |  |      | 1.250 |     |  |  | 1.040 | 
|2001 Second Quarter |  |      | 1.150 |     |  |  | 0.900 | 
|2001 Third Quarter  |  |      | 1.100 |     |  |  | 0.300 | 
|2001 Fourth Quarter |  |      | 0.960 |     |  |  | 0.350 | 
|2002 First Quarter  |  |      | 1.800 |     |  |  | 0.950 | 
|2002 Second Quarter |  |      | 3.45  |     |  |  | 1.60  | 
|2002 Third Quarter  |  |      | 3.60  |     |  |  | 2.55  | 
|2002 Fourth Quarter |  |      | 5.95  |     |  |  | 3.35  | 
|2003 First Quarter  |  |      | 7.10  |     |  |  | 4.45  | 
|2003
Second Quarter |  |      | 9.20  |     |  |  | 5.60  | 

|              |  |      |      |     |  |  |      | 
|------------- |  | ---- | ---- | --- |  |  | ---- | 
|              |  | US$  |      | US$
|              |  |      |      |    
|Period        |  | High |      | Low
|              |  |      |      |    
|December 2002 |  |      | 4.92 |     |  |  | 3.85 | 
|January 2003  |  |      | 5.05 |     |  |  | 4.45 | 
|February 2003 |  |      | 5.23 |     |  |  | 4.72 | 
|March 2003    |  |      | 7.10 |     |  |  | 5.10 | 
|April 2003    |  |      | 7.95 |     |  |  | 5.90 | 
|May 2003      |  |      | 6.80 |     |  |  | 5.80 | 
|June
2003     |  |      | 9.20 |     |  |  | 5.60 | 




ITEM 10. ADDITIONAL INFORMATION.

The Companys objects are to perform all the functions of a holding
company and to coordinate the policy and administration of any subsidiary
company. See Sections 6 and 7 of the Companys Memorandum of Association for
further information.

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Directors

Director Interests and Voting

A Director of the Company cannot vote or be counted in the quorum with
regard to any contract or arrangement or any other proposal in which he has any
interest or in respect of which he has any duty which conflicts with his duty
to the Company. The restriction from voting and being counted in the quorum
does not apply if the only interest the Director has is included in the
following list:



| |  |  | a resolution regarding granting any security or indemnity for
any money lent or obligation incurred by such Director at the
request, or for the benefit, of the Company or any of its
subsidiaries (or a company of which the Company is a beneficially
wholly-owned subsidiary);                                                                                                                                                                                                           
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a resolution regarding granting any security or indemnity to
any third party for a debt or obligation which is owed by the
Company or any of its subsidiaries (or a company of which the
Company is a beneficially wholly-owned subsidiary) to the third
party, for which such Director has assumed responsibility in whole
or in part under a guarantee or indemnity;                                                                                                                      
|
| |  |  | a resolution about an offer of shares, debentures or other
securities of the Company or any of its subsidiaries (or a company
of which the Company is a beneficially wholly-owned subsidiary) for
subscription or purchase in which such Director is to be a
participant in the underwriting or sub-underwriting of the offer;                                                                                                                                                              
|
| |  |  | a resolution about any proposal involving any other company
in which such Director is interested, whether directly or indirectly
and whether as an officer or shareholder or otherwise, provided that
such Director is not the holder of, or directly or indirectly
beneficially interested in, 5% or more of (i) any class of the
equity share capital of such company or in any third company through
which such directors interest is derived or (ii) the voting rights
in that company;
|
| |  |  | any contract arrangement or proposal for the benefit of
employees of the Company under which such Director benefits in a
similar manner as the employees and does not receive any privileges
or advantages not provided to the employees; or                                                                                                                                                                                                                                                
|
| |  |  | any proposal in which such Director is interested in the same
manner as other holders of shares or debentures or other securities
of the Company or any of its subsidiaries by virtue only of such
Directors interest in shares or debentures or other securities of
the Company or any of its subsidiaries.                                                                                                                                                                               

If the Board of Directors of the Company is considering proposals about
appointing two or more Directors to positions with the Company or any company
in which the Company is interested, each such Director can vote and be included
in the quorum for each resolution, except the one concerning such director.

Remuneration and Pensions

The total fees paid to the Directors for performing their services as
Directors must not exceed US$250,000 each year or such lesser amount as the
Board of Directors of the Company may determine. The Directors may decide the
way in which the total sum shall be divided among them, except that any
Director holding office for less than the whole of the relevant period for
which the fees are paid will only

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receive part of the amount in proportion to
the amount of time he has been a Director. The shareholders of the Company may
by ordinary resolution increase the amount of the fees payable to the
Directors.

The Board of Directors of the Company may grant special remuneration to
any Director who shall render any special or extra services to or at the
request of the Company. Such special remuneration may be paid to such Director
in addition to or in substitution for his ordinary remuneration as a Director
and may be payable by way of lump sum, participation in profits or as otherwise
determined by the Board of Directors of the Company.

The Board of Directors of the Company may provide pensions or other
benefits to any Director or former Director, or any of their relations or
dependants.

Borrowing Powers

The Board of Directors of the Company may exercise all the powers of the
Company to borrow money and to mortgage or charge its undertaking, property and
uncalled capital or any part thereof and to issue debentures and other
securities.

Qualification of Directors

No person is required to vacate office or is ineligible for re-election or
re-appointment as a Director, and no person is ineligible for appointment as a
Director, by reason only of his having attained any particular age. No
Director is required to hold any shares of the Company.

Rights of Holders of Common Stock

The holders of Common Stock shall:



| |  |  | be entitled, on a show of hands, to one vote and, on a poll,
to one vote per share;                                                                                                                                                                                                                               
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | be entitled to such dividends as the Board of Directors of
the Company may from time to time declare;                                                                                                                                                                                                             
|
| |  |  | in the event of a winding-up or dissolution of the Company,
whether voluntary or involuntary or for the purpose of the
reorganization or otherwise or upon any distribution of capital, be
entitled to a return of the amount paid up on the Common Stock and
thereafter to the surplus assets of the Company; and
|
| |  |  | generally, be entitled to enjoy all the rights attaching to
shares.                                                                                                                                                                                                                                               

All unclaimed dividends or distributions out of contributed surplus
account may be invested or otherwise made use of by the Board of Directors of
the Company for the benefit of the Company until claimed. No dividend or
distribution shall bear interest against the Company. Any dividend or
distribution which has remained unclaimed for a period of 12 years from the due
date for payment thereof shall at the expiration of that period be forfeited
and shall belong to the Company absolutely.

Rights of Holder of the Special Share

The holder of the Special Share shall be entitled to the following rights:



| |  |  | to elect six Directors of the Company and to remove Directors
so appointed;
| | - |  | ---------------------------------------------------------------------------

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| |  |  | no shareholder resolution may be passed without the
affirmative vote of the holder of the Special Share, including any
resolution to amend the Memorandum of Association or By-laws of the
Company.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The holder of the Special Share shall not be entitled to any dividends and
in the event of a winding up or dissolution of the Company, the holder of the
Special Share shall be entitled only to a return of the amount paid up on the
Special Share.

The Special Share is not transferable
except to HLC and its affiliates or
to China Everbright and its affiliates. The Special Share shall cease to carry
any rights in the event that, if HLC and its affiliates own the Special Share, HLC and its
affiliates cease to own, directly or indirectly, at least 7,290,000 shares of Common Stock
(or such equivalent number upon a consolidation or subdivision of shares of Common Stock), or
if China Everbright and its affiliates own the Special Share, China Everbright and its affiliates
cease to own, directly or indirectly, at least 6,570,000 shares of Common Stock (or such equivalent
number upon a consolidation or subdivision of shares of Common Stock). The By-laws also provide for
circumstances in which DML holds the Special Share; however, DML was dissolved in 2002.

Modification of Shareholders Rights

The rights attached to any class of shares may be varied, modified or
abrogated with the consent in writing of the holders of not less than
three-fourths of the issued shares of that class or with the sanction of an
ordinary resolution passed at a separate general meeting of the holders of the
shares of the class. The rights conferred upon the holders of the shares of
any class issued with preferred or other rights shall not, unless otherwise
expressly provided by the terms of issue of the shares of that class, be deemed
to be varied by the creation or issue of further shares ranking pari passu
therewith.

Annual General and Special General Meetings

The Company must hold an annual general meeting each year. The Directors
of the Company decide where and when it will be held. Not more than fifteen months may elapse
between the date of one annual general meeting and the next. At least 14 clear
days written notice must be given for every annual general meeting and for
every special general meeting. The notice for any annual general meeting must
state the date, place and time at which the meeting is to be held, and the
business to be conducted at the meeting, including, if applicable, any election
of Directors. The notice for any special general meeting must state the time,
place and the general nature of the business to be considered at the meeting
and shall state that a shareholder entitled to attend and vote is entitled to
appoint one or more proxies to attend and vote instead of him. In the case of
a meeting convened for passing a special resolution, the notice shall specify
the intention to propose the resolution as a special resolution.

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Shareholders holding not less than one-tenth in value of the paid up share
capital of the Company and having the right to attend and vote at general
meetings of the Company shall have the right, by written request to the
Chairman or President (as applicable), Deputy Chairman or Vice President (as
applicable) or Secretary of the Company, to require that a special general
meeting be convened by the Directors for the transaction of any business
specified in the request. Such meeting shall be held within two months after
the request has been made. If within 21 days of the request the Board fails to
convene the meeting, the petitioners may convene the meeting themselves.

Limitations on Rights to Own Securities

There are no limitations under Bermuda law or the Companys Memorandum of
Association and By-laws on the rights of non-Bermuda owners of shares of the
Company to hold or vote their shares.

The Company is exempt from the laws of Bermuda which restrict the
percentage of share capital that may be held by non-Bermudians, but as an
exempted company the Company may not participate in certain business
transactions, including: (i) the acquisition or holding of land in Bermuda
(except that required for its business held by way of lease or tenancy for a
term not exceeding 50 years or, with the consent of the Minister of Finance of
Bermuda, land by way of lease or tenancy for a term not exceeding 21 years in
order to provide accommodation for its employees); (ii) the taking of mortgages
on land in Bermuda to secure an amount in excess of 50,000 Bermuda dollars
without the consent of the Minister of Finance of Bermuda; (iii) the
acquisition of any bonds or debentures secured by any land in Bermuda other
than those issued by the Government of Bermuda or a public authority; or (iv)
the carrying on of business of any kind or type whatsoever in Bermuda either
along or in partnership or otherwise except, inter alia, carrying on business
with persons outside Bermuda, in furtherance of the business of the Company
carried on outside Bermuda or under a license granted by the Minister of
Finance of Bermuda.

In accordance with Bermuda law, share certificates are only issued in the
names of corporations, partnerships, or individuals. In the case of an
applicant acting in a special capacity (for example, as an executor or
trustee), certificates may, at the request of the applicant, record the
capacity in which the applicant is acting. Notwithstanding the recording of
any such special capacity, the Company is not bound to investigate or incur any
responsibility in respect of the proper administration of any such estate or
trust. The Company will take no notice of any trust applicable to any of its
shares whether or not it had notice of such trust.

Exchange Controls

Bermuda Exchange Controls

The Company has been designated as a non-resident for exchange control
purposes by the Bermuda Monetary Authority.

The Company has received the permission of the Bermuda Monetary Authority
under the Exchange Control Act of 1972 and regulations thereunder for the
transfer of shares of Common Stock between persons regarded as resident outside
Bermuda for exchange control purposes and the issue of shares within the
existing authorized capital of the Company to or by such persons for so long as
such shares are listed on the NYSE. Issues and transfers of shares involving
any person regarded as resident in Bermuda for exchange control purposes
require specific prior approval under the Exchange Control Act of 1972.

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Because the Company has been designated as a non-resident for Bermuda
exchange control purposes, there are no restrictions on its ability to transfer
funds in and out of Bermuda or to pay dividends to United States residents who
are holders of the shares of Common Stock, other than in respect of local
Bermuda currency.

China Exchange Controls

The Renminbi currently is not a freely convertible currency. The State
Administration for Foreign Exchange (the SAFE), under the authority of the
Peoples Bank of China (the PBOC), controls the conversion of Renminbi into
foreign currency. Prior to January 1, 1994, Renminbi could be converted to
foreign currency through the Bank of China or other authorized institutions at
official rates fixed daily by the SAFE. Renminbi could also be converted at
swap centers (Swap Centers) open to Chinese enterprises and foreign invested
enterprises (FIEs), subject to SAFE approval of each foreign currency trade,
at exchange rates negotiated by the parties for each transaction. In the year
ended December 31, 1993, as much as 80% by value of all foreign exchange
transactions in China took place through the Swap Centers. The exchange rate
quoted by the Bank of China differed substantially from that available in the
Swap Centers. Effective January 1, 1994, a unitary exchange rate system was
introduced in China, replacing the dual-rate system previously in effect. In
connection with the creation of a unitary exchange system, the China Foreign
Exchange Trading System (CFETS) inter-bank foreign exchange market was
established. Under the unitary foreign exchange system, PBOC sets daily
exchange rates (the PBOC Rates) for conversion of Renminbi into U.S. dollars
and other currencies based on the CFETS interbank market rates, and the Bank of
China and other authorized banks may engage in foreign exchange transactions at
rates that vary within a prescribed range above or below PBOC Rates.

Yuchai, as a FIE, is permitted to retain its foreign currency earnings and
maintain foreign currency accounts at designated foreign exchange banks.
However, there can be no assurance that the current authorizations for FIEs to
retain their foreign exchange to satisfy foreign exchange liabilities in the
future will not be limited or eliminated or that Yuchai will be able to obtain
sufficient foreign exchange to satisfy their foreign exchange requirements.
Foreign exchange transactions under the capital account continue to be subject
to limitations and require approvals of the SAFE, which could affect the
ability of the Yuchai to obtain foreign exchange through debt or equity
financing, including by means of loans or capital contributions from the
Company.

In the event of shortages of foreign currencies, Yuchai may be unable to
convert sufficient Renminbi into foreign currency to meet its foreign currency
obligations or to pay dividends in foreign currency. Yuchai requires foreign
currency to purchase a substantial portion of the manufacturing equipment
required for the planned expansion of its manufacturing facilities and to meet
foreign currency-denominated debt payment obligations. Yuchai will also
require foreign currency for payment of its imported engine components.

The value of the Renminbi is subject to changes in Chinese government
policies and to international economic and political developments. During the
few years prior to 1994, the Renminbi experienced a devaluation against most
major currencies, and a devaluation of approximately 50% of the Renminbi
against the U.S. dollar occurred on January 3, 1994 in connection with the
adoption of the new unitary exchange rate system. Since 1994, the official
exchange rate for the conversion of Renminbi to U.S. dollars has been stable,
and the Renminbi has appreciated slightly against other currencies. Any future
devaluation of the Renminbi would increase the effective cost to Yuchai of
foreign manufactured equipment or components, and of satisfying any other
foreign currency denominated liabilities. In addition, any such devaluation
would reduce the U.S. dollar value of any dividends declared in Renminbi.
During 2000, 2001 and 2002, the Renminbi has remained stable against the U.S.
dollar.

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Taxation

Bermuda Taxation

There is no Bermuda income, corporation or profits tax, withholding tax,
capital gains tax, capital transfer tax, estate duty or inheritance tax payable
by shareholders of the Company other than by shareholders ordinarily resident
in Bermuda. Neither the Company nor its shareholders (other than shareholders
ordinarily resident in Bermuda) are subject to stamp or other similar duty on
the issue, transfer or redemption of Common Stock. The Company has received
from the Minister of Finance of Bermuda under the Exempted Undertakings Tax
Protection Act of 1966, as amended, an assurance that, in the event that
Bermuda enacts any legislation imposing any tax computed on profits or income,
or computed on any capital assets, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, the imposition of such tax shall not
be applicable to the Company or to any of its operations, shares, debentures or
other obligations of the Company, until March 28, 2016. This assurance does
not, however, prevent the imposition of any such tax or duty on such persons as
are ordinarily resident in Bermuda and holding such shares, debentures or
obligations of the Company or on land in Bermuda leased or let to the Company.

As an exempted company, the Company is required to pay a registration fee
in Bermuda based upon its authorized share capital and the premium on the issue
of its shares, at rates calculated on a sliding scale not exceeding US$27,825
per annum.

Taxation  Peoples Republic of China Taxation

The following discussion summarizes the taxes applicable to the Companys
investment in Yuchai and applicable to Yuchai under Chinese law.

Taxation of Dividends from Yuchai

Dividends distributed by Yuchai to the Company can be remitted from China
without any Chinese taxation. Although the Income Tax Law on Foreign
Investment Enterprises and Foreign Enterprises (the Foreign Investment
Enterprise Tax Law) provides that certain remittances of foreign exchange
earnings from China are subject to Chinese withholding tax, dividends received
by foreign investors from a foreign investment enterprise are exempt from
withholding tax. Yuchai is qualified as a foreign investment enterprise and, as
a result, withholding tax is not applicable to dividends received by the
Company from Yuchai.

Taxation of Disposition of Yuchai Shares

In the event the Company transfers any of its current holding of the
Yuchai Shares, the amount received in excess of its original capital
contribution would be subject to Chinese withholding tax at a rate of 20%.

In the event that Yuchai is liquidated, the portion of the balance of its
net assets or remaining property, after deducting undistributed profits,
various funds and liquidation expenses, that exceeds Yuchais paid-in capital
would be income from liquidation, which would be subject to income tax at the
same rate Yuchai would be subject to on its income as described under  Income
Tax.

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Income Tax

Yuchai is subject to the Foreign Investment Enterprise Tax Law. Pursuant
to this law, Sino-foreign joint stock companies generally are subject to an
income tax at a rate of 33%, including a national tax of 30% and a local tax of
3%. If an enterprise is located in specially designated regions, more
favorable effective rates apply. The Foreign Investment Enterprise Tax Law
generally exempts Sino-foreign joint stock companies engaged in manufacturing
with an operation term of more than ten years from national and local income
taxes for two years starting from the first profitable year of operations,
followed by a 50% exemption for the next three years. The Detailed Rules for
Performance of the Foreign Investment Enterprise Tax Law (the Detailed Rules)
and the Guangxi Zhuang Autonomous Region Foreign Joint Venture Tax Incentives
Regulation (the Guangxi Tax Regulation) generally provide a three-year
extension of the 50% tax exemption if a company meets the standards of an
advanced technology enterprise as defined under the regulation and will be or
has been operating for at least ten years. The Foreign Investment Enterprise
Tax Law and the Detailed Rules and the Guangxi Tax Regulation also generally
provide for a tax reduction to a 15% tax rate for certain foreign-invested
enterprises meeting the following criteria: (i) the enterprise is in an
industry involving energy, transportation, port or special knowledge or
technology, (ii) the enterprise is located in a coastal special economic zone
and (iii) the enterprise has foreign investment exceeding US$30 million.

Under the tax law and regulations described above, Yuchai is qualified for
the reduced tax rate of 15%. As a Sino-foreign joint stock company, Yuchai was
also exempt from Chinese income tax for the years 1994 and 1995 and was
entitled to a 50% tax exemption for each of the years 1996 to 1998. In
addition, Yuchai has obtained approval to extend the 50% tax exemption for
three additional years from 1999 to 2001 based on its qualification as an
advanced technology enterprise as defined under the relevant local tax law and
regulations. However, based on current interpretations of the PRC income tax
law, Yuchai will be subject to a minimum tax rate of 10% during this three-year
extension. As a result, under current laws, Yuchai was subject to tax at a
rate of 7.5% during the three years from 1996 through 1998 and a rate of 10%
during the three years from 1999 through 2001. Since January 1, 2002, Yuchai is
subject to tax at a rate of 15% so long as it continues to qualify as a
foreign-invested enterprise eligible for such reduction.

Value-Added Tax

In addition to Chinese income tax, Yuchai is subject to tax on its sales.
Effective January 1, 1994, the Value-Added Tax Provisional Regulations subject
all goods produced or processed in China, other than real property and goods
produced or processed for export, to a value-added tax (VAT) at each stage or
sale in the process of manufacture, processing, distribution and sale to the
ultimate consumer. The basic VAT rate is 17% of the sale price of the item,
although certain goods are assessed at a preferential 13% VAT rate. The seller
of the goods adds 17% to the sale price of the item, which is separately
invoiced (except in the case of retail sales), and collects the applicable
amount of VAT through the sale of the item. The amount of the sellers VAT
liability to the Taxation Bureau is calculated as the amount of sales
multiplied by the applicable VAT rate. The amount of the sellers VAT
liability may be reduced by deducting the VAT included in the materials, parts
and other items purchased by the seller and used in producing the goods.

The Value-Added Tax Provisional Regulations do not permit the seller to
deduct from its VAT liability the amount of VAT included in the purchase price
of fixed assets purchased by the seller. Thus, although the book value of
fixed assets, including plant and equipment, purchased by Yuchai will be the
depreciated cost (ordinarily the purchase price plus VAT in the case of
non-real property) of the fixed assets, Yuchai cannot deduct the amount of VAT
paid at the time of such purchase from its VAT liability in respect of products
sold.

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According to the Decision on the Use of Interim Regulations Concerning
Value-Added Taxes, Consumption Taxes and Business Taxes on Foreign-Funded
Enterprises and Foreign Enterprises adopted at the Fifth Meeting of the Eighth
Standing Committee of the National Peoples Congress on December 29, 1993, the
increased tax payment from the tax obligations arising from the levy of the
VAT, consumption taxes and business taxes will be refunded to foreign-funded
enterprises established prior to December 31, 1993 upon their application and
the relevant tax offices approval, for a period of no more than five years.
In August 1994, the Ministry of Finance and State Tax Bureau announced that
foreign-funded enterprises that are exporters are exempt from VAT and
consumption tax.

United States Federal Income Taxation

This section describes the material United States Federal income tax
consequences of owning shares of Common Stock. It applies to a U.S. Holder (as
defined below) that holds the shares as capital assets for tax purposes. This
section does not apply to a U.S. Holder that is a member of a special class of
holders subject to special rules, including:



| |  |  | a financial institution,                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------
|
| |  |  | a dealer in securities,                                                                                     
|
| |  |  | a trader in securities that elects to use a mark-to-market
method of accounting for its securities holdings,
|
| |  |  | a tax-exempt organization,                                                                                  
|
| |  |  | an insurance company,                                                                                       
|
| |  |  | a person liable for alternative minimum tax,                                                                
|
| |  |  | a person that actually or constructively owns 10% or more of
the voting stock of the Company,               
|
| |  |  | a person that holds shares as part of a straddle or a hedging or conversion transaction, or                 
|
| |  |  | a person whose functional currency is not the U.S. dollar.                                                  

This section is based on the Internal Revenue Code of 1986, as amended,
its legislative history, existing and proposed regulations, published rulings
and court decisions, all as currently in effect. These laws are subject to
change, possibly on a retroactive basis. There is currently no comprehensive
income tax treaty between the United States and Bermuda.

For purposes of this discussion, a U.S. Holder is a beneficial owner of
shares that is:



| |  |  | a citizen or resident of the United States,                                                                                                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a domestic corporation,                                                                                                                                                                                   
|
| |  |  | an estate the income of which is subject to United States
Federal income tax regardless of its source, or                                                                                                 
|
| |  |  | a trust, if a United States court can exercise primary
supervision over the trusts administration and one or more United
States persons are authorized to control all substantial decisions
of the trust.

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U.S. Holders should consult their own tax advisor regarding the United
States Federal, state and local and other tax consequences of owning and
disposing of shares in their particular circumstances.

Taxation of Dividends

Under the United States Federal income tax laws, and subject to the
passive foreign investment company (PFIC) rules discussed below, U.S. Holders
will include in gross income the gross amount of any dividend paid by the
Company out of its current or accumulated earnings and profits (as determined
for United States Federal income tax purposes). The dividend is ordinary
income that the U.S. Holder must include in income when the dividend is
actually or constructively received. The dividend will not be eligible for the
dividends-received deduction generally allowed to United States corporations in
respect of dividends received from other United States corporations. The
amount of the dividend distribution includible in the income of a U.S. Holder
will be the U.S. dollar value of the Bermuda dollar payments made, determined
at the spot Bermuda dollar/U.S. dollar rate on the date the dividend
distribution is includible in the income of the U.S. Holder, regardless of
whether the payment is in fact converted into U.S. dollars. Generally, any
gain or loss resulting from currency exchange fluctuations during the period
from the date the dividend payment is includible in income to the date such
payment is converted into U.S. dollars will be treated as ordinary income or
loss. Such gain or loss generally will be income or loss from sources within
the United States for foreign tax credit limitation purposes. Distributions in
excess of current and accumulated earnings and profits, as determined for
United States Federal income tax purposes, will be treated as a non-taxable
return of capital to the extent of the U.S. Holders basis in the shares and
thereafter as capital gain.

For foreign tax credit limitation purposes, the dividend will be income
from sources outside the United States, but generally will be treated
separately, together with other items of passive income or financial
services income.

Taxation of Capital Gains

Subject to the PFIC rules discussed below, upon the sale or other
disposition of shares, a U.S. Holder will recognize capital gain or loss for
United States Federal income tax purposes equal to the difference between the
U.S. dollar value of the amount realized and the U.S. Holders tax basis,
determined in U.S. dollars, in such shares. Capital gain of a noncorporate
U.S. Holder is generally taxed at a reduced rate where the property is
held more than one year. The gain or loss will generally be income or loss
from sources within the United States for foreign tax credit limitation
purposes.

PFIC Rules

The Company believes that its shares should not be treated as stock of a
PFIC for United States Federal income tax purposes, but this conclusion is a
factual determination that is made annually and thus may be subject to change.
If the Company were to be treated as a PFIC, unless a U.S. Holder elects to be
taxed annually on a mark-to-market basis with respect to the shares
(which election may be made only if the Companys shares are
marketable stock), gain
realized on the sale or other disposition of such shares would in general not
be treated as capital gain. Instead, a U.S. Holder would be treated as if such
holder had realized such gain and certain excess distributions ratably over
the holders holding period for the shares and would be taxed at the highest
tax rate in effect for each such year to which the gain was allocated, together
with an interest charge in respect of the tax attributable to each such year.

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Documents on Display

It is possible to read and copy documents referred to in this annual
report on Form 20-F that have been filed with the SEC at the SECs public reference room located at 450 Fifth
Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms and their copy charges. Additional information may also be obtained over the internet at the SECs website at http://www.sec.gov.




ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The Company is subject to market rate risks due to fluctuations in
interest rates. The majority of the Companys debt is variable rate short-term
and long-term Renminbi denominated loans obtained from banks in China. The
interest rates of such loans are generally established in accordance with
directives announced from time to time by the Peoples Bank of China, which are
in turn affected by various factors such as the general economic conditions in
China and the monetary polices of the Chinese government. There is no ready
market in China for the Company to enter into interest rate swaps or other
instruments designed to mitigate its exposure to interest rate risks.

The Company is exposed to foreign currency risk as a result of having to
obtain certain key components used in the manufacturing of the 6112 heavy-duty
engine from overseas suppliers. At December 31, 2002, the Company did not have
any loans that were denominated in a foreign currency.

The following table provide certain interest rate risk information
regarding the Companys short-term and long-term bank loans as of December 31,
2002:

|                    |  |                                          |  |                                                    |  |                         |  |           |  |                |  |                |  |         
|------------------- |  | ---------------------------------------- |  | -------------------------------------------------- |  | ----------------------- |  | --------- |  | -------------- |  | -------------- |  | --------
|                    |  |                                          |  | As of December 31, 2002                            |  | As of December 31, 2001
|                    |  |                                          |  |                                                    |  |                        
|                    |  |                                          |  | Expected maturity                                  |  |                         |  |           |  |                |  |               
|                    |  |                                          |  | dates                                              |  | Total                   |  | Estimated |  |                |  |               
|                    |  |                                          |  |                                                    |  | carrying                |  | fair      |  | Total carrying |  | Estimated fair
|                    |  |                                          |  | 2003                                               |  | 2004                    |  | amount    |  | value(2)       |  | amount         |  | value(2)
|                    |  |                                          |  |                                                    |  |                         |  |           |  |                |  |                |  |         
|                    |  |                                          |  | (Expressed in Rmb thousands, except interest rate)
|Floating rate debt: |  |                                          |  |                                                    |  |                         |  |           |  |                |  |               
|(i)                 |  | Short-term bank
loans denominated in Rmb |  | 135,000                                            |  |                        |  | 135,000   |  | 135,000        |  | 225,000        |  | 225,000 
|                    |  | Weighted
average
interest
rate(1)        |  | 5.12%                                              |  |                        |  | 5.12%     |  |                |  | 5.85%          |  |         
|(ii)                |  | Long-term bank
loans denominated
in Rmb  |  | 130,000                                            |  | 50,000                  |  | 180,000   |  | 180,000        |  | 220,000        |  | 220,000 
|                    |  | Weighted
average
interest
rate(1)        |  | 5.94%                                              |  | 5.94%                   |  | 5.94%     |  |                |  | 5.94%          |  |         



---

|(1) |  | Weighted average interest rate is calculated based on the estimated
interest rates applicable to individual bank loans outstanding as of
December 31, 2002 and 2001.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Fair value was estimated based on the floating interest rates applicable
to similar loan instruments.                                                               




ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

Not Applicable.

67



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##### Table of Contents






PART II




ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

There has not been any dividend arrearage or other material delinquency
with respect to preferred stock of either the Company or Yuchai.

Yuchai has not paid the Company Rmb 245.7 million (US$29.7 million) in
dividends declared in August 2002, and the Company has initiated arbitration
proceedings to seek the release of this payment to the Company. The Company
has not paid Coomber US$3.4 million in dividends declared in March 2003,
pending release of the Rmb 245.7 million (US$29.7 million) in dividends owing
from Yuchai to the Company. See also Item 3. Key InformationDividends and
Item 8. Financial InformationLegal Proceedings.




ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.

Not Applicable.




ITEM 15. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in its Securities and Exchange Act of 1934, as amended reports
is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is
accumulated and communicated to its management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
a reasonable level of assurance of achieving the desired control objectives, and,
in reaching a reasonable level of assurance, management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

In the 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of its
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of its disclosure controls and
procedures. Based on the foregoing, the Companys Chief Executive Officer and
Chief Financial Officer concluded that its disclosure controls and procedures
were effective, subject to the following qualification.

After
the Company initiated legal proceedings described in
Item 8. Financial InformationLegal
Proceedings, management of Yuchai determined that the two senior managers of the Company,
who have been seconded to Yuchai, were to be excluded from the premises and
denied access to certain operating and financial information with respect to
Yuchai, which they had regularly received. For the past 10 years, pursuant to
resolutions of the Yuchai board of directors and other contractual
arrangements, representatives of the Company have been stationed at Yuchais
offices to monitor Yuchais performance, books, records and to provide the
Company with access to records necessary for it to comply with U.S. securities
laws and financial reporting. The Company has attempted to have these two senior managers
reinstated, but has been unsuccessful to date. Alternative
arrangements satisfactory to the Company have been put in place to
allow the Company to continue to monitor Yuchais performance,
books, records and to provide the Company with access to records
necessary for it to comply with U.S. securities laws and financial
reporting.

68



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##### Table of Contents



Other than as described above, there have been no significant changes in
the Companys internal controls or in other factors that could significantly
affect the internal controls subsequent to the date the Company completed its
evaluation.




ITEM 16A. AUDIT COMMITTEE
FINANCIAL EXPERT.

Not Applicable.




ITEM 16B. CODE OF ETHICS.

Not Applicable.




ITEM 16C. PRINCIPAL ACCOUNTANTS
FEES AND SERVICES.

Not Applicable.




PART III




ITEM 17. FINANCIAL STATEMENTS.

The Company has elected to provide the financial statements and related
information specified in Item 18 in lieu of Item 17.




ITEM 18. FINANCIAL STATEMENTS.

Index to Financial Statements

China Yuchai International Limited

|                                                                                                            |  |  |     | 
|----------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Independent Auditors Report                                                                                |  |  | F-2 | 
|Consolidated Statements of Income for
Years Ended December 31, 2000, 2001 and 2002                          |  |  | F-3 | 
|Consolidated Balance Sheets as of December 31, 2001 and 2002                                                |  |  | F-4 | 
|Consolidated Statements of Cash Flows for
Years Ended December 31, 2000, 2001 and 2002                      |  |  | F-6 | 
|Consolidated Statements of Changes in Shareholders Equity for
Years Ended December 31, 2000, 2001 and 2002 |  |  | F-8 | 
|Notes to Consolidated Financial Statements                                                                  |  |  | F-9 | 

69



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ITEM 19. EXHIBITS.

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | Exhibits to this Annual Report:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|1.1 |  | Memorandum of Association of China Yuchai International Limited (the
Registrant) (incorporated herein by reference to the Registration
Statement on Form F-1, filed by the Registrant on November 9,1994 (File
No. 33-86162) (the Form F-1)).                                                                                                                                                                                                                                                                                                                                                        
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|1.2 |  | By-laws of the Registrant (incorporated herein by reference to the Form
F-1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|3.1 |  | Subscription and Shareholders Agreement of Diesel Machinery (BVI)
Limited, dated November 9, 1994, among Diesel Machinery (BVI) Limited,
Hong Leong Asia (HLA) and China Everbright Holdings Company Limited (EB
Holdings) (incorporated herein by reference to the Form F-1).                                                                                                                                                                                                                                                                                                                      
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|3.2 |  | Supplemental Subscription and Shareholders Agreement, dated January 21,
2002, between EB Holdings and HLA (incorporated
herein by reference to the
Annual Report on Form 20-F for
fiscal year ended December 31,
2001, filed by the Registrant
on June 25, 2002 (the Form 20-F FY
2001).                                                                                                                                                                                                                                                                                                               
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|3.3 |  | Second Supplemental Subscription and Shareholders Agreement, dated May
17, 2002, between EB Holdings and HLA (incorporated herein by
reference to the Form 20-F FY
2001).                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.1 |  | Contract for the Subscription of Foreign Common Shares in Guangxi Yuchai
Machinery Company Limited (Yuchai) and Conversion from a Joint Stock
Limited Company into a Sino-Foreign Joint Stock Limited Company, dated
April 1, 1993, among Yuchai, Guangxi Yuchai Machinery Holdings Company,
Hong Leong Technology Systems (BVI) Ltd., Cathay Clemente Diesel Holdings
Limited, Goldman Sachs Guangxi Holdings (BVI) Ltd., Tsang & Ong Nominees
(BVI) Ltd. and Youngstar Holdings Limited, with amendments, dated May 27,
1994 and October 10, 1994 (incorporated herein by reference to the Form
F-1).
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.2 |  | Subscription and Transfer Agreement (with Shareholders Agreement), dated
April 1993, among Cathay Clemente (Holdings) Limited, GS Capital Partners
L.P., Sun Yuan Overseas Pte Ltd., HL Technology Systems Pte Ltd. and
Coomber Investments Limited (incorporated herein by reference to the Form
F-1).                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.3 |  | Amended and Restated Shareholders Agreement, dated as of November 9,
1994 among the Cathay Investment Fund, Limited, GS Capital Partners L.P.,
HL Technology Systems Pte. Ltd., Coomber Investments Limited, owners of
shares formerly held by Sun Yuan Overseas (BVI) Ltd., and the Registrant
(incorporated herein by reference to the Form F-1).                                                                                                                                                                                                                                                     
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.4 |  | Form of Amended and Restated Registration Right Agreement, dated as of
November 9, 1994, among the Cathay Investment Fund, Limited, GS Capital
Partners L.P., HL Technology Systems Pte. Ltd., Coomber Investments
Limited, owners of shares formerly held by Sun Yuan Overseas (BVI) Ltd,.
and the Registrant (incorporated herein by reference to the Form F-1).                                                                                                                                                                                                                                       
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.5 |  | Form of Subscription Agreement between the Registrant, its wholly-owned
subsidiaries named therein and Yuchai (incorporated herein by reference to
the Form F-1).                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.6 |  | Form of Term Loan Agreement between the Registrant and Yuchai
(incorporated herein by reference to the Form F-1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

70



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|     |  |                                                                                                                                                                                                                                              
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.7  |  | Share Purchase and Subscription Agreement, dated as of November 9, 1994,
between (i) the Registrant, (ii) China Everbright Holdings Company Limited
and (iii) Coomber Investments Limited (incorporated herein by reference to
the Form F-1).
|     |  |                                                                                                                                                                                                                                              
|4.8  |  | Investment and Shareholders Agreement between CACG Limited IV and
Guangxi Yuchai Machinery Company Limited, dated July 14, 1994, with a
First Amendment dated September 5, 1994 (incorporated herein by reference
to the Form F-1).         
|     |  |                                                                                                                                                                                                                                              
|4.9  |  | Employment Agreement, dated November 1, 2001, between the Registrant and Wang Jianming (incorporated herein by
reference to the Form 20-F FY
2001).                                                                                          
|     |  |                                                                                                                                                                                                                                              
|8.1  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                              
|     |  |                                                                                                                                                                                                                                              
|12.1 |  | Independent Auditors Consent.                                                                                                                                                                                                               
|     |  |                                                                                                                                                                                                                                              
|12.2 |  | Certifications furnished (not filed) pursuant to Section 906 of the Sarbanes-Oxley Act.                                                                                                                                                      

71



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##### Table of Contents






SIGNATURES AND CERTIFICATIONS

Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                     |  |                                    |  |                                             
|-------------------- |  | ---------------------------------- |  | --------------------------------------------
|                     |  | CHINA YUCHAI INTERNATIONAL LIMITED
|                     |  |                                    |  |                                             
|                     |  | By:                                |  | /s/ Philip TING Sii Tien                    
|                     |  |                                    |  |                                             
|                     |  |                                    |  | Philip TING Sii Tien
Chief Financial Officer
|                     |  |                                    |  |                                             
|Date:  July 15, 2003 |  |                                    |  |                                             

72



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##### Table of Contents



CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Wrixon Frank Gasteen, certify that:



|1. |  | I have reviewed this annual report on Form 20-F of China Yuchai
International Limited;                                                                                                                                                                                                                                  
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                               



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |     |  |                                             
|-------------------- |  | --- |  | --------------------------------------------
|Dated July 15, 2003. |  |     |  |                                             
|                     |  |     |  |                                             
|                     |  | By: |  | /s/ Wrixon Frank Gasteen                    
|                     |  |     |  |                                             
|                     |  |     |  | Wrixon Frank Gasteen
Chief Executive Officer

73



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CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Philip Ting Sii Tien, certify that:



|1. |  | I have reviewed this annual report on Form 20-F of China Yuchai
International Limited;                                                                                                                                                                                                                                  
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                               



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |     |  |                                             
|-------------------- |  | --- |  | --------------------------------------------
|Dated July 15, 2003. |  |     |  |                                             
|                     |  |     |  |                                             
|                     |  | By: |  | /s/ Philip Ting Sii Tien                    
|                     |  |     |  |                                             
|                     |  |     |  | Philip Ting Sii Tien
Chief Financial Officer

74



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##### Table of Contents



Exhibit Index

|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |  |  | 
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | 
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | 
|1.1            |  | Memorandum of Association of
China Yuchai International
Limited (the Registrant)
(incorporated herein by
reference to the Registration
Statement on Form F-1, filed by
the Registrant on November
9,1994 (File No. 33-86162) (the
Form F-1)).                                                                                                                                                                                                                                                                                  
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|1.2            |  | By-laws of the Registrant
(incorporated herein by
reference to the Form F-1).                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|3.1            |  | Subscription and Shareholders
Agreement of Diesel Machinery
(BVI) Limited, dated November
9, 1994, among Diesel Machinery
(BVI) Limited, Hong Leong Asia
(HLA) and China Everbright
Holdings Company Limited (EB
Holdings) (incorporated herein
by reference to the Form F-1).                                                                                                                                                                                                                                                
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|3.2            |  | Supplemental Subscription and
Shareholders Agreement, dated
January 21, 2002, between EB
Holdings and HLA (incorporated herein by
reference to the Form 20-F FY
2001).                                                                                                                                                                                                                                                                                                                                                             
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|3.3            |  | Second Supplemental
Subscription and Shareholders
Agreement, dated May 17, 2002,
between EB Holdings and HLA
(incorporated herein by
reference to the Form 20-F FY
2001).                                                                                                                                                                                                                                                                                                                                                          
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.1            |  | Contract for the Subscription
of Foreign Common shares in
Guangxi Yuchai Machinery
Company Limited (Yuchai) and
Conversion from a Joint Stock
Limited Company into a
Sino-Foreign Joint Stock
Limited Company, dated April 1,
1993, among Yuchai, Guangxi
Yuchai Machinery Holdings
Company, Hong Leong Technology
Systems (BVI) Ltd., Cathay
Clemente Diesel Holdings
Limited, Goldman Sachs Guangxi
Holdings (BVI) Ltd., Tsang &
Ong Nominees (BVI) Ltd. and
Youngstar Holdings Limited with
amendments, dated May 27, 1994
and

75



---



##### Table of Contents



|               |  |                                                                                                                                                                                                                                                                                                                                                                   |  |                        |  | 
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- |  | 
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                            |  | Sequential Page Number
|               |  |                                                                                                                                                                                                                                                                                                                                                                   |  |                       
|               |  | October 10, 1994
(incorporated herein by
reference to the Form F-1).                                                                                                                                                                                                                                                                                             
|               |  |                                                                                                                                                                                                                                                                                                                                                                  
|4.2            |  | Subscription and Transfer
Agreement (with Shareholders
Agreement), dated April 1993,
among Cathay Clemente
(Holdings) Limited, GS Capital
Partners L.P., Sun Yuan
Overseas Ptd Ltd., HL
Technology Systems Pte Ltd. and
Coomber Investments Limited
(incorporated herein by
reference to the Form F-1).                                                         
|               |  |                                                                                                                                                                                                                                                                                                                                                                  
|4.3            |  | Amended and Restated
Shareholders Agreement, dated
as of November 9, 1994 among
The Cathay Investment Fund,
Limited, GS Capital Partners
L.P., HL Technology Systems
Pte. Ltd., Coomber Investments
Limited, owners of shares
formerly held by Sun Yuan
Overseas (BVI) Ltd. and the
Registrant (incorporated herein
by reference to the Form F-1).              
|               |  |                                                                                                                                                                                                                                                                                                                                                                  
|4.4            |  | Form of Amended and Restated
Registration Right Agreement,
dated as of November 9, 1994,
among The Cathay Investment
Fund, Limited, GS Capital
Partners L.P., HL Technology
Systems Pte. Ltd., Coomber
Investments Limited, owners of
shares formerly held by Sun
Yuan Overseas (BVI) Ltd. and
the Registrant (incorporated
herein by reference to the Form
F-1).
|               |  |                                                                                                                                                                                                                                                                                                                                                                  
|4.5            |  | Form of Subscription Agreement
between the Registrant and its
wholly-owned subsidiaries named
therein and Yuchai
(incorporated herein by
reference to the Form F-1).                                                                                                                                                                                             
|               |  |                                                                                                                                                                                                                                                                                                                                                                  
|4.6            |  | Form of Term Loan Agreement
between the Registrant and
Yuchai (incorporated herein by
reference to the Form F-1).                                                                                                                                                                                                                                                

76



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|               |  |                                                                                                                                                                                                                                               |  |  |  | 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                        |  | 
|               |  |                                                                                                                                                                                                                                               |  | 
|               |  |                                                                                                                                                                                                                                              
|4.7            |  | Share Purchase and Subscription
Agreement, dated as of November
9, 1994, between (i) the
Registrant, (ii) China
Everbright Holdings Company
Limited and (iii) Coomber
Investments Limited
(incorporated herein by
reference to the Form F-1).
|               |  |                                                                                                                                                                                                                                              
|4.8            |  | Investment and Shareholders
Agreement between CACG Limited
IV and Guangxi Yuchai Machinery
Company Limited, dated July 14,
1994 with a First Amendment
dated September 5, 1994
(incorporated herein by
reference to the Form F-1).          
|               |  |                                                                                                                                                                                                                                              
|4.9            |  | Employment agreement, dated
November 1, 2001, between the
Registrant and Wang Jianming
(incorporated herein by
reference to the Form 20-F FY
2001).                                                                                          
|               |  |                                                                                                                                                                                                                                              
|8.1            |  | Subsidiaries of the Registrant.                                                                                                                                                                                                              
|               |  |                                                                                                                                                                                                                                              
|12.1           |  | Independent Auditors Consent.                                                                                                                                                                                                               
|               |  |                                                                                                                                                                                                                                              
|12.2           |  | Certifications furnished (not
filed) pursuant to Section 906
of the Sarbanes-Oxley Act.                                                                                                                                                      

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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 and 2002

(With Independent Auditors Report Thereon)

Index to Financial Statements

China Yuchai International Limited

|                                                                                                            |  |  |     | 
|----------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Independent Auditors Report                                                                                |  |  | F-2 | 
|Consolidated Statements of Income for
Years Ended December 31, 2000, 2001 and 2002                          |  |  | F-3 | 
|Consolidated Balance Sheets as of December 31, 2001 and 2002                                                |  |  | F-4 | 
|Consolidated Statements of Cash Flows for
Years Ended December 31, 2000, 2001 and 2002                      |  |  | F-6 | 
|Consolidated Statements of Changes in Shareholders Equity for
Years Ended December 31, 2000, 2001 and 2002 |  |  | F-8 | 
|Notes to Consolidated Financial Statements                                                                  |  |  | F-9 | 

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INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders
China Yuchai International Limited (the Company)

We have audited the accompanying consolidated balance sheets of the
Company and subsidiaries as of December 31, 2001 and 2002, and the related
consolidated statements of income, cash flows, and changes in stockholders
equity for each of the years in the three-year period ended December 31, 2002,
all expressed in Renminbi. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit 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 the Company
and subsidiaries as of December 31, 2001 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Notes 3(n) and 16 to the consolidated financial
statements, in 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, issued by Financial Accounting Standards Boards.

As discussed in Note 30 to the consolidated financial statements, certain
subsequent events have occurred with respect to the Companys primary
subsidiary, Guangxi Yuchai Machinery Company Limited.

The accompanying consolidated financial statements as of and for the year
ended December 31, 2002 have been translated into United States dollars solely
for the convenience of the reader. We have audited the translation and, in our
opinion, the consolidated financial statements expressed in Renminbi have been
translated into United States dollars on the basis set forth in Note 3(i) to
the consolidated financial statements.



/s/  KPMG

Certified Public Accountants
Hong Kong
March 31, 2003, except for Note 30, as to which the date is July 15, 2003

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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
For Years Ended December 31, 2000, 2001 and 2002

(Rmb and US$ amounts expressed
in thousands, except share data)

|                                                          |  |      |                  |                         |  |      |            |      |  |      |            |      |  |  |            |   |  |  |            |  
|--------------------------------------------------------- |  | ---- | ---------------- | ----------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | ---- |  |  | ---------- | - |  |  | ---------- | -
|                                                          |  | Note |                  | Year ended December 31,
|                                                          |  |      |                  |                        
|                                                          |  |      |                  |                         |  | 2000 |            | 2001 |  | 2002 |            | 2002
|                                                          |  |      |                  |                         |  |      |            |      |  |      |            |     
|                                                          |  |      |                  |                         |  | Rmb  |            | Rmb  |  | Rmb  |            | US$ 
|Net sales                                                 |  |      | 29               |                         |  |      | 1,414,527  |      |  |      | 1,783,329  |      |  |  | 3,513,047  |   |  |  | 424,455    |  
|Cost of goods sold                                        |  |      | 4                |                         |  |      | 960,079    |      |  |      | 1,183,403  |      |  |  | 2,371,080  |   |  |  | 286,480    |  
|                                                          |  |      |                  |                         |  |      |            |      |  |      |            |      |  |  |            |   |  |  |            |  
|Gross profit                                              |  |      |                  |                         |  |      | 454,448    |      |  |      | 599,926    |      |  |  | 1,141,967  |   |  |  | 137,975    |  
|Research and development cost                             |  |      | 3 (m)            |                         |  |      | 49,011     |      |  |      | 44,721     |      |  |  | 75,532     |   |  |  | 9,126      |  
|Selling, general and administrative expense               |  |      | 3 (m), 4, 24 (b) |                         |  |      | 298,361    |      |  |      | 243,231    |      |  |  | 426,128    |   |  |  | 51,486     |  
|Amortization of goodwill                                  |  |      | 3(n), 16         |                         |  |      | 16,859     |      |  |      | 16,859     |      |  |  |           |   |  |  |           |  
|                                                          |  |      |                  |                         |  |      |            |      |  |      |            |      |  |  |            |   |  |  |            |  
|Operating income                                          |  |      |                  |                         |  |      | 90,217     |      |  |      | 295,115    |      |  |  | 640,307    |   |  |  | 77,363     |  
|Interest cost                                             |  |      | 5                |                         |  |      | 27,886     |      |  |      | 29,784     |      |  |  | 25,144     |   |  |  | 3,038      |  
|Other income, net                                         |  |      | 6                |                         |  |      | (1,685     | )    |  |      | (3,858     | )    |  |  | (10,287    | ) |  |  | (1,243     | )
|                                                          |  |      |                  |                         |  |      |            |      |  |      |            |      |  |  |            |   |  |  |            |  
|Income before income taxes and
minority interests         |  |      |                  |                         |  |      | 64,016     |      |  |      | 269,189    |      |  |  | 625,450    |   |  |  | 75,568     |  
|Income tax expense/(credit)                               |  |      | 7                |                         |  |      | 10,682     |      |  |      | (63,584    | )    |  |  | 83,242     |   |  |  | 10,057     |  
|                                                          |  |      |                  |                         |  |      |            |      |  |      |            |      |  |  |            |   |  |  |            |  
|Income before minority interests                          |  |      |                  |                         |  |      | 53,334     |      |  |      | 332,773    |      |  |  | 542,208    |   |  |  | 65,511     |  
|Minority interests in income of
consolidated subsidiaries |  |      |                  |                         |  |      | 16,256     |      |  |      | 82,386     |      |  |  | 129,775    |   |  |  | 15,680     |  
|                                                          |  |      |                  |                         |  |      |            |      |  |      |            |      |  |  |            |   |  |  |            |  
|Net income                                                |  |      |                  |                         |  |      | 37,078     |      |  |      | 250,387    |      |  |  | 412,433    |   |  |  | 49,831     |  
|                                                          |  |      |                  |                         |  |      |            |      |  |      |            |      |  |  |            |   |  |  |            |  
|Net income attributable to common shares                  |  |      |                  |                         |  |      |            |      |  |      |            |      |  |  |            |   |  |  |            |  
|Basic and diluted                                         |  |      | 3 (l)            |                         |  |      | 1.05       |      |  |      | 7.09       |      |  |  | 11.67      |   |  |  | 1.41       |  
|                                                          |  |      |                  |                         |  |      |            |      |  |      |            |      |  |  |            |   |  |  |            |  
|Weighted average number of shares                         |  |      | 3 (l)            |                         |  |      | 35,340,000 |      |  |      | 35,340,000 |      |  |  | 35,340,000 |   |  |  | 35,340,000 |  
|                                                          |  |      |                  |                         |  |      |            |      |  |      |            |      |  |  |            |   |  |  |            |  

See accompanying notes to consolidated financial statements.

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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 and 2002

(Rmb and US$ amounts expressed in thousands)

|                                                     |                                              |                                   |           |           |  |              |         |         |           |      |         |           |           |  |        |         |         | 
|---------------------------------------------------- | -------------------------------------------- | --------------------------------- | --------- | --------- |  | ------------ | ------- | ------- | --------- | ---- | ------- | --------- | --------- |  | ------ | ------- | ------- | 
|                                                     |                                              |                                   |           | Note      |  | December 31,
|                                                     |                                              |                                   |           |           |  |             
|                                                     |                                              |                                   |           |           |  |              |         | 2001    |           | 2002 |         | 2002     
|                                                     |                                              |                                   |           |           |  |              |         |         |           |      |         |          
|                                                     |                                              |                                   |           |           |  |              |         | Rmb     |           | Rmb  |         | US$      
|                                                     | ASSETS                                       |                                   |           |           |  |              |         |         |           |      |         |           |           |  |        |         |        
|Current Assets                                       |                                              |                                   |           |           |  |              |         |         |           |      |         |           |           |  |        |        
|                                                     | Cash and cash equivalents                    |                                   |           |           |  |              |         | 409,193 |           |      |         | 643,200   |           |  |        | 77,713  |        
|                                                     | Trade accounts receivable, net               |                                   |           | 8         |  |              |         | 773,789 |           |      |         | 1,003,135 |           |  |        | 121,201 |        
|                                                     | Amounts due from related companies           |                                   |           | 9, 24 (c) |  |              |         | 20,915  |           |      |         | 16,367    |           |  |        | 1,978   |        
|                                                     | Inventories, net                             |                                   |           | 10        |  |              |         | 544,669 |           |      |         | 843,229   |           |  |        | 101,881 |        
|                                                     | Prepaid expenses                             |                                   |           |           |  |              |         | 181,825 |           |      |         | 102,248   |           |  |        | 12,354  |        
|                                                     | Other receivables                            |                                   |           | 11        |  |              |         | 27,349  |           |      |         | 18,718    |           |  |        | 2,262   |        
|                                                     |                                              |                                   |           |           |  |              |         |         |           |      |         |           |           |  |        |        
|                                                     |                                              | Total Current Assets              |           |           |  |              |         |         | 1,957,740 |      |         |           | 2,626,897 |  |        |         | 317,389 | 
|Property, plant and equipment, net                   |                                              |                                   | 12        |           |  |              | 815,880 |         |           |      | 772,968 |           |           |  | 93,391 |        
|Construction in progress                             |                                              |                                   | 13        |           |  |              | 53,975  |         |           |      | 121,867 |           |           |  | 14,724 |        
|Lease prepayments, net                               |                                              |                                   | 14        |           |  |              | 85,660  |         |           |      | 85,576  |           |           |  | 10,340 |        
|Investments                                          |                                              |                                   | 15        |           |  |              | 5,705   |         |           |      | 5,705   |           |           |  | 689    |        
|Amount due from a related company                    |                                              |                                   | 9, 24 (c) |           |  |              | 12,673  |         |           |      | 9,990   |           |           |  | 1,207  |        
|Goodwill                                             |                                              |                                   |           |           |  |              | 212,636 |         |           |      | 212,636 |           |           |  | 25,691 |        
|Deferred income taxes                                |                                              |                                   | 7         |           |  |              | 118,599 |         |           |      | 149,820 |           |           |  | 18,102 |        
|                                                     |                                              |                                   |           |           |  |              |         |         |           |      |         |           |           |  |        |        
|                                                     |                                              | Total Assets                      |           |           |  |              |         |         | 3,262,868 |      |         |           | 3,985,459 |  |        |         | 481,533 | 
|                                                     |                                              |                                   |           |           |  |              |         |         |           |      |         |           |           |  |        |        
|                                                     | LIABILITIES AND SHAREHOLDERS EQUITY         |                                   |           |           |  |              |         |         |           |      |         |           |           |  |        |         |        
|Current Liabilities                                  |                                              |                                   |           |           |  |              |         |         |           |      |         |           |           |  |        |        
|                                                     | Short-term bank loans                        |                                   |           | 17 (a)    |  |              |         | 225,000 |           |      |         | 135,000   |           |  |        | 16,311  |        
|                                                     | Current installments of long-term bank loans |                                   |           | 17 (b)    |  |              |         | 40,000  |           |      |         | 130,000   |           |  |        | 15,707  |        
|                                                     | Amount due to the holding company            |                                   |           | 24 (e)    |  |              |         | 9,774   |           |      |         | 2,100     |           |  |        | 254     |        
|                                                     | Amounts due to related companies             |                                   |           | 9, 24 (c) |  |              |         | 11,714  |           |      |         | 25,409    |           |  |        | 3,070   |        
|                                                     | Trade accounts payable                       |                                   |           |           |  |              |         | 349,313 |           |      |         | 628,901   |           |  |        | 75,985  |        
|                                                     | Income taxes payable                         |                                   |           |           |  |              |         | 5,150   |           |      |         | 58,410    |           |  |        | 7,057   |        
|                                                     | Accrued expense and other liabilities        |                                   |           | 18        |  |              |         | 216,327 |           |      |         | 306,245   |           |  |        | 37,001  |        
|                                                     |                                              |                                   |           |           |  |              |         |         |           |      |         |           |           |  |        |        
|                                                     |                                              | Total Current Liabilities         |           |           |  |              |         |         | 857,278   |      |         |           | 1,286,065 |  |        |         | 155,385 | 
|Long-term bank loans, excluding current installments |                                              |                                   | 17 (b)    |           |  |              | 180,000 |         |           |      | 50,000  |           |           |  | 6,041  |        
|                                                     |                                              |                                   |           |           |  |              |         |         |           |      |         |           |           |  |        |        
|                                                     |                                              | Total Liabilities carried forward |           |           |  |              |         |         | 1,037,278 |      |         |           | 1,336,065 |  |        |         | 161,426 | 
|                                                     |                                              |                                   |           |           |  |              |         |         |           |      |         |           |           |  |        |        

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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (Continued)
As of December 31, 2001 and 2002

(Rmb and US$ amounts expressed in thousands,
except share data)

|                              |                                                                                                                                          |                                            |        |      |  |              |         |           |           |      |         |           |           |  |        |         |         | 
|----------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ---- |  | ------------ | ------- | --------- | --------- | ---- | ------- | --------- | --------- |  | ------ | ------- | ------- | 
|                              |                                                                                                                                          |                                            |        | Note |  | December 31,
|                              |                                                                                                                                          |                                            |        |      |  |             
|                              |                                                                                                                                          |                                            |        |      |  |              |         | 2001      |           | 2002 |         | 2002     
|                              |                                                                                                                                          |                                            |        |      |  |              |         |           |           |      |         |          
|                              |                                                                                                                                          |                                            |        |      |  |              |         | Rmb       |           | Rmb  |         | US$      
|                              |                                                                                                                                          | Total Liabilities brought forward          |        |      |  |              |         |           | 1,037,278 |      |         |           | 1,336,065 |  |        |         | 161,426 | 
|                              |                                                                                                                                          |                                            |        |      |  |              |         |           |           |      |         |           |           |  |        |        
|Minority Interests            |                                                                                                                                          |                                            |        |      |  |              | 420,545 |           |           |      | 487,491 |           |           |  | 58,900 |        
|                              |                                                                                                                                          |                                            |        |      |  |              |         |           |           |      |         |           |           |  |        |        
|Stockholders Equity          |                                                                                                                                          |                                            |        |      |  |              |         |           |           |      |         |           |           |  |        |        
|                              | Common stock                                                                                                                             |                                            |        |      |  |              |         | 30,349    |           |      |         | 30,349    |           |  |        | 3,667   |        
|                              | Ordinary shares US$0.10 par value: authorized 100,000,000
shares; issued and outstanding 35,340,000 shares
at December 31, 2001 and 2002 |                                            |        |      |  |              |         |           |           |      |         |           |           |  |        |         |        
|                              | Special share US$0.10 par value: authorized 1 share;
issued and outstanding 1 share at December 31, 2001 and 2002                        |                                            |        |      |  |              |         |           |           |      |         |           |           |  |        |         |        
|                              | Contributed surplus                                                                                                                      |                                            |        |      |  |              |         | 1,486,934 |           |      |         | 1,486,934 |           |  |        | 179,655 |        
|                              | Statutory reserves                                                                                                                       |                                            |        | 20   |  |              |         | 118,684   |           |      |         | 170,806   |           |  |        | 20,636  |        
|                              | Retained earnings                                                                                                                        |                                            |        |      |  |              |         | 169,078   |           |      |         | 473,814   |           |  |        | 57,249  |        
|                              |                                                                                                                                          |                                            |        |      |  |              |         |           |           |      |         |           |           |  |        |        
|                              |                                                                                                                                          | Total Stockholders Equity                 |        |      |  |              |         |           | 1,805,045 |      |         |           | 2,161,903 |  |        |         | 261,207 | 
|Commitments and contingencies |                                                                                                                                          |                                            | 21, 22 |      |  |              |         |           |           |      |         |           |           |  |        |        
|                              |                                                                                                                                          |                                            |        |      |  |              |         |           |           |      |         |           |           |  |        |        
|                              |                                                                                                                                          | Total Liabilities and Stockholders Equity |        |      |  |              |         |           | 3,262,868 |      |         |           | 3,985,459 |  |        |         | 481,533 | 
|                              |                                                                                                                                          |                                            |        |      |  |              |         |           |           |      |         |           |           |  |        |        

See accompanying notes to consolidated financial statements.

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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For Years Ended December 31, 2000, 2001 and 2002
(Rmb and US$ amounts expressed in thousands)

|                                      |                                                                                           |                                         |  |                         |         |      |  |         |          |      |  |          |          |   |  |         |         |  
|------------------------------------- | ----------------------------------------------------------------------------------------- | --------------------------------------- |  | ----------------------- | ------- | ---- |  | ------- | -------- | ---- |  | -------- | -------- | - |  | ------- | ------- | -
|                                      |                                                                                           |                                         |  | Year ended December 31,
|                                      |                                                                                           |                                         |  |                        
|                                      |                                                                                           |                                         |  | 2000                    |         | 2001 |  | 2002    |          | 2002
|                                      |                                                                                           |                                         |  |                         |         |      |  |         |          |     
|                                      |                                                                                           |                                         |  | Rmb                     |         | Rmb  |  | Rmb     |          | US$ 
|Cash provided by operating activities |                                                                                           |                                         |  |                         |         |      |  |         |          |      |  |          |          |   |  |        
|                                      | Net income                                                                                |                                         |  | 37,078                  |         |      |  | 250,387 |          |      |  | 412,433  |          |   |  | 49,831  |        
|                                      | Adjustments to reconcile net income to
net cash provided by operating activities:         |                                         |  |                         |         |      |  |         |          |      |  |          |          |   |  |         |        
|                                      | Depreciation of property, plant and equipment                                             |                                         |  | 123,341                 |         |      |  | 111,292 |          |      |  | 117,968  |          |   |  | 14,252  |        
|                                      | Amortization of lease prepayments                                                         |                                         |  | 2,640                   |         |      |  | 2,388   |          |      |  | 904      |          |   |  | 109     |        
|                                      | Impairment of property, plant and equipment                                               |                                         |  |                        |         |      |  |        |          |      |  | 23,120   |          |   |  | 2,793   |        
|                                      | Loss on disposal of property, plant and equipment                                         |                                         |  | 1,194                   |         |      |  | 249     |          |      |  | 7,276    |          |   |  | 879     |        
|                                      | Deferred income taxes                                                                     |                                         |  | (1,873                  | )       |      |  | (94,404 | )        |      |  | (31,221  | )        |   |  | (3,772  | )      
|                                      | Amortization of goodwill                                                                  |                                         |  | 16,859                  |         |      |  | 16,859  |          |      |  |         |          |   |  |        |        
|                                      | Minority interests                                                                        |                                         |  | 16,256                  |         |      |  | 82,386  |          |      |  | 129,775  |          |   |  | 15,680  |        
|                                      | Decrease/(increase) in assets                                                             |                                         |  |                         |         |      |  |         |          |      |  |          |          |   |  |         |        
|                                      |                                                                                           | Inventories                             |  |                         | (76,703 | )    |  |         | (175,774 | )    |  |          | (298,560 | ) |  |         | (36,073 | )
|                                      |                                                                                           | Amounts due from/(to) related companies |  |                         | (2,576  | )    |  |         | 40,965   |      |  |          | 20,926   |   |  |         | 2,528   |  
|                                      |                                                                                           | Trade accounts receivable, net          |  |                         | (53,310 | )    |  |         | (245,225 | )    |  |          | (229,346 | ) |  |         | (27,710 | )
|                                      |                                                                                           | Prepaid expenses                        |  |                         | (16,102 | )    |  |         | (106,485 | )    |  |          | 79,577   |   |  |         | 9,615   |  
|                                      |                                                                                           | Other receivables                       |  |                         | (5,162  | )    |  |         | 2,826    |      |  |          | 8,631    |   |  |         | 1,043   |  
|                                      | Increase/(decrease) in liabilities                                                        |                                         |  |                         |         |      |  |         |          |      |  |          |          |   |  |         |        
|                                      |                                                                                           | Trade accounts payable                  |  |                         | 84,255  |      |  |         | 136,785  |      |  |          | 279,588  |   |  |         | 33,781  |  
|                                      |                                                                                           | Income taxes payable                    |  |                         | (1,650  | )    |  |         | 5,743    |      |  |          | 53,260   |   |  |         | 6,435   |  
|                                      |                                                                                           | Accrued expenses and other liabilities  |  |                         | 43,944  |      |  |         | 30,474   |      |  |          | 92,843   |   |  |         | 11,217  |  
|                                      |                                                                                           | Amount due to holding company           |  |                         | 2,544   |      |  |         | 807      |      |  |          | (7,674   | ) |  |         | (927    | )
|                                      |                                                                                           |                                         |  |                         |         |      |  |         |          |      |  |          |          |   |  |        
|                                      | Net cash provided by operating activities                                                 |                                         |  | 170,735                 |         |      |  | 59,273  |          |      |  | 659,500  |          |   |  | 79,681  |        
|                                      |                                                                                           |                                         |  |                         |         |      |  |         |          |      |  |          |          |   |  |        
|Cash flow from investing activities   |                                                                                           |                                         |  |                         |         |      |  |         |          |      |  |          |          |   |  |        
|                                      | Purchase of property, plant and equipment, lease prepayments
and construction in progress |                                         |  | (14,958                 | )       |      |  | (43,043 | )        |      |  | (174,850 | )        |   |  | (21,125 | )      
|                                      | Proceeds from disposal of property, plant and equipment                                   |                                         |  | 83                      |         |      |  | 298     |          |      |  | 686      |          |   |  | 83      |        
|                                      | Proceeds from redemption of government bonds                                              |                                         |  | 800                     |         |      |  | 63      |          |      |  |         |          |   |  |        |        
|                                      |                                                                                           |                                         |  |                         |         |      |  |         |          |      |  |          |          |   |  |        
|                                      | Net cash used in investing activities                                                     |                                         |  | (14,075                 | )       |      |  | (42,682 | )        |      |  | (174,164 | )        |   |  | (21,042 | )      
|                                      |                                                                                           |                                         |  |                         |         |      |  |         |          |      |  |          |          |   |  |        

F-6



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For Years Ended December 31, 2000, 2001 and 2002
(Rmb and US$ amounts expressed in thousands)

|                                                     |                                                        |  |                         |          |      |  |         |          |      |  |         |          |   |  |        |         |  
|---------------------------------------------------- | ------------------------------------------------------ |  | ----------------------- | -------- | ---- |  | ------- | -------- | ---- |  | ------- | -------- | - |  | ------ | ------- | -
|                                                     |                                                        |  | Year ended December 31,
|                                                     |                                                        |  |                        
|                                                     |                                                        |  | 2000                    |          | 2001 |  | 2002    |          | 2002
|                                                     |                                                        |  |                         |          |      |  |         |          |     
|                                                     |                                                        |  | Rmb                     |          | Rmb  |  | Rmb     |          | US$ 
|Cash flow from financing activities                  |                                                        |  |                         |          |      |  |         |          |      |  |         |          |   |  |        |        
|                                                     | Proceeds from short-term bank loans                    |  |                         | 265,000  |      |  |         | 215,000  |      |  |         | 135,000  |   |  |        | 16,311  |  
|                                                     | Proceeds from long-term bank loans                     |  |                         | 170,000  |      |  |         | 80,000   |      |  |         |         |   |  |        |        |  
|                                                     | Repayment of short-term bank loans                     |  |                         | (140,000 | )    |  |         | (225,000 | )    |  |         | (225,000 | ) |  |        | (27,185 | )
|                                                     | Repayment of long-term bank loans                      |  |                         | (294,800 | )    |  |         | (70,000  | )    |  |         | (40,000  | ) |  |        | (4,833  | )
|                                                     | Capital contribution from minority shareholders        |  |                         | 229      |      |  |         | 164      |      |  |         |         |   |  |        |        |  
|                                                     | Dividend paid by subsidiaries to minority shareholders |  |                         | (22,316  | )    |  |         | (22,316  | )    |  |         | (62,829  | ) |  |        | (7,591  | )
|                                                     | Dividend paid to shareholders                          |  |                         | (2,925   | )    |  |         | (2,925   | )    |  |         | (58,500  | ) |  |        | (7,068  | )
|                                                     |                                                        |  |                         |          |      |  |         |          |      |  |         |          |   |  |        |        
|                                                     | Net cash used in financing activities                  |  |                         | (24,812  | )    |  |         | (25,077  | )    |  |         | (251,329 | ) |  |        | (30,366 | )
|                                                     |                                                        |  |                         |          |      |  |         |          |      |  |         |          |   |  |        |        
|Net increase/(decrease) in cash and cash equivalents |                                                        |  | 131,848                 |          |      |  | (8,486  | )        |      |  | 234,007 |          |   |  | 28,274 |        
|Cash and cash equivalents at beginning of year       |                                                        |  | 285,831                 |          |      |  | 417,679 |          |      |  | 409,193 |          |   |  | 49,439 |        
|                                                     |                                                        |  |                         |          |      |  |         |          |      |  |         |          |   |  |        |        
|Cash and cash equivalents at end of year             |                                                        |  | 417,679                 |          |      |  | 409,193 |          |      |  | 643,200 |          |   |  | 77,713 |        
|                                                     |                                                        |  |                         |          |      |  |         |          |      |  |         |          |   |  |        |        
|Supplemental disclosures of cash flow information    |                                                        |  |                         |          |      |  |         |          |      |  |         |          |   |  |        |        
|Cash paid during the year for:                       |                                                        |  |                         |          |      |  |         |          |      |  |         |          |   |  |        |        
|                                                     | Interest, net of amount capitalized                    |  |                         | 27,886   |      |  |         | 29,784   |      |  |         | 25,144   |   |  |        | 3,038   |  
|                                                     | Income taxes                                           |  |                         | 14,205   |      |  |         | 25,077   |      |  |         | 61,203   |   |  |        | 7,394   |  
|                                                     |                                                        |  |                         |          |      |  |         |          |      |  |         |          |   |  |        |        

See accompanying notes to consolidated financial statements.

F-7



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##### Table of Contents






CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
For Years Ended December 31, 2000, 2001 and 2002

(Rmb and US$ amounts expressed in thousands,
except per share data)

|                                      |  |      |    |       |  |         |        |             |  |           |           |                    |  |               |         |  |  |              |         |       |  |  |           |  
|------------------------------------- |  | ---- | -- | ----- |  | ------- | ------ | ----------- |  | --------- | --------- | ------------------ |  | ------------- | ------- |  |  | ------------ | ------- | ----- |  |  | --------- | -
|                                      |  |      |    |       |  |         |        |             |  |           |           |                    |  |               |         |  |  | (Accumulated |         | Total
|                                      |  |      |    |       |  | Common  |        | Contributed |  | Statutory |           | deficits)/Retained |  | stockholders'
|                                      |  | Note |    | stock |  | surplus |        | reserves    |  | earnings  |           | equity            
|                                      |  |      |    |       |  |         |        |             |  |           |           |                   
|                                      |  |      |    | Rmb   |  | Rmb     |        | Rmb         |  | Rmb       |           | Rmb               
|                                      |  |      |    |       |  |         |        |             |  |           |           |                   
|Balance at January 1, 2000            |  |      |    |       |  |         | 30,349 |             |  |           | 1,486,934 |                    |  |               | 108,095 |  |  |              | (99,023 | )     |  |  | 1,526,355 |  
|Net income                            |  |      |    |       |  |         |       |             |  |           |          |                    |  |               |        |  |  |              | 37,078  |       |  |  | 37,078    |  
|Transfer to statutory reserves        |  |      | 20 |       |  |         |       |             |  |           |          |                    |  |               | 9,691   |  |  |              | (9,691  | )     |  |  |          |  
|Dividend declared (US$0.01 per share) |  |      |    |       |  |         |       |             |  |           |          |                    |  |               |        |  |  |              | (2,925  | )     |  |  | (2,925    | )
|                                      |  |      |    |       |  |         |        |             |  |           |           |                    |  |               |         |  |  |              |         |       |  |  |           |  
|Balance at December 31, 2000          |  |      |    |       |  |         | 30,349 |             |  |           | 1,486,934 |                    |  |               | 117,786 |  |  |              | (74,561 | )     |  |  | 1,560,508 |  
|Net income                            |  |      |    |       |  |         |       |             |  |           |          |                    |  |               |        |  |  |              | 250,387 |       |  |  | 250,387   |  
|Transfer to statutory reserves        |  |      | 20 |       |  |         |       |             |  |           |          |                    |  |               | 898     |  |  |              | (898    | )     |  |  |          |  
|Dividend declared (US$0.02 per share) |  |      |    |       |  |         |       |             |  |           |          |                    |  |               |        |  |  |              | (5,850  | )     |  |  | (5,850    | )
|                                      |  |      |    |       |  |         |        |             |  |           |           |                    |  |               |         |  |  |              |         |       |  |  |           |  
|Balance at December 31, 2001          |  |      |    |       |  |         | 30,349 |             |  |           | 1,486,934 |                    |  |               | 118,684 |  |  |              | 169,078 |       |  |  | 1,805,045 |  
|Net income                            |  |      |    |       |  |         |       |             |  |           |          |                    |  |               |        |  |  |              | 412,433 |       |  |  | 412,433   |  
|Transfer to statutory reserves        |  |      | 20 |       |  |         |       |             |  |           |          |                    |  |               | 52,122  |  |  |              | (52,122 | )     |  |  |          |  
|Dividend declared (US$0.19 per share) |  |      |    |       |  |         |       |             |  |           |          |                    |  |               |        |  |  |              | (55,575 | )     |  |  | (55,575   | )
|                                      |  |      |    |       |  |         |        |             |  |           |           |                    |  |               |         |  |  |              |         |       |  |  |           |  
|Balance at December 31, 2002          |  |      |    |       |  |         | 30,349 |             |  |           | 1,486,934 |                    |  |               | 170,806 |  |  |              | 473,814 |       |  |  | 2,161,903 |  
|                                      |  |      |    |       |  |         |        |             |  |           |           |                    |  |               |         |  |  |              |         |       |  |  |           |  

See accompanying notes to consolidated financial statements.

F-8



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##### Table of Contents






CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rmb and US$ amounts expressed in thousands, except per share data)



|1. |  | Background and Principal Activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | China Yuchai International Limited (the Company) was incorporated under the laws of
Bermuda on April 29, 1993. The Company was established to acquire a
controlling interest in Guangxi Yuchai Machinery Company Limited
(Yuchai), a Sino-foreign joint stock company which manufactures,
assembles and sells diesel engines in the Peoples Republic of China (the
PRC). The principal markets for Yuchais diesel engines are medium-duty
truck manufacturers in the PRC.                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | The Company owns, through six of its wholly-owned subsidiaries,
361,420,150 shares or 76.41% of the issued share capital of Yuchai which
it acquired through a series of share transfer, purchase and subscription
transactions entered into between 1993 and 1994. In connection with these
transactions, the Company recorded goodwill of Rmb 337,164. Guangxi Yuchai
Machinery Holdings Company Limited (the State Holding Company), a
state-owned enterprise, owns 22.09% of the issued share capital of Yuchai.                                                                                                                                                                                                                                                                                                                  
|  
|   |  | In December 1994, the Company issued a special share (the Special
Share) at par value of US$0.10 to Diesel Machinery (BVI) Limited (DML),
a holding company of the Company, controlled by Hong Leong Corporation
Limited, now known as Hong Leong (China) Limited (HLC). The Special
Share entitles its holder designate the majority of the Companys Board of
Directors (six of eleven). The Special Share is not transferable except
to Hong Leong Asia Ltd. (HLA), the holding company of HLC, or any of its
affiliates. Since virtually all decisions can be made by a majority of
the Board of Directors of the Company, following the initial public
offering of the Company, HLA is deemed to have control of the Company and
Yuchai. HLA is the only party that can initiate any action to lose
control of the Company.
|  
|   |  | During 2002, following the decision of DML shareholders to dissolve
DML, DML redeemed all the redeemable stock issued by it to its
shareholders and as consideration for the redemption, DML transferred all
its shares of the Company to its shareholders, which included HLC and its
wholly-owned subsidiary, HL Technology Systems Pte Ltd (HLT), currently
one of the Companys substantial shareholders. Following the above
redemption exercise, DML was eventually wound up in early 2003. The
Special Share was transferred from DML to HLT, an affiliate of HLA. The
Company considers its holding company at December 31, 2002 to be HLA.                                                                                                                                                                                   
|  
|   |  | The State Holding Company had the right to subscribe for
approximately 31 million shares of Yuchai at a subscription price of Rmb
6.29 per share, pursuant to its entitlement to pre-emptive rights to
subscribe pro rata in accordance with its ownership percentage for any new
Yuchai shares at a price and on terms equivalent to those offered to other
shareholders of Yuchai. Such subscription right had an original
termination date of December 1998 and was extended to March 31, 2002.
Such subscription right was not exercised by the State Holding Company by
March 31, 2002 and has lapsed.                                                                                                                                                                                                                             
|  
|   |  | Yuchai established two companies, namely Yuchai Machinery Monopoly
Company Limited (YMMC) and Guangxi Yulin Yuchai Machinery Spare Parts
Manufacturing Company Limited (GYSPM) in 2000. These companies are
involved in the manufacture and sale of spare parts and components for
diesel engines in the PRC. Yuchai holds an equity interest of 71.83% and
97.14% respectively in these companies while the State Holding Company
holds the remaining equity interest therein. As at December 31, 2002,
YMMC had direct interests in nineteen (2001: fifteen) subsidiaries, which
are involved in the trading and distribution of spare parts of diesel
engines, all of which are established in the PRC.                                                                                                                          

F-9



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|1. |  | Background and Principal Activities (continued)                 
|-- |  | ----------------------------------------------------------------
|  
|   |  | The particulars of the Companys subsidiaries are set out below:

|                                                                         |  |            |  |                     |  |                      |  |                                                                   
|------------------------------------------------------------------------ |  | ---------- |  | ------------------- |  | -------------------- |  | ------------------------------------------------------------------
|Name of company                                                          |  | Registered |  | Attributable equity |  | Principal activities
|                                                                         |  | capital    |  | interests           |  |                     
|                                                                         |  | Rmb        |  | Direct              |  | Indirect             |  |                                                                   
|                                                                        
|Guangxi Yuchai Machinery Company Limited                                 |  | 472,989    |  | 76.41%              |  |                     |  | Manufacturing, assembling and selling diesel engines in the PRC   
|                                                                        
|Guangxi Yulin Yuchai Machinery Spare Parts
Manufacturing Company Limited |  | 90,170     |  |                    |  | 74.22%               |  | Manufacturing and selling spare parts of diesel engines in the PRC
|                                                                        
|Yuchai Machinery Monopoly Company Limited                                |  | 30,000     |  |                    |  | 54.89%               |  | Trading of spare parts of diesel engines in the PRC               
|                                                                        
|Hangzhou Yuchai Machinery Monopoly Company Limited                       |  | 500        |  |                    |  | 54.89%               |  | Trading of spare parts of diesel engines in the PRC               
|                                                                        
|Nanchang Yuchai Machinery Monopoly Company Limited                       |  | 500        |  |                    |  | 54.89%               |  | Trading of spare parts of diesel engines in the PRC               
|                                                                        
|Xiamen Yuchai Machinery Monopoly Company Limited                         |  | 520        |  |                    |  | 54.89%               |  | Trading of spare parts of diesel engines in the PRC               
|                                                                        
|Wulumuqi Yuchai Machinery Monopoly Company Limited                       |  | 500        |  |                    |  | 54.89%               |  | Trading of spare parts of diesel engines in the PRC               
|                                                                        
|Guiyang Yuchai Machinery Monopoly Company Limited                        |  | 500        |  |                    |  | 54.89%               |  | Trading of spare parts of diesel engines in the PRC               
|                                                                        
|Guangzhou Yuchai Machinery Monopoly Company Limited                      |  | 550        |  |                    |  | 27.99%               |  | Trading of spare parts of diesel engines in the PRC               
|                                                                        
|Chengdu Yuchai Machinery Monopoly Company Limited                        |  | 500        |  |                    |  | 54.89%               |  | Trading of spare parts of diesel engines in the PRC               
|                                                                        
|Nanjing Yuchai Machinery Monopoly Company Limited                        |  | 500        |  |                    |  | 54.89%               |  | Trading of spare parts of diesel engines in the PRC               

F-10



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|1. |  | Background and Principal Activities (continued)
|-- |  | -----------------------------------------------

|                                                       |  |            |  |                     |  |                      |  |                                                    
|------------------------------------------------------ |  | ---------- |  | ------------------- |  | -------------------- |  | ---------------------------------------------------
|Name of company                                        |  | Registered |  | Attributable equity |  | Principal activities
|                                                       |  | capital    |  | interests           |  |                     
|                                                       |  | Rmb        |  | Direct              |  | Indirect             |  |                                                    
|                                                      
|Xian Yuchai
Machinery Monopoly
Company Limited         |  | 500        |  |                    |  | 54.89%               |  | Trading of spare
parts of diesel
engines in the PRC
|                                                      
|Hefei Yuchai
Machinery Monopoly
Company Limited        |  | 500        |  |                    |  | 54.89%               |  | Trading of spare
parts of diesel
engines in the PRC
|                                                      
|Shijiazhuang Yuchai
Machinery Monopoly
Company Limited |  | 500        |  |                    |  | 54.89%               |  | Trading of spare
parts of diesel
engines in the PRC
|                                                      
|Changsha Yuchai
Machinery Monopoly
Company Limited     |  | 550        |  |                    |  | 54.89%               |  | Trading of spare
parts of diesel
engines in the PRC
|                                                      
|Jinan Yuchai
Machinery Monopoly
Company Limited        |  | 500        |  |                    |  | 54.89%               |  | Trading of spare
parts of diesel
engines in the PRC
|                                                      
|Chongqing Yuchai
Machinery Monopoly
Company Limited    |  | 550        |  |                    |  | 43.91%               |  | Trading of spare
parts of diesel
engines in the PRC
|                                                      
|Wuhan Yuchai Machinery Monopoly
Company Limited        |  | 500        |  |                    |  | 54.89%               |  | Trading of spare
parts of diesel
engines in the PRC
|                                                      
|Zhengzhou Yuchai
Machinery Monopoly
Company Limited    |  | 520        |  |                    |  | 54.89%               |  | Trading of spare
parts of diesel
engines in the PRC
|                                                      
|Kunming Yuchai Machinery Monopoly Company Limited      |  | 500        |  |                    |  | 54.89%               |  | Trading of spare parts of diesel engines in the PRC
|                                                      
|Shenyang Yuchai Machinery Monopoly Company Limited     |  | 530        |  |                    |  | 54.89%               |  | Trading of spare parts of diesel engines in the PRC
|                                                      
|Lanzhou Yuchai Machinery Monopoly Company Limited      |  | 530        |  |                    |  | 54.89%               |  | Trading of spare parts of diesel engines in the PRC

F-11



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|2. |  | Basis of Presentation
|-- |  | ---------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP). This basis of accounting differs from
that used in the statutory financial statements of Yuchai, which are
prepared in accordance with the accounting principles and the relevant
financial regulations applicable to joint stock companies as promulgated
by the Ministry of Finance of the PRC (PRC GAAP).
|
| | The significant adjustments made to conform to U.S. GAAP include the
following:                                                                                                                                                                                                                                                                                                                                                                                                          



| | (i)   |  | Recognition of capitalized interest under U.S. GAAP
methodology;                                                                                                  
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | Elimination of a reversal of impairment losses on plant and
equipment and construction in progress, which were made in the
financial year ended December 31, 1997;
|
| | (iii) |  | Recognition of fair value adjustment for receivables; and                                                                                                         
|
| | (iv)  |  | Deferred tax effect on the items (i), (ii) and (iii) above.                                                                                                       



|3. |  | Summary of Significant Accounting Policies and Practices
|-- |  | --------------------------------------------------------



| |                                
| | -------------------------------
| | (a) Principles of Consolidation



| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The consolidated financial statements include the financial
statements of the Company and its subsidiaries (see Note 1). All
significant intercompany balances and transactions have been eliminated in
consolidation.



| |                              
| | -----------------------------
| | (b) Cash and Cash Equivalents



| |                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cash includes cash on hand and demand deposits with banks. For
purposes of the consolidated statements of cash flows, the Company
considered all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents. None of the Companys cash is
restricted as to withdrawal. See Note 25 for discussion of restrictions
on the Rmb.



| |                              
| | -----------------------------
| | (c) Trade Accounts Receivable



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Trade accounts receivable are recorded at the invoiced amount and do
not bear interest. The allowance for doubtful accounts is the Companys
best estimate of the amount of probable credit losses in the Companys
existing accounts receivable. The Company determines the allowance based
on historical write-off experience by industry and national economic data.
The Company reviews its allowance for doubtful accounts monthly. Past due
balances over 90 days and a specified amount are reviewed individually for
collectibility. All other balances are reviewed on a pooled basis by aging
of such balances. Account balances are charged off against the allowance
after all means of collection have been exhausted and the potential for
recovery is considered remote. The Company does not have any
off-balance-sheet credit exposure related to its customers.

F  - 12



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|3. |  | Summary of Significant Accounting Policies and Practices (continued)
|-- |  | --------------------------------------------------------------------



| |                
| | ---------------
| | (d) Inventories



| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Inventories are stated at the lower of cost or market. Cost is
determined using the weighted average cost method. Cost of work in
progress and finished goods comprises direct materials, direct labour and
an attributable portion of production overheads.



| |                                  
| | ---------------------------------
| | (e) Property, Plant and Equipment



| |                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, taking into account the
estimated residual value. The estimated useful lives are as follows:

|                        |  |                |  | 
|----------------------- |  | -------------- |  | 
|Buildings               |  | 30 to 40 years
|Machinery and equipment |  | 5 to 15 years 



| |                             
| | ----------------------------
| | (f) Construction in Progress



| |                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Construction in progress represents factories and office buildings
under construction and plant and machinery pending installation. All
direct costs relating to the acquisition or construction of buildings and
plant and machinery, including interest charges on borrowings, are
capitalized as construction in progress. No depreciation is provided in
respect of construction in progress.
|
| | Construction of plant is considered to be complete on the date when
the plant is ready for its intended use notwithstanding whether the plant
is capable of producing saleable output in commercial quantities.                                                                                                                                                                                  



| |                      
| | ---------------------
| | (g) Lease prepayments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Lease prepayments represent land use rights paid to the PRC land
bureau. Land use rights are carried at cost and amortised on a
straight-line basis over the respective periods of the rights which are 40
to 50 years. At December 31, 2002, lease prepayments have been presented
in a separate balance sheet caption. Accordingly, the comparative amount
at December 31, 2001 which was previously included in property, plant and
equipment was reclassified to conform with the current years
presentation.



| |                
| | ---------------
| | (h) Investments



| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Investments in unlisted equity securities are stated at cost less
provision for impairment loss, if any. In the opinion of management,
there is no impairment in the value of investments.



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | It was not practicable for Yuchai to estimate the fair value of its
equity investment for which a quoted market price is not available because
it has not yet obtained or developed the valuation model necessary to make
the estimate, and the cost of obtaining an independent valuation appears

F  - 13



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|3. |  | Summary of Significant Accounting Policies and Practices
(continued)
|-- |  | --------------------------------------------------------------------



| |                            
| | ---------------------------
| | (h) Investments (continued)



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | excessive considering the materiality of the equity investment to Yuchai.
Yuchai does not believe the effect on the Companys consolidated
financial statements would be material if the carrying value of the
equity investment is different from its fair value.



| |                                      
| | -------------------------------------
| | (i) Translation of Foreign Currencies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Foreign currency transactions during the year are translated into
Renminbi at the applicable rates of exchange quoted by the Peoples
Bank of China at the transaction dates. Foreign currency monetary
assets and liabilities are translated into Renminbi at rates quoted by
the Peoples Bank of China ruling at the balance sheet date. The
resulting exchange differences are recorded in the statements of
income.                                                                                                                                                                                                                                                                                                 
|
| | The Companys functional and reporting currency is Renminbi and its
sole operating asset and source of cash flows is its investment in
Yuchai and its subsidiaries. For the United States dollar convenience
translation amounts included in the accompanying consolidated
financial statements, the Renminbi equivalent amounts were translated
into United States dollars at the rate of US$1.00 = Rmb 8.2766, the
rate quoted by the Peoples Bank of China at the close of business on
December 31, 2002. No representation is made that the Renminbi
amounts could have been, or could be, converted into United States
dollars at that rate or at any other certain rate on December 31, 2002
or at any other date.



| |                 
| | ----------------
| | (j) Income Taxes



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and credit carry forward. Deferred tax
assets are reduced by a valuation allowance to the extent the Company
concludes it is more likely than not that the assets will not be
realized. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to forecasted taxable income in future years
in which those temporary differences are expected to be recovered or
settled. The Company believes that the forecasted taxable income in
future years are appropriate. However, forecasted taxable income may
significantly differ from actual taxable income in future years, which
may result in material revisions to the valuation allowance for deferred
tax assets.



| |              
| | -------------
| | (k) Net Sales



| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company recognizes sales when products are delivered and the
customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement
exists and the sales price is fixed or determinable.

F  - 14



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|3. |  | Summary of Significant Accounting Policies and Practices (continued)
|-- |  | --------------------------------------------------------------------



| |                          
| | -------------------------
| | (k) Net
Sales (continued)



| |                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net sales represent the invoiced value of goods, net of value added
taxes (VAT), sales returns, trade discounts and allowances. Yuchai and
its subsidiaries are subject to VAT which is levied on the majority of
Yuchai and its subsidiaries products at the rate of 17% on the invoiced
value of sales.
|
| | Output VAT is borne by customers in addition to the invoiced value of
sales. VAT paid by Yuchai and its subsidiaries on its purchases is
recoverable out of VAT collected from its customers on its sales.                                                                                                  



| |                                         
| | ----------------------------------------
| | (l) Basic and Diluted Earnings Per Share



| |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Basic earnings per share (EPS) excludes dilution and is computed
by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in issuance of common stock that then shared in
earnings.



| |                                                     
| | ----------------------------------------------------
| | The EPS reconciliation of the Company is as follows:

|                                       |  |                                                                             |        |      |            |      |         |                         |            |      |         |  |            |  |        |  |            | 
|-------------------------------------- |  | --------------------------------------------------------------------------- | ------ | ---- | ---------- | ---- | ------- | ----------------------- | ---------- | ---- | ------- |  | ---------- |  | ------ |  | ---------- | 
|                                       |  |                                                                             |        |      |            |      |         | Year ended December 31, |            |      |         | 
|                                       |  |                                                                             |        |     
|                                       |  |                                                                             |        | 2000 |            | 2001 |         | 2002                    |            | 2002
|                                       |  |                                                                             |        |      |            |      |         |                         |            |     
|                                       |  |                                                                             |        | Rmb  |            | Rmb  |         | Rmb                     |            | US$ 
|Net income applicable to common shares |  |                                                                             | 37,078 |      |            |      | 250,387 |                         |            |      | 412,433 |  |            |  | 49,831 | 
|                                       |  |                                                                             |        |      |            |      |         |                         |            |      |         |  |            |  |        | 
|Basic earnings per share               |  |                                                                             |        |      |            |      |         |                         |            |      |         |  |            |  |        | 
|                                       |  | Weighted average common shares outstanding
during the year                  |        |      | 35,340,000 |      |         |                         | 35,340,000 |      |         |  | 35,340,000 |  |        |  | 35,340,000 | 
|                                       |  |                                                                             |        |      |            |      |         |                         |            |      |         |  |            |  |        | 
|                                       |  | Basic earnings per share of common stock                                    |        |      | 1.05       |      |         |                         | 7.09       |      |         |  | 11.67      |  |        |  | 1.41       | 
|                                       |  |                                                                             |        |      |            |      |         |                         |            |      |         |  |            |  |        | 
|Diluted earnings per share             |  |                                                                             |        |      |            |      |         |                         |            |      |         |  |            |  |        | 
|                                       |  | Weighted average common shares outstanding
during the year                  |        |      | 35,340,000 |      |         |                         | 35,340,000 |      |         |  | 35,340,000 |  |        |  | 35,340,000 | 
|                                       |  | Increase in shares which would result from
exercise of stock options        |        |      |           |      |         |                         |           |      |         |  |           |  |        |  |           | 
|                                       |  |                                                                             |        |      |            |      |         |                         |            |      |         |  |            |  |        | 
|                                       |  | Weighted average common shares, assuming
conversion of the above securities |        |      | 35,340,000 |      |         |                         | 35,340,000 |      |         |  | 35,340,000 |  |        |  | 35,340,000 | 
|                                       |  |                                                                             |        |      |            |      |         |                         |            |      |         |  |            |  |        | 
|                                       |  | Diluted earnings per share of common stock                                  |        |      | 1.05       |      |         |                         | 7.09       |      |         |  | 11.67      |  |        |  | 1.41       | 
|                                       |  |                                                                             |        |      |            |      |         |                         |            |      |         |  |            |  |        | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The State Holding Company had the right to subscribe for approximately 31 million shares of Yuchai at a subscription price of Rmb
6.29 per share (see Note 1). Such subscription right had an original
termination date of December 1998 and was extended to March 31, 2002.
Such subscription right was not exercised by the State Holding Company
and has lapsed. Such subscription right was not included in the
computation of diluted EPS because the effect was anti-dilutive.

F  - 15



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|3. |  | Summary of Significant Accounting Policies and Practices (continued)
|-- |  | --------------------------------------------------------------------



| |                                                
| | -----------------------------------------------
| | (m) Advertising, Research and Development Costs



| |                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Advertising, research and development costs are expensed as
incurred. Advertising costs amounted to Rmb 22,353, Rmb 17,846 and Rmb
31,935 (US$3,858), respectively, for the years ended December 31, 2000,
2001 and 2002. Research and development costs amounted to Rmb 49,011, Rmb
44,721 and Rmb 75,532 (US$9,126), respectively, for the years ended
December 31, 2000, 2001 and 2002.



| |             
| | ------------
| | (n) Goodwill



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Goodwill represents the excess of costs over fair value of net
assets of businesses acquired. The Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No.142, Goodwill
and Other Intangible Assets, as of January 1, 2002. Goodwill acquired in
a purchase business combination and intangibles determined to have an
indefinite useful life are not amortized, but instead are tested for
impairment at least annually in accordance with the provisions of SFAS
No. 142.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | In connection with SFAS No. 142s transitional goodwill impairment
evaluation, the Company performed an assessment of whether there was an
indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company identified its single reporting unit, which
is Yuchai and determined the carrying value of the reporting unit by
assigning the assets and liabilities, including the existing goodwill, to
this reporting unit as of January 1, 2002. The Company determined the
fair value of the reporting unit and compared it to the carrying amount
of the reporting unit. The fair value of the reporting unit exceeded its
carrying amount as of January 1, 2002. However, under the circumstance
that the carrying amount of a reporting unit exceeded the fair value of
the reporting unit, the Company would be required to perform a second
step of the transitional impairment test, as this is an indication that
the reporting unit goodwill may be impaired. In this step, the Company
would compare the implied fair value of the reporting unit goodwill with
the carrying amount of the reporting unit goodwill. The implied fair
value of goodwill is determined by allocating the fair value of the
reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141, Business
Combinations.
The residual fair value after this allocation is the implied fair value
of the reporting units goodwill.
|
| | Prior to the adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over the expected periods to be benefited, generally
20 years, and assessed for recoverability by determining whether the
amortization of the goodwill balance over its remaining life could be
recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, was
measured based on projected discounted future operating cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F  - 16



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|3. |  | Summary of Significant Accounting Policies and Practices (continued)
|-- |  | --------------------------------------------------------------------



| |                     
| | --------------------
| | (o) Product Warranty



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company provides for estimated future costs to be incurred under
a warranty period or warranty mileage on various engine models, which the
Company provides free repair and replacement. Warranties generally
extend for a period of 12 months to 18 months or 120,000 kilometres to
180,000 kilometres, whichever is the lower. Provisions for warranty are
primarily determined based on historical warranty cost per units of engines sold
adjusted for specific conditions that may arise and the number of engines
under warranty at each financial year-end.



| |                        
| | -----------------------
| | (p) Segmental Reporting



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SAFS No. 131, Disclosures about Segments of an Enterprise and
Related Information, establishes standards for reporting information
about operating segments in financial statements. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance.
|
| | The Companys principal operations comprise the manufacture and
distribution of light-duty, medium-duty and heavy-duty diesel engines.
The Company combines these operations into a single operating segment as
they are expected to exhibit similar future economic characteristics. In
view of the fact that the operations of Company and its subsidiaries are
almost entirely within the PRC, no geographical segment information is
presented.                          



| |                     
| | --------------------
| | (q) Use of Estimates



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The preparation of the consolidated financial statements in
accordance with accounting principles generally accepted in the United
States of America requires management of the Company to make a number of
estimates and assumptions relating to the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the period. Significant items
subject to such estimates and assumptions include the carrying amount of
goodwill, property, plant and equipment, construction in progress and
lease prepayments; fair value adjustment of receivable from a related
party; valuation allowances for receivables and inventories; and
allowance for sales discounts and warranty costs. Actual results could
differ from those estimates.



| |                                    
| | -----------------------------------
| | (r) Impairment of Long-Lived Assets



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived
Assets provides a single accounting model for long-lived assets to be
disposed of. SFAS No. 144 also changes the criteria for classifying an
asset as held for sale; and broadens the scope of businesses to be
disposed of that qualify for reporting as discontinued operations and
changes the timing of recognizing losses on such operations. The Company
adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did
not materially affect the Companys financial statements.

F  - 17



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|3. |  | Summary of Significant Accounting Policies and Practices (continued)
|-- |  | --------------------------------------------------------------------



| |                                                
| | -----------------------------------------------
| | (r) Impairment of Long-Lived Assets (continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In accordance with SFAS No. 144, long-lived assets, such as property,
plant and equipment, and purchased intangibles subject to amortization,
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of would be separately
presented in the balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer depreciated.
The assets and liabilities of a disposed group classified as held for sale would
be presented separately in the appropriate asset and liability sections of
the balance sheet.
|
| | Goodwill is not subject to amortization and is tested annually for
impairment, or more frequently if events and circumstances indicate that
the asset might be impaired. An impairment loss is recognized to the
extent that the carrying amount exceeds the assets fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets in accordance with SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



| |                                  
| | ---------------------------------
| | (s) Commitments and Contingencies



| |                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Liabilities for loss contingencies, including arising from claims,
assessments, litigation, and penalties and other sources are recorded when
it is probable that a liability has been incurred and the amount of the
assessment and/or remediation can be reasonably estimated.



| |                      
| | ---------------------
| | (t) Stock Option Plan



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
including FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25,
issued in March 2000, to account for its fixed-plan stock options. Under
this method, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise
price. SFAS No. 123, Accounting for Stock-Based
Compensation,
established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123
and SFAS No. 148. No stock options have been granted since the inception
of the Companys stock option plan. See also Note 24(g) for further
discussion on Stock Option Plan.

F  - 18



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|3. |  | Summary of Significant Accounting Policies and Practices (continued)
|-- |  | --------------------------------------------------------------------



| |                         
| | ------------------------
| | (u) Comprehensive income



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Management is not aware of any other comprehensive income for the
year ended December 31, 2000, 2001 and 2002.



| |                                         
| | ----------------------------------------
| | (v) Recently Issued Accounting Standards



| |             
| | ------------
| | SFAS No. 143



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS
No. 143 requires the Company to record the fair value of an asset retirement obligation as
a liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long-lived-assets that result from the
acquisition, construction, development, and/or normal use of the assets.
The Company is also required to record a corresponding asset, if any, that
is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be
adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the obligation. The
Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption
of SFAS No. 143 is not expected to have a material effect on the Companys
consolidated financial statements.



| |             
| | ------------
| | SFAS No. 145



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 amends existing guidance on reporting
gains and losses on the extinguishment of debt to prohibit the
classification of the gain or loss as extraordinary, as the use of such
extinguishments have become part of the risk management strategy of many
companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback
accounting for certain lease modifications that have economic effects
similar to sale-leaseback transactions. The provisions of the Statement
related to the rescission of SFAS No 4 were applied in 2002. The
provisions of the Statement related to SFAS No. 13 were effective for
transactions occurring after May 15, 2002. The adoption of SFAS No. 145
did not have a material effect on the Companys consolidated financial
statements.



| |             
| | ------------
| | SFAS No. 146



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity. The provisions of this Statement are
effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS No. 146 is not expected to have a
material effect on the Companys consolidated financial statements.

F  - 19



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|3. |  | Summary of Significant Accounting Policies and Practices (continued)
|-- |  | --------------------------------------------------------------------



| |                                                     
| | ----------------------------------------------------
| | (v) Recently Issued Accounting Standards (continued)



| |                      
| | ---------------------
| | Interpretation No. 45



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of
FASB Interpretation No. 34. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued including warranty obligation. The Interpretation also
clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken.
The initial recognition and measurement provisions of the Interpretation
are applicable to guarantees issued or modified after December 31, 2002.
The disclosure requirements are effective for financial statements of
interim or annual periods that end after December 15, 2002. Other than product warranties, which have been disclosed pursuant to the Interpretation, the Company
has not issued any guarantees as at December 31, 2002, therefore, the
application of Interpretation No. 45 was not expected to have a material
effect on the Companys consolidated financial statements.



| |             
| | ------------
| | SFAS No. 148



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment of
FASB Statement No. 123. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No. 123 to
require prominent disclosures in both annual and interim financial
statements. The board of directors of the Company has not granted any
stock options to the employees, therefore, the adoption of SFAS No. 148
is not expected to have a material effect on the Companys consolidated
financial statements.



| |                      
| | ---------------------
| | Interpretation No. 46



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51. This Interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies immediately to variable
interests in variable interest entities created after January 31, 2003,
and to variable interests in variable interest entities obtained after
January 31, 2003. The application of this Interpretation is not expected
to have a material effect on the Companys financial statements. The
Interpretation requires certain disclosures in financial statements
issued after January 31, 2003 if it is reasonably possible that the
Company will consolidate or disclose information about variable interest
entities when the Interpretation becomes effective. The Interpretation
applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company
is currently assessing the effect that the application of this
Interpretation will have on its consolidated financial statements.

F - 20



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|3. |  | Summary of Significant Accounting Policies and Practices (continued)
|-- |  | --------------------------------------------------------------------



| |                                                     
| | ----------------------------------------------------
| | (w) Recently Issued Accounting Standards (continued)
|
| | SFAS No. 149                                        



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April 2003,
the FASB issued SFAS No. 149, Accounting for Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133. This Statement amends and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS No. 133 (Accounting for Derivative Instruments and Hedging Activities). SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. All provisions of SFAS No. 149 will be applied prospectively. The Company is currently assessing the effect that the application of SFAS
No. 149 will have on its consolidated financial statements.



| |             
| | ------------
| | SFAS No. 150



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In May 2003, the
FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments
with characteristics of both liabilities and equity, and requires the classification of a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company is currently assessing the effect that the application of SFAS No. 150 will have on its consolidated
financial statements.



|4. |  | Depreciation, Sales Commissions, Shipping and Handling Expenses
|-- |  | ---------------------------------------------------------------



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Depreciation of property, plant and equipment and amortization of lease prepayments is included in the following captions:

|                                            |  |      |         |      |  |                         |         |      |  |  |         |  |  |  |        | 
|------------------------------------------- |  | ---- | ------- | ---- |  | ----------------------- | ------- | ---- |  |  | ------- |  |  |  | ------ | 
|                                            |  |      |         |      |  | Year ended December 31, |         |      |  | 
|                                            |  |     
|                                            |  | 2000 |         | 2001 |  | 2002                    |         | 2002
|                                            |  |      |         |      |  |                         |         |     
|                                            |  | Rmb  |         | Rmb  |  | Rmb                     |         | US$ 
|Cost of goods sold                          |  |      | 101,341 |      |  |                         | 91,612  |      |  |  | 93,237  |  |  |  | 11,265 | 
|Selling, general and administrative
expense |  |      | 24,640  |      |  |                         | 22,068  |      |  |  | 25,635  |  |  |  | 3,097  | 
|                                            |  |      |         |      |  |                         |         |      |  |  |         |  |  |  |        | 
|                                            |  |      | 125,981 |      |  |                         | 113,680 |      |  |  | 118,872 |  |  |  | 14,362 | 
|                                            |  |      |         |      |  |                         |         |      |  |  |         |  |  |  |        | 

F - 21



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|4. |  | Depreciation, Sales Commissions, Shipping and Handling Expenses
(continued)
|-- |  | ---------------------------------------------------------------------------



| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Sales commissions to sales agents incurred by the Company are
included in the following caption:

|                                            |  |                         |        |      |  |      |        |      |  |  |        |  |  |  |       | 
|------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ----- | 
|                                            |  | Year ended December 31,
|                                            |  |                        
|                                            |  | 2000                    |        | 2001 |  | 2002 |        | 2002
|                                            |  |                         |        |      |  |      |        |     
|                                            |  | Rmb                     |        | Rmb  |  | Rmb  |        | US$ 
|Selling, general and administrative
expense |  |                         | 18,090 |      |  |      | 12,583 |      |  |  | 17,721 |  |  |  | 2,141 | 
|                                            |  |                         |        |      |  |      |        |      |  |  |        |  |  |  |       | 



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales related shipping and handling expenses incurred by the Company
and not separately billed to customers are included in the following
caption:

|                                            |  |                         |        |      |  |      |        |      |  |  |        |  |  |  |       | 
|------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ----- | 
|                                            |  | Year ended December 31,
|                                            |  |                        
|                                            |  | 2000                    |        | 2001 |  | 2002 |        | 2002
|                                            |  |                         |        |      |  |      |        |     
|                                            |  | Rmb                     |        | Rmb  |  | Rmb  |        | US$ 
|Selling, general and administrative
expense |  |                         | 21,113 |      |  |      | 30,383 |      |  |  | 49,696 |  |  |  | 6,004 | 
|                                            |  |                         |        |      |  |      |        |      |  |  |        |  |  |  |       | 



|5. |  | Interest Cost
|-- |  | -------------



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The company capitalizes interest cost as a component of the cost of
construction in progress. The following is a summary of interest cost
incurred during 2000, 2001 and 2002:

|                                |  |                         |        |      |  |      |        |      |  |  |        |  |  |  |       | 
|------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ----- | 
|                                |  | Year ended December 31,
|                                |  |                        
|                                |  | 2000                    |        | 2001 |  | 2002 |        | 2002
|                                |  |                         |        |      |  |      |        |     
|                                |  | Rmb                     |        | Rmb  |  | Rmb  |        | US$ 
|Interest cost capitalized       |  |                         | 2,711  |      |  |      | 2,214  |      |  |  | 4,598  |  |  |  | 556   | 
|Interest cost charged to income |  |                         | 27,886 |      |  |      | 29,784 |      |  |  | 25,144 |  |  |  | 3,038 | 
|                                |  |                         |        |      |  |      |        |      |  |  |        |  |  |  |       | 
|Total interest cost incurred    |  |                         | 30,597 |      |  |      | 31,998 |      |  |  | 29,742 |  |  |  | 3,594 | 
|                                |  |                         |        |      |  |      |        |      |  |  |        |  |  |  |       | 

F - 22



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|6. |  | Other Income, net
|-- |  | -----------------



| |                              
| | -----------------------------
| | Other income, net consist of:

|                           |  |                         |        |      |  |      |        |      |  |  |         |   |  |  |        |  
|-------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  |  | ------- | - |  |  | ------ | -
|                           |  | Year ended December 31,
|                           |  |                        
|                           |  | 2000                    |        | 2001 |  | 2002 |        | 2002
|                           |  |                         |        |      |  |      |        |     
|                           |  | Rmb                     |        | Rmb  |  | Rmb  |        | US$ 
|Interest income            |  |                         | (6,261 | )    |  |      | (9,558 | )    |  |  | (4,664  | ) |  |  | (564   | )
|Foreign exchange loss, net |  |                         | 74     |      |  |      |       |      |  |  | 639     |   |  |  | 77     |  
|Other                      |  |                         | 4,502  |      |  |      | 5,700  |      |  |  | (6,262  | ) |  |  | (756   | )
|                           |  |                         |        |      |  |      |        |      |  |  |         |   |  |  |        |  
|                           |  |                         | (1,685 | )    |  |      | (3,858 | )    |  |  | (10,287 | ) |  |  | (1,243 | )
|                           |  |                         |        |      |  |      |        |      |  |  |         |   |  |  |        |  



|7. |  | Income Taxes Expense/(Credit)
|-- |  | -----------------------------
|  
|   |  | Bermuda Tax                  



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | The Company was incorporated under the laws of Bermuda and, under
current Bermuda laws, is not subject to tax on income or on capital gains.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has received an undertaking from the Minister of Finance
in Bermuda pursuant to the provisions of the Exempted Undertakings Tax
Protection Act, 1966, which exempts the Company and its shareholders,
other than shareholders ordinarily resident in Bermuda, from any Bermuda
taxes computed on profit, income or any capital assets, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax
at least until the year 2016.

F - 23



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|7. |  | Income Taxes Expense/(Credit) (Continued)
|-- |  | -----------------------------------------
|  
|   |  | PRC Income Tax                           



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | As Yuchai is a Sino-foreign enterprise, its PRC income tax rate is
15% under the relevant PRC income tax laws.



| |                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | An extension of the reduction in the PRC income tax rate to 10% for
the three years ended December 31, 2001 was granted to Yuchai pursuant to
the relevant PRC income tax laws (the tax holiday). The 10% rate was
based on the interpretations of the PRC income tax law that subjects
entities such as Yuchai to a minimum tax rate of 10% following an
extension of the initial tax holiday.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | As a result of the above tax holiday, Yuchai was subject to PRC
income taxes at a rate of 10% in 2000 and 2001, and 15% in 2002.



| |                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If Yuchai was not in a tax holiday period, income tax expense for the
years ended December 31, 2000 and 2001 would have increased by Rmb 4,747
and Rmb 42,489 respectively. Net income for the years ended December 31,
2000 and 2001 would have reduced by Rmb 3,627 or Rmb 0.10 per share and
Rmb 32,464 or Rmb 0.92 per share respectively.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | The PRC income tax rates of Yuchais subsidiaries under the relevant
PRC income tax laws are as follows:

|                        |  |                     |           | 
|----------------------- |  | ------------------- | --------- | 
|Year ended December 31, |  | PRC income tax rate
|                        |  |                    
|2000                    |  |                     | 33%       | 
|2001                    |  |                     | 33%       | 
|2002                    |  |                     | 15% - 33% | 



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Income tax expense/(credit) in the consolidated statements of income
consists of:

|                     |  |                         |        |      |  |      |         |      |  |  |         |   |  |  |        |  
|-------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------- | ---- |  |  | ------- | - |  |  | ------ | -
|                     |  | Year ended December 31,
|                     |  |                        
|                     |  | 2000                    |        | 2001 |  | 2002 |         | 2002
|                     |  |                         |        |      |  |      |         |     
|                     |  | Rmb                     |        | Rmb  |  | Rmb  |         | US$ 
|Current tax expense  |  |                         | 12,555 |      |  |      | 30,820  |      |  |  | 114,463 |   |  |  | 13,829 |  
|Deferred tax benefit |  |                         | (1,873 | )    |  |      | (94,404 | )    |  |  | (31,221 | ) |  |  | (3,772 | )
|                     |  |                         |        |      |  |      |         |      |  |  |         |   |  |  |        |  
|                     |  |                         | 10,682 |      |  |      | (63,584 | )    |  |  | 83,242  |   |  |  | 10,057 |  
|                     |  |                         |        |      |  |      |         |      |  |  |         |   |  |  |        |  

F - 24



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|7. |  | Income Taxes Expense/(Credit) (Continued)
|-- |  | -----------------------------------------



| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The net tax expense reported in the consolidated statements of income
differs from the amount computed by applying the PRC income tax rate of
15% for the three years ended December 31, 2002 for the following reasons:

|                                |                                                                   |  |                         |        |      |  |         |         |      |  |        |         |   |  |        |        |  
|------------------------------- | ----------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ------- | ------- | ---- |  | ------ | ------- | - |  | ------ | ------ | -
|                                |                                                                   |  | Year ended December 31,
|                                |                                                                   |  |                        
|                                |                                                                   |  | 2000                    |        | 2001 |  | 2002    |         | 2002
|                                |                                                                   |  |                         |        |      |  |         |         |     
|                                |                                                                   |  | Rmb                     |        | Rmb  |  | Rmb     |         | US$ 
|Computed expected
tax expense |                                                                   |  | 9,602                   |        |      |  | 40,378  |         |      |  | 93,818 |         |   |  | 11,335 |       
|Adjustments resulting from:     |                                                                   |  |                         |        |      |  |         |         |      |  |        |         |   |  |        |       
|                                | Non-deductible staff expenses                                     |  |                         | 3,923  |      |  |         | 1,000   |      |  |        | 401     |   |  |        | 48     |  
|                                | Non-deductible business entertainment                             |  |                         | 1,375  |      |  |         | 773     |      |  |        | 442     |   |  |        | 53     |  
|                                | Non-deductible goodwill amortization                              |  |                         | 2,529  |      |  |         | 2,529   |      |  |        |        |   |  |        |       |  
|                                | Other non-deductible expenses                                     |  |                         |       |      |  |         | 325     |      |  |        | 88      |   |  |        | 11     |  
|                                | Deductible expenses previously
recognized as non-deductible items |  |                         |       |      |  |         |        |      |  |        | (13,358 | ) |  |        | (1,614 | )
|                                | Rate differential of subsidiaries
tax assets                      |  |                         |       |      |  |         |        |      |  |        | 1,851   |   |  |        | 224    |  
|                                | Change in valuation allowance for
deferred tax assets             |  |                         | (2,000 | )    |  |         | (66,100 | )    |  |        |        |   |  |        |       |  
|                                | Tax holiday                                                       |  |                         | (4,747 | )    |  |         | (42,489 | )    |  |        |        |   |  |        |       |  
|                                |                                                                   |  |                         |        |      |  |         |         |      |  |        |         |   |  |        |       
|Net tax expense                 |                                                                   |  | 10,682                  |        |      |  | (63,584 | )       |      |  | 83,242 |         |   |  | 10,057 |       
|                                |                                                                   |  |                         |        |      |  |         |         |      |  |        |         |   |  |        |       



| |                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain expenses totalling Rmb 13,358 have been previously included
by the relevant tax authorities as non-deductible in the period in which
they were recorded. During the year ended December 31, 2002,
deductibility of such expenses was agreed by the tax authorities.

F - 25



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|7. |  | Income Taxes Expense/(Credit) (Continued)
|-- |  | -----------------------------------------



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | The significant components of deferred income tax benefit
attributable to income for the years ended December 31, 2000, 2001 and
2002 are as follows:

|                                                                                             |  |                         |        |      |  |      |         |      |  |  |         |   |  |  |        |  
|-------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------- | ---- |  |  | ------- | - |  |  | ------ | -
|                                                                                             |  | Year ended December 31,
|                                                                                             |  |                        
|                                                                                             |  | 2000                    |        | 2001 |  | 2002 |         | 2002
|                                                                                             |  |                         |        |      |  |      |         |     
|                                                                                             |  | Rmb                     |        | Rmb  |  | Rmb  |         | US$ 
|Deferred tax expense/ (benefit)                                                              |  |                         | 127    |      |  |      | (28,304 | )    |  |  | (31,221 | ) |  |  | (3,772 | )
|Decrease in beginning of the
year balance of the valuation allowance
for deferred tax assets |  |                         | (2,000 | )    |  |      | (66,100 | )    |  |  |        |   |  |  |       |  
|                                                                                             |  |                         |        |      |  |      |         |      |  |  |         |   |  |  |        |  
|                                                                                             |  |                         | (1,873 | )    |  |      | (94,404 | )    |  |  | (31,221 | ) |  |  | (3,772 | )
|                                                                                             |  |                         |        |      |  |      |         |      |  |  |         |   |  |  |        |  



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets at December 31, 2001 and
2002 are presented below:

|                                                          |  |                         |         |      |  |      |         |  |  |  |        | 
|--------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  |  | ------ | 
|                                                          |  | Year ended December 31,
|                                                          |  |                        
|                                                          |  | 2001                    |         | 2002 |  | 2002
|                                                          |  |                         |         |      |  |      |        
|                                                          |  | Rmb                     |         | Rmb  |  | US$ 
|Allowance for doubtful accounts                           |  |                         | 23,996  |      |  |      | 24,378  |  |  |  | 2,946  | 
|Fair value adjustment for amount due
from a related party |  |                         | 3,000   |      |  |      | 1,019   |  |  |  | 123    | 
|Property, plant and equipment                             |  |                         | 78,635  |      |  |      | 78,051  |  |  |  | 9,430  | 
|Accrued liabilities                                       |  |                         | 5,862   |      |  |      | 35,914  |  |  |  | 4,339  | 
|Allowance for inventories                                 |  |                         | 7,106   |      |  |      | 10,458  |  |  |  | 1,264  | 
|                                                          |  |                         |         |      |  |      |         |  |  |  |        | 
|Total gross deferred tax assets                           |  |                         | 118,599 |      |  |      | 149,820 |  |  |  | 18,102 | 
|Less: valuation allowance                                 |  |                         |        |      |  |      |        |  |  |  |       | 
|                                                          |  |                         |         |      |  |      |         |  |  |  |        | 
|Net deferred tax assets                                   |  |                         | 118,599 |      |  |      | 149,820 |  |  |  | 18,102 | 
|                                                          |  |                         |         |      |  |      |         |  |  |  |        | 

F - 26



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|7. |  | Income Taxes Expense/(Credit) (Continued)
|-- |  | -----------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
assets, projected future taxable income, and tax planning strategies in
making this assessment. In order to fully realize the deferred tax asset,
the Company will need to generate future taxable income of approximately
Rmb 998,800. Taxable income for the years ended December 31, 2000, 2001
and 2002 amounted to Rmb 113,144, Rmb 235,096 and Rmb 692,542,
respectively. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely
than not that the Company will realize the benefits of these deductible
differences at December 31, 2002.



|8. |  | Trade Accounts Receivable, Net
|-- |  | ------------------------------



| |                                         
| | ----------------------------------------
| | Trade accounts receivable, net comprise:

|                                      |  |              |         |      |  |      |           |  |  |  |         | 
|------------------------------------- |  | ------------ | ------- | ---- |  | ---- | --------- |  |  |  | ------- | 
|                                      |  | December 31,
|                                      |  |             
|                                      |  | 2001         |         | 2002 |  | 2002
|                                      |  |              |         |      |  |     
|                                      |  | Rmb          |         | Rmb  |  | US$ 
|Trade accounts receivable             |  |              | 568,428 |      |  |      | 450,127   |  |  |  | 54,385  | 
|Less: allowance for doubtful accounts |  |              | 164,924 |      |  |      | 158,075   |  |  |  | 19,099  | 
|                                      |  |              |         |      |  |      |           |  |  |  |         | 
|                                      |  |              | 403,504 |      |  |      | 292,052   |  |  |  | 35,286  | 
|Bills receivable                      |  |              | 370,285 |      |  |      | 711,083   |  |  |  | 85,915  | 
|                                      |  |              |         |      |  |      |           |  |  |  |         | 
|                                      |  |              | 773,789 |      |  |      | 1,003,135 |  |  |  | 121,201 | 
|                                      |  |              |         |      |  |      |           |  |  |  |         | 

F - 27



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)

8.     Trade Accounts Receivable, Net (Continued)



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | An analysis of the allowance for doubtful accounts for 2000, 2001 and
2002 is as follows:

|                                      |  |              |         |      |  |      |         |      |  |  |         |   |  |  |        |  
|------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------- | ---- |  |  | ------- | - |  |  | ------ | -
|                                      |  | December 31,
|                                      |  |             
|                                      |  | 2000         |         | 2001 |  | 2002 |         | 2002
|                                      |  |              |         |      |  |      |         |     
|                                      |  | Rmb          |         | Rmb  |  | Rmb  |         | US$ 
|Balance at beginning of year          |  |              | 172,225 |      |  |      | 201,533 |      |  |  | 164,924 |   |  |  | 19,927 |  
|Allowance charged to income statement |  |              | 29,308  |      |  |      |        |      |  |  |        |   |  |  |       |  
|(Written back) to income statement    |  |              |        |      |  |      | (36,609 | )    |  |  | (6,849  | ) |  |  | (828   | )
|                                      |  |              |         |      |  |      |         |      |  |  |         |   |  |  |        |  
|Balance at end of year                |  |              | 201,533 |      |  |      | 164,924 |      |  |  | 158,075 |   |  |  | 19,099 |  
|                                      |  |              |         |      |  |      |         |      |  |  |         |   |  |  |        |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2001 and 2002, gross trade accounts receivable due
from major customers, Dongfeng Automobile Company and its affiliates (the
Dongfeng companies), were Rmb 290,148 and Rmb 140,781, respectively. In
establishing the allowance for doubtful accounts, the Company considered
all known facts and conditions of its customer base, and the general
macroeconomic conditions in the PRC. See also Note 29 for further
discussion of business concentration risk.



|9. |  | Amounts Due From/ To Related Companies
|-- |  | --------------------------------------



| |                                             
| | --------------------------------------------
| | Amounts due from related companies comprise:

|                    |  |              |        |      |  |      |        |  |  |  |       | 
|------------------- |  | ------------ | ------ | ---- |  | ---- | ------ |  |  |  | ----- | 
|                    |  | December 31,
|                    |  |             
|                    |  | 2001         |        | 2002 |  | 2002
|                    |  |              |        |      |  |     
|                    |  | Rmb          |        | Rmb  |  | US$ 
|                    |  |              |        |      |  |     
|Due within one year |  |              | 20,915 |      |  |      | 16,367 |  |  |  | 1,978 | 
|Due over one year   |  |              | 12,673 |      |  |      | 9,990  |  |  |  | 1,207 | 
|                    |  |              |        |      |  |      |        |  |  |  |       | 
|                    |  |              | 33,588 |      |  |      | 26,357 |  |  |  | 3,185 | 
|                    |  |              |        |      |  |      |        |  |  |  |       | 



| |                                           
| | ------------------------------------------
| | Amounts due to related companies comprise:

|                    |  |              |        |      |  |      |        |  |  |  |       | 
|------------------- |  | ------------ | ------ | ---- |  | ---- | ------ |  |  |  | ----- | 
|                    |  | December 31,
|                    |  |             
|                    |  | 2001         |        | 2002 |  | 2002
|                    |  |              |        |      |  |     
|                    |  | Rmb          |        | Rmb  |  | US$ 
|Due within one year |  |              | 11,714 |      |  |      | 25,409 |  |  |  | 3,070 | 
|                    |  |              |        |      |  |      |        |  |  |  |       | 

F - 28



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|9. |  | Amounts Due From/ To Related Companies (Continued)
|-- |  | --------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Related companies include the State Holding Company and its
subsidiaries and associated companies. The amounts due from/to related
companies are unsecured and interest free. All the balances are repayable
on demand, except for an amount due from Guangxi Yuchai Machinery &
Electrical Company (GYMEC), a wholly-owned subsidiary of the State
Holding Company. The directors consider that the amount due from GYMEC
will not be settled within one year and hence the amount is classified as
a long term receivable in the consolidated balance sheets. Amount due from
GYMEC is recorded at its net present value based on a discount rate of
5.94% generally available for discounting similar instruments with banks
in the PRC. See Note 24.



|10. |  | Inventories, net
|--- |  | ----------------



| |                      
| | ---------------------
| | Inventories comprise:

|                 |  |              |         |      |  |      |         |  |  |  |         | 
|---------------- |  | ------------ | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                 |  | December 31,
|                 |  |             
|                 |  | 2001         |         | 2002 |  | 2002
|                 |  |              |         |      |  |     
|                 |  | Rmb          |         | Rmb  |  | US$ 
|Raw materials    |  |              | 350,534 |      |  |      | 426,950 |  |  |  | 51,585  | 
|Work in progress |  |              | 52,234  |      |  |      | 112,459 |  |  |  | 13,588  | 
|Finished goods   |  |              | 141,901 |      |  |      | 303,820 |  |  |  | 36,708  | 
|                 |  |              |         |      |  |      |         |  |  |  |         | 
|                 |  |              | 544,669 |      |  |      | 843,229 |  |  |  | 101,881 | 
|                 |  |              |         |      |  |      |         |  |  |  |         | 



|11. |  | Other Receivables
|--- |  | -----------------



| |                            
| | ---------------------------
| | Other receivables comprise:

|                                |  |              |        |      |  |      |        |  |  |  |       | 
|------------------------------- |  | ------------ | ------ | ---- |  | ---- | ------ |  |  |  | ----- | 
|                                |  | December 31,
|                                |  |             
|                                |  | 2001         |        | 2002 |  | 2002
|                                |  |              |        |      |  |     
|                                |  | Rmb          |        | Rmb  |  | US$ 
|VAT recoverable                 |  |              |       |      |  |      | 8,927  |  |  |  | 1,079 | 
|Amounts due from suppliers, net |  |              | 4,900  |      |  |      |       |  |  |  |      | 
|Staff loans                     |  |              | 7,457  |      |  |      | 6,877  |  |  |  | 831   | 
|Deposits                        |  |              | 10,000 |      |  |      |       |  |  |  |      | 
|Other                           |  |              | 4,992  |      |  |      | 2,914  |  |  |  | 352   | 
|                                |  |              |        |      |  |      |        |  |  |  |       | 
|                                |  |              | 27,349 |      |  |      | 18,718 |  |  |  | 2,262 | 
|                                |  |              |        |      |  |      |        |  |  |  |       | 

F - 29



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)

11. Other Receivables (continued)



| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Amounts due from suppliers were stated after allowance for doubtful
balances, totalling Rmb 4,119 and Rmb 6,036, respectively, at December 31,
2001 and 2002. An analysis of the allowance for doubtful balances due
from suppliers is as follows:

|                                      |  |              |        |      |  |      |       |      |  |  |       |  |  |  |     | 
|------------------------------------- |  | ------------ | ------ | ---- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | --- | 
|                                      |  | December 31,
|                                      |  |             
|                                      |  | 2000         |        | 2001 |  | 2002 |       | 2002
|                                      |  |              |        |      |  |      |       |     
|                                      |  | Rmb          |        | Rmb  |  | Rmb  |       | US$ 
|                                      |  |              |        |      |  |      |       |     
|Balance at beginning of year          |  |              | 8,344  |      |  |      | 4,119 |      |  |  | 4,119 |  |  |  | 498 | 
|Allowance charged to income statement |  |              |       |      |  |      |      |      |  |  | 1,917 |  |  |  | 232 | 
|Allowance written off                 |  |              | (4,225 | )    |  |      |      |      |  |  |      |  |  |  |    | 
|                                      |  |              |        |      |  |      |       |      |  |  |       |  |  |  |     | 
|Balance at end of year                |  |              | 4,119  |      |  |      | 4,119 |      |  |  | 6,036 |  |  |  | 730 | 
|                                      |  |              |        |      |  |      |       |      |  |  |       |  |  |  |     | 



| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Amounts due from suppliers at December 31, 2001 included a balance of
Rmb 2,500, which carried interest at the prevailing bank interest rate,
approximately 5.94% per annum in 2001. The balance was settled in 2002.

F - 30



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|12. |  | Property, Plant and Equipment, Net
|--- |  | ----------------------------------



| |                                             
| | --------------------------------------------
| | Property, plant and equipment, net comprise:

|                                                  |  |      |           |      |  |              |           |  |  |  |         | 
|------------------------------------------------- |  | ---- | --------- | ---- |  | ------------ | --------- |  |  |  | ------- | 
|                                                  |  |      |           |      |  | December 31, |           |  |  | 
|                                                  |  |      |           |      |  |              |           |  |  | 
|                                                  |  | 2001 |           | 2002 |  | 2002        
|                                                  |  |      |           |      |  |             
|                                                  |  | Rmb  |           | Rmb  |  | US$         
|Buildings                                         |  |      | 359,038   |      |  |              | 490,685   |  |  |  | 59,286  | 
|Machinery and equipment                           |  |      | 1,242,229 |      |  |              | 1,195,889 |  |  |  | 144,489 | 
|                                                  |  |      |           |      |  |              |           |  |  |  |         | 
|                                                  |  |      | 1,601,267 |      |  |              | 1,686,574 |  |  |  | 203,775 | 
|Less accumulated depreciation
and impairment loss |  |      | 785,387   |      |  |              | 913,606   |  |  |  | 110,384 | 
|                                                  |  |      |           |      |  |              |           |  |  |  |         | 
|Net property, plant and equipment                 |  |      | 815,880   |      |  |              | 772,968   |  |  |  | 93,391  | 
|                                                  |  |      |           |      |  |              |           |  |  |  |         | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management has conducted a review on the conditions of the property,
plant and equipment and identified that certain property, plant and
equipment mainly related to the 6105 production line were no longer used
in production due to the introduction of replacement property, plant and
equipment. This change required an impairment analysis to be performed in
accordance to SFAS No. 144. The estimated undiscounted future cash flows
generated from such property, plant and equipment were less than their
carrying value. The carrying value of such assets were therefore reduced
to fair value. This resulted in an impairment loss of Rmb 23,120, which
has been included in Selling, General and Administration expense in
2002. Management estimated fair value using internal appraisals and value
of similar assets in the market.
|
| | All of Yuchai and its subsidiaries buildings are located in the PRC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2002, certain plant and equipment of Yuchai with
an aggregate carrying amount of Rmb 98,901 (2001: Rmb 291,386) were
pledged as security under certain bank loan arrangements (see Note 17).

F - 31



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Rmb and US$ amounts expressed in thousands, except per share data)

12. Property, Plant and Equipment, Net (Continued)



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Loss on disposal of property, plant and equipment for the years ended
December 31, 2000, 2001 and 2002 is included in Selling, general and
administrative expense as follows:

|                                                  |  |                         |       |      |  |      |     |      |  |  |       |  |  |  |     | 
|------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | --- | ---- |  |  | ----- |  |  |  | --- | 
|                                                  |  | Year ended December 31,
|                                                  |  |                        
|                                                  |  | 2000                    |       | 2001 |  | 2002 |     | 2002
|                                                  |  |                         |       |      |  |      |     |     
|                                                  |  | Rmb                     |       | Rmb  |  | Rmb  |     | US$ 
|                                                  |  |                         |       |      |  |      |     |     
|Loss on disposal of property,
plant and equipment |  |                         | 1,194 |      |  |      | 249 |      |  |  | 7,276 |  |  |  | 879 | 
|                                                  |  |                         |       |      |  |      |     |      |  |  |       |  |  |  |     | 



| |  | The Company has several non-cancelable operating leases, primarily for
offices and warehouses that expire over the next five years. These leases
generally contain renewal options for periods ranging from one year to
three years. Rental expense for operating leases is included in Selling,
general and administrative expense as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|               |  |                         |       |      |  |      |       |      |  |  |       |  |  |  |     | 
|-------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | --- | 
|               |  | Year ended December 31,
|               |  |                        
|               |  | 2000                    |       | 2001 |  | 2002 |       | 2002
|               |  |                         |       |      |  |      |       |     
|               |  | Rmb                     |       | Rmb  |  | Rmb  |       | US$ 
|Rental expense |  |                         | 6,859 |      |  |      | 6,965 |      |  |  | 4,241 |  |  |  | 512 | 
|               |  |                         |       |      |  |      |       |      |  |  |       |  |  |  |     | 

F - 32



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Rmb and US$ amounts expressed in thousands, except per share data)

12. Property, Plant and Equipment, Net (Continued)



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Future minimum lease payments under non-cancellable operating leases
(with initial or remaining lease terms in excess of one year) as of
December 31, 2002 are:

|                         |  |                          |       |     |  |  |     | 
|------------------------ |  | ------------------------ | ----- | --- |  |  | --- | 
|Year ending December 31, |  | Operating lease payments
|                         |  |                         
|                         |  | Rmb                      |       | US$
|2003                     |  |                          | 1,835 |     |  |  | 222 | 
|2004                     |  |                          | 686   |     |  |  | 83  | 
|2005                     |  |                          | 331   |     |  |  | 40  | 
|2006                     |  |                          | 146   |     |  |  | 18  | 
|                         |  |                          |       |     |  |  |     | 
|                         |  |                          | 2,998 |     |  |  | 363 | 
|                         |  |                          |       |     |  |  |     | 

13. Construction In Progress



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Construction in progress comprises capital expenditures relating to
the construction of facilities and assembly lines for the following
projects:

|                                                 |  |              |        |      |  |      |         |  |  |  |        | 
|------------------------------------------------ |  | ------------ | ------ | ---- |  | ---- | ------- |  |  |  | ------ | 
|                                                 |  | December 31,
|                                                 |  |             
|                                                 |  | 2001         |        | 2002 |  | 2002
|                                                 |  |              |        |      |  |     
|                                                 |  | Rmb          |        | Rmb  |  | US$ 
|Diesel engine projects - 6105QF/
6108QC projects |  |              | 41,474 |      |  |      | 19,860  |  |  |  | 2,400  | 
|Factories auxiliary facilities                   |  |              | 10,718 |      |  |      | 21,250  |  |  |  | 2,567  | 
|Diesel engine projects - 6113/4113 projects      |  |              |       |      |  |      | 18,789  |  |  |  | 2,270  | 
|Office building                                  |  |              |       |      |  |      | 50,108  |  |  |  | 6,054  | 
|Others                                           |  |              | 1,783  |      |  |      | 11,860  |  |  |  | 1,433  | 
|                                                 |  |              |        |      |  |      |         |  |  |  |        | 
|                                                 |  |              | 53,975 |      |  |      | 121,867 |  |  |  | 14,724 | 
|                                                 |  |              |        |      |  |      |         |  |  |  |        | 

F - 33



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Rmb and US$ amounts expressed in thousands, except per share data)

14. Lease prepayments, Net

|                               |  |              |        |      |  |      |        |  |  |  |        | 
|------------------------------ |  | ------------ | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                               |  | December 31,
|                               |  |             
|                               |  | 2001         |        | 2002 |  | 2002
|                               |  |              |        |      |  |     
|                               |  | Rmb          |        | Rmb  |  | US$ 
|Lease prepayments              |  |              | 98,355 |      |  |      | 99,175 |  |  |  | 11,982 | 
|Less: accumulated amortization |  |              | 12,695 |      |  |      | 13,599 |  |  |  | 1,642  | 
|                               |  |              |        |      |  |      |        |  |  |  |        | 
|Net lease prepayments          |  |              | 85,660 |      |  |      | 85,576 |  |  |  | 10,340 | 
|                               |  |              |        |      |  |      |        |  |  |  |        | 



| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The land on which the Companys buildings are erected is owned by the
PRC Government. Yuchai and its subsidiaries are granted the land use
rights of 40 to 50 years in respect of such land.  
|
| | As of December 31, 2002, land use rights of Yuchai with a carrying
amount of Rmb 17,430 (2001: nil) were pledged as security under certain
short-term bank loan arrangements (see Note 17(a)).

15. Investments



| |                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Non-current investments represent an equity interest in Yuchai/ASIMCO
Components Company Limited (YACC) which was established as a joint
venture in the Cayman Islands on June 30, 1994. Yuchais effective
interest in the common stock of YACC was 4.73%.                                                                                   
|
| | The fair value of the unlisted equity investments cannot be measured
reliably because they are not traded in an open market and there were no
transactions for the investments during the year. The unlisted equity
investments are stated at cost as management considers no indication of
impairment in view of the profitability of the YACC.

F - 34



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Rmb and US$ amounts expressed in thousands, except per share data)

16. Goodwill



| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Amortization expense related to goodwill was Rmb16,859 for the years
ended December 31, 2000 and 2001. The following table reconciles
previously reported net income as if the provisions of SFAS No. 142 were
in effect in each year presented:

|                                      |                                               |  |              |            |      |  |         |            | 
|------------------------------------- | --------------------------------------------- |  | ------------ | ---------- | ---- |  | ------- | ---------- | 
|                                      |                                               |  | December 31,
|                                      |                                               |  |             
|                                      |                                               |  | 2000         |            | 2001
|                                      |                                               |  |              |            |     
|                                      |                                               |  | Rmb          |            | Rmb 
|Reported net income                   |                                               |  | 37,078       |            |      |  | 250,387 |           
|Add back goodwill amortization        |                                               |  | 16,859       |            |      |  | 16,859  |           
|                                      |                                               |  |              |            |      |  |         |           
|Adjusted net income                   |                                               |  | 53,937       |            |      |  | 267,246 |           
|                                      |                                               |  |              |            |      |  |         |           
|Basic and diluted earnings per share: |                                               |  |              |            |      |  |         |           
|                                      | Reported basic and diluted
earnings per share |  |              | 1.05       |      |  |         | 7.09       | 
|                                      | Goodwill amortization                         |  |              | 0.48       |      |  |         | 0.48       | 
|                                      |                                               |  |              |            |      |  |         |           
|                                      | Adjusted basic and diluted
earnings per share |  |              | 1.53       |      |  |         | 7.57       | 
|                                      |                                               |  |              |            |      |  |         |           
|Average number of shares outstanding: |                                               |  |              |            |      |  |         |           
|                                      | Basic and diluted                             |  |              | 35,340,000 |      |  |         | 35,340,000 | 
|                                      |                                               |  |              |            |      |  |         |           



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | There is no change in the carrying amount of goodwill for the year
ended December 31, 2002.

F - 35



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Rmb and US$ amounts expressed in thousands, except per share data)

17. Debt



|(a) |  | Short-term Bank Loans
|--- |  | ---------------------



| |                                                               
| | --------------------------------------------------------------
| | Short-term bank loans were denominated in Renminbi as follows:

|                      |  |              |         |      |  |      |         |  |  |  |        | 
|--------------------- |  | ------------ | ------- | ---- |  | ---- | ------- |  |  |  | ------ | 
|                      |  | December 31,
|                      |  |             
|                      |  | 2001         |         | 2002 |  | 2002
|                      |  |              |         |      |  |     
|                      |  | Rmb          |         | Rmb  |  | US$ 
|Rmb denominated loans |  |              | 225,000 |      |  |      | 135,000 |  |  |  | 16,311 | 
|                      |  |              |         |      |  |      |         |  |  |  |        | 



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | The weighted average interest rate of short-term bank loans at
December 31, 2001 and 2002 was 5.85% and 5.12% per annum, respectively.
|
| | As of December 31, 2002, short-term bank loans of Rmb 10,000 (2001:
nil) were secured by the pledge of land use rights (see Note 14). 



|(b) |  | Long-term Bank Loans
|--- |  | --------------------



| |                                        
| | ---------------------------------------
| | Yuchais long-term bank loans comprise:

|                                                                  |  |                      |      |     |  |              |         |      |  |      |         |  |  |  |        | 
|----------------------------------------------------------------- |  | -------------------- | ---- | --- |  | ------------ | ------- | ---- |  | ---- | ------- |  |  |  | ------ | 
|                                                                  |  |                      |      |     |  | December 31,
|                                                                  |  |                      |      |     |  |             
|                                                                  |  |                      |      |     |  | 2001         |         | 2002 |  | 2002
|                                                                  |  | Interest rate        |      |     |  |              |         |     
|                                                                  |  | at December 31, 2002 |      | Rmb |  | Rmb          |         | US$ 
|                                                                  |  |                      |      |     |  |              |         |     
|                                                                  |  | (per annum)          |      |     |  |              |         |     
|Rmb denominated loans:                                            |  |                      |      |     |  |              |         |      |  |      |         |  |  |  |        | 
|Due in 2002                                                       |  |                      | 5.94 | %   |  |              | 40,000  |      |  |      |        |  |  |  |       | 
|Due in 2003                                                       |  |                      | 5.94 | %   |  |              | 180,000 |      |  |      | 130,000 |  |  |  | 15,707 | 
|Due in 2004                                                       |  |                      | 5.94 | %   |  |              |        |      |  |      | 50,000  |  |  |  | 6,041  | 
|                                                                  |  |                      |      |     |  |              |         |      |  |      |         |  |  |  |        | 
|Total long-term bank loans
outstanding                            |  |                      |      |     |  |              | 220,000 |      |  |      | 180,000 |  |  |  | 21,748 | 
|Less amounts due within 1 year
included under current liabilities |  |                      |      |     |  |              | 40,000  |      |  |      | 130,000 |  |  |  | 15,707 | 
|                                                                  |  |                      |      |     |  |              |         |      |  |      |         |  |  |  |        | 
|Amounts due after 1 year                                          |  |                      |      |     |  |              | 180,000 |      |  |      | 50,000  |  |  |  | 6,041  | 
|                                                                  |  |                      |      |     |  |              |         |      |  |      |         |  |  |  |        | 



| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2002, long-term bank loans totalling Rmb 130,000
(2001: Rmb 215,000) were secured by the pledge of certain of Yuchais
plant and equipment (see Note 12). As of December 31, 2001, bank loans
totalling Rmb 50,000 were guaranteed by a corporate guarantee given by the
State Holding Company. The guarantee was released in 2002 (see Note 24).

F - 36



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Rmb and US$ amounts expressed in thousands, except per share data)

18. Accrued Expense and Other Liabilities



| |                                                
| | -----------------------------------------------
| | Accrued expense and other liabilities comprise:

|                                         |  |              |         |      |  |      |         |  |  |  |        | 
|---------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------- |  |  |  | ------ | 
|                                         |  | December 31,
|                                         |  |             
|                                         |  | 2001         |         | 2002 |  | 2002
|                                         |  |              |         |      |  |     
|                                         |  | Rmb          |         | Rmb  |  | US$ 
|VAT payable                              |  |              | 2,509   |      |  |      |        |  |  |  |       | 
|Deposits from customers                  |  |              | 24,056  |      |  |      | 56,033  |  |  |  | 6,770  | 
|Staff welfare fund (Note a)              |  |              | 15,041  |      |  |      | 15,041  |  |  |  | 1,817  | 
|Allowance for product warranty (Note 19) |  |              | 29,699  |      |  |      | 66,864  |  |  |  | 8,079  | 
|Wages payable                            |  |              | 16,338  |      |  |      | 55,950  |  |  |  | 6,760  | 
|Management bonus payable (Note 24(f))    |  |              | 13,426  |      |  |      | 41,071  |  |  |  | 4,962  | 
|Payable for construction in progress     |  |              | 9,939   |      |  |      | 13,678  |  |  |  | 1,653  | 
|Accrued research and development expense |  |              | 8,948   |      |  |      | 11,963  |  |  |  | 1,445  | 
|Accrued advertising expense              |  |              | 4,221   |      |  |      | 4,478   |  |  |  | 541    | 
|Accrued interest and other expense       |  |              | 92,150  |      |  |      | 41,167  |  |  |  | 4,974  | 
|                                         |  |              |         |      |  |      |         |  |  |  |        | 
|                                         |  |              | 216,327 |      |  |      | 306,245 |  |  |  | 37,001 | 
|                                         |  |              |         |      |  |      |         |  |  |  |        | 



| |  | Note:
| |  | -----



| | (a) |  | Staff welfare fund represents amount allocated at the
discretion of Yuchai. The fund can be applied in the payment
of special bonuses or collective welfare benefits to staff and
workers of Yuchai, such as staff dormitories, staff welfare
facilities. Assets acquired using this fund should not be taken
as assets of Yuchai. The fund is non-distributable to the
owners of Yuchai.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Rmb and US$ amounts expressed in thousands, except per share data)

19. Allowance for product warranty



| |  | An analysis of the provision for product warranty for 2000, 2001 and 2002
is as follows:
| |  | ----------------------------------------------------------------------------------------

|                                      |  |                         |        |      |  |      |        |      |  |  |         |  |  |  |        | 
|------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  |  | ------- |  |  |  | ------ | 
|                                      |  | Year ended December 31,
|                                      |  |                        
|                                      |  | 2000                    |        | 2001 |  | 2002 |        | 2002
|                                      |  |                         |        |      |  |      |        |     
|                                      |  | Rmb                     |        | Rmb  |  | Rmb  |        | US$ 
|Balance at beginning of year          |  |                         | 15,249 |      |  |      | 17,896 |      |  |  | 29,699  |  |  |  | 3,588  | 
|Allowance charged to income statement |  |                         | 27,882 |      |  |      | 58,582 |      |  |  | 127,058 |  |  |  | 15,351 | 
|Less allowance utilised               |  |                         | 25,235 |      |  |      | 46,779 |      |  |  | 89,893  |  |  |  | 10,861 | 
|                                      |  |                         |        |      |  |      |        |      |  |  |         |  |  |  |        | 
|Balance at end of year                |  |                         | 17,896 |      |  |      | 29,699 |      |  |  | 66,864  |  |  |  | 8,078  | 
|                                      |  |                         |        |      |  |      |        |      |  |  |         |  |  |  |        | 

20. Statutory Reserves



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Yuchai and its subsidiaries follow PRC GAAP in the preparation of
their accounting records and PRC GAAP statutory financial statements. PRC
GAAP requires Yuchai and its subsidiaries to provide for certain statutory
reserves which are designated for specific purposes. Such reserves are
not distributable in the form of cash dividends (see Note 26).                                                                                                                                                                   
|
| | Article 177 of the Company Law of the PRC requires companies to
allocate 10% of their annual net income to their statutory general reserve
and 5% to 10% to their statutory public welfare fund. Yuchai and its
subsidiaries made total appropriations of 15% of its net income to the
statutory reserves for the years ended December 31, 2000, 2001 and 2002.
For the purpose of calculating the transfers to reserves, net income is
determined based on distributable profit reported in the PRC GAAP
financial statements.

F - 38



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Rmb and US$ amounts expressed in thousands, except per share data)

20. Statutory Reserves (Continued)



| |  | The Companys attributable share in the statutory reserves of Yuchai and
its subsidiaries for the three years ended December 31, 2002 is as
follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|                                       |  |                         |         |      |  |      |         |      |  |  |         |  |  |  |        | 
|-------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | ---- |  |  | ------- |  |  |  | ------ | 
|                                       |  | Year ended December 31,
|                                       |  |                        
|                                       |  | 2000                    |         | 2001 |  | 2002 |         | 2002
|                                       |  |                         |         |      |  |      |         |     
|                                       |  | Rmb                     |         | Rmb  |  | Rmb  |         | US$ 
|Statutory general reserve (note a)     |  |                         |         |      |  |      |         |      |  |  |         |  |  |  |        | 
|Balance at January 1                   |  |                         | 74,894  |      |  |      | 81,355  |      |  |  | 81,953  |  |  |  | 9,902  | 
|Transfer from statement of income      |  |                         | 6,461   |      |  |      | 598     |      |  |  | 34,749  |  |  |  | 4,198  | 
|                                       |  |                         |         |      |  |      |         |      |  |  |         |  |  |  |        | 
|Balance at December 31                 |  |                         | 81,355  |      |  |      | 81,953  |      |  |  | 116,702 |  |  |  | 14,100 | 
|                                       |  |                         |         |      |  |      |         |      |  |  |         |  |  |  |        | 
|Statutory public welfare fund (note b) |  |                         |         |      |  |      |         |      |  |  |         |  |  |  |        | 
|Balance at January 1                   |  |                         | 7,495   |      |  |      | 10,725  |      |  |  | 11,025  |  |  |  | 1,332  | 
|Transfer from statement of income      |  |                         | 3,230   |      |  |      | 300     |      |  |  | 17,373  |  |  |  | 2,098  | 
|                                       |  |                         |         |      |  |      |         |      |  |  |         |  |  |  |        | 
|Balance at December 31                 |  |                         | 10,725  |      |  |      | 11,025  |      |  |  | 28,398  |  |  |  | 3,430  | 
|                                       |  |                         |         |      |  |      |         |      |  |  |         |  |  |  |        | 
|General surplus reserve (note c)       |  |                         |         |      |  |      |         |      |  |  |         |  |  |  |        | 
|Balance at January 1 and December 31   |  |                         | 25,706  |      |  |      | 25,706  |      |  |  | 25,706  |  |  |  | 3,106  | 
|                                       |  |                         |         |      |  |      |         |      |  |  |         |  |  |  |        | 
|Total                                  |  |                         | 117,786 |      |  |      | 118,684 |      |  |  | 170,806 |  |  |  | 20,636 | 
|                                       |  |                         |         |      |  |      |         |      |  |  |         |  |  |  |        | 



| |  | Notes:
| |  | ------



| | (a) |  | In accordance with the relevant regulations in the PRC, the 10%
appropriations to the statutory general reserve are required until
the balance reaches 50% of the authorized share capital of Yuchai and
its subsidiaries. Statutory general reserve can be used to make good
previous years losses, if any, and may be converted into share
capital by the issue of new shares to shareholders in proportion to
their existing shareholdings, or by increasing the par value of the
shares currently held by them, provided that the reserve balance
after such issue is not less than 25% of the authorized share
capital.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Yuchai and its subsidiaries shall determine to transfer 5% to
10% of its net income to the statutory public welfare fund. There is
no limit on the amount that may be allocated to this fund. This fund
can only be utilized on capital expenditure for the collective
welfare of Yuchai and its subsidiaries employees, such as the
construction of dormitories, canteen and other welfare facilities,
and cannot be utilized to pay staff welfare expenses. The transfer
to this fund must be made before the distribution of a dividend to
shareholders.                                                                 

F - 39



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL
LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)

20. Statutory Reserves (Continued)



| | (c) |  | Yuchai and its subsidiaries shall transfer from the statutory
public welfare fund to the general surplus reserve an amount equal to
the cost of assets acquired during the year for the collective
welfare of its employees. These assets belong to Yuchai and its
subsidiaries, and depreciation expense and any profit or loss on
disposal will be reflected in the statements of income. On disposal
of these assets, the original transfers to this reserve should be
reversed to the statutory public welfare fund. As of December 31,
2001 and 2002, the carrying amounts of assets acquired utilizing the
statutory public welfare fund amounted to Rmb 26,143 and Rmb 23,347
respectively.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21. Contingencies



| | (a) |  | The General Principles of the Civil Law of China and the
Industrial Product Quality Liability Regulations provide for the
liability of manufacturers and sellers for loss and injury caused by
defective products. Yuchai and its subsidiaries do not carry product
liability insurance. However, the laws have seldom been utilized.
Yuchai and its subsidiaries have not had any significant product
liability claims brought against them.                                                                                                                                                                                                                                                                                                                                                       
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | In accordance with the relevant environment protection laws in
the PRC, diesel engines have to compile at least emission standards
approximately equivalent to EURO I standard. Management reviewed the
potential effects following the adoption of the policy above and
considers that it will not have any material adverse impact to Yuchai
and its subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (c) |  | In 2002, the Companys sole operating subsidiary, Yuchai, is
involved in legal proceedings instituted by the Yulin Road Bureau
against Yuchai and Naning Hengji Company, an unrelated third party.
In these proceedings, the Yulin Road Bureau has sought payment of Rmb
7,259 from Yuchai and Naning Hengji Company, as the construction cost
of a road built by Yulin Road Bureau near Yuchais factory. At
trial, a Yulin court ordered Yuchai and Naning Hengji Company to pay
Rmb 4,595 to the Yulin Road Bureau. Yuchai has appealed this
decision to a Guangxi court, and is awaiting the outcome of this
appeal. The Company has made a provision of Rmb 4,595 which has been
included in Selling, General and Administration expense and
Accrued Expense and Other Liabilities in 2002.
|
| | (d) |  | The Company is involved in various other claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a
material adverse effect on the Companys consolidated financial
position, results of operations, or liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (e) |  | Subsequent to December 31,
2002, the Company has become involved in
several legal proceedings (See Note 30).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F - 40



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL
LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)

22. Commitments



| |                                                               
| | --------------------------------------------------------------
| | As of December 31, 2002, Yuchai had the following commitments:

|                               |                                                                       |  |              |         |      |  |      |        |  |  |  |       | 
|------------------------------ | --------------------------------------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------ |  |  |  | ----- | 
|                               |                                                                       |  | December 31,
|                               |                                                                       |  |             
|                               |                                                                       |  | 2001         |         | 2002 |  | 2002
|                               |                                                                       |  |              |         |      |  |     
|                               |                                                                       |  | Rmb          |         | Rmb  |  | US$ 
|Authorized and contracted for: |                                                                       |  |              |         |      |  |      |        |  |  |  |      
|                               | Capital expenditure for improvement to existing
production facilities |  |              | 232,567 |      |  |      | 72,113 |  |  |  | 8,713 | 
|                               |                                                                       |  |              |         |      |  |      |        |  |  |  |      

23. Retirement and Other Postretirement Benefits



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As stipulated by the regulations of the PRC, Yuchai and its
subsidiaries participate in a defined contribution retirement plan
organized by the Guangxi Regional Government for its staff. All staff is
entitled to an annual pension equal to a fixed proportion of their final
basic salary amount at their retirement date. For the years ended
December 31, 2000, 2001 and 2002, Yuchai and its subsidiaries were
required to make contributions to the retirement plan at a rate of 20.0%
of the basic salary of their staff. The Guangxi Regional Government is
responsible for the entire obligations of all Yuchai and its subsidiaries
retirees. Expenses incurred in connection with the plan were Rmb 17,628,
Rmb 31,906 and Rmb 22,012, respectively, for the years ended December 31,
2000, 2001 and 2002. Yuchai and its subsidiaries have no obligation for
the payment of pension benefits or any other postretirement benefits
beyond the annual contributions described above.

24. Related Party Transactions



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has undertaken significant business transactions with
related companies during the three years ended December 31, 2002. The
following is a summary of these transactions:

|                                                |                                            |  |                         |        |      |  |        |        |      |  |       |        |  |  |     |       | 
|----------------------------------------------- | ------------------------------------------ |  | ----------------------- | ------ | ---- |  | ------ | ------ | ---- |  | ----- | ------ |  |  | --- | ----- | 
|                                                |                                            |  | Year ended December 31,
|                                                |                                            |  |                        
|                                                |                                            |  | 2000                    |        | 2001 |  | 2002   |        | 2002
|                                                |                                            |  |                         |        |      |  |        |        |     
|                                                |                                            |  | Rmb                     |        | Rmb  |  | Rmb    |        | US$ 
|Sales of trucks from customers to GYMEC (a)     |                                            |  | 18,466                  |        |      |  | 18,062 |        |      |  |      |        |  |  |    |      
|Purchases of trucks from GYMEC to suppliers (a) |                                            |  |                        |        |      |  | 32,289 |        |      |  | 2,657 |        |  |  | 321 |      
|General and administrative expenses             |                                            |  |                         |        |      |  |        |        |      |  |       |        |  |  |     |      
|                                                | - charged by the State Holding Company (b) |  |                         | 25,997 |      |  |        | 25,029 |      |  |       | 24,186 |  |  |     | 2,922 | 
|                                                | - charged by HLA (b)                       |  |                         | 4,150  |      |  |        | 4,139  |      |  |       | 4,200  |  |  |     | 507   | 



| | (a) |  | Sales and purchases of diesel trucks
| | --- |  | ------------------------------------



| |                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2000 and 2001, Yuchai received diesel trucks from certain
customers as part of the settlement of their trade accounts receivable.
Pursuant to an agreement between Yuchai and GYMEC, Yuchai sold such diesel
trucks at cost to GYMEC, which owns a business license for

F - 41



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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|24. |  | Related Party Transactions (Continued)
|--- |  | --------------------------------------



| |  |  | (a) Sales and purchases of diesel trucks (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | selling diesel trucks in the PRC. Yuchai recorded a receivable from GYMEC
in connection with the truck sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | GYMEC either sold the diesel trucks to external parties, in which
case GYMEC earned the difference between the selling price and the cost of
the diesel truck, or offset the amounts due from GYMEC against Yuchais
trade accounts payable. The directors consider that the amount due from
GYMEC for the sales of diesel trucks, of Rmb 16,784, outstanding at
December 31, 2002 (2001: Rmb 32,673) will not be repayable within one year
and the amount is classified as a long term receivable in the consolidated
balance sheets. Amount due from GYMEC is recorded at its net present value
based on a discount rate of 5.94% generally available for discounting
similar instruments with banks in the PRC.
|
| |  |  | (b) General and Administrative Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | The State Holding Company charges Yuchai for certain general and
administrative expenses. Such expenses are charged to Yuchai by the State
Holding Company on an actually incurred basis. The Company believes that
the expenses charged to Yuchai by the State Holding Company would not have
been materially different on a stand alone basis because Yuchai could
provide these services for itself at approximately the same cost. HLA
provides certain management, financial planning and control and other
services to Yuchai. Such charges represent HLAs estimated direct costs
of providing these services.                                                                                             
|
| |  |  | (c) Amounts Due From/To Related Companies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | Amounts due from related companies comprise mainly (i) prepaid
general and administrative expenses to the State Holding Company and (ii)
receivables for trading of diesel trucks with GYMEC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | In addition to the above, Yuchai also entered into transactions with
other PRC Government owned enterprises. The Company considers that these
transactions were entered into in the normal course of business and
expects that these transactions will continue on normal commercial terms.
Balances with other PRC entities are excluded from this caption.                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | (d) Guarantee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | In 2001, certain of Yuchais bank loans were secured by a corporate
guarantee issued by the State Holding Company. The guarantee were
released in 2002 (see Note 17).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | (e) Amount due to the holding company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | The balance is unsecured, interest free and repayable within one
year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|24. |  | Related Party Transactions (Continued)
|--- |  | --------------------------------------



| |  |  | (f) Management Incentive Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Yuchai has a management bonus plan under which annual incentive
bonuses in an aggregate amount equal to 2.5% of after-tax profit are
mandatorily required to be paid to Mr Wang Jianming, the Chairman of the
Board of Directors of Yuchai and a Company director, if Yuchai achieves
80% of the after-tax profit approved in the annual budget by Yuchais
Board of Directors. Bonus expense recognized in accordance with such plan
in the years ended December 31, 2000, 2001 and 2002 amounted to Rmb 1,400,
Rmb 8,500 and Rmb 13,506 (US$1,632) respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Mr. Wang Jianming is also the legal person representative of the
State Holding Company and is in charge of and responsible for the
operations of the State Holding Company. Mr. Wang Jianming does not have
any ownership interest in and does not receive any compensation from the
State Holding Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | (g) Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | The Company adopted a Stock Option Plan (the Plan) in December 1994
to award stock options to key employees and outside directors. The Plan
is administered by a committee (the Committee) appointed by the Board of
Directors consisting of at least two directors. The Committee is to
administer and interpret the Plan and has the sole authority to determine
who will be eligible and who will be granted stock options and the timing,
terms and number of share options to be granted. Members of the Committee
are not eligible to receive stock options under the Plan. The Plan
provides for the granting of incentive stock options (within the meaning
of Section 422(a) of the United States Internal Revenue Code of 1986, as
amended) to employees and outside directors who are citizens or residents
of the United States. The exercise price of each stock option will be
determined by the Committee, but may not be less than the fair value, as
determined by the Committee, of the Companys common stock on the date the
option is granted. The total number of shares of the Companys common
stock that may be purchased pursuant to stock options granted under the
Plan shall not exceed in the aggregate 750,000 shares of the common stock.
The Plan will expire in 2004 unless terminated earlier by the Board of
Directors. The Company will reimburse the Plan for the administrative
expenses incurred. From inception of the Plan through December 31, 2002,
no options had been granted under the Plan.



|25. |  | Foreign Currency Exchange
|--- |  | -------------------------



| |  |  | The Renminbi is not freely convertible into foreign currencies. All
foreign exchange transactions involving Renminbi must take place either
through the Peoples Bank of China or other institutions authorized to buy
and sell foreign exchange or at a swap center. The exchange rate adopted
for the foreign exchange transactions are the rates of exchange quoted by
the Peoples Bank of China which are determined largely by supply and
demand.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Foreign currency payments, including the remittance of earnings
outside of the PRC, are subject to the availability of foreign currency
which is dependent on the foreign currency denominated earnings of Yuchai
or must be arranged with government approval.                                                                                                                                                                                        

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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|26. |  | Distribution of Profits
|--- |  | -----------------------



| |  |  | The Companys only sources of cash flow are its share of the
dividends, if any, paid by Yuchai to the Company and retained net proceeds
(and investment interest thereon) from its initial public offering. With
respect to dividends by Yuchai, applicable PRC laws and regulations
require that, before it can distribute profit to investors it must satisfy
all tax liabilities, recover losses in previous years and make
contributions to certain statutory reserves as discussed in Note 20. If
available foreign currency to Yuchai is insufficient to pay declared
dividends, such dividends may be paid partly in Renminbi and partly in
foreign currency. In the event that dividends are distributed in
Renminbi, such dividends may be converted into foreign currency and
remitted in accordance with relevant PRC laws, regulations and policies
and to the extent permitted by PRC market conditions. Dividends of Yuchai
are determined based on distributable profit reported in its PRC GAAP
financial statements, after appropriation to statutory reserves. Such
distributable profits differ from the amounts reported under U.S. GAAP
(see Note 20). In August 2002, Yuchai declared a final dividend for
2001, and an interim dividend for 2002. The Company has yet to
receive its portion of such dividends (see Note 30).
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Under the Companies Act of 1981 of Bermuda (as amended), the
Companys contributed surplus is available for distribution to
shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



|27. |  | Derivative Instrument and Hedging Activities
|--- |  | --------------------------------------------



| |  |  | The Company and its subsidiaries do not enter into derivative
instruments for any purpose. The Company and its subsidiaries do not hedge
risk exposures or speculate using derivative instruments.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|28. |  | Fair Value of Financial Instruments
|--- |  | -----------------------------------



| |  |  | The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying amount of cash and cash equivalents, trade accounts
receivable, bills receivable, amounts due from related companies (except
for amount due from GYMEC), prepaid expenses, other receivables, PRC
government bonds, short-term bank loans, current instalments of long term
bank loans, trade accounts payable, amount due to the holding company,
amounts due to related companies, accrued expense and other liabilities
approximates their fair value because of the short maturity of these
instruments. It was not practicable for Yuchai to estimate the fair value
of its equity investment for which a quoted market price is not available
because it has not yet obtained or developed the valuation model necessary
to make the estimate, and the cost of obtaining an independent valuation
appears excessive considering the materiality of the equity investment to
Yuchai. Yuchai does not believe the carrying value of the equity
investment will be significantly different from its fair value.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Cash and cash equivalents of Yuchai and its subsidiaries denominated
in foreign currencies have been translated at the balance sheet date into
Renminbi at rates quoted by the Peoples Bank of China. Yuchai did not
have and does not believe it will have any difficulty in exchanging its
foreign currency cash for Renminbi.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Amount due from GYMEC is recorded in its net present value based on a
discount rate of 5.94%, the rate generally available for discounting
similar instruments with banks in the PRC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | The carrying amount of long-term bank loans approximates their fair
value based on the borrowing rates currently available for bank loans with
similar terms and average maturities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-45



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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|29. |  | Business Credit Concentration
|--- |  | -----------------------------



| |  |  | Substantially all of the Companys customers are located in the PRC. The
following are the customers that individually comprise 10% or more of
gross revenue in any of the relevant periods:
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   |  |                         |         |      |  |      |         |      |  |  |         |  |  |  |        | 
|---------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | ---- |  |  | ------- |  |  |  | ------ | 
|                                   |  | Year ended December 31,
|                                   |  |                        
|                                   |  | 2000                    |         | 2001 |  | 2002 |         | 2002
|                                   |  |                         |         |      |  |      |         |     
|                                   |  | Rmb                     |         | Rmb  |  | Rmb  |         | US$ 
|Liuzhou Dongfeng
Automobile        |  |                         | 408,201 |      |  |      | 420,171 |      |  |  | 513,789 |  |  |  | 62,077 | 
|Wubei Dongfeng
Automobile          |  |                         | 180,898 |      |  |      | 272,469 |      |  |  | 359,598 |  |  |  | 43,448 | 
|Dongfeng Special Automobile
(Note) |  |                         | 55,410  |      |  |      | 200,937 |      |  |  | 327,475 |  |  |  | 39,566 | 
|                                   |  |                         |         |      |  |      |         |      |  |  |         |  |  |  |        | 



| |  |  | Note: Sales to Dongfeng Special Automobile for the year ended December
31, 2002 was approximately 9.3% of total sales.                                                                                                                                                                                                                                                                                                                                           
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | All the above customers are controlled by or affiliated with Dongfeng
Automobile Company. At December 31, 2001 and 2002, approximately 38% and
31% of gross trade accounts receivable, respectively, were due from these
customers. The Company considers its relationships with these major
customers to be good; however, the loss of one or more of the Companys
major customers would have a material adverse effect on the Companys
results of operations.
|
| |  |  | During periods of economic expansion, the demand of trucks,
construction machinery and other application of diesel engines generally
increase. Conversely, during economic slowdowns the diesel engine
industry is generally adversely affected by a decline in demand. As a
result, the performance of Chinese economy will affect the Companys
business and prospects by a significant degree.                                                                



|30. |  | Subsequent Events
|--- |  | -----------------



| |  |  | The Company has had difficulties in obtaining the cooperation
of the State Holding Company and Mr. Wang Jianming in the daily management
and operation of Yuchai, including obtaining payments of the Companys
share of the final 2001 dividend declared in August 2002. The State
Holding Company is a minority shareholder of Yuchai and is wholly-owned by
the municipal government of Yulin City in the Guangxi Zhuang Autonomous
Region. Mr. Wang is the chairman, legal representative and Chief Executive
Officer of Yuchai and a director of the Company, as well as the Chairman
and legal representative of the State Holding Company.                                   
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In March 2003, Mr. Wang forwarded to the Company a letter from
Goldman Industrial Limited (Goldman), an intermediate holding company of
one of the Companys shareholders, demanding that the Company
agrees in
advance to remit within one month of receiving its share of the unpaid
August 2002 dividend all or substantially all of that amount to its
shareholders and to appoint two named individuals to the Companys Board
of Directors. Although the letter was from Goldman, Mr. Wang referred to
these individuals as directors nominated by Zhong Lin Development Company
Limited ( Zhong Lin), an intermediate holding company of Goldman. Mr.
Wang suggested that

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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|30. |  | Subsequent Events (continued)
|--- |  | -----------------------------



| |  |  | Zhong Lin had complained to the Guangxi provincial authorities that
certain aspects of the foreign ownership and control of Yuchai had not
been properly approved. Mr. Wang further suggested that only if Zhong Lins demands were met could
the Company expect that the question of the payment of the Companys share
of the August 2002 dividend might be addressed by the Chinese
shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Following numerous attempts to remedy these difficulties, a Special
Committee of the Companys Board of Directors determined that
the Company take the actions described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | In London, the Company initiated arbitration proceedings against
Yuchai, the State Holding Company and Mr. Wang with respect to the
non-payment of the pro rata share of the unpaid August 2002 dividends to
each of the six subsidiaries through which the Company holds its shares in
Yuchai, as well as a determination that Yuchais Articles of Association
have been violated. The proceedings seek to cause Yuchai to release
payment of RMB 245,766 (US$29,690) in dividends owed to the Company, in
accordance with the Companys rights as a shareholder under Yuchais
Articles of Association. In the
respondents response and counter-claim, the respondents acknowledge
Yuchais obligation to pay the Company its pro-rata share of the unpaid
August 2002 dividend. The response and counter-claim also states that
Yuchai has segregated sufficient funds to pay the Company its pro-rata
share of the unpaid August 2002 dividend, that the funds are currently
held in time deposit accounts in China, and that Yuchai has been and
remains fully prepared to pay those dividends to the Company. However, the
response and counter-claim asserts that Yuchai is not currently at liberty
to pay the dividends until certain alleged Chinese law irregularities
arising from the structure of the Companys ownership of and
rights of control over Yuchai are remedied. Their response also requests that the State
Holding Company and Mr. Wang be dismissed from the proceedings. For the reasons outlined below, the Company disputes
these assertions, and intends to respond to such counter-claims after the
formation of the arbitral tribunal.
|
| |  |  | In Singapore, the Company initiated arbitration proceedings against
Mr. Wang, as Chief Executive Officer of Yuchai, for breach of his November
1, 2001 Employment Agreement with the Company, breach of his fiduciary
duties and fraud arising from his repeated failure to comply with the
instructions of the Companys Board of Directors, including with respect
to capital expenditures, corporate governance, use of corporate assets and
the non-payment of dividends owed to the Company. The Company also filed a
complaint with the appropriate Chinese authorities. Mr. Wang has filed a response to the Companys request for arbitration and counter-claimed US$2,600 in bonus payments for the period 1995 to 2002. In
connection with the arbitration proceedings, the Company served notice on
Mr. Wang on May 19, 2003 to terminate his employment as Chief Executive
Officer of Yuchai, effective July 18, 2003, in accordance with the notice
period specified in Mr. Wangs Employment Agreement. Mr. Wang has
subsequently disputed the effectiveness of such notice and denied the
validity of his Employment Agreement with the Company, pursuant to
which such notice was given. Mr. Wang asserts that termination of his
employment as Chief Executive Officer of Yuchai can only be effected by a
board resolution of the Yuchai board of                                                                                                                                                                                                                                                                                                        

F-47



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|30. |  | Subsequent Events (continued)
|--- |  | -----------------------------



| |  |  | directors. However, Mr. Wang is refusing to hold a meeting of the Yuchai
board of directors at this time, in violation of the requirements of
Article 36 of Yuchais Articles of Association, including that a board of
directors meeting be held at least once every six months and that a
meeting be held upon a request being made by more than one-third of the
directors. The Board of Directors of the Company passed a resolution on July 9, 2003 determining that Mr. Wang had committed a penalty breach of his November 1, 2001 Employment Agreement with the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In response to legal proceedings which the Company initiated in New York, on June 23, 2003, Coomber Investment Limited, one of the Companys
direct shareholders (Coomber), Goldman, Zhong Lin, the State Holding
Company and certain individuals filed an amended and restated Schedule 13D
reporting beneficial ownership of 8,601,550 shares, or 24.3%, of the
Company, originally dated November 13, 2002 and filed December 16, 2002.
Through this amended Schedule 13D, the Company learned that Goldman, which
owns Coomber, is a wholly-owned subsidiary of Zhong Lin. Furthermore, the
amended Schedule 13D also reported that Zhong Lin is financed by the
State Holding Company, that the
State Holding Company is also wholly-owned and controlled by the municipal government of Yulin
City (Yulin City Government), and that Zhong Lin is controlled by the Yulin City Government.
On July 9, 2003, this Schedule 13D was further amended.                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | After the Company initiated the legal proceedings outlined above,
two senior managers of the
Company, who have been seconded to Yuchai, were excluded from the
premises and denied access to certain operating and financial information
with respect to Yuchai, which they had regularly received. For the past 10
years, pursuant to resolutions of the Yuchai board of directors and other
contractual arrangements, representatives of the Company have been
stationed at Yuchais offices to monitor Yuchais performance, books,
records and to provide the Company with access to records necessary for
it to comply with U.S. securities laws and financial reporting. The
Company believes that this recent action by Yuchai management to lock
out the Companys representatives is improper and contravenes resolutions
of Yuchais board of directors authorizing the presence of these secondees
at Yuchai. The Company has attempted to have these two senior managers
reinstated, but has been unsuccessful to date. However, alternative
arrangements satisfactory to the Company have been put in place to allow
the Company to continue to monitor Yuchais performance, books, records and to provide the Company with access to
records necessary for it to comply with U.S. securities laws and financial
reporting.
|
| |  |  | On June 16, 2003, the Company received from Yuchai copies of recent
letters from various Chinese government agencies stating that the transfer
of ownership of shares with respect to Yuchai in November 1994, in
connection with the Companys initial public offering (IPO), was not
validly approved by the Chinese authorities, and that as a result its
exercise of control over Yuchai has been improper. The background to and
contents of such correspondence is described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Following approaches by the provincial government of the Guangxi
Zhuang Autonomous Region, at the initiation of the Yulin City Government,
the Ministry of Commerce (MOC), the successor entity of the Ministry of
Foreign Trade and Economic Cooperation of China (MOFTEC), in Beijing,
wrote a letter dated April 17, 2003 agreeing with the Guangxi
Government that the November 1994 transfer by the owners of Yuchais six
foreign shareholders of the owners equity interests in such six foreign
shareholders to the Company, in exchange for shares of the Company in
anticipation of the Companys IPO, was not in conformity with the
conditions set                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-48



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|30. |  | Subsequent Events (continued)
|--- |  | -----------------------------



| |  |  | by MOFTEC in an approval which it had issued in June 1994. The June 1994
approval had specifically named six foreign shareholders and authorized
them to own 76.4% of the shares of Yuchai (which have remained the same
six foreign shareholders of Yuchai to date), and all of the Yuchai shares
held by such foreign shareholders were designated as foreign investment
shares. The MOC requested the Guangxi Government to advise the Chinese
and foreign shareholders of Yuchai to promptly rectify these matters and
to resolve the related issues in an appropriate manner.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In response, the Guangxi Government then appears to have sent a
letter dated May 22, 2003 to the Yulin City Government advising them of
the MOCs response and similarly requesting the Yulin City Government to
cause the Chinese and foreign shareholders of Yuchai to promptly rectify
the irregularities in the equity transfer process and to resolve the
related issues in an appropriate manner. Apparently, the Yulin City
Government, on behalf of Yuchai, has set a two month period commencing
June 10, 2003 within which the Chinese and foreign shareholders are
required to remedy these irregularities.                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | Based on advice from its special Chinese counsel, the Company
believes that this recent correspondence is based on an incorrect
understanding of the facts and circumstances of the November 1994 share
transfers and an incorrect interpretation of the language of the June 1994
approval. The Company further believes, similarly based on advice from its
special Chinese counsel, that Yuchais ownership structure has been
validly approved by the relevant Chinese authorities, and that the
Companys share of the August 2002 Dividend is properly due and owing. In
addition, legal opinions were given at the time of the Companys IPO
stating that all necessary approvals had been granted and that Yuchais
ownership structure was valid under Chinese law. The Company has written
to various Chinese government agencies to communicate its beliefs in this
respect, and the Company is also actively taking steps to arrange meetings
with appropriate officials in China to clarify the basis for this recent
correspondence.
|
| |  |  | Yuchais current ownership structure had been unchallenged since it
was established almost nine years ago, and payments have been made by
Yuchai to the Company for each dividend declared prior to the unpaid
August 2002 dividend. The Company believes that no changes have occurred
in the ownership structure that would invalidate the Chinese governmental
approvals that were obtained in 1994.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | The Company is continuing in its efforts to obtain the assistance of
the relevant government authorities in China for a comprehensive
resolution of the matters in dispute, including various legal and
arbitrational proceedings against Yuchai, as well as against Yuchais
principal Chinese shareholders, and Yuchais chairman and legal
representative.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | The Company has begun to meet with the relevant PRC Government
ministries in an attempt to resolve these matters. When possible, the
Company also plans to revise the Articles of Association to ensure that
Yuchais board of directors meetings can be held, thereby minimizing the
risk that the current lock out situation can be repeated. As noted above,
following the lock out of the Companys two representatives, the Company
has put in place alternative arrangements to monitor Yuchais performance, books, records and to provide the Company with
access to records                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-49



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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Rmb and US$ amounts expressed in thousands, except per share data)



|30. |  | Subsequent Events (continued)
|--- |  | -----------------------------



| |  |  | necessary for it to comply with U.S. securities laws and financial
reporting. The Company intends to continue and/or to modify these
alternative arrangements as needed.                                                                                                                                                                                                        
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Based in part on updated legal advice recently obtained in the PRC
and Bermuda, it is the opinion of Companys management that:
(a) the Company
has proper legal title to its interest in Yuchai and
(b) the issues discussed above will be resolved without any
material adverse effect on the results of operations or financial
position of the Company and its subsidiaries.

F-50