20-F 1 h00634e20vf.htm CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
o   SMALL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report ............
For the transition period from                      to                     
Commission file number 000-29008
CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION
(Exact name of Registrant as specified in its charter)
 
(Translation of Registrant’s name into English)
 
British Virgin Islands
 
(Jurisdiction of incorporation or organization)
Room 2413, 24th Floor, Shui On Centre, 8 Harbour Road, Wanchai, Hong Kong
 
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
     
Title of each class   Name of each exchange on which registered
     
None   Not Applicable
     
     
     
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Stock, Par Value US$0.01 each
 
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
 
(Title of Class)
As of August 31, 2006, there were 11,274,497 shares of Common Stock outstanding, with par value of US$0.01 each.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes             þ No          
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes             þ No          
Note – Checking the box will not relieve any registrant required to file reports pursuant to 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.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes             o No          
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o       Accelerated filer o       Non-accelerated filer þ
Indicate by check mark which financial statement item the registrant has elected to follow
o Item 17 þ Item 18           
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes            þ No             
 
 

 


Table of Contents

Introduction
This annual report on Form 20-F includes our audited consolidated financial statements as of December 31, 2004 and 2005, and for each of the three years in the period ended December 31, 2003, 2004 and 2005.
We list our common stock, par value of US$0.01 on the Nasdaq Capital Market, or Nasdaq, under the symbol “CTDC” (formerly known as “TRFDF”).
Except as otherwise required and for purposes of this Annual Report only:
  “CTDC”, “Company”, “us” or “we” refer to China Technology Development Group Corporation. The term “you” refers to holders of our common stock.
 
  “Hong Kong” and the “Government” refer to the Hong Kong Special Administrative Region of the People’s Republic of China and its government, respectively.
 
  “China” and the “Chinese government” refer to the People’s Republic of China and its government.
  All references to “Renminbi,” or “Rmb” are to the legal currency of China, all references to “U.S. dollars,” “dollars,” “$” or “US” are to the legal currency of the United States and all references to “Hong Kong dollars” or “HK$” are to the legal currency of Hong Kong. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.
Description of Business
China Technology Development Group Corporation (formerly known as “Tramford International Limited”) was incorporated as an International Business Company under the laws of the British Virgin Islands in September 1995. The Company is a dynamic growth company with its main portfolio business based in China. Headquartered in Hong Kong, the Company operates the business in Hong Kong, Beijing, Shenzhen, and the Zhejiang Province. The Company became a NASDAQ listed company in 1996, one of the very first China-based technology companies listed on the NASDAQ Capital Market. The Company capitalizes its unique techniques of developing ingredients for health food products and food supplements utilizing bio-active components of bamboo to enter the fast growing Chinese nutraceutical market. Besides that, it is also one of the leading network security solution providers in China.
Recent major events
On September 13, 2005, the Company entered into a sale and purchase agreement with Beijing Holdings Limited (“Beijing Holdings”), its then 47.18% shareholder, pursuant to which the Company acquired 51% of the issued and outstanding stock of a nutraceutical corporation in China, named Future Solutions Development Inc. (now known as “China Natures Technology Inc.”, “CNT”). On the same day, the Company also entered into an option agreement with Beijing Holdings to acquire the remaining issued and outstanding stock of CNT. At the Annual Meeting of Stockholders of the Company held on October 21, 2005, special resolution to approve the acquisition by the Company of the 51% equity interest in CNT and the option to acquire the remaining 49% equity interest in CNT were passed.
On October 31, 2005, the transaction to acquire from Beijing Holdings the 51% equity interest of the issued and outstanding stock of CNT closed and as a result, the Company issued 2,233,800 shares of the Company’s common stock of US$0.01 each to Beijing Holdings. After the closing, Beijing Holdings’ ownership of shares of the Company’s common stock increased from 47.18% to 60.11% and the Company had total outstanding shares of 9,128,297 shares.
On December 22, 2005, the Company exercised its option to acquire, from Beijing Holdings, the remaining 49% equity interest of CNT in exchange for 2,146,200 shares of the Company’s common stock. As a result of the closing of the transaction, CNT became a wholly owned subsidiary of the Company and Beijing Holdings’ aggregate ownership in the Company increased from 60.11% to 67.70% and the Company had total outstanding shares of 11,274,497 shares.
On January 9, 2006, the name of the Company was changed to China Technology Development Group Corporation and its common stock continued to trade on NASDAQ Capital Market under the new symbol “CTDC”. Along with the corporate name change, the Company also moved its corporate website to a new domain at www.chinactdc.com and the CUSIP number of the Company’s common stock was also changed to G84384 10 9.

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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 4A. Unsolved Staff Comments
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 Disclosures About Market Risk
Item 12 Description of Securities Other than Equity Securities
PART II
Item 13 Default, Dividend Arrearages and Delinquencies
Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15 Controls and Procedures
Item 16A Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions from the Listing Standards for Audit Committee
Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers
Item 17 Financial Statements
Item 18 Financial Statements
Item 19 Exhibits
SIGNATURES
EX-3.1 AMENDED MEMORANDUM AND ARTICLES OF ASSOCIATION
EX-10.1 AGREEMENT WITH IVORY CAPITAL ASIA LTD.
EX-10.2 AGREEMENT WITH BEIJING HOLDINGS LTD.
EX-10.3 OPTION AGREEMENT
EX-10.4 SUPPLY OF GOODS AGREEMENT WITH CHINA NEW ERA
EX-10.5 FRAMEWORK AGREEMENT WITH LEGEND
EX-10.6 FRAMEWORK AGREEMENT WITH LEGENDSEC
EX-10.7 FRAMEWORK AGREEMENT WITH MR. HU LINFU
EX-14.1 CODE OF ETHICS
EX-21.1 LIST OF THE COMPANY'S SIGNIFICANT SUBSIDIARIES
EX-31.1 CERTIFICATION OF CEO REQUIRED BY SEC. 302
EX-31.2 CERTIFICATION OF CEO REQUIRED BY SEC. 302
EX-31.3 CERTIFICATION OF CFO REQUIRED BY SEC. 302
EX-32.1 CERTIFICATION OF CEO AND CFO REQUIRED BY SEC. 906


Table of Contents

PART I
Item 1. Identity of Directors, Senior Management and Advisers
     Not Applicable.
Item 2. Offer Statistics and Expected Timetable
     Not Applicable.
Item 3. Key Information
   A. Selected financial data.
     The following selected financial data should be read in conjunction with Item 5 — the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and the Financial Statements and Notes thereto included elsewhere in this Annual Report.
     The selected financial data at December 31, 2004 and 2005 and years ended December 31, 2003, 2004 and 2005 have been derived from and should be read with our audited consolidated financial statements, including notes to the consolidated financial statements, included in this Annual Report beginning on page F-1. We derived the selected financial data at December 31, 2003, 2002 and 2001 and for the years ended December 31, 2002 and 2001 from our consolidated financial statements, which have been prepared in accordance with U.S. GAAP, but have not been included in this Annual Report.
     All financial data included elsewhere in this Annual Report are expressed, unless otherwise stated, in the nearest thousand of Renminbi. This Annual Report contains translations of Renminbi amounts into U.S. dollar amounts, solely for your convenience. Unless otherwise indicated, the translations have been made at Rmb8.0702 = US$1.00, which was the noon buying rate in The City of New York for cable transfers in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York on December 30, 2005. See Item 3 “Key Information — Selected Financial Data — Exchange Rate Information” for historical information regarding this noon buying rate. You should not construe these translations as representations that the Renminbi actually represents such U.S. dollar amounts or could have been or could be converted into U.S. dollars at the rate indicated or at any other rates.

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    (Amounts in thousands, except per share data)
    Year   Year   Year   Year   Year   Year
    Ended   Ended   Ended   Ended   Ended   Ended
    December   December   December   December   December   December
    31,   31,   31,   31,   31,   31,
    2001   2002   2003   2004   2005   2005
    Rmb(1)   Rmb(1)   Rmb(1)   Rmb(1)   Rmb(1)   US$(2)
Consolidated Statement of Operations Data:
                                               
Operating Loss
    (12,751 )     (15,105 )     (4,378 )     (10,779 )     (17,886 )     (2,215 )
                                                 
Non-operating income
    2,555       2,456       2,310       167       276       34  
                                                 
Non-operating expenses
                            (2,628 )     (325 )
                                                 
Loss from continuing operations before minority interests
    (10,196 )     (12,790 )     (2,198 )     (10,369 )     (19,956 )     (2,472 )
                                                 
Discontinued operations
                                               
                                                 
Income/(loss) from discontinued operations before income tax
    (610 )     (4,805 )     366       254       (288 )     (36 )
                                                 
Net loss for the year
    (9,141 )     (15,446 )     (942 )     (10,115 )     (19,532 )     (2,420 )
                                                 
Loss per share
    (1.32 )     (2.24 )     (0.14 )     (1.47 )     (2.67 )     (0.32 )
                                                 
Loss per share from continuing operations
    (1.23 )     (1.54 )     (0.19 )     (1.51 )     (2.63 )     (0.31 )
                                                 
(Loss)/earnings per share from discontinued operations
    (0.09 )     (0.70 )     0.05       0.04       (0.04 )     (0.01 )

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    (Amounts in thousands, except per share data)
    Year   Year   Year   Year   Year   Year
    Ended   Ended   Ended   Ended   Ended   Ended
    December   December   December   December   December   December
    31,   31,   31,   31,   31,   31,
    2001   2002   2003   2004   2005   2005
    Rmb   Rmb   Rmb   Rmb   Rmb   US$(2)
Supplemental data to Consolidated Statements of Operations
                                               
                                                 
Revenues
    707       5,658       8,405       2,720       7,503       930  
                                                 
Cost of sales
    508       2,986       4,421       1,394       3,290       408  
                                                 
Gross Profit
    199       2,672       3,984       1,326       4,213       522  
                                                 
Consolidated Balance Sheet Data:
                                               
                                                 
Total assets
    93,407       55,208       51,582       39,355       117,849       15,273  
                                                 
Total liabilities
    27,846       7,818       5,391       6,501       13,626       1,689  
                                                 
Shareholders’ equity
    62,522       46,500       46,191       32,854       98,708       12,902  
 
(1)   During the fiscal year ended December 31, 2005, we disposed the service rendering operating segment. The operating result up to the date of this disposal and the loss resulted from the disposal were reported as discontinued operations. To conform with the presentation of this year, the comparative operating results of the disposed segment for the years ended December 31, 2001, 2002, 2003 and 2004 were consistently summarized into discontinued operations.
 
(2)   For the convenience of the reader, translation of amounts from Renminbi into United States Dollars has been made at the noon buying rate in New York City for cable transfer in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2005 of Rmb 8.0702 = US$1.00.
Exchange Rate Information
On July 21, 2005 the Chinese government changed its policy of pegging the value of the Renminbi to the U.S. dollar. This revaluation of the Renminbi was based on a conversion of Renminbi  into United States dollars at an exchange rate of US$1.00=Rmb8.11. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign currencies. This change in policy resulted initially in an approximately 2.0% appreciation in the value of the Renminbi against the U.S. dollar and could result in further and more significant appreciations. Although the Company generates substantially all of its revenue in Renminbi which has become more valuable in U.S. dollars, the Company’s U.S. dollars cash deposits are subject to foreign currency translations which will impact net income.
We have calculated and presented our financial statements in Renminbi. Our business is primarily conducted in China and denominated in Renminbi. Reports will be made to shareholders and will be expressed in Renminbi. The conversion of Renminbi into U.S. dollars in this Annual Reports is based on the noon buying rate in The city of New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from Renminbi to U.S. dollars in this annual report were made at US$1.00 to Rmb8.0702, which was the prevailing rate on December 31, 2005. The prevailing rate on August 31, 2006 was US$1.00 to Rmb7.9538. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The Chinese government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and though restrictions on foreign trade.
The following table sets forth various information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Bank of New York.

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    Average   High   Low   Period-end
    (Rmb per U.S. $1.00)
2001 (1)
    8.2770       8.2786       8.2676       8.2766  
                                 
2002 (1)
    8.2770       8.2800       8.2669       8.2800  
                                 
2003 (1)
    8.2770       8.2800       8.2765       8.2769  
                                 
2004 (1)
    8.2768       8.2774       8.2764       8.2765  
                                 
2005 (1)
    8.1472       8.2765       8.0702       8.0702  
                                 
November 2005
    8.0839       8.0877       8.0796       8.0796  
                                 
December 2005
    8.0764       8.0808       8.0709       8.0709  
                                 
January 2006 (2)
    8.0668       8.0705       8.0608       8.0608  
                                 
February 2006 (2)
    8.0500       8.0608       8.0420       8.0420  
                                 
March 2006 (2)
    8.0345       8.0503       8.0170       8.0170  
                                 
April 2006 (2)
    8.0155       8.0248       8.0040       8.0165  
                                 
May 2006 (2)
    8.0131       8.0300       8.0005       8.0215  
                                 
June 30, 2006 (2)
    8.0042       8.0225       7.9943       7.9943  
                                 
July 2006 (2)
    7.9897       8.0018       7.9690       7.9690  
                                 
August 2006 (2)
    7.9722       7.9538       8.0000       7.9538  
 
(1)   Annual averages are calculated by averaging the rates on the last business day of each month during the relevant period.
 
(2)   Monthly average are calculated by averaging the daily rates during the relevant period.
   B. Capitalization and indebtedness.
     Not Applicable.
   C. Reasons for the offer and use of proceeds.
     Not Applicable.
   D. Risk factors.
The following matters and other additional risks not presently known to us or that we deem immaterial, may have a material adverse effect on our business, financial condition, liquidity, results of operations or prospects, financial or otherwise. Reference to this cautionary statement in the context of a forward-looking statement or statements shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those in such forward-looking statement or statements.
You should carefully consider the risks described below and other information in this annual report before deciding to invest in the Company.

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Forward Looking Statements
Some of the statements contained in this Annual Report contain forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are found in this Item 3, Item 4, Item 5 and other sections in which the future prospects of the Company are discussed. These statements include information concerning:
  our ability to achieve or sustain profitability in the rapidly changing Internet and nutraceutical market in which we operate;
  our ability to successfully integrate acquired businesses, products and technologies;
  our ability to keep pace with the rapidly changing technology and products in the market we operate;
  our ability to achieve our future pricing strategies or policies;
  our ability to achieve our plans to expand our sales;
  our ability to achieve our plans to diversify our sources of revenues industry;
  our ability to respond to competition in the China market;
  our ability to maintain and protect our intellectual property.
You can identify these statements by forward-looking terminology such as “anticipate”, “expect”, “believe”, “goal”, “plan”, “intend”, “estimate”, “may”, “can”, “could”, “will” and “would” or similar words. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those described in this Item 3 and elsewhere in this annual report that could cause our actual results to differ materially from those anticipated. “CTDC”, “Company”, “us” or “we” refer to China Technology Development Group Corporation. The term “you” refers to holders of our common stock.
(a) Risks Associated with Our Business
(1) We have limited operating history and evolving business model and strategy.
We have limited experience in the businesses that we are currently involved, including the network security and nutraceutical products.
We were originally engaged in the sanitary wares and ceramic tiles manufacturing business, which was changed to the Internet related business in June 2000 and then the addition of nutraceutical related business in October 2005.
For Internet related business, we started with a focus on system integration services (“SI”). In 2001, SI was terminated due to very keen competition and a low profit margin. We then positioned ourselves as a network security services provider and started developing our own products. Major development of our existing products were completed in 2002 and certificates for these products were obtained from the Police Bureau, Security Bureau, etc in subsequent months.
Our nutraceutical related business is operated by the CNT and its subsidiaries which was newly acquired by us in October 2005. The business comprised commercializing the unique techniques of various types of bamboo extracts. As of August 28, 2006, there have been ten (10) patents filed in China, three (3) of them have been approved.
Both network security market and nutraceutical product market of China are rapidly evolving. We lack experience in managing these new markets. We are planning to strengthen the sales and marketing function to minimize this risk, such as, active participation in exhibitions, recruitments of qualified sales team and interview of senior management of customers. However, we cannot assure you that we will finally succeed

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in meeting customers’ needs in these markets. If we fail to modify our business model or strategy to adapt to these market changes, our business financial condition and results of operations may suffer.
(2) We have continued to incur operating losses and we cannot provide assurance that we can achieve or sustain profitability.
We have incurred operating losses in the preceding five years as follows:
         
Year   Operating loss
    (in thousands of Rmb)
2001
    (12,751 )
2002
    (15,105 )
2003
    (4,378 )
2004
    (10,779 )
2005
    (17,886 )
The rapidly evolving Internet market and the newly acquired nutraceutical business in which we operate have made it difficult for us to estimate our future performance and profitability. We cannot give any assurances that operating losses will not increase in the future because our revenues, gross margins and operating results may fluctuate significantly due to, among other things:
-   our ability to obtain timely and accurate user sales information;
 
-   the effectiveness of our distribution channel;
 
-   product upgrading or updating progress by us or our competitors;
 
-   the mix of products sold;
 
-   our competitors’ price changes;
 
-   our research and development and marketing abilities;
 
-   our acquisition costs of new technology or businesses;
 
-   employee wage pressure arising from increased competition for skilled employees and increased governmental staff welfare regulations;
 
-   extraordinary costs incurred for acquisitions or any reductions in work force, if any;
The above factors make predicting revenues more difficult and may adversely affect our performance and profitability. Although we believe new or additional sales contracts may be entered into in the future, there is no assurance that these contracts can be successfully executed, or even if successfully executed, we may not be able to control our costs effectively. The operating results would be materially adversely affected in case the contracts are not successfully obtained and costs are not effectively controlled.
(3) We may not be competitive and increased competition could seriously harm our business.
Many of our competitors in the fast growing network and nutraceutical market in China have one or more of the following advantages over us:
    Longer operating history;
 
    Greater financial, technical, marketing, sales and other resources;
 
    Greater profitability in their operations;
 
    Superior product functionality in certain areas;

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    Greater name recognition;
 
    A broader range of products to offer; and
 
    A larger base of customers.
Current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to enhance their products, which may result in increased competition. As a result of these and other factors, we may be unable to compete successfully with our existing or new competitors. With China entering into World Trade Organization (WTO), more and more foreign companies are entering into network and nutraceutical market in China. They also impose great potential competition to our business.
(4) We may not successfully integrate acquired businesses, products and technologies.
As a component of our business and growth strategy, we intend to acquire companies, products and technologies that we feel will enhance our business model, revenue base, operations and profitability. The acquisitions may result in use of significant amounts of cash, dilutive issuances of common stock, amortization expenses related to certain intangible assets and annual impairment of goodwill on acquisition, each of these could materially adversely affect our results.
We may also encounter problems in implementing effective controls over acquired businesses, including:
  the difficulties of integrating, assimilating and managing the operations, technologies, intellectual property, products and personnel of the acquired business; including the implementation of controls, procedures, and policies appropriate for a listed company at the acquired business that prior to acquisition had lacked such controls, policies and procedures, particularly if the acquired business will exist as a separate line of business of us or as a subsidiary not wholly owned by us.
  the diversion of management attention to business concerns of the acquired business from that of our existing operation.
  declining employee morale and retention issues for employees in the acquired business.
  the risk of litigation by terminated employees and contractors.
  our lack of familiarly with other conditions and business practices of the acquired business.
The acquisition implementation process may last longer than one financial reporting period. Any failure in such implementation may have an adverse effect on our business, results of operations and financial condition.
(5) We have experienced deficiencies in our ability to integrate a newly acquired business.
In December 2005, after the acquisition of the remaining 49% of CNT, we proposed to strengthen internal controls at Anji Bio, a 93.67% subsidiary of Zhejiang Innoessen, the 71.43% subsidiary of the newly acquired CNT. However, we faced resistance from Mr. Hu Linfu(“Mr. Hu”), the then general manager of Anji Bio, and Mdm. Chen Shuizhen (“Mdm. Chan”), the wife of Mr. Hu and the minority shareholder of Anji Bio (collectively, the “Anji Buyers”). Consequently, the Anji Buyers refused to provide financial statements and prohibited the access by staff sent by the Company at the site of Anji Bio. Having reviewed the situation and expected that the future smooth control of Anji Bio would potentially cause the Company to incur significant costs, management decided to dispose of our entire interest in Anji Bio and started the negotiation of disposal with the Anji Buyers. At such time, we also terminated Mr. Hu as the general manager of Anji Bio. Following the termination of Mr. Hu, the Anji Buyers filed litigation against Zhejiang Innoessen to the People’s Court of Anji County (the “Anji Court”). In the litigation, the Anji Buyers requested the Anji Court to rule that the termination of the service of Mr. Hu was unlawful and further requested the Anji Court to order the Company to pay Mr. Hu, an economic compensation of Rmb 50,000 for such unlawful termination. The Company restarted its negotiation with the Anji Buyers in July 2006 and entered into a memorandum with the Anji Buyers on July 27, 2006 in relation to the potential disposal of Anji Bio. (the “Anji Memorandum”) (filed as Exhibit 10.6 hereto). Upon the execution of the Anji Memorandum, Zhejiang Innoessen and the Anji Buyers mutually applied to the Anji County to delay the litigation.
Our disputes with the Anji Buyers has had significant effects on our operations, including the late submission of financial information to PricewaterhouseCoopers, our independent registered public accounting firm which finally lead to late commencement of our audit and thus the late filing of this Annual Report. Because of the late filing of this Annual Report, we face the risk of delisting from Nasdaq. We

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may also face resuming litigation with the Anji Buyers. We believe that our proposed disposal of Anji Bio will cause us to incur additional capital expenditures because we will need to invest in a new plant facility to replace the Anji Bio facility in order to enable us to maintain the Company’s productivity. Substantial legal costs may also be incurred as a result of the litigation with the Anji Buyers in case the final settlement with the Anji Buyers is not successful.
Currently the Anji Bio is the main production base of the Group. In case the proposed disposal is completed and new plant facility to replace the Anji Bio facility is not successfully found, we may face the risk of having no production facility. Our results of operations and financial conditions may be adversely mutually affected.
(6) We may face risks in retaining current employees.
Many of our key employees are located in areas and have skills in fields where there is high worker mobility and work force turnover. The departure of a large number of our key employees can be disruptive and could materially adversely impact our business, including our ability of new product development, existing products upgrading and products sales and marketing. Currently we do not have employment contracts with our key employees. We expect to rely, and will continue to rely, on a number of key technical and management employees. We can make no assurance that we will be able to hire, motivate and retain highly effective key employees. If any of our key employees leave, our business, results of operations and financial condition could suffer. Besides, we currently do not use our own employees or members of our management team to operate certain of our operating subsidiaries. Key management at these companies has been in place for several years and has established solid relationships with their customers. Competition in our industry for executive-level personnel is strong and we can make no assurance that we will be able to retain the highly effective executive employees. Although we plan to provide incentives to management to stay with the acquired business, we have not entered into agreements with them. If such key persons were to resign we might face impairment of relationships with remaining employees or customers, which might result in further resignation by employees, and might cause long-term clients to terminate their relationship with us. Furthermore, we have not entered into any non-competition and confidentiality agreements with these employees and management. Due to the limited enforceability of these types of agreements in China, we face the risk that employees of the operating subsidiary might divulge our protected intellectual property or trade secrets to competitors.
(7) We are subject to risks of excessive reliance on certain significant customers and risks of non-recurring contracts and cost controls.
For our network security business, the two largest customers in 2005 accounted for over 38.3% of our total sales, compared to 79.9 % of its 2004 total sales of the segment. For our nutraceutical business, the two largest customers in 2005 accounted for over 59.8% of our total sales. Although we believe that we have maintained good relationships with these customers, we cannot assure you that we will continue to maintain good relationships with these customers. A loss of one or both of these customers could have a material adverse effect on our business, results of operation and financial condition.
Prior to 2004, a substantial portion of our contracts signed by our subsidiary — BBHL were short-term, individual and non-recurring. In 2004, we attempted to improve this situation by seeking longer term contracts:
(a) On March 14, 2003, we had entered into a three years long term contract with the Legend Group (subsequently renamed the Lenovo Group).

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The sales to Legend Group amounted to Rmb1.3 million in 2003, Rmb 0.68 million in 2004 and Rmb 2.47 million in 2005, representing respectively, 15.2%, 58.6% and 38.3% of the revenues of BBHL of the year. The contract with the Legend Group had expired in March 2006. We are currently negotiating the renewal of the contract and sales with the Legend Group since the expiry of the old contract are conducted on individual basis.
(b)   On February 10, 2005, we had entered into a two years’ contract with the Legendsec (Beijing) Limited (“Legendsec”) at exactly the same terms of the Legend Group;
(c)   We acquired Zhejiang Innoessen, a 71.43% subsidiary of CNT in October 2005 which had an existing long term contract with the China New Era Health Industry Group Limited (“New Era”). The sales made by our Nutraceutical Operations to New Era in the 2004 and 2005 Period amounted to Rmb1.32 million and Rmb2.86 million, representing respectively 42.1% and 54.7% of the total revenues of our Nutraceutical Operations.
We cannot assure you that these contracts can be maintained successfully or what level of sales will be generated under these contracts. Any failure in maintaining the contract could materially and adversely affect the Company’s revenues, Besides, any additional changes in the contract terms could have material adverse effect on our business, results of operations and financial conditions.

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(8) We may not be able to keep pace with the rapid technological changes in the market, new competition, and new product developments.
The markets in which our business are involved are highly fragmented and characterized by ongoing technological developments, evolving industry standards and rapid changes in customer requirements. Our success will depend on our ability to:
-   provide a broad range of network security, network management software products and nutraceutical products;
-   timely develop and introduce new products with technological advances;
-   respond promptly to new customer requirements;
 
-   comply promptly with evolving industry standards;
 
-   provide upgrades and updates to users frequently at the lowest costs; and
-   maintain compatibility of our products with popular operating systems and develop products that are compatible with new or otherwise emerging operating systems.
Our product enhancements or new products may not adequately address the changing needs of the marketplace. New products with new technological capabilities could replace or shorten the life cycle of our products or cause our customers to defer or cancel purchases of our existing products. Our Technology is subject to the risk of obsolence.
Our product development efforts are impacted by the adoption or evolution of forthcoming industry standards. As industry standards are adopted or evolve, we may have to modify existing products or develop and support new versions of existing products. In addition, if an industry standard does not develop, our products and our competitors’ products could be incompatible, which could prevent or delay overall development of the market for a particular product. If our products fail to comply with existing or evolving industry standards in a timely fashion, if any in the future, our business, results of operation and financial condition could be materially and adversely affected.
Our long-term success depends on our ability to upgrade and update existing product offerings, modify and enhance acquired products and introduce new products, which meet our customers’ needs. Future upgrades and updates may include additional functionality, response to user problems or address compatibility problems with changing environments. We believe that our ability to provide these upgrades and updates frequently and at low costs is key to our success. Failure to release upgrades and updates could have a material adverse effect on our business, results of operations and financial condition. Our failure to introduce in a timely manner new products that are compatible with requirements preferred by users would materially and adversely affect our business, results of operations and financial condition.
(9) We do not intend to pay dividends.
Payment of dividends is within the discretion of our Board of Directors. Our Board of Directors does not intend to declare any dividends in the foreseeable future, but instead intends to retain all future earnings, if any, for use in our business operations.
(10) We are subject to risk of computer hackers’ attacks.
Following the increase in computer crimes in China, computer hackers may create viruses to sabotage or otherwise attack our products. Although no such event has occurred or been discovered to date, the adverse impact arising from any virus sabotage or attacks cannot be ignored. If sabotage or attacks on our products

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do happen, our customers’ computer systems could be seriously damaged. Consequently, our business will be adversely impacted as a result of our impaired professional image.
(11) Our subsidiaries are subject to termination.
Our agreements for our 76% held, 71.43% held and 93.67% held subsidiaries, respectively BBHL, Zhejiang Innoessen and Anji Bio, provides for an initial term of 50 years, 20 years and 10 years respectively. Following the Anji Memorandum, upon the completion, Anji Bio may be disposed and thus its term may be less than the initial term. In the event the term of agreements is not extended, the subsidiaries will be dissolved and liquidated pursuant to the provisions of the applicable law and the applicable agreements. In addition, subsidiaries may be terminated prior to the expiration of the agreements upon the occurrence of certain events, including without limitation, the inability of the enterprise to conduct its business due to financial losses or a breach of the agreements by one of the parties.
(12) We may not be able to adequately control the business of our subsidiaries. We have experienced integration issues with one of our subsidiaries.
We may not be as effective in providing and maintaining control over our operating subsidiaries and their business operations as direct or indirect owners of these businesses. We may not be able to take control of the operating subsidiary upon the occurrence of certain events, such as the imposition of statutory liens, judgments, court orders, death or capacity. Furthermore, if the operating subsidiary fails to perform as required, we will have to rely on the Chinese legal system to enforce our rights and due to the uncertainties that exist under Chinese Law about the structure of our organization, there is no guarantee that we will be successful in an enforcement action. In addition, the Chinese government may propose new laws or amend current laws that may be detrimental to our current relationships with our operating subsidiaries, which may in turn have a material adverse effect on our business operations.
We experienced problems while attempting to integrate Anji Bio as mentioned in the fourth and fifth paragraphs of the fourth risk factor under the subheading “Risks-Associated with Our Business”. The delayed preparation of our financial statements and the delayed filing of our Annual Report and the possible delisting of our common stock from Nasdaq have resulted from our integration problems with Anji Bio. The potential disposal of Anji Bio to the Anji Buyers in accordance with the terms of the Anji Memorandum will likely result in the incurrence by the Company of additional capital expenditures in order to restore its production capacity. In addition, substantial legal costs may result from litigations with Anji Buyers. As of date we do not have similar problems with any of our other subsidiaries, however we cannot be certain that such an incident may not recur.
(13) We may fail to consummate the settlement with the Anji Buyers.
Pursuant to the Anji Memorandum dated July 27, 2006, we have to complete the disposal of the Anji Bio before September 30, 2006. We cannot assure you that settlement can be completed on time. We may face the resuming of litigation and further diversion of our resources in dealing with the litigations which eventually may cause material adverse effect on our results of operations and financial conditions.
(14) We may not be able to successfully implement our growth strategies.
We are pursuing a number of growth strategies, which will require us to introduce more technological products through partnerships, joint ventures and acquisitions. Some of these strategies relate to new technological products for which there are no established markets in China, or relate to technological

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products in which we lack experience and expertise. We cannot assure you that we will be able to deliver new technological products on a commercially viable basis or in a timely manner, or at all. Any failure in implementation of our strategies could materially adversely affect our business, financial condition and results of operations.
(15) We may face difficulties in implementing our acquisition strategy, including identifying suitable opportunities and integrating them with our existing operations.
As part of our business strategy, we intend to use partnerships and acquisitions to facilitate the introduction of new service offerings as well as to add capabilities that we do not currently have. For example, we may consider acquiring or entering into partnerships with firms that specialize in unique technology where expertise is not easily obtained.
However, our ability to implement this strategy will depend on the availability of suitable acquisition candidates at an acceptable cost, our ability to compete effectively to attract and reach agreement with acquisition candidates or joint venture partners on commercially reasonable terms, the availability of financing to complete larger acquisitions or joint ventures, as well as our ability to obtain any required governmental approvals. In addition, the benefits of a partnership, acquisition or joint venture transaction may take considerable time to develop, and there is no assurance that any particular partnership, acquisition or joint venture will produce the intended benefits. For example, we may experience difficulties in integrating acquisitions with our existing operations and personnel. The identification and completion of these transactions may require us to expend significant management time and resources. Moreover, the partnership, acquisition and joint venture strategies we pursue could also cause earnings or ownership dilution to our shareholders’ interests, which could result in losses to investors.
(16) Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
We rely on applicable trademark and copyright laws and confidentiality agreements with our employees, customers, business partners and others to protect our intellectual property rights in China. We own and have exclusive licenses to a number of China and foreign patents and patent applications, and intend to seek additional patents as we deem appropriate. Whether patents will be issued for any of our pending applications or even if patents are issued, it is uncertain that any claims allowed will be sufficiently broad to cover our products or to effectively limit competition against us. Furthermore, any patents that may be issued to us may be challenged, invalidated or circumvented. Litigation may result from our use of registered trademarks or common law marks and, if litigation against us were successful, a resulting loss of the right to use a trademark could reduce sales of our products and could result in a significant damage award. Although we intend to defend the proprietary rights, policing unauthorized use of proprietary technology and products is difficult. International operations may be affected by changes in intellectual property legal protections and remedies in foreign countries in which we do business.
Besides, despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. The validity, enforceability and scope of protection of intellectual property in technological industries are uncertain and still evolving. In particular, the laws and enforcement procedures in China do not protect intellectual property rights to the same extent as do the laws and enforcement procedures in the United States. Moreover, litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and diversion of our resources, and could disrupt our business, as well as have a material adverse effect on our financial condition and results of operations.
(17) Because there is limited business insurance coverage in China, any business disruption or litigation we experience might result in our incurring substantial costs and the diversion of resources.

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The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products and do not, to our knowledge, offer business liability insurance. While business disruption insurance is available to a limited extent in China, we have determined that the risks of disruption, cost of such insurance and the difficulties associated with acquiring such insurance make having such insurance impractical for us. As a result, except for directors and officers insurance, employees’ compensation insurance and fire insurance we do not have any other business liability, disruption or litigation insurance coverage for our operations in China. Any business disruption or litigation might result in our incurring substantial costs and the diversion of resources.
(18) We are subject to risks of acquisition of new business, products and technologies.
Our Internet Security and nutraceutical industries are highly competitive. They have experienced, and are expected to continue to experience, a significant amount of consolidation. It is one of our growth strategies to acquire or make investments in complementary companies, products and technologies in future. However, a number of companies, many of which have greater financial resources, marketing capabilities and research and development capacities than ours, are actively engaged in the development of products similar to the products we produce. These industries are characterized by extensive and ongoing research efforts. Other competitors may succeed in developing products superior to those we market. It may be difficult for us to maintain or increase sales volume and market share due to keep competiton and may have a material adverse effect on our financial conditions and results of operations.
Beside, our acquisitions and strategic investments involve a number of risks and we may not realize the expected benefits of these transactions. We may lose all or a portion of our investment. Our available cash and securities may be used to buy or invest in companies or products, which could result in significant acquisition-related charges to earnings and dilution to our shareholders. Moreover, we may have to incur or assume the acquiree’s liabilities, including liabilities that are unknown at the time of acquisition, which may result in a material adverse effect on us.
In the event that the acquiree does not perform as anticipated, we would be required to incur a significant impairment of goodwill. Any impairment of goodwill may adversely and materially affect our results of operations and financial conditions.
(19) We may need additional financing.
Our business currently has limited amounts of capital. The existing capital is only sufficient for maintaining our current level of business. As we increase our sales and expand our business or follow our intended growth strategy through continuous acquisitions of new businesses, we may need additional funding sooner than anticipated. We cannot assure you that such financing would be available on terms satisfactory to us, if at all. If we need to pay higher than anticipated costs for additional financing, our results of operations or financial conditions may be materially and adversely affected. Besides, upon new shares issued for financing or acquisition purposes, interests of existing shareholders will also be diluted.
(b) Risks Associated with China
A substantial majority of our assets are located in China and a substantial majority of our revenue is derived from our operations in China. Accordingly, our business, financial condition, results of operations and prospects are subject, to a significant extent, to economic, political and legal developments in China.
(1) We are subject to risks relating to operating a business in China.
We may face foreign competition as a result of China’s entry into the WTO. China formally became a member of the WTO in 2002. China is required to reduce tariffs and to eliminate other trade restrictions, which may lead to increased foreign investment and foreign competition in China’s markets from international companies and the impact of which on China’s economy and our business would remain uncertain. The foreign competitors are usually characterized by better research and development and financial backup who can bear a longer period of net operating loss and have larger scaled marketing campaign. Even with locally developed products occupying the majority of the existing market share, we cannot assure you that this strength will be maintained, particularly when foreign competitors form joint ventures with certain local competitors. Any success in increasing market share by foreign competitors will materially and adversely affect our business, results of operations and financial condition.
We may experience foreign currency losses due to fluctuations in exchange rates. The Chinese government controls the conversion of the Chinese currency, the Renminbi. We must rely on the Chinese government’s foreign currency conversion policies, which may change at any time, in regard to our currency exchange needs. In 2005 and 2004, respectively 100% and 40.8% of our total revenue was received in Renminbi, which is not freely convertible into other foreign currencies. In China, the government has control over Renminbi reserves through, among other things, direct regulation of the conversion of Renminbi into other foreign currencies and restrictions on foreign imports. Although foreign currencies which are required for current account transactions, such as the payment of dividends to shareholders to foreign invested enterprises such as ourselves, can be bought freely at authorized Chinese banks, the proper procedural requirements prescribed by Chinese law must be met. At the same time, Chinese companies are also required to sell their foreign exchange earnings to authorized Chinese banks and the purchase of foreign currencies for capital account transactions still requires prior approval of the Chinese government. This type of heavy regulation by the Chinese government of foreign currency exchange restricts certain of our business operations and a change in any of these government policies, or any other, could further negatively impact our operations.
In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. For example, due to the recent devaluation of the U.S. dollar against other reserve currencies, as well as pressure from a number of other governments (including the United States), the Chinese government has indicated that it may adjust the current rate at which Renminbi-U.S. dollar exchanges are fixed, as well as reevaluate its decades-old policy of using a fixed-rate regime to govern foreign currency transactions, although the Chinese government has not committed itself to take any such action currently. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue which will be exchanged into U.S. dollars and earnings from and the value of any U.S. dollar denominated investments we make in the future.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by Chinese exchange control regulations that restrict our ability to convert Renminbi into foreign currency.
Because a significant portion of our revenue and cash operations are denominated in Renminbi, fluctuations in exchange rates between U.S. dollars and Renminbi will affect our balance sheet and earnings per share in U.S. dollars.
Our operations and assets in China are subject to significant political and economic uncertainties. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under its current leadership, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
We may have limited legal recourse under Chinese law if disputes arise under our contracts with third parties. 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. The overall effect of legislation over the past 25 years has significantly enhanced the protections afforded to various forms of foreign investment in China. However, the laws, regulations and legal requirements are constantly changing, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, we cannot predict the effect of future developments in the Chinese legal system, particularly with regard to the Internet, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. The Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. Due to our current business operations, we may be subject to the implementations, interpretations and enforcement of China’s laws by its courts or governmental agencies in connection with our contracts with third parties. The resolution of any such matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under Chinese law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.
The recurrence of Severe Acute Respiratory Syndrome (“SARS’) in China, or similar adverse public health developments, such as Bird Flu (Avian Influenza), may materially and adversely affect our business and operating results. From December 2002 to June 2003, China and certain other countries experienced an outbreak of a new and highly contagious form of atypical pneumonia now known as severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health Organization declared that the SARS outbreak had been contained. Since September 2003, however, a number of isolated new cases of SARS have been reported, most recently in central China in April 2004. During May and June of 2003, many businesses in China were closed by the Chinese government to prevent transmission of SARS. Any recurrence of the SARS outbreak, or a development of a similar health hazard in China, may adversely affect our business and operating results. For instance, a recurrence of SARS or the spread out of Bird Flu or any other epidemic in China may reduce the level of economic activity in affected areas and negatively impact China’s economy. In addition, health or other government regulations may require temporary closure of our offices, which will severely disrupt our business operations and have a material adverse effect on our financial condition and results of operations.

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(2) Our business may be adversely affected by Chinese government regulations.
Internet Security
China is regulating its Internet sector through new pronouncements and regulations regarding the legality of foreign investment in the Chinese Internet sector, the existence and enforcement of content restrictions on the Internet and the availability of securities offerings by companies operating in the Chinese Internet sector. There are substantial uncertainties regarding the proper interpretation of current and future Chinese Internet laws and regulations. Although we believe and have been advised that many current regulations will not apply to us, we cannot assure that existing or future regulations will be interpreted differently.
A majority of Chinese laws, regulations and legal requirements governing the Internet are relatively new and untested, their interpretation and enforcement of what is deemed to be socially destabilizing by Chinese authorities may involve significant uncertainty. In addition, the Chinese legal system is a civil law system in which decided legal cases have little precedential value. As a result, we cannot predict the actions of Chinese legal authorities, particularly with regard to the Internet and software, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement of local regulations by national laws.
Besides, the interpretation and application of existing Chinese laws and regulations, the stated positions of the Ministry of Information Industry and the possible new laws or regulations have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, Chinese Internet businesses. Accordingly, it is possible that the relevant Chinese authorities could, at any time, assert that any portion or all of our existing or future ownership structure and businesses violate Chinese laws and regulations. It is also possible that the new laws or regulations governing the Chinese Internet sector that may be adopted in the future will prohibit or restrict foreign investment in, or other aspects of, any of our current or proposed businesses and operations.
Nutraceutical Business
Several government agencies in China regulate the manufacturing, packaging, labeling, advertising, promotion, distribution, and the sale of nutrition, health, beauty, and weight management products.
According to the Food and Health Hygiene Law of China, and health dietary supplement is subject to the inspection by the Center of Inspection of Health Dietary Supplement. The maker of the medicine needs to obtain approval from the Bureau of Health Dietary Supplement of Department of Drug Registration.
There is also regulation governing the production and distribution of food ingredients and additives issued by the Ministry of Public Health of China. The test including intoxication and safety reports of the health dietary supplement. Manufacturing of health and dietary supplement must be done by facilities that have passed the inspection of GMP for Health Dietary Supplement.
If we are found to be in violation of any existing or future Chinese laws or regulations, the relevant Chinese authorities would have broad discretion in dealing with such a violation, including, without limitation, the following:
-   levying fines;
 
-   revoking our business license;
 
-   requiring us to restructure our ownership structure or operations; and
 
-   requiring us to discontinue any portion or all of our business.

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(c) Risks Related to Our Technology and Product Research and Development
(1) Inspection of Manufacturing Facilities
The China regulatory agencies may periodically inspect our manufacturing facilities and certain facilities of our suppliers of our nutraceutical business. Such inspections resulted in the identification of certain minor

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deficiencies. We developed and implemented action plans to remedy the deficiencies. Should these deficiencies not be remedied to the satisfaction of the regulatory body, product supply could be affected and our operating results could be adversely affected.
(2) Possible Claims Relating to Products
We could be exposed to possible claims for personal injury resulting from allegedly defective products manufactured by third parties with whom we have entered into manufacturing agreements or by us. We do not maintain product liability insurance coverage for claims arising from the use of our products. Therefore, we could be subject to product liability claims in excess of our financial ability. Any significant product liability claims not within the scope of our insurance coverage could have a material adverse effect on us.
(3) We must respond quickly and effectively to new research and developments.
Our businesses are highly dependent on new products. Our failure to maintain the superiority of our research capabilities or to respond effectively to technological changes could adversely affect our business, results of operations or financial condition. Our future success also depends on our ability to enhance products and introduce new products to respond to changing market trends. If we are unable to successfully develop and bring to market new products in a timely manner, our competitors’ products may render ours noncompetitive or obsolete. Any such event would have a material adverse effect on our operating results.
(d) Risks Associated with Investing in our common stock.
Stock prices of technological-related companies, particularly companies with business operations primarily in China, have fluctuated widely in recent years, which could result in substantial losses to investors.
(1) Our stock price has been and may continue to be volatile.
Our stock price was volatile and ranged from a per-share high of US$14.5 to low of US$1.20 during the period from January 1, 2005 to August 31, 2006. On August 31, 2006, the closing price of our common stock was US$3.46 per share. Many factors affect our stock price which we cannot control. Our ability to meet the expectations of investors with respect to our operating and financial results may contribute to current and future stock price volatility.
On February 3, 2006, the Nasdaq Stock Market, Inc. halted trading of our common stock at a trading price of $9.64 requesting “additional information” . The Company provided the additional information on February 6, 2006 and trading resumed at 2:15 p.m. New York Time on that date. Our stock price may be adversely affected by the performance and fluctuation of the stock prices of other technology companies with business operations mainly in China that have listed their securities in the U.S.
The price and trading volume of our common stock may be highly volatile for business specific reasons. Factors such as variations in our revenue, earnings and cash flow, announcements of new investments, cooperation arrangements or acquisitions, and fluctuations in market prices for our services and technological products could cause the market price for our common stock to change substantially. Any of these factors may result in large and sudden changes in the volume and price at which our common stock shall trade. There is no assurance that these factors will not occur in the future.
(2) Our stock may be delisted from trading on the NASDAQ Stock Market
On July 19, 2006, we received correspondence from the Nasdaq Stock Market indicating that as a result of our failure to timely file with the Securities and Exchange Commission this Annual Report on Form 20-F for the fiscal year ended December 31, 2005, we are not in compliance with the Nasdaq requirements for continued listing set forth in Nasdaq Marketplace Rule 4320(e)(12). Nasdaq Marketplace Rule 4320(e)(12) requires us to make on a timely basis all filings with the Securities and Exchange Commission, as required by the Securities Exchange Act 1934, as amended.
Our securities were subject to delisting from the Nasdaq Stock Market beginning at the opening of business on July 28, 2006. We have appealled the Nasdaq Staff’s determination by requesting a hearing before the Nasdaq Listing Qualifications Panel, which has delayed the delisting of our common stock pending the

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Panel’s review and determination. The hearing was held on September 7, 2006. We are awaiting the Panel’s determination. There can be no assurance that the Panel will grant our request for continued listing.
(3) The sale or availability for sale of substantial amounts of our common stock could adversely affect their market price.
Sales of substantial amounts of our common stock in the public market in future, or the perception that these sales could occur, could adversely affect the market price of our common stock and could materially impair our future ability to raise capital through offerings of our common stock.
(4) Rights of Shareholders under British Virgin Islands Law May Be Less Than Those of Shareholders in U.S. Jurisdictions.
Our corporate affairs are governed by our Memorandum and Articles of Association and by the International Business Companies Act of the British Virgin Islands. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of our management, directors and controlling shareholders and the rights of our shareholders differ from those that would apply if we were incorporated in a jurisdiction within the United States. Further, the rights of shareholders under British Virgin Islands law are not as clearly established as the rights of shareholders under legislation or judicial precedent in existence in most United States jurisdictions. Thus, our public shareholders may have more difficulty in protecting their interests in the face of actions by the management, directors or controlling shareholders than they might have as shareholders of a corporation incorporated in the United States jurisdiction.
Under the laws of most jurisdictions in the United States, majority and controlling shareholders generally have certain “fiduciary” responsibilities to the minority shareholders. Shareholder action must be taken in good faith and actions by controlling shareholders which are obviously unreasonable may be declared null and void. British Virgin Islands law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in United States jurisdictions. In addition, in most United States jurisdictions, directors owe a fiduciary duty to the corporation and its shareholders, including a duty of care, pursuant to which directors must properly apprise themselves of all reasonably available information, and a duty of loyalty, pursuant to which they must protect the interests of the corporation and refrain from conduct that injures the corporation or its shareholders or that deprives the corporation or its shareholders of any profit or advantage. Many United States jurisdictions have enacted various statutory provisions which permit the monetary liability of directors to be eliminated or limited. Under British Virgin Islands law, liability of a corporate director to the corporation is basically limited to cases of willful malfeasance in the performance of his duties or to cases where the director has not acted honestly and in good faith and with a view to the best interests of the corporation.
It is unknown whether the courts of the British Virgin Islands would enforce, either in an original action or in an action for enforcement of judgments of United States courts, liabilities which are predicated upon the securities laws of the United States.
(5) Compliance with requirements under Section 404 of the Sarbanes-Oxley Act of 2002
Our company will become subject to Section 404 of the Sarbanes-Oxley Act of 2002 in the fiscal year ending December 31, 2007, and will need to evaluate and test our abilities to comply with the statute as well as take such remedial actions that may be necessary to ensure our compliance. We cannot be certain that evaluations, tests and remedial actions will all be timely completed. We also do not know how compliance with Section 404 of the Sarbanes-Oxley Act of 2002 will affect our operations.
Our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 may present us with significant challenges. In connection with their audit of our consolidated financial statements as of and for the year ended December 31, 2005, our independent registered public accounting firm, identified to our management and audit committee certain internal control deficiencies in our internal control over financial reporting that they considered to constitute material weakness in our internal control over financial reporting. See the section headed “Item 15 — Controls and Procedures”. If up to the fiscal year ending December 31, 2007, we are unable to effectively implement the measures necessary for our compliance with Section 404 of the Sarbanes-Oxley Act of 2002, including any remedial actions that are required to address any internal control weakness already detected by our independent registered public accounting firm, our auditors may not be able to provide us with an attestation regarding the effectiveness of our internal control over financial reporting. Even if our management believes that our internal control over financial reporting is effective, our independent registered public accounting firm may disagree. In addition, if they are not satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, operated, reviewed or evaluated, or if they interpret the relevant requirements, rules or regulations differently from us, then they may decline to attest to our management’s assessment or may issue an adverse opinion.
Any of these possible outcomes may result in an adverse reaction in the financial marketplace and/or a loss of investor confidence in the reliability of our consolidated financial statements. We could also become subject to regulatory investigations and sanctions by regulators such as the Securities and Exchange Commission. We may also be required to incur greater than expected costs to improve our internal control processes. All of these factors could materially and adversely affect our business.
Item 4. Information on the Company
      A. History and development of the Company.
Our company was incorporated as an International Business Company under the laws of the British Virgin Islands in September 1995. We previously owned, through our wholly owned subsidiaries, Jing Tai Industrial Investment Company Limited which was subsequently renamed to BHL Networks Technology Company Limited (“BHLHK”), and Jolly Mind Company Limited (“Jolly Mind”), both Hong Kong companies, 95% equity interests in each of Linyi Baoquan Bathtub Company Limited (“Baoquan”) and Linyi Xinhua Building Ceramics Company Limited (“Xinhua”, and together with Baoquan, the “Disposed Operations”). The Disposed Operations are Sino-foreign equity joint ventures incorporated under the laws of China. A wholly owned subsidiary of BHLHK, Beijing Taigong Sanitary Wares Company Limited (“Taigong”), was also incorporated in Beijing in 1997 under the laws of China as our administrative and sales support office of our Disposed Operations.

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Pursuant to certain sales and purchases agreements entered into among BHLHK, Shandong Linyi Industrial Enamel Joint Stock Company (“Linyi Industrial”), Jolly Mind and Shandong Luozhang Group Company (“Shandong Luozhang”), on July 2, 1999, BHLHK sold its 60% interests in each of the Disposed Operations to Shandong Luozhang for cash consideration of Rmb28 million. Pursuant to a Share Purchase Agreement dated July 2, 1999 entered into between our company and Linyi Industrial, we sold all of our interest in Jolly Mind, which owned a 35% interest in each of the Disposed Operations, to Linyi Industrial in consideration of 1,952,291 shares (the “Consideration Shares”) of Common Stock of the Company. Taigong was voluntarily dissolved in March, 2000.
On June 30, 2000, Jingle Technology Co., Ltd., our wholly owned subsidiary incorporated in the British Virgin Islands, entered into an agreement with China Internet Technology Co., Ltd. (“China Internet”) and Great Legend Internet Technology and Service Co., Ltd. (“Great Legend”) to acquire the entire outstanding shares of BHL Networks Technology Co. Ltd. (“BHLNet”), a company incorporated under the laws of the Cayman Islands, which owns a 76% interest in Beijing BHL Networks Technology Co. Ltd. (“BBHL”), a company incorporated under the laws of China.
On October 31, 2005, the Company acquired from Beijing Holdings of the 51% equity interest of the issued and outstanding stock of CNT and on December 22, 2005, the Company exercised the option to acquire from Beijing Holdings the remaining 49% equity interest of CNT and close the transaction on the same day. As a result of closing the transactions, the Company became the shareholder of 100% equity interest in CNT. CNT currently owns 71.43% interest in Zhejiang University (Hangzhou) Innoessen Bio-technology Inc. (“Zhejiang Innoessen”), which then owns 93.67% interest in Anji Science Bio-Product Inc. (“Anji Bio”) and 51% in Jian’ou Yingshi Food Technology Ltd (“Jian’ou”). Zhejiang Innoessen is the head office of CNT’s research and development and sale and marketing functions. Anji Bio is currently the manufacturing center and Jian’ou is the newly established manufacturing base in Fujian, China. CNT also owns 100% of Shenzhen Innoessen Bio-Tech Inc. which is engaged in sales and marketing of nutraceutical products in South China. CNT was incorporated in the British Virgin Islands on January 28, 2003.
The following diagram illustrates our corporate and share ownership structure as at August 31, 2006:
(FLOW CHART)

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Our registered office is located at P.O. Box 71, Craigmuir Chambers, Road Town, Tortola, BVI. Only corporate administrative matters are conducted at this office, through our registered agent, HWR Services Limited. Our principal executive office is located at Room 2413-18, Shui On Centre, 8 Harbour Road, Wanchai, Hong Kong.
B. Business overview.
The Company used to be engaged primarily in providing information network security solutions in People’s Republic of China. The Company’s certified hardware and software products are used by numerous Chinese business enterprises, financial institutions and government agencies and have been rewarded as the leading network security solutions in China. With the acquisition of CNT in 2005, which develops nutraceutical products utilizing bio-active components of bamboo, the Company has entered the Chinese nutraceutical market. All sales of the Company are conducted in China . The Company’s major shareholder is Beijing Holdings. As of August 15, 2006, Beijing Holdings was the beneficial holder of 62.73% of the Company’s outstanding shares of Common Stock.
Market Overview
Network Security Business:
The Chinese network security market has grown during the last three years. According to IDC’s recently released China IT Security Product Market Size and Forecast, 2006 – 2010 (2005 Second Half) (File No.: CN324100N), the 2005 total sales of the IT security market in China amounted to approximately US$378 million, which was US$15 million higher than that estimated by the IDC in early 2005. It is also expected that the performance of the China security market will maintain a steady growth rate, with an annual CAGR of approximately 20.9% in the coming five years. It is estimated that the 2010 total sales will reach US$976 million.
Nutraceutical Business:
According to the statistics from the Market Research Committee of the Association of Health Care of China, the health dietary supplement market in China is RMB 60 billion with a growth rate of approximately 20% per annum. There are approximately 2,025 dietary supplement companies in China. Most of them are small in size. Most of the products are based on traditional Chinese medicinal and manufacturing processes. Approximately 50% of the market is located in Beijing, Shanghai, Guangdong, and Zhejiang province.
We believe that the market will continue to grow as more people become concerned with health and have more disposable income. Following increased urbanization, an estimated 300 million people in the next 10 years will add constant growth element to the market in cities.
The products are likely to become more scientifically based, have higher potency, and higher value added to human health. New technology results in new products and result in a change from traditional methods of production. The functional food market in China is still in its early stage and is expected to experience high growth with a focus on food ingredients and health dietary supplement.
Company Overview
The Company was originally engaged in the sanitary wares and ceramic tiles manufacturing business and transitioned to Internet related business in June 2000, with a specific focus on system integration services (“SI”). In 2001, the Company phased out the SI business due to strong competition and low profit margins. As a result, we transformed to a network security service provider after our acquisition of BHLNet in 2002. Our current business focuses on the network security and related software development. We stress innovation, reliability, flexibility and efficiency to ensure a high degree of advancement in technology and commercialization of research results. We believe the existing market preference of local products and

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services, the governmental regulations and our technological advancement will create good market opportunities for our business.
Upon the acquisition of BHLNet, we positioned ourselves as a provider of system integration services, network security and network management solutions. As a result of our limited investment in research and development at the initial stage, due to our difficulties in recruiting qualified staff and our reliance on a shift of mature technologies from the Institute of Computing Technology (“ICT”), our products were generally similar to those provided by our competitors. In order to be pioneers in our key markets, we switched our business focus to self-developed security software in 2001 and had established a research and development team formed by experienced research staff recruited from universities and competitors. This change was proved to be successful, in particular in the development of the Intranet / Internet Physical Separation Security Solution (the “IPSSS”), a unique product which was generally recognized and certified by the relevant government agencies and had accounted for the majority of the 2002 sales. In 2003, based on the technology backbone of the IPSSS, we further developed the BHL Information Security Gate System (the “Security Gate”). The Security Gate enhanced the safe exchange of information between two networks which were completely physically separated.
The management believed that along with China’s tremendous economic growth, there are emerging industries positioned to become the future growth engine for the new economy. The Company needs to seize the opportunity of entering into these emerging industries in China. The acquisition of CNT opened the door for the Company to venture into the nutraceutical industry, which is one of the most promising industries of the new economy. This industry is expected to have high growth opportunity as well as above average return on investment. The Company completed the acquisition of the entire issued share capital of CNT in December 2005 and the Company’s management expected the newly acquired business will contribute to the revenue and profitability of the Company’s operation in the coming years.
The nutraceutical industry in China is still at its early stage of development. China has over 2000 years of history of herbal medicine. Herbal medicine in recent years has become increasing popular and is playing more important role in healing and enhancing overall wellbeing of human body and mind. China’s 1.3 billion of population with increasing purchasing power presents the largest growth market for nutraceutical products in the world. The intended acquisition brings cutting edge technology knowledge, unique products and applications, market experience, industry expertise and talents, and seasoned management team to the Company, giving the Company a very strong head start in this industry. The management believes that the Company can leverage its capital market strength to invest, consolidate and develop nutraceutical related industries in China and to achieve significant returns.
In 2005, the Company began to carry out its investment and acquisition strategy in these two industries by seeking companies with ownership of leading intellectual properties, proven products, unique value proposition in the marketplace, profitable, strong management team, and growing customer base.
Capital Expenditures
For our network security business, there were no significant amounts of capital expenditures incurred during the past three years. For our nutraceutical business, except for an aggregate amount of Rmb 2.4 million valued production line, located at the factory site controlled by Anji Bio, which was purchased but not used, all production lines purchased were assembled and utilized in our production before CNT was acquired by us in October 2005. The capital expenditures of CNT incurred for the fiscal years 2003, 2004 and 2005 were, respectively, approximately Rmb 0.23 million, Rmb 4.18 million and Rmb 3.08 million. As of December 31, 2005, except as disclosed above, we had no other capital commitments incurred.
Seasonal sales
The Company is not subject to seasonal fluctuations in its sales.

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Source of raw materials
The major raw materials used in our network security business are computer components such as integrated circuits and circuits boards. All of these raw materials could be easily purchased from the open market at competitive price. Besides, we are not subject to shortage of raw materials as there existed a huge number of suppliers.
For our nutraceutical business, the primary raw material used in our product is bamboo leaf. Bamboo leaf is purchased annually in the winter of each year from local farmers. There are no recurring contracts with the farmers.
Description of Products and Services
Network Security Business:
We focus on network security solutions and related products. They mainly include the Security Gate, IPSSS, Secure Channel and Secure Server. Our major target customers include large enterprises and government bureaus, who are less price sensitive and are financially capable to pay. We have obtained ten certificates as related to our security products from all related government bureaus in the past three years, which represent their recognition of the validity of our products.
Our most outstanding products in the network security sector include Security Gate and IPSSS. Due to complicated technical requirements, we believe these products face the lowest competition in the market and provide us the highest gross profit margin compared to other products in the market. Security Gate is a newly developed technology. We believe its acceptance by users will expand, particularly by government agencies. In 2005, we successfully developed the Security Gate application for the Power Supply Industry. We plan to further focus on the development of a series of Security Gate applications in future in order to fit the specific requirements of different industries.
Another service of ours is network management. Network management primarily includes the BHL LDAP Catalogue Server, BHL Search Engine V2.0, BHL Charging Proxy of Network Expenses and BHL Re-broadcasting system V2.0. These products are highly efficient, intelligent and provide high performance in assisting enterprises in increasing the automatic abstraction and classification of information influx and control of network expenses.
Nutraceutical Business:
The newly acquired subsidiary, CNT, is a leading nutraceutical company in China. CNT has developed a series of nutraceutical products based on bamboo extracts and other botanical plants.
Scientists at CNT discovered that various parts of bamboo (leaf, bark and shoot) are rich in bio-active components such as flavonoids, lactones, terpenoids, sterols, and polysaccharides, that are known to have medical and health benefits. Extractives of bamboo (EOB) made with CNT’s state-of-art biotechnology have multiple applications, as pharmaceutical ingredients, nutraceutical dietary supplements, and an organic anti-oxidant food additive.
The research and development team of CNT has developed 10 patented applications of bamboo extractives in nutraceutical and pharmaceutical fields. There are four major product lines based on the patents: 1) Zhukangning Capsule as a dietary supplement; 2) EOB product series as pharmaceutical ingredients and functional food additives; 3) AOB antioxidant as a natural food preservative; 4) EOBS and EOBB product pipeline for applications in medicine and food industries.
Business Strategy
We intend to achieve our business goals primarily through the following strategies:
Expanding distribution channels by cooperating with market leaders

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Since it is costly to establish owned distribution channels, we will cooperate with enterprises having wide and mature distribution channels in China to enhance easier penetration of our products into more industrial sectors, through OEM (producing under their brand name) production of their products. Through the established distribution networks of these large enterprises, we believe we can penetrate into the market at minimum cost.
In addition, in connection with our nutraceutical business, we plan to target manufacturers of food and beverages in China. We are working with industry organizations in meat processing, seafood, canned and preserved food, and fast food to provide research results, product information and their applications within each industry. We also work with the Ministry of Health and State Food and Drug Agency to create industry standards which would adopt our product specifications. By making our products an example of approved industry standards, we may create an entry barrier for competition and ensure our leading position in the industry.
Strengthen the management team
We plan to invite capable candidates to join our management team, and we have in the last year appointed new directors and officers. We currently have as advisers financial, operational, investment and public relation experts, and will in the foreseeable future, focus on the recruitment of investor relations, marketing and research and development experts. We believe a strong management team can significantly contribute to the strategic planning and its implementation to our company.
Acquiring companies with potential and expansion of product applicability
Following the appointment of our new Chief Investment Officer in May 2005, we have achieved growth through merger and acquisitions.
In connection with our Internet Security business, we plan to expand our product lines to cover additional industries. We have successfully developed Security Gate for Power Supply Industry and plan in the current year to focus on upgrading Security Gate for the Transportation Industry. In connection with our nutraceutical business, we plan to acquire other nutraceutical businesses in China to expand our product lines from bamboo based to other herbal extracts, including tea, gingko, and soy.
   C. Organizational structure.
We conduct substantially all of our business through BBHL and Zhejiang Innoessen, our respective 76% and 71.43% indirect subsidiaries.
The following table set forth the details of our subsidiaries as at the date of this Annual Report:
                 
    Country of     Ownerships    
Name   Incorporation     Interests   Direct Parent
BHL Networks Technology Co Ltd (“BHLHK”)
  Hong Kong     100 %   China Technology
Development Group
Corporation
 
               
Jingle Technology Co Ltd (“Jingle”)
  BVI     100 %   China Technology
Development Group
Corporation
 
               
BHL Networks Technology Co Ltd (“BHLNet”)
  Cayman Islands     100 %   Jingle
 
               
Beijing BHL Networks Technology Co Ltd (“BBHL”)
  China     76 %   BHLNet
 
               
China Natures Technology Inc. (“CNT”)
  BVI     100 %   China Technology
Development Group
Corporation

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    Country of     Ownerships    
Name   Incorporation     Interests   Direct Parent
Zhejiang University (Hangzhou) Innoessen Bio-technology Inc. (“Zhejiang Innoessen”)
  China     71.43 %   CNT
 
               
Shenzhen Innoessen Bio-Tech Inc. (“Shenzhen Innoessen”)
  China     100 %   CNT
 
               
Anji Science Bio-Product Inc. (“Anji Bio”)
  China     93.67 %   Zhejiang Innoessen
 
               
Jian’ou Yingshi Food Technology Ltd (“Jian’ou”)
  China     51 %   Zhejiang Innoessen

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BHLHK is the cash management vehicle of the Company. BHLNet and Jingle are investment-holding vehicles. BBHL specializes in network technology. With network security and information security technology and support software as its main business, the company has established its brand image with specialized technology, system products and comprehensive service. The principal technology of the company include: accreditation and encryption, coding, information protection and testing, network security technical standard and related technology as well as products and solutions in the aspect of network information processing.
CNT is currently an investment holding company for our nutraceutical business. It owns 71.43% interest in Zhejiang Innoessen, which then owns 93.67% interest in Anji Bio. Zhejiang Innoessen is the head office of CNT’s research and development and sale and marketing functions. Anji Bio is currently the manufacturing center. Shenzhen Innoessen was established in Shenzhen and was wholly owned by the CNT. It acted as the sale and marketing office of our nutraceutical business in the South China.
In January 2006, Zhejiang Innoessen entered into a joint venture agreement with Fujian Jian’ou Food Production Limited, pursuant to which, Jian’ou, the 51% subsidiary of Zhejiang Innoessen, was established as our additional production center in Fujian Province, another bamboo rich area in China. Since early June of 2006, however, the Fujian Province of China had been subject to the worst heavy rainstorms and floods in the past fifty years, Jian'ou, one of the cities in the Fujian Province, suffered the most damage. As a result of this flooding, the production facilities held by Fujian Jian'ou, having started their trial run in May 2006, were damaged and all operations of Fujian Jian’ou were stopped. Management is in the process of quantifying the losses suffered by the Company as a result of this flood. Management’s preliminary assessment is that the cleanup of the site and restoration of the factory's capability will not be completed before the middle of September 2006.

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D. Property, plant and equipment.
Our principal executive office is located at Room 2413-18, Shui On Centre, 8 Harbour Road, Wanchai, Hong Kong. We signed a month-to-month lease on May 20, 2005, for a period of two years, with monthly rent of Rmb 33,000.
BBHL leases its office at Room 214-216, Tai Li Min Yuan Office Building, No. 1, Wai Guan Xie Street, Chaoyang District, Beijing, 100011, China (“Tai Li Min Yuan”) at a monthly rent of Rmb 53,000 for a period of two years commencing September 20, 2002. Upon the expiry of the lease agreement on September 20, 2004, BBHL exercised the option granted by the lease agreement to extend the lease for an additional one year at the same terms. Due to an increase in number of staff, BBHL also leased another office at Room 316 of Tai Li Min Yuan, at a monthly rent of Rmb 11,000, for the period from June 1, 2005 to October 31, 2005. BBHL has subsequently obtained oral extensions of each of these two leases of office space on the same terms as those contained in the expired leases.
CNT’s manufacture facility, Anji Bio, is located at Anji City, Zhejiang Province, one of the top ten cities in China with the richest bamboo resources. The facility of Anji Bio was approved to manufacture bamboo flavonoids in March, 1998, by the Department of Health, Zhejiang Province.
There are two production lines controlled by Anji Bio. The older line has an annual production capacity of ten tons of flavonoids and its current utilization is approximately 50%. The new line was purchased in 2004. It has an annual production capacity of 50 tons of flavonoids, however, it has not been used since acquired because our sales growth is lower than expected.
Since their acquisition, we have not to our knowledge violated any environmental laws, ordinances or regulations, and believe that all of our operations comply fully with applicable environmental laws.
On July 27, 2006, we entered into the Anji Memorandum with the Anji Buyers pursuant to which, among other things, we agreed to dispose Zhejiang Innoessen’s equity interest in Anji Bio, the sole production base of our nutraceutical business. Pursuant to the Anji Memorandum, part of the consideration for the disposal of Anji Bio’s shares will be settled by the transfer to Zhejiang Innoessen of unused new production line as mentioned above. In anticipation of the sale, we are in the process of making arrangements with other producers to service our nutraceutical business. We are in the process of selecting such potential producers and have identified at least one such producer, subject to final cooperative agreements pending finalization.
We intend that our flooded production line located in Jian’ou will be used for production of a new product. Since time is required to repair the line and cleanup the factory site, the launch of this new product will be delayed. We have been informed by our engineers, following their Completion of an assessment, that the flooded production line can be restored to its full function again.
Assuming that the above arrangements are finalized with potential producers and the production line is restored to its full function, we believe that physical facilities are adequate to conduct our business for the next twelve months.
Item 4A. Unsolved Staff Comments
Not applicable.
Item 5 Operating and Financial Review and Prospects
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains certain forward-looking statements that involve risk and uncertainties.
Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, risks and uncertainties related to the need for additional funds, the rapid growth of the operations and our ability to operate profitably in future.
All financial data referred to in the following management’s discussion has been prepared in accordance with U.S. GAAP. Results of operations for the years ended December 31, 2003, 2004 and 2005 refer to our audited consolidated results. U.S. GAAP requires that we adopt the accounting policies and make estimates that management believe are most appropriate in the circumstances for the purposes of giving a true and fair view of our results and financial condition. Our principal accounting policies are set forth in Note 2 to our consolidated financial statements. However, different policies, estimates and assumptions in critical areas

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could lead to materially different results. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. We believe the following critical accounting policies may affect our judgments and estimates used in the preparation of this consolidated financial statements: -
Revenue recognition. Our revenue includes product sales and the rendering of services. Revenue is generally recognized when all of the following criteria are met (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sellers’ price to the buyer is fixed or determinable, and (iv) collectibility is reasonably assured. Specially, product sales represent the invoiced value of goods, net of discounts, supplied to customers. Revenues of product sales are recognized upon delivery to customers and when title has passed. Rendering of services represent fees charged on the provision of information technology and network security consultancy services. Fees on such services are recognized upon the completion of the underlying services and when collectibility to the fees is reasonably assured.
Impairment. Annual impairment test for goodwill is carried out in two steps. The first step of the impairment test which is used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. The fair value is determined by the forecasted discounted net cash inflows of the reporting unit for a period of five years. If the carrying amount of the reporting unit exceeds its fair value, goodwill of the reporting unit is considered impaired. The second step of the impairment test quantifies the amount of the impairment loss by comparing the carrying amount of goodwill to its implied fair value. An impairment loss is recorded to the extent the carrying amount of goodwill exceeds its implied fair value. Goodwill must be tested for impairment at least annually, or more frequently if warranted. The Group has performed the required impairment test for 2005 and no impairment loss was identified.
     The carrying value of a long-lived asset is considered impaired by the Group when the anticipated undiscounted cash flow from such asset is less than its carrying value. If an impairment is identified, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved or based on independent appraisals.
     Long-lived assets, including certain identifiable intangibles with finite-lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

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Recent accounting pronouncements.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). This statement is a revision to SFAS No. 123 and supersedes APB Opinion No. 25. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, and addresses transactions in which an entity obtains employee services in share-based payment transactions. Entities are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share options and similar instruments are to be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. In accordance with the standard, the Group is required to adopt SFAS No. 123R effective January 1, 2006.
     Upon adoption, the Group has two application methods to choose from: the modified-prospective transition approach or the modified-retrospective transition approach. Under the modified-prospective transition method the Group would be required to recognize compensation cost for share-based awards to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provision are first applied as well as compensation cost for awards that were granted prior to, but not vested as of the date of adoption. Prior periods remain unchanged and pro forma disclosures previously required by SFAS No. 123 continue to be required. Under the modified-retrospective transition method, the Group would restate prior periods by recognizing compensation cost in the amounts previously reported in the pro forma footnote disclosure under SFAS No. 123. Under this method, the Group is permitted to apply this presentation to all periods presented or to the start of the fiscal year in which SFAS No. 123R is adopted. The Company plans to adopt SFAS No. 123R using the modified-prospective transition method. Although the Group is currently evaluating the impact of this Standard, it is expected that the adoption may not have a significant impact on the results of operations and financial position.
     Subsequently in August, October and November 2005, the FASB released Staff Position (“FSP”) 123(R)-1, "Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R)," FSP123(R)-2, "Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R)" and FSP 123(R)-3, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." Additionally, on February 1, 2006, the FASB issued FSP 123(R)-4, "Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event." The FSPs clarify certain accounting provisions set forth in SFAS No. 123(R). The requirements and guidance prescribed in SFAS No. 123(R), Staff Accounting Bulletin No. 107 and the FSPs is effective in 2006. The Group considers that the adoption of SFAS No. 123R will not have significant impact on its financial statements.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (SFAS No. 154”), which was a replacement of APB Opinion No. 20 and FAS No. 3 effective for accounting changes made in fiscal years beginning after December 15, 2005. SFAS No. 154 requires restrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. It also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change.

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SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. The Company does not expect the adoption of SFAS No. 154 on January 1, 2006 to have a material impact on its results of operations and financial condition.
In November 2005, the FASB issued FSP FAS115-1 and FAS 124-1, which nullifies certain provisions of EITF Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments", and completely supersedes EITF Topic D-44, "Recognition of Other Than Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value", addresses (1) determining when an investment should be considered impaired, (2) determining whether an impairment should be deemed other than temporary, and (3) measuring impairment loss. FAS 115-1 and FAS 124-1 are effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The Company does not expect the adoption of FAS 115-1 and FAS 124-1 on January, 2006 will have a significant effect on its financial statements.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets—An Amendment of FASB Statement No. 140" ("SFAS") No. 156. SFAS No. 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS No. 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006, which for the Group will be as of the beginning of fiscal 2007. The Company does not believe that the adoption of SFAS No. 156 will have a significant effect on its financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (“FIN 48”), which is an interpretation of SFAS No. 109, "Accounting for Income Taxes" (“SFAS No. 109”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2006, which for the Group will be as of the beginning of fiscal 2007. The Company does not believe that the adoption of FIN48 will have a significant effect on its financial statements.
     A. Results of Operations
The following table presents selected statement of operations data and such data expressed as a percentage of net sales for the years ended December 31, 2003, 2004 and 2005.
                                                 
    (Amounts in thousands, Rmb)
    2003   2004   2005(Note 1)
            Percentage           Percentage           Percentage
            of Net           of Net           of Net
    Amount   sales   Amount   sales   Amount   sales
             
Net sales
    8,405       100 %     2,720       100 %     7,503       100 %
Cost of sales
    4,421       52.6 %     1,394       51.3 %     3,290       43.8 %
Gross profit
    3,984       47.4 %     1,326       48.7 %     4,213       56.2 %
Selling, general and administrative expenses
    8,362       99.5 %     7,768       285.6 %     21,971       292.8 %
Impairment of goodwill
                4,337       159.4 %            
Bad debt expense
                            (128 )     1.8 %
Operating loss
    (4,378 )             (10,779 )             (17,886 )        
Interest income
    119               243               302          
Finance cost
                                (11 )        
Non-operating income
    2,310               167               276          
Non-operating expenses
                                     
Income tax provision
    (249 )                           (9 )        
Minority interests – continuing operations
    890                             712          
Loss from continuing operations
    (1,308 )           (10,369 )           (19,244 )        
Discontinued operations Income/(loss) from discontinued operations
    366               254               (288 )        
Net loss for the year
    (942 )             (10,115 )             (19,532 )        
Note 1:
The results for the fiscal year ended December 31, 2005 included:
(1) the results for the period from November 1 to December 31, 2005 of our newly acquired CNT and its subsidiaries including Zhejiang Innoessen Anji Bio and Shenijhen Innoessen;
(2) the results for the period from January 1 to March 31, 2005 of the Zhuhai branch of BBHL which was disposed on March 31,2005; and
(3) the results for the period from January 1 to December 31, 2005 of the remaining operating units of BBHL and the Company and our other subsidiaries including Jingle, BHLHK and BHLNet.
The operating results for the years ended December 31, 2003 and 2004, together with the operating results from January 1 to March 31, 2005 of the Zhuhai branch disposed off (which represented the entire service rendering business segment of the Company) were grouped into the line of “Income/(loss) from discontinued operations”. A description of the disposal is also included in this Management Discussion and Analysis section (the “MD&A”) and this is referred to as “Disposed Section” in this MD&A.

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The newly acquired CNT and its subsidiaries will be referred to as the CNT group in this MD&A.
The remaining operating units of BBHL, excluding the disposed Zhuhai branch, will be referred to as the “IT Operation” in this MD&A.
The Company, Jingle, BHLHK and BHLNet will be collectively referred to as “Corporate Office” in this MD&A.
Year ended December 31, 2005 compared to year ended December 31, 2004.
Revenues. Revenues increased by Rmb4.78 million, or 175.8%, from Rmb2.72 million of the year ended December 31, 2004 (the “2004 Period”) to Rmb7.5 million of the year ended December 31, 2005 (the “2005 Period”). The CNT group contributed a total revenues of Rmb 1.03 million for the 2005 Period after it was acquired by the Company. Excluding this, the revenues of the IT Operations increased by Rmb3.75 million, or 137.8%, from Rmb2.72 million, which of the 2004 Period to Rmb6.47 million of the 2005 Period. The increase was primarily due to: (1) the resumed contract with the Legend Group, which increased the revenues earned from this customer by Rmb1.79 million, or 260.6%, from Rmb0.68 million of the 2004 Period to Rmb2.47 million of the 2005 Period;. (2) the addition of one large customer in the 2005 Period, namely Wuxi Jiangnan Computing Research Center ("Wuxi Jiangnan"), which contributed Rmb1.39 million to our revenues; and (3) an increase in smaller sales contracts with other customers as a result of the increased acceptance of our products in the market.
Cost of sales. Cost of sales increased by Rmb1.90 million, or 136.0%, from Rmb1.39 million of the 2004 Period to Rmb3.29 million of the 2005 Period. The cost of sales of the CNT group amounted to Rmb0.80 million after it was acquired by the Company. Excluding this, the cost of sales of the IT Operations amounted to Rmb2.49 million, which was increased by Rmb1.10 million, or 78.6%, from Rmb1.39 million of the 2004 Period. The increase in cost of sales of the IT Operations was in line with the increase in net sales, however, the percentage increase was less than that of the net sales, as the majority of sales of the 2005 Period represented sales of self-developed products for which we had more effective control on material costs.
Gross profit. Gross profit increased by Rmb2.88 million, or 217.7%, from Rmb1.33 million of the 2004 Period to Rmb4.21 million of the 2005 Period. The gross profit of the CNT group amounted to Rmb0.23 million. Excluding this, the gross profit for IT Operations amounted to Rmb3.98 million, which was increased by Rmb2.65 million, or 200%, from Rmb1.33 million of the 2004 Period. As a percentage of sales, the gross profit margin of the IT Operations increased by 12.7% from 48.8% of the 2004 Period to 61.5% of the 2005 Period. The significant increase was mainly due to an increase in the proportion to 60% of revenues generated in the 2005 Period from large customers such as the Legend Group and Wuxi Jiangnan whose gross profit margin is between 68% and 72%, as compared to the proportion of 30% of the Company’s revenues generated from the Legend Group in the 2004 Period whose gross profit margin was 74%. Excluding these large customers, the gross profit margin of the Company’s remaining revenues during the 2005 Period was approximately 49%, which represented an increase of approximately 9%, from the Company’s gross profit margin of 40% of the 2004 Period.
Selling, general and administrative expenses. Selling, general and administrative expenses increased by Rmb14.2 million, or 182.8%, from Rmb7.77 million of the 2004 Period to Rmb21.97 million of the 2005 Period.
The increase in selling, general and administrative expenses was as a result of the following:
(1)   salaries and benefits increased by Rmb6.75 million, or 215.1%, from Rmb3.14 million of the 2004 Period to Rmb9.89 million of the 2005 Period. The salaries and benefits of the CNT group incurred since acquired amounted to Rmb0.19 million. Excluding this, the salaries and benefits of our IT operations and Corporate Office were increased by Rmb6.56 million, or 208.9%, from Rmb3.14 million of the 2004 Period to Rmb9.70 million of the 2005 Period. The increase was due primarily to significant increase in headcounts during the 2005 Period. The increase could be further segmented as follows:
(i) salaries and benefits of IT Operations increased by Rmb1.77 million, or 67.6%, from Rmb2.62 million of the 2004 Period to Rmb4.39 million of the 2005 Period, the increase was in line with our increase in headcounts from 37 employees during the 2004 Period to 63 employees during the 2005 Period;
(ii) salaries and benefits of our Corporate Office increased by Rmb 4.79 million, or 921.2%, from Rmb 0.52 million of the 2004 Period to Rmb 5.31 million of the 2005 Period. The significant increase was primarily due to: (a) an amount of Rmb2.48 million, being the difference between the exercise price and market price of options granted to the newly appointed chairman and CEO in the 2005 Period, was recognized as staff costs; and (b) the size of our Corporate Office team was expanded in the 2005 Period which included newly created co-Chief Executive Officer positions. An aggregate of eight employees were newly recruited, including two Co-CEOs and a Chief Scientist.

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

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Bad debt. Due to its long outstanding nature, bad debt of Rmb0.13 million had been accounted for in the 2005 Period, which mainly represented unrecovered advances to ex-staff and trade receivables of BBHL.
Non-operating income. Non-operating income increased by Rmb0.11 million, or 65.3% from Rmb0.17 million of the 2004 Period to Rmb0.28 million of the 2005 Period. The non-operating income mainly represented Rmb 0.11 million of dividend income received by Corporate Office in Hong Kong and Rmb0.16 million of subsidies from government in respect of a research project.
Non-operating expense. Non-operating expense of Rmb 2.63 million mainly represented the realization of Rmb2.60 million of the accumulated unrealized losses of our available-for-sale securities upon our disposal of such securities in the 2005 Period. These unrealized losses were reflected in previous years’ comprehensive income/loss.
Loss from discontinued operations. On March 31, 2005, BBHL had entered into agreement with Beijing Enterprise Development Corporation (“BEDC”), the shareholder of China Internet Technology Company Limited, the then 17.21% shareholder of the Company, to dispose its Zhuhai branch, at a cash consideration of Rmb1.3 million. The loss from discontinued operation represented: (1) net income of Rmb0.22 million, being the operating income of the Disposed Section up to the effective date of disposal, which represented the net effect of the revenues of Rmb1.04 million less the cost of sales and selling, general and administrative expenses of Rmb0.68 million and Rmb0.14 million respectively, and (2) loss of Rmb0.51 million, being the net loss of net assets of the Disposed Section disposed by the Company.
Net loss. Net loss for the 2005 Period was Rmb 19.53 million, an increase of Rmb 9.42 million, or 93.1%, from Rmb 10.11 million of the 2004 Period.
Year ended December 31, 2004 compared to year ended December 31, 2003.
Revenues. Revenues decreased by Rmb5.69 million, or 67.6%, from Rmb8.41 million of the year ended December 31, 2003 (the “2003 Period”) to Rmb2.72 million of the year ended December 31, 2004 (the “2004 Period”). The decrease was mainly attributable to the restructuring exercise undertaken by the Legend Group, the largest customer of the IT Operations, during the year, which led to cessation of revenue from it in the second and third quarters of the 2004 Period.
Cost of sales. Cost of sales primarily represented the direct material costs of our self-developed products sold to customers. Cost of sales of decreased by Rmb 3.03 million, or 68.5%, from Rmb 4.42 million of the 2003 Period to Rmb 1.39 million of the 2004 Period. The decrease in cost of sales was mainly due to the decrease in net sales.
Gross profit. Gross profit decreased by Rmb2.66 million, or 66.7%, from Rmb3.99 million of the 2003 Period to Rmb1.33 million of the 2004 Period. As a percentage of sales, gross profit of IT Operations increased by 1.4%, from 47.4% of the 2003 Period to 48.8% of the 2004 Period. The gross profit remained stable for the 2003 and 2004 Period.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased by Rmb0.59 million, or 7.1%, from Rmb8.36 million of the 2003 Period to Rmb7.77 million of the 2004 Period.
The decrease in selling and general and administrative expenses was mainly due to the following factors:
(1)   Amortization of intangible assets and software development costs of our IT Operations decreased by Rmb1.09 million, or 100%. No amortization of intangible assets and capitalized software development cost were made for the 2004 Period as it had been fully amortized in the 2003 Period.
 
(2)   Depreciation charge decreased by Rmb0.4 million, or 84.2% from Rmb0.48 million of the 2003 Period to Rmb 0.08 million of the 2004 Period because most of the fixed assets had been fully depreciated in prior year.

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(3)   Legal and professional fee increased by Rmb0.3 million, or 38.2%, from Rmb0.77 million of the 2003 Period to Rmb1.07 million of the 2004 Period, which was mainly due to increase in legal services incurred by our Corporate Office for our proposed registration of the Company’s 2000 stock option plan with the SEC and providing advice in respect of restrictions applicable to exercise of options.
(4)   Insurance expenses of our Corporate Office increased by Rmb 0.42 million, or 165.7, from Rmb 0.25 million of the 2003 Period to Rmb0.67 million of the 2004 Period. The increase was mainly due to the increased amount of our directors and officers insurance.
(5)   Audit fee increased by Rmb0.13 million, or 27.9%, from Rmb0.48 million of the 2003 Period to Rmb0.61 million of the 2004 Period, due primarily to the increased workloads of our independent registered public accounting firm.
Impairment of goodwill. The goodwill recognized before the 2005 Period was attributable to the purchase of BHLNet in 2000, and which was subject to an annual impairment test. The annual impairment test was performed based on a comparison between the fair value, which was determined by the forecasted discounted net cash inflow and our carrying amount of each of the reporting units. In the 2004 Period, an assessment for impairment was carried out after the annual forecasting process. In view of the underperformance of the IT Operations, the earning forecast was revised to a lower level. Based on the revised forecast, the present value of future cash flow of the IT Operations was lower than the carrying value of goodwill and therefore, a goodwill impairment loss of Rmb4.34 million was reported.
Non-operating income. Non-operating income decreased by Rmb 2.14 million, or 92.8% from Rmb2.31 million of the 2003 Period to Rmb0.17 million of the 2004 Period. The decrease was mainly due to the net combined effect of the following:
(1)   decrease of Rmb1.9 million, or 95%, from Rmb2 million of the 2003 Period to Rmb0.1 million of the 2004 Period, of realized gain on available-for-sale securities;
(2)   decrease of Rmb0.23 million, or 77.3%, from Rmb0.30 million of the 2003 Period to Rmb 0.07 million of the 2004 Period, of dividend income from marketable securities.
Income from discontinued operations. This represented the net operating gain of the Disposed Section in the 2004 Period, which comprised revenues of Rmb3.95 million, less cost of sales, selling, general and administrative expenses and impairment of goodwill of, respectively, Rmb2.76 million, Rmb0.53 million and Rmb0.41 million, resulting in a net operating gain of Rmb0.25 million. The revenue of the 2004 Period was Rmb3.95 million, which was increased by Rmb0.61 million, or 18.3%, from Rmb3.34 million of the 2003 Period, due primarily to increase in number of professional technicians requested by customers. The cost of sales of the 2004 Period was Rmb2.76 million, which was increased by Rmb0.55 million, or 25%, from Rmb2.21 million of the 2003 Period, due primarily to increase in discount given to the customers of the discontinued operations, as a term of the customer’s promising headcount increase in the 2004 Period.
Net loss. Net loss for the 2004 Period was Rmb10.11 million, an increase of Rmb9.17 million, or 973.8%, from Rmb0.94 million of the 2003 Period.
Taxation
Our Company, CNT and Jingle were incorporated under the laws of the British Virgin Islands (BVI), and under current BVI law, are not subject to tax on income or capital gains as we did not carry out business in BVI.
BBHL, Zhejiang Innoessen and Shenzhen Innoessen are all Sino-foreign joint ventures established in China. Pursuant to the applicable PRC income tax laws, they are fully exempt from the PRC state income tax for two years, starting from the first profit-making year followed by a 50% reduction over the ensuing three years (“tax holidays”). BBHL and Zhejiang Innoessen and Anji Bio incurred losses since their incorporation, and therefore, the tax holidays were not started.

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BHLHK is subject to taxation in Hong Kong. Since no estimated net assessable profit is recognized for the 2005 Period , no tax provision is made for BHLHK. There was also no tax provision made for the 2004 Period because no net assessable profit was recognized. For the fiscal year ended December 31, 2003, a tax provision of Rmb0.25 million was incurred for net assessable profit estimated for the year.
In the Cayman Islands, there are no taxes other than import duties and stamp duty (at certain occasions). Therefore, BHLNet is not subject to taxes in the Cayman Island.
     B. Liquidity and capital resources
Cash flows and working capital
We have neither engaged in any form of off-balance sheet arrangement/ relationships with unconsolidated entities or other persons that are reasonably likely to affect materially liquidity and the availability of or requirements for capital resources, nor any trading activities that include non-exchange traded contracts accounted for at fair value. Except for the operating lease commitment, as fully disclosed in the financial statements, we are not involved in any kind of other commitments, both expressed or contingent, which may cause us to make future payments under contracts.
Our cash and cash equivalents on hand as of December 31, 2005 was Rmb18.32 million, which increased by Rmb13.07 million from Rmb5.26 million at the beginning of the year.
The net cash outflow of the operating activities of the 2005 Period was Rmb18.16 million, which increased by Rmb15.15 million, or 503%, from an outflow of Rmb3.01 million of the 2004 Period. The increase in net cash outflow of the 2005 Period was mainly due to increase in the selling, general and administrative expenses.
The net cash inflow of the investing activities of the 2005 Period was Rmb28.20 million, which increased by Rmb27.34 million, or 3,160.6%, from the net cash inflow of Rmb0.86 million of the 2004 Period. The significant increase in net cash inflow of the 2005 Period, was mainly due to the combined effects of: (1) withdrawal of Rmb6.76 million of funds previously kept in securities house; (2) withdrawal of Rmb10.08 million of funds previously held by Beijing Holdings and Beijing Holdings Investment Management Center (“BIMC”), a 100% subsidiary of Beijing Holdings incorporated in China, for security investment purpose; (3) proceeds of Rmb12.51 million received from disposal of available-for-sale securities; (4) cash of Rmb0.35 million disposed of upon disposal of our discontinued operations; and (5) outflows of Rmb0.88 million arising from purchases of property, plant and equipments.
As of December 31, 2005, after deducting the total liabilities from the cash and cash equivalents (“net cash balance”), we had a net cash balance of Rmb4.70 million, which increased by Rmb5.95 million from a cash deficit of Rmb1.25 million of the 2004 Period. We believe that we have enough cash resources to sustain our operation for the next twelve months.
Capital resources
There was no significant capital expenditures incurred for the years ended December 31, 2003, 2004 and 2005.
We do not have a fixed plan of capital expenditure for the year ending December 31, 2006. The Capital expenditures increased up to the date of this Annual Report, however, amounted to Rmb0.60 million as part of our share capital injected into Fujian Jian'ou. Capital expenditures in the 2004 and 2005 Periods have been funded through our retained cash.
We believes our current cash and cash equivalents will be sufficient to meet our anticipated cash needs, including for our working capital needs, for the foreseeable future. We may, however, require additional cash resources due to changes in business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional equity securities or obtain a credit facility. The sale of convertible debt securities obligations or additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financial covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

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From time to time, we also evaluate potential investments, acquisitions or divestments and may, if a suitable opportunity arises, make an investment or acquisition or conduct a investment. As a result of the above possible actions, we may need to obtain additional funds through issuance of new equity or debt. Again, we may have to seek additional financing sooner than currently anticipated and there can be no assurance that we would be able to obtain additional financing on terms acceptable to us.
     C. Research and development, patents and licenses, etc.
Network Security Business:
We acquired, through BBHL, a technological platform for the development of Internet security devices from ICT of the CAS at a cash consideration of Rmb 4 million in 2000. This intangible asset had been fully amortized in 2003. Subsequent to that, we did not incur significant expenses in acquiring techniques but had maintained a research and development team to upgrade the existing products and all costs of which had been recorded as expenses in the consolidated statement of operations when incurred.
Nutraceutical Business:
Our major research and development section for bamboo-related products is in Zhejinag Innoessen, which is affiliated to Zhejiang University, China’s third largest university. Professor Ying Zhang is the section leader and, also, our Chief Scientist, with a team consisting of experienced scientists and graduate students. The research facility of Zhejiang Innoessen includes one analytical laboratory and a medium scale production facility for plant leaf extraction. The R&D team has been utilizing the extensive research resources within Zhejiang University, including one analytical laboratory and one pilot plant, and the outside research institutes such as Zhejiang Disease Control Center, Zhejiang Academy of Pharmaceutical, etc, to perform the world-class research and experiments. Their study on bamboo extractives has been published in numerous Chinese and international research journals, which has established Dr. Zhang as one of the international authorities in the field of biochemical utilization of bamboo.
Over the past eight years, Dr. Zhang and the R&D team had filed in China ten patents on the chemical components, preparation techniques, and the nutraceutical applications of bamboo extractives. As of December 31, 2005, three out of the ten filed patents had been approved by the State Department of Health in China and had been applied in manufacturing Bamboo Flavonoid Powder, Zhukangning Capsule and Bamboo Health Beer.
The R&D team works closely with Anji Bio for technical trouble shooting and the scale-up manufacturing of each new product and its procedure. The team has developed analytical testing methods for the Quality Control Laboratory of Anji Bio, and provided technical support for the manufacture.
The ten patents filed in China are:
Preparation method of flavonoid concentrate and powder from bamboo leaves.
This patent was filed on March 17, 1998 and was granted in year 2001. This invention claims a manufacturing procedure of extracting flavonoids from plants, particularly from bamboo leaves, to prepare flavonoids concentrate or powder. Using bamboo leaves as raw material, after going through extraction, separation, concentration, refining, or drying process, a product is obtained that contains highly concentrated bamboo leaf flavonoid glycosides, phytophenolic acidsanthraquinones-tertene lactones, etc. This preparation has excellent properties of antioxidation, free radical scavenging ability, and can lower blood lipids. It carries an original bamboo fragrance which can be used widely in various anti-ageing health food and as pharmaceutical ingredients.
A health beer fortified with bamboo leaf flavonoids.
This patent was filed on March 17, 1998 and was granted in year 2000. This patent claims a food technology, is about a health beer fortified with bamboo leaf flavonoids. This health beer is made by adding a certain amount of bamboo leaf flavonoids into regular beer. The health beer, besides its nutrition and flavor of a beer, has many health functionalities including scavenging free radicals and liposome peroxidation residues, improving brain metabolism, lowering blood lipid, etc. In addition, the beer has an original refreshing fragrance of bamboo.

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The composition, preparation and application of total triterpenoid sapogenins isolated from bamboo.
This patent was filed on December 12, 2002 and was granted in June 2006. PCT international patent (PCT/CN03/00309) and patent applications for Japan, USA and Europe were also filed. The invention provides compositions, preparation methods and applications of total triterpenoid sapogenins isolated from bamboo. The extract in this invention has many kinds of excellent physiological and pharmacological activities such as anti free radical, anti-oxidation, anti-tumor and anti-hypertension. It has a great potential for the preparation of cardiovascular disease prevention and the development of drugs and health food. Meanwhile, it can be applied in the field of daily cosmetics.
Application of total flavonoids of bamboo leaf as an anti-aging and skin-care factor in cosmetics.
This patent was filed on March 3, 2003 and PCT international patent (PCT/CN2004/000136) was also filed. This invention provides an application of bamboo leaf flavonoid in cosmetics, the purpose of which is to provide the cosmetic industry with a natural anti-aging skin-care factor from a plant. Total flavonoids of bamboo leaf has multiple functions including scavenging free radicals, anti-oxidation, irradiation protection, anti-bacteria, enhancing multiplication of skin cells, skin oxidization damage prevention, decreasing synthesis of melanin delaying senescence of skin, etc. The flavonoid preparation can be applied to nutrition lotion, sunscreen lotion, anti-wrinkle cream, face cleansing cream, shampoo, bath gel and many other personal care cosmetics.
Application of total flavonoids of bamboo leaf as preventive medicine and functional foods against prostate disease.
This patent was filed on March 25, 2003 and PCT international patent (PCT/CN2004/000531) and patent applications for Japan and USA were also filed. This invention provides an application of total flavonoids of bamboo leaf as preventive medicine and functional foods against prostate disease. This invention provides an effective plant extractive, the total flavonoids of bamboo leaf, with abundant resources, safe to use, and highly effective.
Bamboo leaf antioxidant and its use.
This patent was filed on October 10, 2003 and PCT international patent (PCT/CN2004/000531) and patent applications for Japan and USA were also filed. This invention provides the composition and application of antioxidant of bamboo (AOB), the purpose of which is to provide the food industry a novel food additive that is abundant, safe, effective, low-cost, nutritious, and having multiple functions. AOB is a yellowish brown powder or particles prepared from bamboo leaves. The main antioxidant components are flavonoids, lactones, and phenolic acids. AOB has a smooth texture, no medicine smell, no bitterness in taste or pungent smell. It has excellent water solubility and is, stable, resistant to acid hydrolyzation, heat hydrolyzation and enzyme hydrolyzation. AOB can be widely applied in edible oil, oil-containing foods, meat products, sea foods, fruit juices, dairy, soft drinks, wine, flavorings, and bakeries.
Application of bamboo leaf extract as acrylamide inhibitor in heat-treated foods.
This patent was filed on March 21, 2005 and PCT international patent (PCT/CN2006/000431) was filed on March 21, 2006. This invention provides a new application of bamboo leaf extract as acrylamide inhibitor in heat-treated foods. When the bamboo leaf extract in this invention is used as acrylamide inhibitor and used in the above food applications, it can inhibit the acrylamide formation up to 20-98%.
Preparation method and application of phytosterols extracted from bamboo shoot.
This patent was filed on December 29, 2004. This invention provides a preparation method and application of phytosterols extracted from bamboo shoots. The preparation has excellent functions of anti-inflammation, lowering blood lipid and cholesterol inhibition of hyperplasia of leukemic cells, and can be applied in cosmetics, foods, nutraceuticals and pharmaceuticals.

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Preparation method and application of amino acids and peptides extracted from bamboo shoots.
This patent was filed on April 27, 2005. This invention provides a preparation method and application of amino acids and peptides extracted from bamboo shoot. The amino acids preparation has multiple pharmaceutical and nutraceutical functions, including improving brain metabolism, anti-depression, and slowing down memory loss. The preparation has an excellent texture and taste, and can be widely used in functional food, beverages, and flavorings.
Preparation method and application of high quality non-soluble plant dietary fiber micro powder extracted from bamboo shoots.
This patent was filed on March 16, 2006. This invention provides a preparation method and application of high quality non-soluble plant dietary fiber micro powder extracted from bamboo shoot. It has multiple pharmaceutical and nutraceutical functions, including purgation, de-toxin, obesity control. The preparation has an excellent texture and taste, and can be widely used in functional food, and conventional food.
     D. Trend Information
Other than as disclosed elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our net sales, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
     E. Off-balance Sheet Arrangements
We have no outstanding off-balance sheet arrangements, derivative financial instruments, interest rate swap transactions or foreign currency forward contracts. We do not engage in trading activities involving non-exchange traded contracts.
     F. Tabular disclosure of contractual obligations.
The following table summarizes contractual obligations as of December 31, 2005.
                                         
    Payments due by period  
            Less than                 More than  
    Total     1 year     1 to 3 years     3-5 years     5 years  
    Rmb     Rmb     Rmb     Rmb     Rmb  
Short-term borrowings
    3,569       3,569                    
Operating leases
    948       615       333              
 
                             
Total contractual cash obligations
    4,517       4,184       333              
 
                             
     The Company is a party to four lease agreements for office premises and staff quarters. The lease agreements are described below:

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(a)   The lease agreement of our Corporate Office (situated in Hong Kong) commenced on May 27, 2005, and shall continue for a period of two years, at a monthly rent of Rmb 33,000 As of December 31, 2005, the future minimum lease payments under this non-cancelable operating lease amounted to Rmb 358,000 and Rmb 158,000 for years ended December 31, 2006 and 2007 respectively.
(b)   The lease agreement of staff quarters (situated in Hong Kong) for managers of our Corporate Office commenced on December 11, 2005, and shall continue for a period of two years, at a monthly rent of Rmb 7,000. As of December 31, 2005, the future minimum lease payments under this non-cancelable operating lease amounted to Rmb 86,000 and Rmb 81,000 for years ended December 31, 2006 and 2007 respectively.
(c)   The lease agreement of staff quarters (situated in Hong Kong) for Alan Li, the executive director and Co-Chief Executive Officer of the Company, commenced on December 8, 2005, and shall continue for a period of two years, at a monthly rent of Rmb 8,000. As of December 31, 2005, the future minimum lease payments under this non-cancelable operating lease amounted to Rmb 100,000 and Rmb 93,000 for years ended December 31, 2006 and 2007 respectively.
(d)   The lease agreement for the office of Shenzhen Innoessen (situated in Shenzhen, China) commenced on March 23, 2005, and shall continue for a period of one year, at a monthly rent of Rmb 24,000. As of December 31, 2005, the future minimum lease payments under this non-cancelable operating lease amounted to Rmb 71,000 for year ended December 31, 2006.
Lease rental costs incurred by the Company for the year ended December 31, 2003, 2004 and 2005 amounted to Rmb596,000, Rmb519,000 and Rmb1,052,000 respectively.
Except as disclosed above, as of December 31, 2005, we did not have other contractual obligations.
Contingencies
     G. Safe Harbor.
Forward-Looking Statement Disclosure
This news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements regarding CTDC contained in this press release that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparable terminology, are forward-looking statements. Forward-looking statements are based on current expectations and assumptions, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Important factors known to Tramford that cause actual results to differ materially from those expressed in such forward-looking statements are identified and discussed in CTDC’s filings with the Securities and Exchange Commission.
Item 6 Directors, Senior Management and Employees
A. Directors and senior management.
Our directors and executive officers and their present positions with our company, as at the date of this Annual Report, are as follows:

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Name   Age   Positions with the Company
Changshan Zhao
  41   Chairman of the Board and Executive Director
 
       
Xu Qian
  42   Chief Executive Officer and Executive Director
 
       
Alan Li
  38   Co-Chief Executive Officer (Greater China) and Executive Director
 
       
Ju Zhang
  44   Executive Director
 
       
Michael Siu
  37   Executive Director, Chief Financial Officer and Secretary
 
       
Peter Fu (1)(2)
  51   Independent Director
 
       
L C Wan (1)(2)
  45   Independent Director
 
       
Meng Wan (3)
  42   Independent Director
 
       
Yezhong Ni (1)(2)
  36   Independent Director
 
       
Weidong Wang (3)
  39   Independent Director
 
       
Xinping Shi (3)
  48   Independent Director
 
       
Aaron Zhu *
  38   Co-Chief Executive Officer (International)
 
       
Zhenwei Lu
  35   Chief Investment Officer
 
(1)   Member of the Audit Committee
 
(2)   Member of the Compensation Committee
 
(3)   Member of the Nominating Committee
 
*   Ceased to be Co-Chief Executive Officer on February 21, 2006
Information about Directors and Officers
Set forth below is certain information with respect to each director and officer as of August 31, 2006:
Mr. Changshan Zhao, 41, nominee of Beijing Holdings, was appointed the Chairman of the Board on February 8, 2005. He also was the Vice-Chairman and General Manager of Beijing Holdings. Mr. Zhao obtained his master degree in business administration in the Guanghua School of Management of the Beijing University. He was appointed the Vice-Chairman and General Manager of Beijing Holdings in November 2003. Prior thereto, he was a senior officer of the Beijing People’s Municipal Government.
Mr. Xu Qian, 42, nominee of Beijing Holdings, was appointed the Director and Co-Chief Executive Officer of the Company on March 29, 2005. Mr. Qian graduated from the Economics and Management Faculty of the Beijing Industrial University with a bachelor degree in Economics in 1986. From 1986 to 1993, he worked as an economic analyst in the Statistics Bureau of the BPMG. From 1993 to 1996, he worked as an independent auditor in Hong Kong and from 1996 to 1998, he worked as the Project Chief Financial Officer of the TA Orient Telecommunication Co., Ltd. Since 1998, he worked as the Finance Manager of Beijing Holdings. In March 2005, he was promoted to serve as the Chief Financial Officer of Beijing Holdings and was further promoted as the Assistant General Manager of Beijing Holdings in March 2006. Mr. Qian has extensive experience in merger and acquisition, corporate restructuring and financial management.

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Mr. Alan Li, 38 , was appointed the Co-Chief Executive Officer (Greater China) and Director of the Company on May 24, 2005. Mr. Li obtained his master degree in Business Administration from Murdoch University, Australia. From 2000 to 2002, Mr. Li had been the Executive Director and Vice President of Linchest Technology Ltd. (“Linchest”) and he had led Linchest in achieving the 60% market share of the School Management education software in China. Mr. Li has extensive experience in management, financial planning and investments in China, and particularly, he has deep exposure in overseas listing of Chinese companies. Mr. Li is currently responsible for business development, mergers and acquisition and capital market development of the Company in the Greater China Region.
Mr. Ju Zhang, 44, was appointed a Director of the Company on May 24, 2005. Mr. Zhang obtained his master degree from the Chinese Academy of Social Sciences in Philosophy and a bachelor degree from Tsinghua University in Energy Engineering. Mr. Zhang currently is the Assistant to General Manager of the Research and Development Department of the China Merchants Group (“CMG”), one of the largest state-owned enterprises directly under the administration of the China State Council and having its business zones all across Hong Kong and China in real estate, energy, logistics and technology, and the largest ports, highways, and industrial zones investor and operator in China. Prior thereto, he was the Deputy Chairman and General Manager of China Merchants Technology Holdings Co. Ltd (“CMTH”). a wholly owned subsidiary of CMG. Mr. Zhang was also the Associate Professor at the Chinese Academy of Medical Sciences and Peking Union Medical College, the Assistant Director of Department of Research in National Committee of Science & Technology and Department of Research in Chinese Ministry of Science & Technology.
Michael Siu, 37, was appointed a Director of the Company on February 8, 2005. He had also served as the Chief Financial Officer and Secretary of the Company since September 1997. He is currently a fellow member of the Association of Chartered Certified Accountants and an associate member of the Hong Kong Institute of Certified Public Accountants.
Peter Fu, 51, was appointed an Independent Director and a member of the Audit Committee of the Company on April 5, 2005. On May 24, 2005, he was also appointed a member of the Company’s Compensation Committee. Mr. Fu began his career in the finance industry in 1978 after his graduation from Wharton School, University of Pennsylvania. He made his mark as one of top institutional sales in Hong Kong when he worked for HG Asia (currently known as ABN Amro) in the mid-80s. Since then, Mr. Fu had taken up senior sales positions in other investment banks including Citicorp Vickers and Barings Securities in Hong Kong. For the ten years between late 1991 and early 2001, Mr. Fu was one of the senior executives of the Peregrine Group in Hong Kong, which operates currently under the name of BNP Paribas Peregrine. From 2003 to 2005, he was the head of the corporate finance team of the Kim Eng Group focusing on Hong Kong and China business. Mr. Fu currently is a senior advisor of the Goldbond Group, one of the leading investment bank in the Asian capital market.
L C Wan, 45, was appointed an Independent Director and member and the financial expert of the Audit Committee of the Company on March 24, 2005. On May 24, 2005, he was also appointed a member of the Company’s Compensation Committee. Mr. Wan graduated from the Coventry Polytechnic with a master degree in 1988. He was fellow member of the Chartered Association of Certified Accountants and an associate member of the Hong Kong Institute of Certified Public Accountants. Prior to his service with the Company, he was the General Manager in Finance and Administration of the China Digital satNet Limited and the Project Financial Controller of the C.P. Pokphand Co. Ltd. Mr. Wan had extensive and valuable experience in financial management.
Meng Wan, 42, was appointed an Independent Director of the Company on May 24, 2005. On July 28, 2005, he was also appointed a member of the Company’s Nominating Committee. Professor Wan was the Dean of Laws of the Beijing Foreign Studies University, an Arbitrator of the China International Economic and Trade Arbitration Commission and China Maritime Arbitration Commission and a member of The World Jurist Association. Professor Wan also received his doctorate and master of laws degrees from Wuhan University Law School, and he taught as a guest professor at Wuhan University and at Zhonnan University of Economics and Law. He was also a senior research fellow at the London Institute of International Banking and Finance. Professor Wan specializes in economic law and is a former President and Chief Justice of the Wuhan Maritime Court and Chief Judge of the Economic Division of the Hubei High Court.

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Yezhong Ni, 36, was appointed an Independent Director and a member of the Audit Committee of the Company on April 28, 2005. On May 24, 2005, he was also appointed a member of the Company’s Compensation Committee. Mr. Ni is a partner of the Kingson Law Firm, one of the top law firms in China. He graduated from the Law School of the Beijing University in 1990 and was experienced in legal services for bankruptcy, derivatives and financial instruments. Mr. Ni had been appointed in 1999 as one of the lead attorneys for the liquidation of the Guangdong International Trust & Investment Company, the largest bankruptcy case of financial institution in the Chinese history.
Weidong Wang, 39, was appointed an Independent Director and a member of the Nominating Committee of the Company on July 28, 2005. Mr. Wang had been the Business Representative of Henan Province in Australia from February 1990 to June 1991 and the Business Director of China National Cereals, Oils & Foodstuffs Import & Export Corporation from 1991 to 2000. Since March 2000, Mr. Wang had been appointed the Deputy General Manager of Ceroilfood Enterprises Limited — Foreign Office of China Business Department, in charge of overseas business development and management. Mr. Wang has ample experience in national cereals, oils and foodstuffs import and export industry and has extensive access to sale channels all over the world. He was awarded the qualification of International Business Engineer in 1994 in China, and obtained his master degree in Public Finance from Tianjin University of Finance & Economics in 1999 and a MBA degree in 2000 from Murdoch University, Australia.
Xinping Shi, 48, was appointed an Independent Director and a member of the Nominating Committee of the Company on July 28, 2005. Dr. Shi is the Director of Logistics Management Research Centre, Coordinator of the focused research area of Logistics and Supply Chain Management, and Associate Professor of the Department of Finance and Decision Sciences of Hong Kong Baptist University. Dr. Shi has been served as the Independent Director of China Merchants Shekou Holdings Company Limited, a company listed on the Shenzhen Stock Exchange; the Director of Weboptimal International Limited, a management consulting firm; Guest Professor of the College of Logistics, the Beijing Normal University and the Advisor of the Chamber of Hong Kong Logistics. Dr. Shi obtained his doctorate degree and master degree in Business Administration from Middlesex University and Lancaster University, UK respectively and the Bachelor of Science from North-Western Polytechnic University, Xian, China.
Zhenwei Lu, 35, was appointed the Chief Investment Officer of the Company on May 24, 2005. Mr. Lu obtained his bachelor degree from Shanghai Marine College and a master degree from Zhong Nan Finance, Politics and Law University. He was also the Vice General Manager of CMTH. Since 1993, Mr. Lu had served as an executive of China Merchants Group at its Guangzhou office, an executive of Shenzhen Haihong Chemicals Co., Ltd., The Finance Manager of Hong Kong Haitong Limited, the Finance Manager and Assistant to the General Manager of Shenzhen Zhaoxun Communication Co. Ltd, and Assistant to General Manager of CMTH and Shenzhen Merchants Technology Investment Holdings Co., Ltd. Mr. Lu was appointed the General Manager of CMTH since March 2006. Mr. Lu is currently responsible for strategic corporate investment and mergers and acquisitions of the Company in the Greater China Region.
The directors were appointed at our shareholders meeting held on October 21, 2005 and will serve until the next annual shareholders meeting of the Company.
There are no family relationships between the above named officers and directors. Beijing Holdings is our 62.73% shareholder, however, we do not have any formal agreement and arrangement with Beijing Holdings and pursuant to which the authority of direct nomination of directors into the Company’s board was granted. All of our directors are appointed through resolution passed in our annual shareholders meeting. Nevertheless, prior to the establishment of our nominating committee on July 28, 2005, it was the Company’s practice in previous year to include two candidates recommended by Beijing Holdings in the list of candidates of directors eligible for election in our annual shareholders meeting, as the Company’s intention to capitalize on the specific position of our major shareholder in promoting our business in China. In the Company’s 2005 Annual Shareholders Meeting, however, all candidates were recommended by the Company’s nomination committee based on their experience and capability and such practice no longer existed. Mr. Changshan Zhao and Mr. Xu Qian were selected by the nominating committee as candidates on the fact their senior positions in Beijing Holdings will enhance closer involvement of Beijing Holdings in the future development of the Company.

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Audit Committee. Mr. Peter Fu, Mr. L C Wan and Mr. Yezhong Ni were appointed the members of the Audit Committee of our board of directors. According to the Charter of the Audit Committee, the responsibilities of the Audit Committee include the oversight of (1) integrity of our financial statements; (2) our compliance with legal and regulatory requirements; (3) the qualification, appointment, compensation, retention and oversight of our independent auditors, including resolving disagreements between management and the auditors regarding financial reporting; and (4) the performance of our independent auditors and of our internal control function.
The Audit Committee was given the resources and assistance necessary to discharge its responsibilities, including appropriate funding, as determined by the Committee, the unrestricted access to our personnel and documents and our independent auditors. The Committee shall also have authority, with notice to the Chairman of the Board, to engage outside legal, accounting and other advisors as it deems necessary or appropriate.
The Audit Committee is required to meet at least two times a year and may call special meeting as required. All members of the Audit Committee shall be financially literate, having a basic understanding of financial controls and reporting, and none of them shall receive directly or indirectly any compensation from our company other than his or her directors’ fee and benefits.
Compensation Committee. The Compensation Committee makes recommendations to the Board of Directors concerning salaries and incentive compensation for our officers, including our Chief Executive Officer, and employees and administers our stock option plans. The Compensation Committee consists of three directors, each of whom meets the independence requirements and standards established by the NASDAQ rules and the SEC regulations. The Compensation Committee was established on May 24, 2005 and Mr. Peter Fu, L C Wan and Yezhong Ni were appointed the members.
Nominating Committee. The purpose of the Nominating Committee is to assist the Board of Directors in identifying qualified individuals to become board members, consultants and officers of the Company, in determining the composition of the Board of Directors and in monitoring a process to assess Board effectiveness. The Nominating Committee established on July 28, 2005, consists of three directors, each of whom meets the independence requirements and standards established by the NASDAQ rules and the SEC regulations. Mr. Meng Wan, Weidong Wang and Xinping Shi were appointed the members.
B. Compensation.
Except Mr. Changshan Zhao who had been paid Rmb 405,000 in the 2005 Period for his capacity as the Chairman of the Board of the Company, we did not pay any compensation to other directors in the 2005 Period.
The directors who also acted in their capacities as officers of the Company were paid in the 2005 Period as follows:
                     
        Compensation paid
        (Amounts in thousand, Rmb)
Name   Management position held   2005   2004
Changshan Zhao
  Chairman     405    
 
                   
Xu Qian
  Chief Executive Officer     315    
 
                   
Alan Li
  Co-Chief Executive Officer (Greater China)     303    
 
                   
Michael Siu
  Chief Financial Officer and Secretary     487       270  

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The Company has granted stock options to certain officers and directors as described in Item 6E.
We do not have any employment contracts with our officers or directors except Mr. Michael Siu who had entered into an employment contract with the Company when he joined on July 1, 1997 as the Finance Manager of the Company. The terms of the contract followed the sample employment contract as suggested by the Labour Department of the Government of Hong Kong, such as five working days per week, termination of contract by one month’s notice and annual pay leave of seven days. The contract also included guaranteed double pay of salary in the last month of each year, however, there was no term of guaranteed stock options.
C. Board practices.
At the Annual Meeting on October 21, 2005, Changshan Zhao, Xu Qian, Alan Li, Ju Zhang, Michael Siu, Peter Fu, L C Wan, Meng Wan, Yezhong Ni, Weidong Wang and Xinping Shi were appointed the directors of the Company. There was no subsequent change of directors of the Company up to the date of this Annual Report.
A total of seventeen (17) meetings of directors were held in 2005. Our Memorandum and Articles of Association do not require the establishment of audit committee and compensation committee. Following the requirements of the Sarbanes Oxley Act of 2002, we established an audit committee comprised of the independent directors in 2004. On May 24, 2005, we established the Compensation Committee and on July 28, 2005, we established the Nominating Committee. It is stated in the respective charters that only independent directors are qualified to be appointed as members of these committees.
D. Employees.
As of December 31, 2005, our total staff consisted of 130 employees compared to that of 66 in 2004. The increase was due to the completion of the acquisition of the 100% equity interest of CNT, the nutraceutical business.
An analysis of the employees by function is as follows:
                 
    2005   2004
Corporate administration
    18       9  
 
               
Finance
    8       3  
 
               
Research and developments
    7        
 
               
Technology
    43       46  
 
               
Sales and services
    24       8  
 
               
Workers
    30        
 
               
 
               
Total
    130       66  
We do not have any collective bargaining agreements with our employees. We have never experienced any material labor disruptions and are unaware of any current efforts or plans to organize employees. We believe we have good relationships with our employees.
E. Share ownership.
None of our executive officers and directors own shares of the company as of June 26, 2006:

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The names and titles of our executive officers and directors to whom we have granted options which are outstanding as of August 31, 2006 and the number of shares of our common stock subject to such options are set forth in the following table:
                         
                Exercise    
        Number   per option    
Name   Title/Office   of options   (US$)   Expiration Date
Changshan Zhao
  Chairman and Executive Director     50,000       1.15     December 28, 2009 (1)
 
        45,000       1.85     September 20, 2016 (2)
                         
Xu Qian
  Chief Executive Officer and Executive Director     50,000       1.15     December 28, 2009 (1)
 
        25,000       1.85     September 20, 2016 (2)
                         
Alan Li
  Co-Chief Executive Officer and Executive Director     75,000       1.85     September 20, 2016 (2)
                         
Michael Siu
  Chief Financial Officer, Secretary and Executive Director     40,000       1.15     December 28, 2009 (1)
 
        15,000       1.85     September 20, 2016 (2)
                         
Ju Zhang
  Executive Director     10,000       1.85     September 20, 2016 (2)
                         
Peter Fu
  Independent Director     10,000       1.85     September 20, 2016 (2)
                         
L C Wan
  Independent Director     10,000       1.85     September 20, 2016 (2)
                         
Meng Wan
  Independent Director     10,000       1.85     September 20, 2016 (2)
                         
Yezhong Ni
  Independent Director     10,000       1.85     September 20, 2016 (2)
                         
Weidong Wang
  Independent Director     10,000       1.85     September 20, 2016 (2)
                         
Xinping Shi
  Independent Director     10,000       1.85     September 20, 2016 (2)
                         
Zhenwei Lu
  Chief Investment
Officer
    40,000       1.85     September 20, 2016 (2)
 
(1)   These options were granted under the Company’s 1996 Stock Option Plan. These options were granted pursuant to a board resolution passed on December 28, 1999 (the “Resolution”) and are fully vested as of December 31, 2005. Pursuant to the Resolution, the persons holding the position of Chairman and Chief Executive Officer were each granted 50,000 options. Unless the options were exercised during their service period with the Company, the remaining unexercised options can be succeeded by the newly appointed persons holding these positions. Mr. Xiaohong Li and Mr. Xinhao Jiang had resigned on February 8, 2005 and March 9, 2005 respectively. They had not exercised any of the above options granted and so Mr. Zhao Changshan and Mr. Jeff Qian, respectively the newly appointed Chairman and Chief Executive Officer, succeeded all granted options of their respective positions.
 
(2)   These options were granted under the Company’s 2000 Stock Option Plan. These options were granted pursuant to a board resolution passed on September 21, 2005 and are fully vested as of December 31, 2005.

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Stock Option Plans
Pursuant to shareholders’ resolutions passed on October 10, 1996, September 20, 2000 and October 21, 2005, the 1996 Stock Option Plan (the “1996 Plan”), the 2000 Stock Option Plan (the “2000 Plan”) and the 2005 Stock Option Plan (the “2005 Plan”) were approved respectively.
Details of these plans are as follows:
1996 Stock Option Plan
Types of Grants and Eligibility
The 1996 Plan is designed to provide an incentive to employees (including directors and officers who are employees) and to consultants who are not our employees, and our present and future subsidiary companies and to offer an additional inducement in obtaining the services of such employees and consultants.
Shares Subject to the 1996 Plan
The aggregate number of shares of our common stock, $0.01 par value per share (“Common Stock”) for which options may be granted under the Plan shall not exceed 200,000. Such shares of Common Stock may, in the discretion of our Board of Directors (the “Board of Directors”), consist either in whole or in part of authorized but unissued shares of Common Stock or shares of Common Stock held as treasury shares. Any shares of Common Stock subject to an option which for any reason expires, is cancelled or is terminated unexercised or which ceases for any reason to be exercisable shall again become available for the granting of options under the 1996 Plan. We shall at all times during the term of the 1996 Plan reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of it.
Administration of the 1996 Plan
The 1996 Plan shall be administered by the Board of Directors or, to the extent the Board of Directors may determine, a committee of the Board of Directors (the “Committee”) consisting of not less than two directors. A majority of the members of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, and any acts approved in writing by all members without a meeting, shall be the acts of the Committee. All references in the 1996 Plan to determinations or actions of the Committee shall be deemed to include determinations and actions by the Committee or the Board of Directors.
The Committee may from time to time, in its sole discretion, consistent with the purposes of the 1996 Plan, grant options to employees (including officers and directors who are our employees, our consultants or any of our subsidiaries. Such options granted shall cover such number of shares of Common Stock as the Committee may determine in its sole discretion.
Subject to the express provisions of the 1996 Plan, the Committee shall have the authority, in its sole discretion, to determine the employees and the consultants who shall be granted options; the times when options shall be granted; the number of shares of Common Stock to be subject to each option; the term of each option; the date each option shall become exercisable; whether an option shall be exercisable in whole, in part or in installments and, if in installments, the number of shares of Common Stock to be subject to each installment, whether the installments shall be cumulative, the date each installment shall become exercisable and the term of each installment; whether to accelerate the date of exercise of any option or installment; whether shares of Common Stock may be issued upon the exercise of an option as partly paid and, if so, the dates when future installments of the exercise price shall become due and the amounts of such installments; the exercise price of each option; the form of payment of the exercise price; the fair market value of a share of Common Stock; whether to restrict the sale or other disposition of the shares of Common Stock acquired upon the exercise of an option and, if so, whether to waive any such restriction; whether to

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subject the exercise of all or any portion of an option to the fulfillment of contingencies as specified in the applicable stock option contract, including without limitation, contingencies relating to entering into a covenant not to compete with us, any of subsidiaries or a parent, to financial objectives for us, any of our subsidiaries or a parent, a division of any of the foregoing, a product line or other category, and/or the period of continued employment of the optionee with us, any of our subsidiaries or a parent, and to determine whether such contingencies have been met; the amount, if any, necessary to satisfy our obligation to withhold taxes or other amounts; whether an optionee is disabled; to construe the respective Contracts and the 1996 Plan; with the consent of the optionee, to cancel or modify an option, provided such modified provision would be permitted to be included in an option on the date of modification; to prescribe, amend and rescind rules and regulations relating to the 1996 Plan; and to make all other determinations necessary or advisable for administering the 1996 Plan. Any controversy or claim arising out of or relating to the 1996 Plan, any option granted under the 1996 Plan or any applicable stock option contract shall be determined unilaterally by the Committee in its sole discretion. The determinations of the Committee on the above matters shall be conclusive and binding on the parties. No member or former member of the Committee shall be liable for any action, failure to act or determination made in good faith with respect to the 1996 Plan or any option hereunder.
Exercise Price
The exercise price of the shares of Common Stock under each option shall be determined by the Committee in its sole discretion; provided, however, the exercise price of an option shall not be less than the fair market value of the Common Stock subject to such option on the date of grant.
Term
The term of each option granted pursuant to the 1996 Plan shall be such term as is established by the Committee, in its sole discretion; provided, however, that the term of each option granted pursuant to the 1996 Plan shall be for a period not exceeding ten years from the date of grant.
Exercise
An option (or any part of installment thereof), to the extent then exercisable, shall be exercised by giving written notice to us at our principal office stating which option is being exercised, specifying the number of shares of Common Stock as to which such option is being exercised and accompanied by payment in full of the aggregate exercise price therefore (or the amount due on exercise if the Contract permits installment payments) (a) in cash or by certified check or (b) if the applicable Contract permits, with previously acquired shares of Common Stock having an aggregate fair market value on the date of exercise equal to the aggregate exercise price of all options being exercise, or with any combination of cash, certified check or shares of Common Stock.
The Committee may, in its sole discretion, permit payment of the exercise price of an option by delivery by the optionee of a properly executed notice, together with a copy of the optionee’s irrevocable instructions to a broker acceptable to the Committee to deliver promptly to us the amount of sale of loan proceeds sufficient to pay such exercise price.
A person entitled to receive Common Stock upon the exercise of an option shall not have the rights of shareholder with respect to such shares of Common Stock until the date of issuance of a share certificate to him for such shares; provided, however, that until such share certificate is issued, any optionee using previously acquired shares of Common Stock in payment of an option exercise price shall continue to have the rights of a shareholder with respect to such previously acquired shares. In no case may a fraction of a share of Common Stock be purchased or issued under the 1996 Plan.
Termination of Relationship
Any optionee whose relationship with us, our subsidiaries and parent as an employee or consultant is terminated for any reason (other than his death or disability) may exercise such option, to the extent exercisable on the date of such termination, at any time within three months after the date of termination, but not thereafter and in no event after the date the option would otherwise have expired; provided, however, that if such relationship is terminated either (a) for cause, or (b) without our consent, such option shall terminate immediately.

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

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Non-Transferability of Options
No option granted under the 1996 Plan shall be transferable otherwise than by will or the laws of descent and distribution, and options may be exercised, during the lifetime of the optionee, only by the optionee or his Legal Representatives. Except to the extent provided above, options may not be assigned, transferred, pledged, hypothecated or disposed of in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process, and any such attempted assignment, transfer, pledge, hypothecation or disposition shall be null and void ab initio of no force or effect.
All options to purchase 200,000 shares of common stock under the 1996 Stock Option Plan were granted.
2000 Stock Option Plan
Types of Grants and Eligibility
The 2000 Plan is designed to provide an incentive to our key employees (including officers and directors who are key employees) and to consultants and directors who are not our employees or employees of our present and future subsidiaries and to offer an additional inducement in obtaining the services of such individuals.
Shares Subject to the 2000 Plan
The aggregate number of shares of Common Stock for which options may be granted under the 2000 Plan may not exceed 400,000; provided, however, that the maximum number of shares of Common Stock with respect to which options may be granted to any individual in any fiscal year may not exceed 100,000. Such shares of Common Stock may consist either in whole or in part of authorized but unissued shares of Common Stock or shares of Common Stock held in our treasury shares. Shares of Common Stock subject to an option which for any reason expires, is cancelled or is terminated unexercised or which ceases for any reason to be exercisable may again become available for the granting of options under the 2000 Plan.
Administration of the 2000 Plan
Except in the case of non-employee director options, in which case the Plan is administered by the Board of Directors, the 2000 Plan is administered by a committee consisting of not less than two directors (the “2000 Plan Committee”), each of whom shall be a “non-employee director” within the meaning of rules and regulations promulgated by the Securities and Exchange Commission.
Subject to the express provisions of the 2000 Plan, the 2000 Plan Committee has the authority, in its sole discretion, with respect to options, to determine, among other things: the key employees, consultants and advisors who are to receive options; the times when they may receive options; the number of shares of Common Stock to be subject to each option; the term of each option; the date each option is to become exercisable; whether an option is to be exercisable in whole, in part or in installments, and, if in installments, the number of shares of Common Stock to be subject to each installment; whether the installments are to be cumulative; the date each installment is to become exercisable and the term of each installment; whether to accelerate the date of exercise of any installment; whether shares of Common Stock may be issued on exercise of an option as partly paid, and, if so, the dates when future installments of the exercise price are to become due and the amounts of such installments; the exercise price of each option; the form of payment of the exercise price; whether to restrict the sale or other disposition of the shares of Common Stock acquired upon the exercise of an option and to waive any such restriction; and whether to subject the exercise of all or any portion of an option to the fulfillment of contingencies as specified in an applicable stock option contract. With respect to all options, the 2000 Plan Committee has such discretion to determine the amount, if any, necessary to satisfy our obligation to withhold taxes; with the consent of the optionee, to cancel or modify an option, provided such option as modified would be permitted to be granted on such date under the terms of the 2000 Plan; to prescribe, amend and rescind rules and regulations relating to the 2000 Plan; and to make all other determinations necessary or advisable for administering the 2000 Plan. The Board of Directors has the authority described above with respect to the granting of non-employee director options.

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

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kind of shares subject to the 2000 Plan, the aggregate number and kind of shares subject to each outstanding option and the exercise price thereof will be appropriately adjusted by the Board of Directors, whose determination will be conclusive.
In the event of (a) the liquidation or dissolution of our company or (b) a merger or consolidation in which we are not the surviving corporation, any outstanding options will terminate, unless other provision is made therefore in the transaction.
Amendments and Termination of the 2000 Stock Option Plan
No option may be granted under the 2000 Plan after October 2007. The Board of Directors, without further approval of our stockholders, may at any time suspend or terminate the 2000 Plan, in whole or in part, or amend it from time to time in such respects as it may deem advisable, including, without limitation, to comply with the provisions of certain rules and regulations promulgated by the Securities and Exchange Commission, among other things; provided, however, that no amendment may be effective without the requisite prior or subsequent shareholder approval which would (a) except as required for anti-dilution adjustments, increase the maximum number of shares of Common Stock for which options may be granted under the 2000 Plan, (b) materially increase the benefits to participants under the 2000 Plan, or (c) change the eligibility requirements for individuals entitled to receive options under the 2000 Plan.
Non-Transferability of Options
No option granted under the 2000 Plan may be transferable otherwise than by will or the laws of descent and distribution, and options may be exercised, during the lifetime of the holder thereof, only by such holder or such holder’s legal representatives. Except to the extent provided above, options may not be assigned, transferred, pledged, hypothecated or disposed of in any way (whether by operation of law or otherwise) and may not be subject to execution, attachment or similar process.
No optionee has any rights as a shareholder with respect to any shares subject to an option prior to the date of the issuance of a certificate or certificates for such shares.
Options to subscribe 370,000 shares and 30,000 shares of common stock under the 2000 Stock Option Plan were granted on September 21, 2005 and July 18, 2006 respectively.
2005 Stock Option Plan
Types of Grants and Eligibility
The 2005 Plan is designed to provide incentives to employees (including key employees such as officers and directors) of the Company and to consultants and directors who are not employees of the Company and its subsidiary companies and to offer an additional inducement in obtaining the services of such individuals.
Shares Subject to the 2005 Stock Option Plan
The aggregate number of Shares for which the options may be granted under the 2005 Plan may not exceed 1,000,000 shares; such Shares may consist either in whole or in part of authorized but un-issued shares of common stock or shares of common stock held in the treasury of the Company. Shares of common stock subject to an option which for any reason expires, is cancelled or is terminated unexercised or which ceases for any reason to be exercisable may again become available for the granting of options under the 2005 Plan.
Administration of the 2005 Plan
The 2005 Plan is administered by the Company’s Compensation Committee (the “Committee”).
Subject to the express provisions of the 2005 Plan, the Committee has the authority, in its sole discretion, with respect to options, to determine, among other things: the key employees, consultants and advisors who are to receive options; the times when they may receive options; the number of shares of common stock to be subject to each option; the term of each option; the date each option is to become exercisable; whether an

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option is to be exercisable in whole, in part or in installments, and, if in installments, the number of shares of common stock to be subject to each installment; whether the installments are to be cumulative; the date each installment is to become exercisable and the term of each installment; whether to accelerate the date of exercise of any installment; whether shares of common stock may be issued on exercise of an option as partly paid, and, if so, the dates when future installments of the exercise price are to become due and the amounts of such installments; the exercise price of each option; the form of payment of the exercise price; whether to restrict the sale or other disposition of the shares of common stock acquired upon the exercise of an option and to waive any such restriction; and whether to subject the exercise of all or any portion of an option to the fulfillment of contingencies as specified in an applicable stock option contract. With respect to all options, the Committee has such discretion to determine the amount, if any, necessary to satisfy the Company’s obligation to withhold taxes; with the consent of the optionee, to cancel or modify an option, provides such option as modified would be permitted to be granted on such date under the terms of the 2005 Plan; to prescribe, amend and rescind rules and regulations relating to the 2005 Plan; and to make all other determinations necessary or advisable for administering the 2005 Plan. The Board of Directors also has the authority described above with respect to the granting of director options.
Exercise Price
The exercise price of the shares of common stock under each option is determined by the Committee at the time of the grant. The exercise price of the shares of common stock is to be equal to the fair market value of the common stock subject to such option on the date of grant.
Term
The term of each option granted pursuant to the 2005 Plan is established by the Committee, in its sole discretion, at or before the time such option is granted. Subject to early termination, the option of each non-employee director is exercisable for a term of ten years from the date of grant.
Exercise
An option (or any part or installment thereof), to the extent then exercisable, is to be exercised by giving written notice to the Company at its principal office. Payment in full of the aggregate exercise price may be made (a) in cash or by certified check, or (b) if the applicable stock option contract at the time of grant so permits, with the authorization of the Committee, with previously acquired shares of common stock having an aggregate fair market value, on the date of exercise, equal to the aggregate exercise price of all options being exercised, or (c) with any combination of cash, certified check or shares of common stock.
The Committee may, in its discretion, permit payment of the exercise price of an option by delivery by the optionee of a properly executed exercise notice, together with a copy of his irrevocable instructions to a broker acceptable to the Committee to deliver promptly to the Company the amount of sale or loan proceeds sufficient to pay such exercise price.
Termination of Relationship
Any employee holder of an option whose employment or relationship with the Company (and its parent and subsidiaries) has terminated for any reason other than his death or disability may exercise such option, to the extent exercisable on the date of such termination, at any time within three months after the date of termination, but not thereafter and in no event after the date the option would otherwise have expired; provided, however, that if his employment is terminated either (a) for cause, or (b) without the consent of the Company, said option terminates immediately. Options granted to employees under the 2005 Plan are not affected by any change in the status of the holder so long as he or she continues to be a full-time employee of the Company, its parent or any of its subsidiaries (regardless of having been transferred from one corporation to another).
Death or Disability
If an optionee dies (a) while he is an employee or consultant to, the Company, its parent or any of its subsidiaries, (b) within three months after the termination of such relationship (unless such termination was

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for cause or without the consent of the Company), or (c) within one year following the termination of such relationship by reason of disability, an option may be exercised, to be extent exercisable on the date of death, by an executor, administrator or other person at the time entitled by law to the rights of the optionee under such option, at any time within one year after death, but not thereafter and in no event after the date the option would otherwise have expired.
Any optionee whose relationship has terminated by reason of disability may exercise his option, to the extent exercisable upon the effective date of such termination, at any time within one year after such date, but not thereafter and in no event after the date the option would otherwise have expired.
Adjustments upon Changes in Common Stock
Notwithstanding any other provisions of the 2005 Plan, in the event of any change in the outstanding common stock by reason of a share dividend, recapitalization, merger or consolidation in which the Company is the surviving corporation, split-up, combination or exchange of shares or the like, the aggregate number and kind of shares subject to the 2005 Plan, the aggregate number and kind of shares subject to each outstanding option and the exercise price thereof will be appropriately adjusted by the Board of Directors, whose determination will be conclusive.
In the event of (a) the liquidation or dissolution of the Company or (b) a merger or consolidation in which the Company is not the surviving corporation, any outstanding options will terminate, unless other provision is made therefore in the transaction.
Amendments and Termination of the 2005 Plan
No option may be granted under the 2005 Plan after October 20, 2015. The Board of Directors, without further approval of the Company’s stockholders, may at any time suspend or terminate the 2005 Plan, in whole or in part, or amend it from time to time in such respects as it may deem advisable, including, without limitation, to comply with the provisions of certain rules and regulations promulgated by the Securities and Exchange Commission, among other things; provided, however, that no amendment may be effective without the requisite prior or subsequent Stockholder approval which would (a) except as required for anti-dilution adjustments, increase the maximum number of shares of common stock for which options may be granted under the 2005 Plan, (b) materially increase the benefits to participants under the 2005 Plan, or (c) change the eligibility requirements for individuals entitled to receive options under the 2005 Plan.
Non-Transferability of Options
No option granted under the 2005 Plan may be transferable otherwise than by will or the laws of descent and distribution, and options may be exercised, during the lifetime of the holder thereof, only by such holder or such holder’s legal representatives. Except to the extent provided above, options may not be assigned, transferred, pledged, hypothecated or disposed of in any way (whether by operation of law or otherwise) and may not be subject to execution, attachment or similar process.
No options were granted under the 2005 Plan.
Item 7 Major Shareholders and Related Party Transactions
A. Major shareholders.
The following table sets forth as of August 31, 2006, the beneficial ownership of (i) all persons known to us to be beneficial owners of equal or more than five percent or more of our common stock and (ii) our current officers and directors and (iii) our current officers and director as a group.

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

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

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

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

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Item 8 Financial Information
A. Consolidated Statements and Other Financial Information.
     Our consolidated financial statements are included herein under Item 18.
     Except for an interim dividend paid in 1997, we have not paid any dividends on our common stock. The payment of dividends in the future, if any, is within the discretion of our Board of Directors and will depend upon our earnings, its capital requirements and financial condition and other relevant factors. We do not anticipate declaring or paying any dividends in the foreseeable future.
     We have experienced a delay in collecting financial information from Anji Bio due to certain disputes between Zhejiang Innoessen and the Anji Buyers as described in Item 3(D) — “Risk Factors”. As stated previously, the Anji Buyers refused to cooperate with the audit instructions issued by the Company, such as provision of financial statements for the Company to prepare its consolidated financial statements and access by staff sent from the Company at site of Anji Bio. The Company finally terminated the employment of the general manager of Anji Bio. The general manager of Anji Bio then sent a letter directly to our independent registered public accounting firm containing certain allegations against the management of the Company. These allegations were then investigated by the Company’s audit committee and concluded to be invalid. Subsequent to the investigation, the ex-general manager of Anji Bio sent another letter to our independent registered public accounting firm withdrawing all of his allegations.
     In the opinion of the senior management of the Company, the conflict with Anji Bio ended on July 26, 2006 and the audited financial statements could be completed. The impacts of this event, included the late filing of this Annual Report, the possible delisting of our stock from Nasdaq and the additional costs and capital expenditures which were incurred. Pursuant to the Anji Memorandum, we have to complete the disposal transaction by September 30, 2006. As of September 11, 2006, the verification on the assets and liabilities of Anji Bio is complete and management believes that it is in a position to finalize the disposal prior to that deadline. The remaining items to be determined are agreement on the final consideration and the drafting of final legal documents.
     Due to the above matters, particularly the time the management and the audit committee taken to perform investigations on the complaints sent by Mr. Hu. Our completed financial statements were sent late to our auditors for commencement of their audit and the above matters had caused the auditors and the audit committee to request for additional time to seek additional information with respect to the financial statements and as a result this Annual Report was filed later than the required statutory deadline.

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B. Significant Changes.
Not Applicable
Item 9 The Offer and Listing.
A. Offer and listing details.
We have authorized capital of US$25,000,000 divided into 2,500,000,000 shares of par value US$0.01 each. As of August 31, 2006, 11,274,497 shares are issued and fully paid.
The annual high and low market prices of our common stock for the five most recent full financial years are as set forth below:
                 
NASDAQ Capital Market   Common Stock
(Year Ending)   High   Low
December 31, 2005
    8.800       1.530  
 
December 31, 2004
    5.600       0.350  
 
December 31, 2003
    0.700       0.030  
 
December 31, 2002
    0.430       0.010  
 
December 31, 2001
    0.444       0.090  
The high and low market prices of our common stock for each financial quarter over the two most recent full financial years are as set forth below:

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NASDAQ Capital Market   Common Stock
(Quarter Ending)   High   Low
December 31, 2005
    3.600       1.560  
 
September, 2005
    4.650       1.530  
 
June 30, 2005
    4.940       3.240  
 
March 31, 2005
    8.800       3.030  
 
December 31, 2004
    5.600       1.400  
 
September 30, 2004
    3.171       1.320  
 
June 30, 2004
    4.200       0.550  
 
March 31, 2004
    6.530       0.350  
For the most recent eight months, the high and low market prices of our common stock are as set forth below:
                 
NASDAQ Capital Market   Common Stock
(Month Ending)   High   Low
August 31, 2006
    5.62       3.02  
 
July 31, 2006
    3.970       1.200  
 
June 30, 2006
    3.580       3.280  
 
May 31, 2006
    6.150       4.400  
 
April 30, 2006
    7.800       6.300  
 
March 31, 2006
    8.950       6.500  
 
February 28, 2006
    14.50       3.420  
 
January 31, 2006
    4.540       2.010  
B. Plan of Distribution.
Not Applicable.
C. Markets.
Our common stock was included for quotation on the NASDAQ Global Market (formerly known as NASDAQ National Market) on December 13, 1996 under the symbol “TRFDF”. Pursuant to the implementation of the new listing requirements since February 1998, we moved the listing of our common stock to the NASDAQ Capital Market on October 12, 1998 under the same symbol.

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Our common stock was listed for quotation on the NASDAQ Capital Market and not on any other public trading market.
On January 9, 2006, the name of the Company was changed to China Technology Development Group Corporation and its common stock continued to trade on NASDAQ Capital Market under the new symbol “CTDC”.
D. Selling Shareholders.
Not applicable.
E. Dilution.
(a)   The Company had authorized the issuance, pursuant to the 1996 Stock Option Plan, 2000 Stock Option Plan and 2005 Stock Option Plan, of options to purchase respectively 200,000 shares, 400,000 shares and 1,000,000 shares of Common Stock to the Company’s existing shareholders, employees, officers, directors and consultants.
 
(b)   Pursuant to a board resolution passed on December 28, 1999, options to purchase 140,000 shares of Common Stock were granted, for an exercise period of ten years, to certain directors and officers at an exercise price of US$1.15 per share.
 
(c)   Pursuant to a board resolution passed on September 20, 2005, options to purchase the remaining 60,000 shares of Common Stock under the 1996 Stock Option Plan were granted and pursuant to the same board resolution, options to purchase 370,000 shares of Common Stock were granted under the 2000 Stock Option Plan, for an exercise period of ten years, to a director at an exercise price of US$1.85 per share and.
 
(d)   As at August 31, 2006, no options granted under the 1996 Stock Option Plan and 2000 Stock Option Plan were exercised.
 
(e)   The Company entered into an agreement dated July 12, 2005 with Ivory Capital Asia Pte, Ltd (the “Ivory Capital”)(filed as Exhibit 10.1 hereto) on an non-exclusive basis to raise at least US$20 million in new capital for the Company and its subsidiaries and to provide financial advisory services to the Company concerning the strategic development of the Company’s business for a period of six months, unless the extension was mutually agreed. Pursuant to the agreement, retainer fee of US$ 40,000 per month was payable 50% in cash and 50% in the Company’s shares at average price of last 30 days prior to date of the signing of the agreement. Besides, a success fee of 3% on the initial US$20 million of capital commitments received from investors and 4% on the amount of capital commitments in excess of US$20 million received from investors was payable in cash if any. Accordingly, an aggregate of 34,488 shares of our Common Stock shall be issued to Ivory Capital as part of the retainer fee charged. Ivory Capital finally failed to raise any funds for the Company during the six month contract term and the services of Ivory Capital were terminated by the Company. The 34,488 shares of common stock were not issued to Ivory Capital. The Company, however, is currently under negotiation with Ivory Capital for the resumption of the contract at the same terms as previously signed as substantial pre-funding work has been done even though no funds were finally raised. As of date, no agreement, memorandum or letter of intent has been signed in respect of resuming the contract but a provision of the unpaid retainer fee was made in the financial statements for the fiscal year ended December 31, 2005.
F. Expenses of the issue.
Not Applicable.
Item 10 Additional Information.
A. Share capital.
Not Applicable.
B. Memorandum and articles of association.

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The Memorandum and Articles of Association of our company as amended were included in the Proxy Statement dated September 21, 2005 filed at the Securities and Exchange Commission on September 26, 2005 in relation to the Annual Meeting of Shareholders of the Company.
Our corporate affairs are governed by our Memorandum and Articles of Association and by the International Business Companies Act of the British Virgin Islands. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of our management, directors and controlling shareholders and the rights of our shareholders differ from those that would apply if we were incorporated in a jurisdiction within the United States. Further, the rights of shareholders under British Virgin Islands law are not as clearly established as the rights of shareholders under legislation or judicial precedent in existence in most United States jurisdictions.
Thus, our public shareholders may have more difficulty in protecting their interests in the face of actions by the management, directors or controlling shareholders than they might have as shareholders of a corporation incorporated in a United States jurisdiction. Please refer to Item 3(D) for a detailed discussion of such risk.
C. Material contracts.
1.   On July 12, 2005, an agreement was entered into between the Company and Ivory Capital whereas the Company engaged Ivory Capital on an non-exclusive basis to provide financial advisory services to the Company concerning the strategic development of the Company’s business, including assisting in the development of a business strategy to maximize international investor interest and to raise at least US$20 million in new capital for the Company.
2.   On September 13, 2005, the Company entered into a sale and purchase agreement with Beijing Holdings, its then 47.18% shareholder, pursuant to which the Company acquired 51% of the issued and outstanding stock of CNT.
3.   On September 13, 2005, the Company also entered into an option agreement with Beijing Holdings to acquire the remaining issued and outstanding stock of CNT. At the Annual Meeting of Stockholders of the Company held on October 21, 2005, the special resolutions to approve the acquisition by the Company of the 51% equity interest in CNT and the option to acquire the remaining 49% equity interest in CNT, were passed.
4.   On March 14, 2003, BBHL entered into a framework purchase agreement with the Legend (Beijing) Limited for three years. Under which BBHL agreed to provide the network security products and its maintenance works based on the actual quantities ordered through purchase orders issued by the Legend Group.
The contract with the Legend (Beijing) Limited expired in March 2006. We are currently negotiating the renewal of the contract and sales with the Legend Group since the expiry of the old contract are conducted on individual basis.
5.   On February 10, 2006, BBHL had entered into a supply contract for a term of two years with the Legendsec Ltd. at exactly the same terms of that of the Legend Group. Legendsec was a new company formed in 2004 by a group of experienced salesmen left the Legend Group after the restructuring of the Legend Group in 2004.

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6.   On March 20, 2004, Zhejiang Innoessen entered into a contract with the China New Era Health Industry Group Limited for the purchase of EOB-f02 and EOB-f04.
7.   On July 27, 2006, Zhejiang Innoessen had entered into the Anji Memorandum with the Anji Buyers to, among other things, dispose of its entire 93.67% ownership interest in Anji Bio.
D. Exchange controls.
China’s government imposes control over the convertibility of Rmb into foreign currencies. Under the current unified floating exchange rate system, the People’s Bank of China publishes a daily exchange rate for Rmb, or the PBOC Exchange Rate, based on the previous day’s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC Exchange Rate according to market conditions.
Pursuant to the Foreign Exchange Control Regulations issued by the State Council on January 29, 1996 and effective as of April 1, 1996 (and amended on January 14, 1997) and the Administration of Settlement, Sale and Payment of Foreign Exchange Regulations which came into effect on July 1, 1996 regarding foreign exchange control, or the Regulations, conversion of Renminbi into foreign exchange by foreign investment enterprises for current account items, including the distribution of dividends and profits to foreign investors of joint ventures, is permissible upon the proper production of qualified commercial vouchers or legal documents as required by the Regulations. Foreign investment enterprises are permitted to remit foreign exchange from their foreign exchange bank account in China upon the proper production of, inter alia, the board resolutions declaring the distribution of the dividend and payment of profits. Conversion of Rmb into foreign currencies and remittance of foreign currencies for capital account items, including direct investment, loans, security investment, is still subject to the approval of the State Administration of Foreign Exchange, or SAFE, in each such transaction. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, as Article 5 provides that the State shall not impose restrictions on recurring international payments and transfers.
Under the Regulations, foreign investment enterprises are required to open and maintain separate foreign exchange accounts for capital account items (but not for other items). In addition, foreign investment enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business upon the production of valid commercial documents and, in the case of capital account item transactions, document approval from SAFE.
Currently, foreign investment enterprises are required to apply to SAFE for “foreign exchange registration certificates for foreign investment enterprises.” With such foreign exchange registration certificates (which are granted to foreign investment enterprises, upon fulfilling specified conditions and which are subject to

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

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F. Dividends and paying agents.
Not Applicable
G. Statement by experts.
Not Applicable.
H. Documents on display.
We have previously filed with the Commission our registration statement on Form F-1, as amended, and our prospectus under the Securities Act of 1933, with respect to our ordinary shares.
We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the Securities and Exchange Commission. Specially, we are required to file annually a Form 20-F no later than six month after the close of each fiscal year, which is December 31. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a Web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting requirements pursuant to Section 16 of the Exchange Act.
Our financial statements have been prepared in accordance with U.S. GAAP.
We will furnish our shareholders with annual reports and all required interim reports, which will include a review of operations and consolidated financial statements (unaudited for interm report and audited for annual report) prepared in conformity with U.S. GAAP.
Documents concerning the Company that are referred to in this document may also be inspected at our office, which is Room 2413-18, Shui On Centre, 8 Harbour Road, Wanchai, Hong Kong.
Subsidiary Information.
Not Applicable
Item 11 Quantitative and Qualitative Disclosures About Market Risk.
Foreign exchange risk
We are exposed to the risk of foreign currency exchange rate fluctuation. We have never used derivative instruments to hedge our exchange rate risks, do not plan to do so, and may not be successful should we attempt to do so in the future. Nevertheless, we believe such risk is low as no foreign currency liabilities are incurred and the principal operations are limited solely to the China market.
Our functional currency is the Renminbi. Transactions in other currencies are recorded in Renminbi at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are converted into Renminbi at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in our statements of operations as a component of current period earnings.
The China State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of Renminbi into foreign currencies. The principal regulation governing foreign

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currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under the Rules, once various procedural requirements are met, Renminbi is convertible for current account transactions, including trade and services, but not for capital account transactions, including direct investment, loan or investment in securities outside China, unless the prior approval of the State Administration of Foreign Exchange of China is obtained. Although the Chinese government regulations now allow greater convertibility of Renminbi for current account transactions, significant restrictions still remain. Currently, BBHL, our Chinese subsidiary, is not involved in foreign exchange transactions as all transactions are completed in Renminbi.
The value of the Renminbi is subject to changes in China’s central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Since 1994, the conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate generally has been stable. However, recently there has been increased political pressure on the Chinese government to decouple the Renminbi from the U.S. dollar.
We conduct substantially all of our operations through our Chinese operating companies, and their financial performance and position are measured in terms of Renminbi. Any devaluation of the Rmb against the United States dollar would consequently have an adverse effect on our financial performance and asset values when measured in terms of United States dollar. Our solutions are primarily procured, sold and delivered in China for Renminbi. The majority of our revenues are denominated in Renminbi. Should the Renminbi devalue against United States dollar, such devaluation could have a material adverse effect on our profits and the foreign currency equivalent of such profits repatriated by the Chinese entities to us. In addition, from time to time we may have United States dollar denominated borrowings, and therefore a decoupling of the Renminbi may affect our financial performance in the future.
Interest rate risk
We are exposed to interest rate risk arising from having short-term variable rate borrowings from time to time. Our future interest expense would fluctuate in line with any change in our borrowing rates. We do not have any derivative financial instruments and believe our exposure to interest rate risk and other relevant market risks is not material.
Inflation
In recent years, China has not experienced significant inflation, and thus inflation has not had a material impact on our results of operations in recent years. According to the National Bureau of Statistics of China, the change in Consumer Price Index in China was — 1.2%, 3.9% and 1.8% in 2003, 2004 and 2005 respectively.

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Item 12 Description of Securities Other than Equity Securities.
Not Applicable.

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PART II
Item 13 Default, Dividend Arrearages and Delinquencies.
None.
Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds.
Not applicable.
Item 15 Controls and Procedures
     As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, our company’s management, including our chief executive officers and our chief financial officer, is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. As of December 31, 2005, an evaluation was performed under the supervision and with the participation of management, including our chief executive officers and our chief financial officer, of the effectiveness of our company’s disclosure controls and procedures. Based on that evaluation, our chief executive officers and our chief financial officer concluded that our company’s disclosure controls and procedures as of December 31, 2005 were not effective because management has identified certain internal control deficiencies in our internal control over financial reporting that they considered to constitute material weaknesses in our internal control over financial reporting.
     The internal control deficiencies that were identified as material weaknesses include: (1) inability to exercise sufficient operational and financial control over a newly acquired subsidiary, which is particularly obvious after disagreement in corporate direction existed between the Company and the management of the subsidiary since early 2006; (2) lack of adequate accounting personnel with sufficient U.S. GAAP technical expertise, including insufficient complement of financial reporting personnel commensurate with the Company’s financial reporting requirements and insufficient formalized and consistent finance and accounting policies and procedures to detect instances of non-compliance with such existing policies and procedures; and (3) inadequate enforcement in respect of segregation of duties in functional access to accounting system of our subsidiaries.
     Our management, including our chief executive officers and our chief financial officer, acknowledged that our company’s internal controls suffered from the internal control deficiencies identified. Our management are committed to remedy these deficiencies to our company’s internal controls and has planned to implement a series of remedial measures, including, among other things: (1) establishment of a dedicated team led by our audit committee to reassess the procedures dealing with controls over subsidiaries, including the system of the appointment of management to subsidiaries, financial reporting system of subsidiaries and the communication system with subsidiaries; (2) provision of additional training to our accounting personnel on the requirements of U.S. GAAP to increase their familiarity with those standards and expansion of our finance function by recruiting additional qualified accountants as well as the reassessment of our existing finance and accounting policies and procedures; and (3) establishment of the information technology department for reinforcement of overall controls on our information technology environment, with particular focuses on the segregation of duties in financial accounting system and implementation of effective policies and procedures to ensure the existence of a regulated information technology operation of the Group.
     Our management, however, believes that the lack of control over the newly acquired subsidiary is mainly caused by our disputes over corporate direction between us and which is mainly caused by lack of communication with the subsidiary, particularly when we are keen to upgrade the subsidiary’s control standards to listed company standards after acquired. Nevertheless, we believes that none of these internal control deficiencies have had a material effect on our financial condition or results of operations or caused our financial statements as of and for the year ended December 31, 2005 to contain a material misstatement. Management of us target to complete the entire ratifications of the above weaknesses within the year ending December 31, 2007.
     Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include a management’s internal control report with our Annual Report on Form 20-F for the fiscal year ending December 31, 2007. The Company will start the exercise of evaluation, designing and implementing processes to improve our internal controls to comply with the requirements of the Sarbanes-Oxley Act of 2002 soon. The exercise will be supervised and with the participation of our management, including our chief executive officers and our chief financial officer. We are currently still reviewing our efforts to improve our internal controls and may in the future identify additional deficiencies to our internal controls. Should we discover any additional deficiencies, we will take appropriate measures to correct or improve of our internal controls. See the section headed “Item 3. Key Information — Risk Factors — Compliance with requirements under Section 404 of the Sarbanes-Oxley Act of 2002”.
Item 16A Audit Committee Financial Expert
The Board has nominated Mr. Peter Fu, Mr. L C Wan and Mr. Yezhong Ni, independent directors, as members of the Audit Committee, and Mr. L C Wan as the financial expert as defined under the applicable rules of the SEC issued pursuant to Section 407 of the Sarbanes-Oxley Act of 2002.
Item 16B. Code of Ethics
The Code of Ethics for the members of the Company’s Board of Directors and Officers was approved by the Board of Directors on April 28, 2005 and is filed as Exhibit 14.1 hereto.
Item 16C. Principal Accountant Fees and Services
Audit Fees

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The audit fee of PricewaterhouseCoopers, our independent registered public accounting firm for the fiscal years ended December 31, 2005 and 2004, amounted to Rmb 1.77 million and Rmb 0.61 million respectively.
Audit-Related Fees
Except as described above, no other audit-related fees were paid by us for the fiscal years ended December 31, 2005 and 2004 to PricewaterhouseCoopers and other professional accounting firms.
Tax Fees
Taxation review services performed by PricewaterhouseCoopers were included as part of their audit works for the fiscal years ended December 31, 2005 and 2004 and thus no separate bills were issued to us. For statutory tax filings of BHLHK requested by the applicable regulations in Hong Kong for the fiscal years ended December 31, 2005 and 2004, it was performed by S L Lee & Lau. S L Lee & Lau charged a fee of Rmb 3,000 for the 2004 filing and fee of 2005 was not yet agreed up to the date of this report.
All Other Fees
Other than audit fee, a fee of Rmb 104,000 was charged by PricewaterhouseCoopers for their advisory services provided to the Company in answering technical enquires from the SEC in October 2005. On August 9, 2005, a fee of Rmb 20,800 was also charged by PricewaterhouseCoopers, at the request of the Company, for issuance of a letter of consent to include its audit report dated June 30, 2005 with the Company’s Registration Statement on Form S-8 filed on August 11, 2005. PricewaterhouseCoopers did not provide any products or render any professional services, other than those disclosed above during either of the fiscal years ended December 31, 2005 or December 31, 2004.
Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The policy of our directors who perform the functions customarily performed by an audit committee is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services and other services.
Audit of Financial Statements
PricewaterhouseCoopers is our principal independent registered public accounting firm. S L Lee & Lau was engaged to file the Hong Kong tax returns of BHLHK.
Item 16D. Exemptions from the Listing Standards for Audit Committee.
Not applicable
Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers.
1.   On October 31, 2005, the transaction to acquire from Beijing Holdings the 51% equity interest of the issued and outstanding stock of CNT was closed and as a result of the closing of the transaction, the Company , issued 2,233,800 shares of the Company’s common stock of US$0.01 each to Beijing Holdings. After the closing of the transaction, Beijing Holdings’ ownership in the Company increased from 47.18% to 60.11% and the Company had total outstanding shares of 9,128,297 shares.
2.   On December 22, 2005, the Company exercised the option to acquire from Beijing Holdings the remaining 49% equity interest of CNT and closed the transaction on the same day. As a result of the closing of the transaction, the Company became the shareholder of 100% equity interest in CNT and, in return, issued 2,146,200 new shares of the Company’s common stock of US$0.01 each to Beijing Holdings. Beijing Holdings’ ownership increased to 62.73% of the total issued and outstanding shares of 11,274,497 shares.

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3.   On December 22, 2005, Beijing Holdings entered into a Placing Agreement with Best Scene Management Limited (“Best Scene”), a company in which Mr. Alan Li, our the executive director and Co-Chief Executive Officer, had an equity interest. Pursuant to the Placing Agreement, Best Scene was appointed the placing agent, on a fully underwritten basis, to sell, on behalf of Beijing Holdings, up to 1,100,000 shares of the Company’s common stock (the “Placing Shares”) to certain placees at a fixed price of US$2.15 per Placing Share. As of January 9, 2006, an aggregate of 560,000 Placing Shares had been successfully sold to certain placees who were not connected parties of the Company.
Item 17 Financial Statements.
The Company has elected to provide Financial Statements pursuant to Item 18 (see below).
Item 18 Financial Statements.
The following documents are filed as Attachment A hereto and are included as part of this Annual report on Form 20-F.
Financial Statements.
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Operations and Comprehensive Income for each of the three years ended December 31, 2003, 2004 and 2005.
Consolidated Balance Sheets as of December 31, 2004 and 2005.
Consolidated Statements of Cash Flows of the company and subsidiaries for each of the three years ended December 31, 2003, 2004 and 2005.
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years ended December 31, 2003, 2004 and 2005.
Notes to Consolidated Financial Statements.
Item 19 Exhibits.
The following exhibits are filed as part of this Annual Report:
3.1   Amended Memorandum and Articles of Association of China Technology Development Group Corporation.
 
10.1   Agreement with Ivory Capital Asia Pte Ltd. dated July 12, 2005.
 
10.2   Agreement with Beijing Holdings Limited to acquire 51% of CNT dated September 13, 2005.
 
10.3   Option Agreement with Beijing Holdings Limited to acquire 49% of CNT dated September 13, 2005.
 
10.4   Supply of Goods Agreement with New Era Health Industry Group Limited dated March 22, 2004 (translated version).
 
10.5   Framework Agreement with the Legend (Beijing) Limited dated March 14, 2003 (translated version).
 
10.6   Framework Agreement with Legendsec (Beijing) Limited dated February 10, 2006 (translated version).
 
10.7   Memorandum Agreement with Mr. Hu Linfu and Madam Chen Shuizhen for termination of the co-operation in Anji Bio dated July 27, 2006 (translated version).
 
14.1   Code of Ethics for CEO and Senior Financial Officers.
 
21.1   List of the company’s significant subsidiaries, their jurisdiction of incorporation and the names under which they operate business, if different from their name.

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

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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
             
 
  CHINA TECHNOLOGY DEVELOPMENT
GROUP CORPORATION

   
Date: September 19, 2006
      /s/ Michael Siu    
 
  Name:  
 
Michael Siu
   
 
  Title:   Executive Director, Chief Financial
Officer and Secretary
   

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

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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
China Technology Development Group Corporation
(Formerly known Tramford International Limited)
We have audited the accompanying consolidated balance sheets of China Technology Development Group Corporation and its subsidiaries (“the Group”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, cash flows and changes in shareholders’ equity for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Technology Development Group Corporation and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
PricewaterhouseCoopers
Hong Kong, September 19, 2006.

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

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
at December 31, 2004 and 2005
                                 
    Note     2004     2005     2005  
            Rmb     Rmb     US$  
                      (Note 2(e))  
ASSETS
                               
 
CURRENT ASSETS
                               
Cash and cash equivalents
            5,255       18,324       2,271  
Short-term investments — security trust account
            6,872       109       13  
Available-for-sale securities
            12,730       366       45  
Trade accounts receivable, net
            1,060       791       98  
Inventories
            1,192       2,586       320  
Due from related parties
    18       10,111       8,447       1,047  
Other assets
    8       1,087       1,462       181  
 
                         
TOTAL CURRENT ASSETS
            38,307       32,085       3,975  
 
                               
Long-term prepayment for rental of land
    9             528       65  
Property, plant and equipment, net
    10       49       9,169       1,136  
Intangible assets
    11             6,541       811  
Goodwill
    12       999       69,526       8,615  
 
                         
TOTAL ASSETS
            39,355       117,849       14,602  
 
                         
 
                               
LIABILITIES AND SHAREHOLDERS’ EQUITY
                               
 
                               
CURRENT LIABILITIES
                               
Trade accounts payable
            175       572       71  
Consideration payable on the acquisition of an operating unit
            1,950              
Accrued professional fees
            888       3,869       480  
Income tax payable
            249       245       30  
Value added tax and business tax payable
            781       41       5  
Deferred government grants
    13             230       28  
Short term borrowings
    14             3,569       442  
Due to related parties
    18             889       110  
Deferred tax liabilities
492 61
Other liabilities and accrued expenses
    15       2,458       3,719       461  
 
                         
TOTAL CURRENT LIABILITIES
            6,501       13,626       1,688  
 
                               
Contingencies and commitments
    21                          
 
                               
Minority interests
                  5,515       683  
 
                               
SHAREHOLDERS’ EQUITY
                               
Common stock (US$0.01 par value; 2,500,000,000 shares authorized; shares issued and outstanding 9,044,888 in 2004 and 11,274,497 in 2005)
    20       749       910       113  
Additional paid-in capital
    20       187,159       269,924       33,447  
Accumulated deficit
            (151,644 )     (171,176 )     (21,211 )
Accumulated other comprehensive losses
            (3,232 )     (950 )     (118 )
Treasury stock, at cost (2,150,391 shares in 2004 and Nil shares in 2005)
    20       (178 )            
 
                         
TOTAL SHAREHOLDERS’ EQUITY
            32,854       98,708       12,231  
 
                         
 
                               
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
            39,355       117,849       14,602  
 
                         
The accompanying notes are an integral part of these consolidated financial statements.

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

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

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Note(a) Purchase of China Nature Technology Inc. (Refer to Note 3 for details)
         
    2005  
    Rmb  
Net assets acquired (excluding cash & cash equivalents):
       
Trade accounts receivable, net
    108  
Inventories
    1,473  
Due from related parties
    21  
Income tax recoverable
    35  
Other assets
    1,638  
Long-term prepayment for rental of land
    530  
Property, plant and equipment, net
    8,617  
Intangible asset
    6,891  
Goodwill
    38,457  
Trade accounts payable
    (271 )
Deferred government grants
    (273 )
Due to a related party
    (204 )
Short term borrowings
    (79 )
Deferred tax liabilities
    (251 )
Other liabilities and accrued expenses
    (913 )
Minority interests
    (11,804 )
 
     
 
    43,975 )
 
     
Discharged by:
       
Issuance of shares at fair value
    43,523  
Capitalized expenses directly incurred in acquisition of CNT*
    936  
Less: Cash and cash equivalents acquired from CNT
    (484 )
 
     
Total net consideration
    43,975  
 
     
 
* Out of the capitalized acquisition expenses, an aggregate of Rmb 417 was still unpaid as of December 31, 2005.
Note(b) Disposal of discontinued operations (Refer to Note 7 for details)
         
    2005  
    Rmb  
Net assets disposed of (excluding cash & cash equivalents):
       
Trade accounts receivable, net
    56  
Other assets
    18  
Goodwill
    999  
Income tax payables
    (753 )
Other liabilities and accrued expenses
    (161 )
 
     
 
    159  
Loss on disposal of discontinued operations
    (509 )
 
     
 
    (350 )
 
     
Discharged by:
       
Cash and cash equivalents disposed
    (350 )
 
     
The accompanying notes are an integral part of these consolidated financial statements.

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)
for the years ended December 31, 2003, 2004 and 2005
                                                 
                                    Accumulated        
                    Stock             other     Total  
                    Options     Accumulated     comprehensive     shareholders’  
    No. of     Equity     Granted     losses     losses     equity  
    shares     Rmb     Rmb     Rmb     Rmb     Rmb  
Balance at December 31, 2002
    6,894,497       187,730             (140,587 )     (643 )     46,500  
Net loss
                        (942 )           (942 )
Net unrealized gain on available-for-sale securities
                              401       401  
Less: Reclassification adjustment for loss realized on sale (Note (a))
                              587       587  
Translation adjustment
                              (355 )     (355 )
 
                                   
Total comprehensive loss for the year
                                            (633 )
 
                                   
Balance at December 31, 2003
    6,894,497       187,730             (141,529 )     (10 )     46,191  
 
                                               
Net loss
                        (10,115 )           (10,115 )
Net unrealized loss on available-for-sale securities
                              (3,222 )     (3,222 )
 
                                   
Total comprehensive loss for the year
                                            (3,222 )
 
                                   
Balance at December 31, 2004
    6,894,497       187,730             (151,644 )     (3,232 )     32,854  
 
                                               
Issue of shares
    4,380,000       79,928                         79,928  
Stock options granted
                    3,176                   3,176  
Net loss
                          (19,532 )           (19,532 )
Net unrealized loss on available-for-sale securities
                                (147 )     (147 )
Less: Reclassification adjustment for loss realized on sale (Note (a))
                                2,890       2,890  
Translation adjustment
                                (461 )     (461 )
 
                                   
Total comprehensive loss for the year
                                            (2,282 )
 
                                   
Balance at December 31, 2005
    11,274,497       267,658       3,176       (171,176 )     (950 )     98,708  
 
                                   
 
                                               
 
          US$   US$   US$   US$   US$
 
                                               
Balance at December 31, 2005
(Note 2(e))
            33,166       394       (21,211 )     (118 )     12,231  
 
                                     
Note (a): The cost of securities sold on the amount reclassified out of accumulated other comprehensive income into earnings was determined
                based on a specific identification basis.
The accompanying notes are an integral part of these consolidated financial statements.

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
1   Nature of operations and basis of presentation
     China Technology Development Group Corporation (the “Company” or “CTDC”) (formerly known as Tramford International Limited and was renamed to CTDC on January 9, 2006) was incorporated under the laws of the British Virgin Islands on September 19, 1995 as a holding company. The consolidated financial statements include the financial statements of the Company and its subsidiaries (hereinafter collectively referred to as the “Group”).
     On May 8, 2000, Jingle Technology Limited (“JTL”), a 100% subsidiary of CTDC, was formed to act as an investment holding company within the Group. Effective July 1, 2000, JTL purchased 100% interests in BHL Networks Technology Co. Ltd. (“BHLNet”), which in turn holds 76% interest in Beijing BHL Networks Technology Co. Ltd (“BBHL”), for a consideration of Rmb21,959. Pursuant to agreements entered into among the Group and the vendors in September 2002, the consideration was reduced from Rmb21,959 to Rmb20,262. BBHL is a Sino-foreign equity joint venture and is principally engaged in the provision of information technology and network security consultancy services and sales of computer related products in the People’s Republic of China (“China” or the “PRC”). BHLNet and BBHL are hereinafter referred to collectively as the “IT Operations”. The IT Operations continue to engage in the provision of information technology and network security consultancy services and the development of network security software for all years presented. The other wholly owned subsidiary of CTDC, BHL Networks Technology Company Limited (“BHLHK”)(formerly Jing Tai Industrial Investment Company Limited), acts as the treasury center for the Group.
     On September 13, 2005, CTDC entered into a sale and purchase agreement with Beijing Holdings Limited (“Beijing Holding”), its then 47.18% shareholder, pursuant to which the Company acquired 51% of the issued and outstanding stock of Future Solutions Development Inc. (subsequently renamed to China Natures Technology Inc. on November 25, 2005, “CNT”). At the same day, the Company also entered into an option agreement with Beijing Holdings to acquire the remaining issued and outstanding stock of CNT. At the Annual Meeting of Stockholders of the Company held on October 21, 2005, the special resolutions to approve the acquisition by the Company of the 51% equity interest in CNT and the option to acquire the remaining 49% equity interest in CNT were passed.
     Effective October 31, 2005, CTDC purchased 51% interests in CNT at a consideration of 2,233,800 shares of CTDC. Effective December 22, 2005, CTDC exercised the option to acquire the remaining 49% interests of CNT at a consideration of 2,146,200 shares of CTDC.
     CNT holds 71.43% interests in Zhejiang University (Hangzhou) Innoessen Bio-technology Inc. (“Zhejiang Innoessen”). Zhejiang Innoessen then holds 93.67% interests in Anji Science Bio-Product Inc. (“Anji Bio”). Shenzhen Innoessen Bio-tech Inc. (“Shenzhen Innoessen’) was a wholly owned subsidiary of CNT and was formed as CNT’s sales and marketing center for South China. CNT, Zhejiang Innoessen, Anji Bio and Shenzhen Innoessen are hereinafter referred to collectively as the “Nutraceutical Operations”. The Nutraceutical Operations are engaged in the development, manufacturing and marketing of healthfood products utilizing bio-active components of bamboo.
     The accompanying financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), present the consolidated results of the operations of the Group. All intercompany balances and transactions have been eliminated in the consolidated financial statements of the Group.
     The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Accounting estimates have been employed in these financial statements to determine reported amounts, including realizability of receivables and other assets, useful lives of assets and income taxes. Actual results could differ from those estimates.
     The financial information has been prepared in Renminbi (Rmb), the national currency of the PRC and also the functional currency of the Group (see also footnote 2(e)). Unless indicated otherwise, amounts in Renminbi have been rounded to the nearest thousand.
     As of December 31, 2005, the list of subsidiaries, their jurisdiction of incorporation and our respective effective shareholding in each of the subsidiaries were shown as follows:
             
        Effective percentage  
Name of Company   Jurisdiction   Shareholding  
BHLHK
  Hong Kong     100 %
JTL
  BVI     100 %
BHLNet
  Cayman Islands     100 %
BBHL
  China     76 %
CNT
  BVI     100 %
Zhejiang Innoessen
  China     71.43 %
Anji Bio.
  China     66.91 %
Shenzhen Innoessen
  China     100 %

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
2   Summary of significant accounting policies
     The following is a summary of significant accounting policies followed by the Group in the preparation of the financial statements.
(a) Consolidation
     The consolidated financial statements include the financial statements of the Company and its subsidiaries as of December 31, 2004 and 2005, and the statements of operations, cash flows and changes in shareholders’ equity for the years ended December 31, 2003, 2004 and 2005. All significant inter-company balances and transactions have been eliminated during consolidation.
     Subsidiaries are those entities in which the company, directly or indirectly, controls the composition of the board of directors, controls more than half the voting power or holds more than half of the issued share capital.
     The results of subsidiaries acquired or disposed of during the year are included in the consolidated statements of operations from the effective date of acquisition or up to the effective date of disposal, as appropriate. The gain or loss on disposal of a subsidiary represents the difference between the proceeds of the sale and the Company’s share of its net assets together with any unamortized goodwill or goodwill/negative goodwill taken to reserves and which was not previously charged or recognized in the consolidated statements of operations.
     Minority interests represent the interest of outside shareholders in the operating results and net assets of subsidiaries.
     In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation (“FIN”) No. 46 which requires certain variable interest entities (the “VIEs”) to be consolidated by the primary beneficiary of the entity if the ownership interest held by the equity investors in the entity does not have characteristics of a controlling financial interests or does not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective for all new VIEs created or acquired after December 15, 2003, the FASB issued FIN 46 (revised), which provides for the deferral of the implementation date to the end of the first reporting period after March 15, 2004, unless the Company has a special purpose entity, in which case the provisions must be applied for fiscal years ending December 31, 2003. There was no impact to the financial statements upon adoption of FIN 46R.
(b) Revenues
     Revenues arise from product sales and the rendering of services. Revenue is generally recognized when all of the following criteria are met (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sellers’ price to the buyer is fixed or determinable, and (iv) collectibility is reasonably assured. Specifically, product sales represent the invoiced value of goods, net of discounts, supplied to customers. Revenues of product sales are recognized upon delivery to customers and when title has passed. Rendering of services represent fees charged on the provision of information technology and network security consultancy services. Fees on such services are recognized upon the completion of the underlying services and collectibility to the fees is reasonably assured.
(c) Taxation
     Deferred income taxes are provided using the liability method under Statement of Financial Accounting Standards (“SFAS”) No.109, “Accounting for Income Taxes”. Under the liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the financial statements and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The tax consequences of these differences are classified as current or non-current based on the classification of the related asset or liability for financial reporting. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized.
(d) Concentration of credit risk and major customers
     The Group is engaged in the provision of information technology and network security services and the development, manufacturing and marketing of nutraceutical products to a wide range of industries and end users within the PRC. All the Group’s revenue is derived from sales to customers located in the PRC. Accordingly, the Group’s trade accounts receivable are concentrated with respect to both geography and customer. The Group performs ongoing credit evaluations of its customers and generally does not require collateral. Approximately, 6.28%, 18.59% and 32.97% of the total revenues were contributed by 3 major customers during the year ended December 31, 2005.

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
2   Summary of significant accounting policies (continued)
(e) Foreign currency transaction gains and losses and translation of foreign currencies
     All foreign currency transaction gains and losses are recognized as other non-operating income/(expense) in the consolidated statements of operations.
     The Renminbi is not freely convertible into foreign currencies. The PRC Government has instituted a single regulated floating exchange rate system principally based on market supply and demand. Under this system, a nationwide inter-bank foreign market has been established by designating certain banks as authorised foreign exchange banks where Renminbi can be converted into foreign currencies subject to prior approval from the PRC State Administration of Exchange Control.
     The functional currency of the Group is Renminbi. The functional currency of BBHL, Zhejiang Innoessen, Anji Bio and Shenzhen Innoessen is Renminbi. Its business is primarily conducted in China and denominated in Renminbi. The functional currency of CTDC and its other subsidiaries is Hong Kong dollar. The financial statements of CTDC and these subsidiaries are translated into Renminbi, using exchange rates in effect at period end, wherever appropriate, for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from the translation of financial statements are reflected as a separate component of shareholders’ equity.
     For the convenience of the reader, a translation of amounts from Renminbi (Rmb) into United States Dollars (US$) has been made at the noon buying rate in New York City for cable transfer in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2005 of Rmb 8.0702 = US$1.00. Such translations should not be construed as representations that the Renminbi amounts represent or have been or could have been converted into United States dollars at that or any other rate.
(f) Property, plant and equipment
     Property, plant and equipment are stated at historical cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Upon retirement or sale, the cost of disposed assets and the related accumulated depreciation are deducted from the respective accounts and the resulting gain or loss is included as other non-operating income/(expense) in the consolidated statement of operations. Maintenance and repair costs are expensed as incurred. The estimated useful lives of property, plant and equipment are as follows:
         
Building
  20 years
Plant and machineries
  10 years
Motor vehicles
  5 years
Furniture, fixtures, office and computer equipment
  3 years
(g) Prepayment for rental of land
     Prepayment for rental of land represents up-front payments to acquire long-term interests in lessee occupied properties. The premiums are stated at cost and are amortised over the period of the lease on a straight-line basis to the consolidation statements of operations
(h) Intangible assets
     Intangible assets represent the extraction of bamboo flavonoids and its related application patents obtained through the acquisition of the Nutraceutical Operations on October 31, 2005. The extraction of bamboo flavonoids (the core technology) is recognized at fair value upon acquisition and is amortized on a straight-line basis over its estimated useful life of eight years. The related application patents of the extraction of bamboo flavonoids (the completed technologies) are recognized at fair value upon acquisition and are amortized on a straight-line basis over the estimated useful life of five years. The acquired in-process research and development technologies is immediately expensed off.
(i) Goodwill
     Goodwill represents cost in excess of the fair value of net assets acquired and was amortized on a straight-line basis over a period of five years prior to January 1, 2002. The Group adopted Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002, and ceased the amortization of goodwill. Instead it is tested at least annually for impairment.

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
2   Summary of significant accounting policies (continued)
(j) Impairment
     Annual impairment test for goodwill is carried out in two steps. The first step of the impairment test which is used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. The fair value is determined by the forecasted discounted net cash inflows of the reporting unit for a period of five years. If the carrying amount of the reporting unit exceeds its fair value, goodwill of the reporting unit is considered impaired. The second step of the impairment test quantifies the amount of the impairment loss by comparing the carrying amount of goodwill to its implied fair value. An impairment loss is recorded to the extent the carrying amount of goodwill exceeds its implied fair value. Goodwill must be tested for impairment at least annually, or more frequently if warranted.
     The carrying value of a long-lived asset is considered impaired by the Group when the anticipated undiscounted cash flow from such asset is less than its carrying value. If an impairment is identified, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved or based on independent appraisals.
     Long-lived assets, including certain identifiable intangibles with finite-lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
(k) Inventories
     Inventories are valued at the lower of cost and net realizable value. Cost includes the purchase cost of products at invoiced value using a first-in first-out method. Net realizable value is determined by reference to the sales proceeds of items sold in the ordinary course of business or to a management estimate based on prevailing market conditions.
(l) Cash and cash equivalents
     Cash and cash equivalents include cash on hand, demand deposits with banks and liquid investments with an original maturity of three months or less. The carrying value of cash equivalents approximates their fair value.
(m) Investment in securities
      Investment in securities comprise of available-for-sale which are carried at fair value, with unrealized gains and losses, if any, reported, net of tax, in other comprehensive income.
(n) Earnings per share
     Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common stocks outstanding during the period. Diluted earnings per share reflects additional common stocks that would have been outstanding if dilutive potential common stocks have been issued, as well as any adjustment to income that would result from the assumed issuance. Dilutive potential common stocks that may be issued by the Group relate solely to outstanding stock options and are determined using the treasury stock method. Effect of stock options is excluded from the computation if the effect would be antidilutive.

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
2   Summary of significant accounting policies (continued)
(o) Deferred government grants
     Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to research and development costs are deferred and recognized in the consolidated statements of operations over the period necessary to match them with costs which the government grants are intended to fund. Government grants relating to the purchase of property, plant and equipment are included in deferred government grants and are recognized in the consolidated statements of operations on a straight line basis over the expected lives of the related assets.
(p) Stock-based compensation
     The Group grants stock options to its employees and certain non-employees.
     The Group applies Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and complies with the disclosure provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148”) for options granted to employees. In general, compensation cost is recognized based on the difference, if any, between the fair value of the Company’s shares and the exercise price as determined on the date the option is granted. Under APB Opinion No. 25, because the exercise price of all the options issued by the Company to employees equals or is higher than the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Group applies SFAS No. 123, as amended by SFAS No. 148 for options granted to non-employees. A charge for stock-based awards for the services rendered by non-employees using the Black-Scholes option pricing model are recognized in the consolidated statements of operations by the Group when incurred.
      For the fiscal year ended December 31, 2005, the stock compensation expenses of Rmb2,475 was charged to the selling, general and administrative expenses in the consolidated statements of operations in respect of the options succeeded by the newly appointed chairman and chief executive officer, being the difference between the market price of the share of common stock of the Company and the exercise price of the options. For options granted to employees on September 20, 2005, there was no impact on the consolidated statements of operations as the exercise of these options was equal to the market price of the share of common stock of the Company at date of grant.

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
(p) Stock-based compensation (continued)
     Stock-based compensation to employees
     Had compensation cost for options granted to employees under the Company stock option plans (the “Plans”) been determined based on the fair value at the grant date, as prescribed by SFAS 123 and SFAS 148, the Company’s pro forma net loss would have been as follows:
                         
    December 31,
    2003   2004   2005
    Rmb   Rmb   Rmb
Net loss for the year, as reported
    (942 )     (10,115 )     (19,532 )
Add: stock-based compensation as reported
                2,475
Less: Stock-based compensation determined using the fair value method
                (7,791 )
 
                       
Pro forma loss for the year
    (942 )     (10,115 )     (24,848 ))
 
                       
 
                       
Basic and diluted loss per share (in Rmb)
                       
- As reported
    (0.14 )     (1.47 )     (2.67 )
 
                       
- Pro forma
    (0.14 )     (1.47 )     (3.39 )
 
                       
 
                       
     There was no option granted to employees in the fiscal years ended December 31, 2003 and 2004. The fair value of each option granted in the fiscal year ended December 31, 2005 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the applicable period.
                         
            Options
    Options       granted to
    deemed   Options deemed   other
    granted to   granted to the   employees
    the chairman   chief executive   on
    on February   officer on March   September
    8, 2005   29, 2005   20, 2005
Average risk-free rate of return*
  3.313%         3.861%       4.050%  
Weighted average expected option life
  2 years         2 years       5 years  
Volatility rate
  197.2%         158.2%       133.8%  
Dividend yield
                 
 
* Risk-free rate represents the yields to maturity of respective US Government STRIPS (Source: Bloomberg)
     The stock compensation expenses, if any, will be charged to the selling, general and administrative expenses in the consolidated statements of operations.
(q) Operating leases
     Leases where substantially all the risk and rewards of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases net of any incentives received from the leasing company are charged to the consolidated statements of operations on a straight-line basis over the lease periods.
(r) Recent accounting pronouncements
     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). This statement is a revision to SFAS No. 123 and supersedes APB Opinion No. 25. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, and addresses transactions in which an entity obtains employee services in share-based payment transactions. Entities are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share options and similar instruments are to be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. In accordance with the standard, the Group is required to adopt SFAS No. 123R effective January 1, 2006.

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
2   Summary of significant accounting policies (continued)
(r) Recent accounting pronouncements (continued)
     Upon adoption, the Group has two application methods to choose from: the modified-prospective transition approach or the modified-retrospective transition approach. Under the modified-prospective transition method the Group would be required to recognize compensation cost for share-based awards to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provision are first applied as well as compensation cost for awards that were granted prior to, but not vested as of the date of adoption. Prior periods remain unchanged and pro forma disclosures previously required by SFAS No. 123 continue to be required. Under the modified-retrospective transition method, the Group would restate prior periods by recognizing compensation cost in the amounts previously reported in the pro forma footnote disclosure under SFAS No. 123. Under this method, the Group is permitted to apply this presentation to all periods presented or to the start of the fiscal year in which SFAS No. 123R is adopted. The Company plans to adopt SFAS No. 123R using the modified-prospective transition method. Although the Group is currently evaluating the impact of this Standard, it is expected that the adoption will not have a significant impact on the results of operations and financial position.
      Subsequently in August, October and November 2005, the FASB released Staff Position (“FSP”) 123(R)-1, "Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R)," FSP123(R)-2, "Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R)" and FSP 123(R)-3, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." Additionally, on February 1, 2006, the FASB issued FSP 123(R)-4, "Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event." The FSPs clarify certain accounting provisions set forth in SFAS No. 123(R). The requirements and guidance prescribed in SFAS No. 123(R), Staff Accounting Bulletin No. 107 and the FSPs is effective in 2006. The Group considers that the adoption of SFAS No. 123R will not have significant impact on its financial statements.
     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (SFAS No. 154”), which was a replacement of APB Opinion No. 20 and FAS No. 3 effective for accounting changes made in fiscal years beginning after December 15, 2005. SFAS No. 154 requires restrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. It also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. The Company does not expect the adoption of SFAS No. 154 on January 1, 2006 to have a material impact on its results of operations and financial condition.
     In November 2005, the FASB issued FSP FAS115-1 and FAS 124-1, which nullifies certain provisions of EITF Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments", and completely supersedes EITF Topic D-44, "Recognition of Other Than Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value", addresses (1) determining when an investment should be considered impaired, (2) determining whether an impairment should be deemed other than temporary, and (3) measuring impairment loss. FAS 115-1 and FAS 124-1 are effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The Company does not expect the adoption of FAS115-1 and FAS124-1 on January 1, 2006 will have a significant effect on its financial statements.
      In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets—An Amendment of FASB Statement No. 140" (“SFAS No. 156”). SFAS No. 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006, which for the Group will be as of the beginning of fiscal 2007. The Company does not believe that the adoption of SFAS No. 156 will have a significant effect on its financial statements.
      In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (“FIN48”), which is an interpretation of SFAS No. 109, "Accounting for Income Taxes" (“SFAS No. 109”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective as of the beginning of an entity's first fiscal year that begins after December 15, 2006, which for the Group will be as of the beginning of fiscal 2007. The Company does not believe that the adoption of SFAS No. 156 will have a significant effect on its financial statements.

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Table of Contents

CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
3   Business combination
      On September 13, 2005, the Company entered into agreements with Beijing Holdings Limited, the then 47.18% shareholder of the Company, to (i) acquire 51% equity interest in CNT in exchange for 2,233,800 shares of the Company (the “51% Acquisition”) and (ii) obtain an option to acquire the remaining 49% equity interest in CNT in exchange for 2,146,200 shares of the Company (the “49% Acquisition”). Effective October 31, 2005, the 51% Acquisition was completed and effective December 22, 2005, the option was also exercised and the 49% Acquisition was completed. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase consideration has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of net assets acquired was Rmb 69,526 and has been recorded as goodwill.
     The fair value of the shares issued for the 51% Acquisition was approximately US$2.41 per share which was calculated based on the simple average of five days’ quoted closing price of the Company’s stock, including two days prior and after the announcement date of the transaction and the announcement date on September 26, 2005. The fair value of the shares issued for the 49% Acquisition was approximately US$2.1 per share which was the quoted closing price of the Company’s stock on December 22, 2005, the date we exercised the option. The consideration paid, the net assets of the Nutraceutical Operations acquired and the goodwill arising there from can be summarized as follows.
                 
  Acquisition of  
  51%
Rmb
    49%
Rmb
 
Consideration Paid:
           
Shares of common stock issued at fair value
    43,523       36,405  
Direct cost related to the acquisition capitalized
    936        
 
           
Subtotal
    44,459       36,405  
 
           
Less Net assets acquired
               
Cash and cash equivalents
    247       2,387  
Trade accounts receivable, net
    56       166  
Inventories
    751       748  
Due from related parties 11 19
Income taxes recoverable 18
Other assets
    835       307  
Property, plant and equipment, net
    4,665       4,487  
Intangible assets
    3,514       3,205  
Trade accounts payable
    (138 )     (148 )
Income taxes payable
          (2 )
Deferred government grants
    (139 )     (113 )
Due to a related party (104 ) (119 )
Short term borrowings (40 ) (1,749 )
Deferred tax liabilities
    (251 )     (241 )
Other liabilities and accrued expenses
    (466 )     (909 )
Minority interests (2,957 ) (2,702 )
 
           
Subtotal 6,002 5,336
 
           
Goodwill arising from acquisition of Nutraceutical Operations
    38,457       31,069  
 
           
     Since December 2005, we had disagreements with management and the minority shareholder of Anji Bio. The Company could not timely obtain the Financial Statements and access to the site of Anji Bio. Through negotiations, the disagreements were resolved and a memorandum was signed on July 27, 2005. Management of the Company has assessed the situation of Anji Bio and determine that it shall be considered as a consolidated subsidiary of the Company for the year ended December 31, 2005 in the view that we are the legally effective owner of it.
     A detailed list of intangible assets acquired is included in Note 11 to the consolidated financial statements.
     The following unaudited pro forma information is based on the assumption that the acquisition took places as of the beginning of the year (January 1, 2005), with comparative information for the immediately preceding year as though the acquisition had been completed at the beginning of that year:
                 
    Unaudited
Years ended December 31,
 
    2004     2005  
    Rmb     Rmb  
Revenue from continuing operations
    6,854       11,698  
Net loss for the year from continuing operations
    (11,623 )     (20,064 )
Loss per share from continuing operations
    (1.69 )     (2.74 )
     The pro forma results have been prepared for comparative purposes only. They do not purport to be indicative of the results of operations which actually would have resulted had the contribution been effect on January 1, 2004 or future results of operations of the consolidated entities.
     The weighted average amortization period for the intangible assets acquired was 5.19 years (Note 11). There was no goodwill that was expected to be deductible for tax purposes.

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
4   Non-operating income
     Non-operating income consisted of the following:
                         
    Year ended December 31,  
    2003     2004     2005  
    Rmb     Rmb     Rmb  
Realized gains on trading securities
    8              
Realized gains on available-for-sale securities
    2,005       100        
Dividend income from available-for-sale securities
    295       67       115  
Subsidies from government
                161  
Others
    2              
 
                 
 
    2,310       167       276  
 
                 
5   Non-operating expenses
     Non-operating expenses consisted of the following:
                         
    Year ended December 31,  
    2003     2004     2005  
    Rmb     Rmb     Rmb  
Realized loss on available-for-sale securities – transferred from comprehensive loss
                2,596  
Others
                32  
 
                 
                2,628  
 
                 
6   Income tax provision
     The Company was incorporated under the laws of the British Virgin Islands (“BVI”), and under current BVI law, is not subject to tax on income or capital gains as it does not carry out business in the BVI. No provision for Hong Kong profits tax was provided for the company’s subsidiary operating in Hong Kong for year ended December 31, 2004 and 2005 as it had no estimated assessable profits arising in Hong Kong. Except Auji Bio which was subject to PRC income tax at rate of 33%. The Company’s other subsidiaries operating in the PRC incurred losses and therefore no PRC income taxes were provided.
     Composition of income tax expense
     The current and deferred portions of income tax expense included in the consolidated statements of operations and comprehensive income for the years ended December 31 are as follows:
                         
    2003     2004     2005  
    Rmb     Rmb     Rmb  
Current income tax expenses
    249             9  
Recognition of deferred tax assets
    1,531       2,927       5,943  
Change in valuation allowance
    (1,531 )     (2,927 )     (5,943 )
 
                 
Income tax expenses
    249             9  
 
                 

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Table of Contents

CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
6   Income tax provision (continued)
     Reconciliation of income tax expense by applying PRC statutory Enterprise Income Tax rate
     Income tax expense differed from the amounts computed by applying PRC statutory Enterprise Income Tax (“EIT”) rate of 33% as a result of the following:
                         
    2003     2004     2005  
    Rmb     Rmb     Rmb  
Income tax credit at PRC statutory EIT rate
    (522 )     (3,338 )     (6,446 )
Effect of different taxation rate in Hong Kong
    (474 )     465       572  
Income not subject to taxation
    (76 )     (53 )     (60 )
Expenses not deductible for taxation purpose
                 
Utilization of previously unrecognized tax losses
    (192 )            
Increase in previously recognized tax loss resulting from an increase in tax rate
    (18 )            
Change in valuation allowance
    1,531       2,926       5,943  
 
                 
Total income tax expense
    249             9  
 
                 
     Significant components of deferred tax assets
                 
    December 31,     December 31,  
    2004     2005  
    Rmb     Rmb  
Tax loss carryforwards
    11,464       17,407  
Less: valuation allowance
    (11,464 )     (17,407 )
 
           
Deferred tax assets
           
 
           
     Tax loss carryforwards from the Company’s PRC subsidiary can be carried forward for five years. As the realization of the current tax loss carryforwards credit is uncertain, a full valuation allowance against the deferred tax assets as at December 31, 2005 has been provided.
7   Discontinued operations
     On March 31, 2005, BBHL entered into an agreement with Beijing Enterprises Development Corporation (“BEDC”), a related party (Note 18), to sell its branch in Zhuhai, China which represented the entire service rendering business segment of BBHL, at zero consideration. In this connection, the service-rendering business segment was presented as discontinued operations.
     An analysis of the results and the loss on disposal of discontinued operations is as follows:-
                         
    Year ended     Year ended     Period ended  
    December     December     March 31,  
    31, 2003     31, 2004     2005  
    Rmb     Rmb     Rmb  
Revenues
    3,337       3,949       1,040  
Cost of sales
    (2,204 )     (2,755 )     (678 )
Gross profit
    1,133       1,194       362  
Selling, general and administrative expenses
    (767 )     (529 )     (141 )
Impairment of goodwill
          (411 )      
 
                 
Profit from discontinued operations
    366       254       221  
Loss on disposal of discontinued operations
                (509 )
 
                 
Profit/(loss) from discontinued operations
    366       254       (288 )
 
                 
     There was no tax charge incurred for the discontinued operations for the years ended December 31, 2003, 2004 and 2005.

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Table of Contents

CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
8   Other assets
     Other assets consisted of the following:
                 
    December 31,     December 31,  
    2004     2005  
    Rmb     Rmb  
Rental and utility deposits
    129       408  
Advance to staff
    74       207  
Prepayment for insurance
    379       305  
Prepayment for consultancy fee
    11       80  
Prepayment for raw materials
    100       83  
Others
    394       319  
 
           
 
    1,087       1,462  
 
           
9   Long term prepayment for rental of land
                 
    December 31,     December 31,  
    2004     2005  
    Rmb     Rmb  
Acquisition of subsidiaries
          530  
Amortisation
          (2 )
 
           
 
          528  
 
           
     The prepayment for rental of land represented the amount paid for the land use right held on medium term lease of 50 years in the PRC. The land use term will be expired on August 1, 2052.
10   Property, plant and equipment, net
                 
    December 31,     December 31,  
    2004     2005  
    Rmb     Rmb  
Building
          2,475  
Plant and machineries
          5,170  
Computer equipments
    1,972       1,678  
Furniture, fixtures and office equipments
    581       1,099  
Motor vehicles
    108       830  
Less: accumulated depreciation
    (2,612 )     (2,083 )
 
           
 
    49       9,169  
 
           
     Depreciation for the year ended December 31, 2003, 2004 and 2005 amounted to Rmb475, Rmb76 and Rmb376 respectively.
11 Intangible assets
     The intangible assets represented the unamortized cost of the extraction of bamboo flavonoids and its related application patents obtained through the acquisition of the Nutraceutical Operations on October 31, 2005.

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Table of Contents

CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
11 Intangible assets (continued)
     The fair values of intangible assets acquired in 2005 represented the core technology, completed technology and in process research and development (“IPR&D”) which amounted to Rmb 624, Rmb 5,792 and Rmb 475 respectively. The fair value of the core technology is determined by the relief from royalty approach. Under this approach, an asset is valued based upon the incremental after-tax cash flow accruing to the owner by virtue of the fact that the owner does not have to pay a “fair royalty” to a third party for the use of that asset. Accordingly, a portion of the owner’s earnings, equal to the after-tax royalty that would have been paid for use of the asset can be attributed to that asset. The value of the asset depends on the present worth of future after-tax royalties derived from ownership. Thus, indications of value are developed by discounting future after-tax royalties attributable to the asset to their present worth at market-derived rates of return appropriate for the risks of that particular asset. The relevant royalty rate was determined by referring to the profit margin of the CNT and actual market transaction in biotechnology industry whose royalty rates ranged from 1% to 10% with median of approximately 4%. In calculating the royalty saving attributable to the core technology, the related R&D expenses for maintaining the core technology were deducted. The maintenance R&D expense was estimated based on 2% of the maintenance R&D expense to sale. Net cash flow was derived by deducting tax expense from net royalty saving. In arriving at net present value, the projected cash flow to the core technology was then discounted to present value at a discount rate of 25% until the end of the economic life in 2012.
     The fair value of completed technology and IPR&D is determined by the estimation of its replacement cost because they are not unique and highly reproduced. The replacement cost of the completed technology and IPR&D include staff costs, equipment, sampling and testing costs, and overhead costs such as utility expense and rents for R&D center. We then multiplied the average development cost per technology by total number of months required to complete the existing technology.
     The fair value, accumulated amortization/write off for the fiscal year ended December 31, 2005 and the remaining balance as of December 31, 2005 of the core technology, completed technology and IPR&D technology were summarized as follows:
                                 
            Accumulated    
    Fair   Acquired   amortization/    
    value   during   write off   Balance as of
    upon   the   during the   December 31,
    acquisition   year   year   2005
    Rmb   Rmb   Rmb   Rmb
Core technology
    624             (13 )     611  
 
                               
Completed technology
                               
Bamboo leaf extract for prostate disease
    209             (7 )     202  
AoB antioxidant from bamboo leaf extract
    1,726             (58 )     1,668  
ZoB from bamboo leaf extract
    1,964             (65 )     1,899  
Bamboo shoot extractive for dietary supplements and fertilizer
    1,892             (63 )     1,829  
Zhukangning capsule from bamboo leaf extract
          343       (11 )     332  
 
                               
 
    5,791       343       (204 )     5,930  
 
                               
In-Process Research and Development technology
                               
Bamboo shoot extractive for calories control
    448             (448 )      
Bamboo shoot extractive for hair loss prevention
    27             (27 )      
 
                               
 
    475             (475 )      
 
                               
Total
    6,890       343       (692 )     6,541  
 
                               
     Amortization expense for the years ended December 31, 2003, 2004 and 2005 amounted to Rmb1,085, Rmb Nil and Rmb 217 respectively. The intangible asset of the network security and server switch technology acquired in 2000 has been fully amortized during the year ended December 31, 2003.
     The estimated amortization expenses of the intangible assets in each of the five succeeding years amounted to Rmb 1,305.
12 Goodwill
     The Group recorded goodwill of Rmb 69,526 in connection with the acquisition of its Nutraceutical Operations in 2005. The goodwill for the year ended December 31, 2005 is as follows:
                                 
    Network   Information   Nutraceutical    
    security   Technology   operations   Total
    Rmb   Rmb   Rmb   Rmb
Balance as of December 31, 2003
    4,337       1,410             5,747  
 
                               
Impairment loss for 2004
    (4,337 )     (411 )           (4,748 )
 
                               
Balance as of December 31, 2004
          999             999  
Goodwill arising from business combination (Note 3)
                69,526       69,526  
Goodwill relating to discontinued operations disposed
          (999 )           (999 )
 
                               
Balance as of December 31, 2005
                69,526       69,526  
 
                               
     In 2004, an assessment for impairment for the network security consultancy segment was carried out after the annual forecasting process. In view of the underperformance of the unit, the earning forecast was revised by management. Based on the revised forecast, the present value of future cash flows of the unit is lower then the carrying value of goodwill and therefore, goodwill impairment loss of Rmb4,337 was reported.
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Table of Contents

CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
12 Goodwill (continued)
     Further, an assessment for impairment was also carried out in 2004 for the information technology consultancy reporting unit. During the process, the estimated selling price of the reporting unit subsequent to balance sheet date was compared against the carrying value of the reporting unit with a shortfall of Rmb411. Therefore, an impairment loss of Rmb411 was recognized in the information technology consultancy reporting unit. Following the disposal of the information technology consultancy reporting unit on March 31, 2005. The Rmb 999, which represented the carrying amount of the goodwill of the reporting unit, was disposed of and was grouped into the net assets of the discontinued operations as mentioned in Note 7.
13 Deferred government grants
         
    Rmb  
Balance as at December 31, 2004
     
Addition upon acquisition of the Nutraceutical Operations on October 31, 2005
    273  
Amounts utilized during the year:
       
- Research and development costs
    (43 )
 
     
Balance as at December 31, 2005
    230  
 
     
     The entire deferred government grants belong to the Nutraceutical Operations acquired on October 31, 2005. The Group is obliged to utilize the government grants only for funding the research and development costs and costs for purchase of plant and machinery incurred for the research and development projects registered with the relevant authorities. Savings in deferred government grants upon completion of the research and development projects, however, is not required to return to the relevant authorities and is recognized as revenue. An aggregated amounts of Rmb 1,862 was received by Zhejiang Innoessen as deferred government grants in 2003. Of the same Rmb 1,060, Rmb 221 and Rmb 308 were utilized for research and development costs, purchase of plant and machinery and recognized to revenue respectively for the period from the date when the grants were received to October 31, 2005, the date of acquisition. The amounts utilized for research and development costs since October 31, 2005 to December 31, 2005 was Rmb 43.
     The deferred government grants are included as current liabilities of the Company.
14 Short term borrowings
     The Company’s short term borrowings as of each balance sheet date, denominated in Renminbi, were analyzed as follows:
                 
    December 31,     December 31,  
    2004     2005  
    Rmb     Rmb  
Unsecured bank loans repayable within one year
          3,069  
A secured revolving banking facility
          500  
 
           
Total
          3,569  
 
           
The weighted average interest rate of short term borrowings was 6.14% as of December 31, 2005. The secured revolving banking facility was secured by the land use right of the Anji Bio.
15 Other liabilities and accrued expenses
                 
    December 31,     December 31,  
    2004     2005  
    Rmb     Rmb  
Deposits received
    1,373       934  
Accrued salaries and staff benefits
    1,007       2,021  
Others
    78       764  
 
           
 
    2,458       3,719  
 
           

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Table of Contents

CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
16 Stock-based compensation
     On October 10, 1996, the Company’s shareholders approved a stock option plan to grant options for a maximum of 200,000 shares (the “1996 Plan”). The 1996 Plan provides for a grant of options to employees, officers, directors and consultants of the Group. The 1996 Plan is administered by the Board of Directors or a committee appointed by the Board, which determines the terms of option’s grant, including the exercise price, the number of shares subject to the option and option’s exercisability. The exercise price of all options granted under the 1996 Plan must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the stock option plan is 10 years.
     On September 20, 2000, the Company’s shareholders approved a stock option plan to grant options for a maximum of 400,000 shares (the “2000 Plan”). The 2000 Plan provides for a grant of options to employees, officers, directors and consultants of the Group. The 2000 Plan is administered by the Board of Directors or a committee appointed by the Board, which determines the terms of option’s grant, including the exercise price, the number of shares subject to the option and option’s exercisability. The exercise price of all options granted under the 2000 Plan must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the stock option plan is 10 years.
     On October 21, 2005, the Company’s shareholders approved another stock option plan to grant options for a maximum of 1,000,000 shares (the “2005 Plan”). The 2005 Plan provides for a grant of options to employees, officers, directors and consultants of the Group. The 2005 Plan is administered by the Company’s Compensation Committee, which determines the terms of option’s grant, including the exercise price, the number of shares subject to the option and option’s exercisability. The exercise price of all options granted under the 2005 Plan must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the stock option is 10 years.
     The Group grants stock options to its employees and certain non-employees.
     The Group applies Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and complies with the disclosure provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148’) for options granted to employees. In general, compensation cost is recognized based on the difference, if any, between the fair value of the Company’s shares and the exercise price as determined on the date the option is granted. Under APB Opinion No. 25, because the exercise price of all the options issued by the Company to employees equals or is higher than the market price of the underlying stock on the date of grant, no compensation expense is recognized.
     The Group applies SFAS No. 123, as amended by SFAS No. 148 for options granted to non-employees. A charge for stock-based awards for the services rendered by non-employees using the Black-Scholes option pricing model are recognized by the Group once incurred.
     A summary of the stock option activity for both employees and non-employees is follows:
                                                 
    Year ended December 31,
    2003   2004   2005
            Weighted           Weighted           Weighted
            average           average           average
            exercise           exercise           exercise
    Number   price   Number   price   Number   price
    of   (US$ per   of   (US$ per   of   (US$ per
    options   share)   options   share)   options   share)
Outstanding at beginning of year
    140,000       1.15       140,000       1.15       140,000       1.15  
Granted
                            430,000       1.85  
Exercised
                                   
Cancelled
                                   
 
                                               
Outstanding at end of year
    140,000       1.15       140,000       1.15       570,000       1.68  
 
                                               

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
16 Stock-based compensation (continued)
     The following table summarizes information with respect to stock options outstanding at December 31, 2005:
                                         
    Options outstanding            
            Weighted           Options exercisable
            average   Weighted           Weighted
            remaining   average           average
    Number   contractual   exercise   Number   exercise
Date of grant   outstanding   life   price   exercisable   price
            (US$ per share)       (US$ per share)
December 28, 1999
    140,000     4 years     1.15       140,000       1.15  
September 20, 2005
    430,000     9.72 years     1.85       430,000       1.85  
 
                                       
 
    570,000                       570,000          
 
                                       
     The share options granted on December 28, 1999 were made pursuant to the 1996 Plan and are immediately exercisable. The share options granted on September 20, 2005 included 60,000 share options made pursuant to the 1996 Plan and 370,000 share options made under the 2000 Plan. All share options granted on September 20, 2005 are immediately exercisable.
     There were no options granted in the fiscal years ended December 31, 2003 and 2004. The Company had granted three groups of options to employees during the year ended December 31, 2005. The options of the chairman and the chief executive officer of the Company were deemed granted on February 8, 2005 and March 29, 2005 respectively upon their appointment to the positions. These options were granted under the 1996 Plan of the Company pursuant to a board resolution passed on December 28, 1999. The resolution had passed 50,000 options were each granted to the respective position. In case the person holding the position has not exercised the options during his service with the Company, the person who is appointed can succeed the options at the same terms. Upon the new appointment of the chairman and the chief executive officer in 2005, their predecessors had not exercised any of the options granted and therefore, the remaining options were succeeded by the newly appointed persons. Pursuant to another resolution passed on September 20, 2005, another 430,000 options were granted to other employees.
     Stock-based compensation to non-employees
     The Company granted 65,000 stock options under the 2000 Plan to certain consultants on September 20, 2005 in respect of their advisory services provided to the Company. The options were fully vested and non-forfeitable. Accordingly, the Company recorded a compensation expenses of approximately Rmb 701 for the fiscal year ended December 31, 2005, estimated using the Black Scholes option pricing model. All options granted to consultants are immediately exercisable after being granted.
     The following assumptions were used in the Black-Scholes option pricing model in assessing the fair value of options granted to non-employees:
         
Average risk-free rate of return*
    3.983 %
Weighted average expected option life
  2.5 years
Volatility rate
    133.18 %
Dividend yield
     
 
* Risk-free rate represents the yields to maturity of respective US Government STRIPS (Source: Bloomberg)
17 Loss per share
     Basic loss per share represents income available to common stockholders divided by the weighted-average number of common stocks outstanding during the period. Diluted earnings per share reflects additional common stocks that would have been outstanding if dilutive potential common stocks have been issued, as well as any adjustment to income that would result from the assumed issuance. Dilutive potential common stocks that may be issued by the Group relate solely to outstanding stock options, and are determined using the treasury stock method. Effects of stock options are excluded from the computation if the effect would be antidilutive.
     Basic and diluted loss per share have been calculated in accordance with SFAS No. 128 for the years ended December 31, 2003, 2004 and 2005 as follows:

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
17 (continued)
                         
    Year ended December 31,  
    2003     2004     2005  
    Rmb     Rmb     Rmb  
Net loss for the year
    (942 )     (10,115 )     (19,532 )
 
                 
Net loss from continuing operations attributable to holders of common stock, basic and diluted shares
    (1,308 )     (10,369 )     (19,244 )
 
                 
Net income/(loss) from discontinued operations attributable to holders of common stock, basic and dilutive shares
    366       254       (288 )
 
                 
 
                       
Weighted-average shares used in computing basic and diluted loss per share
    6,894       6,894       7,327  
Incremental shares from assumed conversions of stock options
          55       274  
Weighted-average shares used in computing diluted loss per share
    6,894       6,949       7,601  
 
                       
Loss per share (in Rmb)
                       
- Basic and dilutive
    (0.14 )     (1.47 )     (2.67 )
 
                 
 
                       
Loss per share from continuing operations (in Rmb)
                       
- Basic and dilutive
    (0.19 )     (1.51 )     (2.63 )
 
                 
 
                       
Income/(loss) per share from discontinued operations (in Rmb)
                       
- Basic and dilutive
    0.05       0.04       (0.04 )
 
                 
     Income/(loss) per share are calculated based on the weighted average number of shares of common stock issued and, as appropriate, diluted shares of common stock equivalent outstanding for each of the relevant years and the related loss amount. The number of incremental shares from assumed exercise of share options has been determined using treasury stock method. Under the treasury stock method, the proceeds from the assumed conversion of options are used to repurchase shares of common stock using the average fair value for the years.
     For all the three years ended December 31, 2003, 2004 and 2005, the number of shares used in the calculation of diluted loss per share is equal to the number of shares used to calculate basic loss per share as the incremental effect of share options would be antidilutive in these loss-making years.
18 Related party transactions
     The transactions and balances with related parties are analyzed as follows:-
                         
    Year ended December 31,  
    2003     2004     2005  
    Rmb     Rmb     Rmb  
 
                       
Transactions with related parties
                       
 
                       
Disposal of Zhuhai branch of BBHL to BEDC (Note a)
                1,300  
Net operating cash outflows of Zhuhai branch reimbursed (Note a)
                    (1,300 )  
Acquisition of CNT from Beijing Holdings by issuance of 2,233,800 new shares at US$2.41 per share and 2,146,200 new shares at US$2.1 per share respectively (Note b)
                    79,928  
Disposal of available-for-sale securities to Beijing Holdings (Note c)
                2,167  

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

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
18 Related party transactions (continued)
Note
(d)   Due to Beijing Holding’s good relationship with leading investment banks and the Company’s desire to access potential investment opportunities as a result of these relationships, the Company previously deposited funds with Beijing Holdings (since 2002) to invest on its behalf in Hong Kong. Nevertheless, due to the poor performance of the Hong Kong Stock market in the last two years, the Company withdrew its entire funds of Rmb 6.53 million in May 2005. There was no agreement signed with Beijing Holdings for the deposit.
 
(e)   On November 17, 2005 the Company entered into a sale and purchase agreement with Beijing Holding to dispose of all of the shares it held in Xi’an Haitian for cash consideration of Rmb2.17 million. The value of the consideration was determined by the quoted closing stock price of Xi’an Haitian at HK$0.33 per share at the date of the agreement.
 
(f)   Due to its good relationship with leading investment banks and potential investment opportunities to be gained from those relationships, the Company previously deposited funds with Beijing Holdings Investment Management Center (“BHIMC”) to invest our behalf in China. Again, due to the poor performance of the China Stock market, we withdrew the entire funds of Rmb 3.39 million in December 2005. There was no agreement signed with BHIMC for the deposit.
 
(g)   China Biotech Holdings Limited (“China Biotech”), is a company incorporated in BVI in which Mr. Alan Li, the executive director and Co-Chief Executive Officer of the Company, is also an executive director. China Biotech has experience in nutraceutical business in China. China Biotech’s experience includes making investments in companies and technologies involved in this industry. In view of China Biotech’s experience, the Company deposited Rmb 6.26 million with China Biotech for the purpose of making (with the assistance of China Biotech) potential acquisitions of technology and businesses in the nutraceutical industry in China. There was no agreement signed for the funds deposited with China Biotech and the Company can withdraw the funds without any restrictions.
 
(h)   The amount represented the advance of funds for the purchase on behalf of the Company of trading securities in Hong Kong by Beijing Investments (BVI) Limited, a wholly owned subsidiary of Beijing Holdings. This amount was wholly withdrawn by the Company in March 2005.
 
(i)   The amount represented the contract sums received on behalf of BEDC by BHLHK in Hong Kong as the customer of BEDC paid in Hong Kong dollars whereas BEDC did not maintain a Hong Kong dollar bank account in Hong Kong.
 
(j)   The amount represented administrative expenses paid on behalf of CNT by China Biotech in China.
19 Retirement benefits
     As stipulated by the regulations of PRC, the PRC subsidiary is required to make contributions to the retirement fund organized by the PRC government at the rate of 19% of the base salaries of their staff. Contributions made in connection with the mandatory fund, which are expensed as incurred, were Rmb293, Rmb363 and Rmb401 for the years 2003, 2004 and 2005 respectively. The PRC subsidiary has no obligation for the payment of pension benefits beyond the annual contributions described above.

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
20 Common Stock
     Common Stock of the Company as of December 31, 2004 and 2005 was as follows:
                                         
                    Ordinary shares              
    Common     Treasury     with par value     Additional paid-in        
    stock     stock     US$0.01 each     capital     Total  
                    Rmb     Rmb     Rmb  
December 31, 2004
    6,894,497       2,150,391       571       187,159       187,730  
Issues of shares for acquisition during the year
    4,380,000             339       79,589       79,928  
Stock options granted to certain consultants (Note (a))
                        701       701  
Stock options granted to officers (Note (b))
                      2,475       2,475  
Cancellation of treasury stocks
          (2,150,391 )                  
                 
December 31, 2005
    11,274,497             910       269,924       270,834  
                 
 
(a)   This represented the fair value of the stock options granted to certain consultants.
 
(b)   This represented the expenses of the stock options granted to the Company’s chairman and chief executive officer. Details of which is discussed in Note 2(p)
 
(c)   The entire treasury stocks of 2,150,391 shares of the Company had been cancelled during the year ended December 31, 2005.
21 Contingencies and commitments
          Operating lease commitments
     As of December 31, 2005, the Group had future aggregate minimum lease payments under non-cancelable operating leases as follows:
                 
    December 31,  
    2004     2005  
    Rmb     Rmb  
In respect of land and buildings
               
Not later than one year
    477       615  
Later than one year and not later than five years
          332  
Later than five years
           
 
           
Total
    477       947  
 
           
     The Company is a party to form lease agreements for office premises and staff quarters. The lease agreements are described below:

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
21 Contingencies and commitments (continued)
    Operating lease commitments (continued)
 
(a)   The lease agreement of our Corporate Office (situated in Hong Kong) commenced on May 27, 2005, and shall continue for a period of two years, at a monthly rent of Rmb 33. As of December 31, 2005, the future minimum lease payments under this non-cancelable operating lease amounted to Rmb 358 and Rmb 158 for years ended December 31, 2006 and 2007 respectively.
 
(b)   The lease agreement of staff quarters (situated in Hong Kong) for managers of our Corporate Office commenced on December 11, 2005, and shall continue for a period of two years, at a monthly rent of Rmb 7. As of December 31, 2005, the future minimum lease payments under this non-cancelable operating lease amounted to Rmb 86 and Rmb 81 for years ended December 31, 2006 and 2007 respectively.
 
(c)   The lease agreement of staff quarters (situated in Hong Kong) for Alan Li, the executive director and Co-Chief Executive Officer of the Company, commenced on December 8, 2005, and shall continue for a period of two years, at a monthly rent of Rmb 8. As of December 31, 2005, the future minimum lease payments under this non-cancelable operating lease amounted to Rmb 100 and Rmb 93 for years ended December 31, 2006 and 2007 respectively.
 
(d)   The lease agreement for the office of Shenzhen Innoessen (situated in Shenghen, PRC) commenced on March 23, 2005, and shall continue for a period of one year, at a monthly rent of Rmb 24. As of December 31, 2005, the future minimum lease payments under this non-cancelable operating lease amounted to Rmb 71 for year ended December 31, 2006.
     Lease rental costs incurred by the Group for the year ended December 31, 2003, 2004 and 2005 amounted to Rmb596, Rmb519 and Rmb1,052 respectively.
     Contingencies
     On June 20, 2006, the ex-general manager and the minority shareholder of Anji Bio (the “Anji Buyers”) filed claims against Anji Bio and Zhejiang Innoessen in the People’s Court of the Anji County (the “Anji Court”) with respect to the unlawful termination of service of the ex-general manager of Anji Bio. The Anji Buyers have requested that the Anji Court order the termination was unlawful and pay Rmb 50 as economic compensation to the ex-general manager. The case has been scheduled to take place on July 31, 2006, Pursuant to the memorandum entered into between Zhejiang innoessen and the Anji Buyers dated July 27, 2006, it was mutually agreed to defer the litigation. As also stipulated in the same memorandum, the litigation would be cancelled upon the completion of the memorandum. The Group has not provided for the claim as the management of the Company has confidence in completing the memorandum.

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
22 Segment information
     For management reporting purposes, the Group’s business segment results are reported to the management in two business segments: IT Operations and Nutraceutical Operations. These business segments are determined based on the nature of the business engaged by each segment.
     Management evaluates each segment’s performance based upon earnings before interest expense, depreciation and amortization charges and other income/ expenses. Such measure is then adjusted to exclude items that are of a non-recurring or unusual nature. Management believes such discussions are the most informative representation of how management evaluates performance.
     Summarized financial information by business segment of our continuing operations for 2005, 2004 and 2003 is as follows:
                                         
                                   
                    Net identifiable     Depreciation        
            Operating     assets/     and     Capital  
    Revenues     loss     (liabilities)     amortization     expenditures  
    Rmb     Rmb     Rmb     Rmb     Rmb  
Year 2005
                                       
IT Operations
    6,468       (3,269 )     2,579       67       221  
Nutraceutical Operations
    1,035       (1,343 )     11,890       410       16,584  
 
                             
Total operating segments
    7,503       (4,612 )     14,469       477       16,805  
Corporate
          (13,274 )     14,713       118       454  
 
                             
Group
    7,503       (17,886 )     29,182       595       17,259  
 
                             
 
                                       
Year 2004
                                       
IT Operations
    2,720       (7,798 )     (1,920 )     76        
 
                             
Total operating segments
    2,720       (7,798 )     (1,920 )     76        
Corporate
          (2,981 )     33,473              
 
                             
Group
    2,720       (10,779 )     31,553       76        
 
                             
 
                                       
Year 2003
                                       
IT Operations
    8,405       (2,102 )     3,581       1,560       29  
 
                             
Total operating segments
    8,405       (2,102 )     3,581       1,560       29  
Corporate
          (2,276 )     36,161              
 
                             
Group
    8,405       (4,378 )     39,742       1,560       29  
 
                             
     The Group is engaged in the provision of information technology and network security services and the sale and marketing of nutraceutical products to a wide range of industries and end users within the PRC. All the Group’s revenue is derived from sales to customers located in the PRC. Approximately, 6.28%, 18.59% and 32.97% of the total revenues were contributed by 3 major customers of our IT operation during the year ended December 31, 2005.
     The Group operates mainly in the PRC and accordingly no geographical segment information is presented.
     There are no sales or other transactions between the segments. Segment assets consist primarily of cash and cash equivalents, inventories, trade receivables, other assets and fixed assets. Segment liabilities comprise operating liabilities.
     In 2004, operating profit/ (loss) of segments include goodwill impairment loss of Rmb4,337 for IT operations.

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CHINA TECHNOLOGY DEVELOPMENT GROUP CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands, unless otherwise stated)
23 Subsequent events
     Investment In Fujian Jian’ou Yingshi Food Technology Limited (“Fujian Jian’ou”)
     On January 12, 2006 Zhejiang Innoessen entered into a joint venture agreement with Fujian Jian’ou Food Production Limited (the “Agreement”) to form the Fujian Jian’ou. Pursuant to the Agreement, Zhejiang Innoessen will invest Rmb5.1 million (the “Capital Injection”) to own 51% interest of Fujian Jian’ou. Rmb3.0 million and Rmb2.1 million of the Capital Injection will be invested in the form of technology owned by Zhejiang Innoessen and a mix of plant and machinery (after valuation) and cash respectively. Pursuant to the Agreement, the deadline of Capital Injection is December 31, 2006. As of date, an aggregated sum of Rmb600 in the form of cash had been invested.
     Since early June of 2006, the Fujian Province of China had been subject to the heaviest rainstorms and floods in the past fifty years, Jian’ou, one of the cities in the FujianProvince, suffered the most damage. As a result of this flooding, the production facilities held by Fujian Jian’ou (having started its trial run in May 2006) were damaged. It was noted that the factory was flooded under 2.50-meters water for over thirty hours. All operations of Fujian Jian’ou are currently stopped and management is in the process of quantifying losses. A preliminary assessment indicates that it will take at least two months to cleanup the site and restore the factory’s capability. As of date, management is in process of quantifying the impacts of which to our operating results for the year ending December 31, 2006.
     Disposal of Anji Bio
     On July 27, 2006, Zhejiang Innoessen entered into a memorandum with the ex-general manager and minority shareholders of Anji Bio (the “Anji Buyers”) pursuant to which the entire interest in Anji Bio held by Zhejiang Innoessen was disposed to Anji Buyers. The final consideration, however, is not yet determined, subject to the finalization of the value determined for the fixed assets of Anji Bio and which will be used as a basis for the total consideration for the whole transaction.

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