20-F 1 a20-f.txt 20-F FORM 20-F [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1999 ----------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to______________________ Commission file number 000-22113 -------------------------------------------------------- EURO TECH HOLDINGS COMPANY LIMITED ------------------------------------------------------------------------------ (Exact name of Registrant as specified in its charter) EURO TECH HOLDINGS COMPANY LIMITED ------------------------------------------------------------------------------ (Translation of Registrant's name into English) BRITISH VIRGIN ISLANDS ------------------------------------------------------------------------------ (Jurisdiction of incorporation or organization) 18/F GEE CHANG HONG CENTRE, 65 WONG CHUK HONG ROAD, HONG KONG ------------------------------------------------------------------------------ (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act.

Name of each exchange Title of each class on which registered NOT APPLICABLE ----------------------------------- ----------------------------------- NOT APPLICABLE ----------------------------------- -----------------------------------

Securities registered or to be registered pursuant to Section 12(g) of the Act. COMMON STOCK, $.01 PAR VALUE ------------------------------------------------------------------------------ (Title of Class) REDEEMABLE COMMON STOCK PURCHASE WARRANTS ------------------------------------------------------------------------------ (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. ------------------------------------------------------------------------------ (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.

2,481,840 SHARES OF COMMON STOCK -------------------------------- 2,016,000 WARRANTS --------------------------------

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No --------------- ---------------

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 X Item 18 --------------- ---------------

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes No --------------- ---------------

EXPLANATORY NOTE: Except as otherwise noted herein, all calculations of the Company's securities and, where relevant, exercise and "target" prices, give effect to the Registrant's 20% stock dividend in September 1999 and the anti-dilution effects of that dividend. GLOSSARY The following glossary of terms may be helpful in understanding the terminology used in this Annual Report. Ambient Air: Atmospheric air (outdoor as opposed to indoor air). Colorimeter: An analytical instrument that measures substance concentration by color intensity when the substance reacts to a chemical reagent. Flow Injection Analyzer: An analytical instrument with a special sampling system that uses a continuous stream of reagent(s) into which fluid samples are injected. pH Controller: A process instrument that measures and controls the acidity or alkalinity of a fluid. Reagent: A chemical substance used to cause a chemical reaction and detect another substance. Mass Spectrometer: An analytical instrument that separates and identifies chemical constituents according to their mass-to-charge ratios and is used to identify organic compounds. Multi-Channel Digital Recorder: A device that measures and records more than one input of a digitized signal (signal in the form of pulses). Multi-Channel and Analogue Recorder: A device that measures and records more than one input of a signal in multi-voltage or milliampere (e.g. temperature in degrees Centigrade or degrees Fahrenheit). Atomic Spectrometer: An analytical instrument used to measure the presence of an element in a substance by testing a sample which is aspirated into a flame and atomized. The amount of light absorbed or emitted is measured. The amount of energy absorbed or emitted is proportional to the concentration of the element in the sample. Process Analyzer: An analyzer that continuously samples, monitors and measures fluids or gases. Process Turbidimeter: An analytical instrument that continually measures the clarity of water based on light scattering or deflection. Total Organic Carbon Analyzer: An analytical instrument that measures organic contamination in water. TABLE OF CONTENTS

PART I.........................................................................................2 ITEM 1. DESCRIPTION OF BUSINESS.............................................................2 ITEM 2. DESCRIPTION OF PROPERTY............................................................20 ITEM 3. LEGAL PROCEEDINGS..................................................................21 ITEM 4. CONTROL OF REGISTRANT..............................................................21 ITEM 5. NATURE OF TRADING MARKET...........................................................22 ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITYHOLDERS..................23 ITEM 7. TAXATION...........................................................................23 ITEM 8. SELECTED FINANCIAL DATA............................................................24 ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................................................26 ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................33 ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT..............................................33 ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS............................................35 ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES....................36 ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS....................................38 PART II.......................................................................................39 ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED........................................39 PART III......................................................................................39 ITEM 15. DEFAULTS UPON SENIOR SECURITIES...................................................39 ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS...................................................................40 PART IV.......................................................................................41 ITEM 17. FINANCIAL STATEMENTS..............................................................41 ITEM 18. FINANCIAL STATEMENTS..............................................................41 ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.................................................42

FORWARD LOOKING STATEMENTS. This annual report contains forward looking statements. Additional written or oral forward looking statements may be made by the Company from time to time in filings with the Commission or otherwise. Such forward looking statements are within the meaning of that term in Section 21E of the Exchange Act of 1934. Such statements may include, but not be limited to, projections of revenues, income, or loss, capital expenditures, plans for future operations, financing needs or plans, and plans relating to products or services of the Company, as well as assumptions relating to the foregoing. The words "believe," "expect," "anticipate," "estimate," "project," and similar expressions identify forward looking statements, which speak only as of the date the statement was made. Forward looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward looking statements. Statements in this Annual Report, including those contained in the sections entitled Item 1. "Business - Risks" and Item 9. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the notes to the Company's Financial Statements, describe factors, among others, that could contribute to or cause such differences. PART I ITEM 1. DESCRIPTION OF BUSINESS INTRODUCTION Euro Tech Holdings Company Limited (the "Company") was organized under the laws of the British Virgin Islands on September 30, 1996 for the purposes of raising capital and for acquiring all the outstanding capital stock of Euro Tech (Far East) Ltd., a Hong Kong corporation ("Far East"). The Company successfully completed a public offering (the "Public Offering") of approximately 741,840 Ordinary Shares, $.01 par value, and 828,000 Redeemable Ordinary Share Purchase Warrants (the "Common Stock"), from which the Company received net proceeds of approximately $1,817,000, in or about March 1997. Each Warrant entitles the holder to purchase one Ordinary Share at a price of $4.5833 per share. At December 31, 1999, no Warrants had been exercised. Pursuant to and concurrently with the Public Offering, the Company acquired all the issued and outstanding capital stock of Far East, and thereafter Far East became a wholly-owned subsidiary and the primary operational tool of the Company. Far East was established in 1971 and has been in continuous operation since that time. See Item 9. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Far East engages in its core business of distributing various equipment, instruments and supplies used in connection with the treatment, analysis and testing of water and waste water. Where appropriate, references to the business of the Company refer to the business of Far East. The Company is primarily a distributor of a wide range of advanced water treatment equipment (including chlorination equipment), laboratory instruments, analyzers, test kits and related supplies. The Company acts as an exclusive and non-exclusive distributor for well-known manufacturers of such equipment, primarily to commercial customers and governmental agencies or instrumentalities in Hong Kong and the People's Republic of China (the "PRC"). The Company 2 distributes products to more than 400 regular customers, including the Hong Kong Environmental Protection Department, the Beijing Hydrology station, China Light & Power Co., Ltd., Hong Kong Electric Co., Ltd., and the Kowloon-Canton Railway Corporation China's National Environmental Protection Agency, a joint venture between the China Great Wall Industry 1/E Corp. and Austria's Aqua Engineering to construct one of Beijing's water treatment plants, and to sub-distributors located in Hong Kong, the PRC and Macao. These products are manufactured by a substantial number of major American, European and Japanese corporations, including Wallace & Tiernan Pacific Pty. Ltd. ("Wallace"), Hach Company, Inc. ("Hach"), Hioki E.E. Corp. ("Hioki") and Finnigan Corporation ("Finnigan") (now a wholly-owned subsidiary of ThermoQuest Corporation ("ThermoQuest"), which are the Company's largest suppliers, with purchases from them accounting for approximately 7%, 17%, 7% and 9%, respectively, of the Company's sales during its fiscal year ended December 31, 1998 ("Fiscal 1998") and 8%, 20%, 11% and 5%, respectively, of the Company's sales during its fiscal year ended December 31, 1999 ("Fiscal 1999"). The Company distributes products through its Hong Kong headquarters, its regional sales offices located in Beijing, Shanghai, Guangzhou, Chongqing, Xian and Shenyang, and through non-exclusive arrangements with independent sub-distributors located in Hong Kong, the PRC and Macao. The Company believes that the continuing growth of industrial activity in particular, and overall business activity in general, in the PRC over the last five years has produced a strong and increasing demand for its products in the PRC. The Company further believes that in the near future the need and demand for the products it distributes will grow as a result of increased regulations governing the environment and industrial pollution output, projected growing demands of the PRC's population for clean water and a healthier and safer environment, and the potential for the contamination or depletion of existing clean fresh water sources. The Company used portions of the net proceeds of the Public Offering to (a) establish an operation for the assembly of the type of products now distributed by the Company, including certain water-related testing, monitoring and treatment equipment (approximately $200,000), (b) to expand its marketing efforts by, among other things, opening additional regional sales offices in the PRC (approximately $200,000), (c) purchase equipment (approximately $135,000), (d) establish Chinah2o.com Limited (approximately $300,000), (e) repurchase securities from the underwriter of the Company's Public Offering (approximately $105,000) and (f) pay expenses incurred in seeking acquisition candidates and hiring an agent in the United States (approximately $170,000). The Company believes that by assembling the products it distributes, it may realize increased gross profit margins and greater revenues and net income than if it remained only a distributor of such products. Similarly, the Company believes that by expanding its regional sales efforts in the PRC, it may realize higher revenues and net income. The Company has engaged a business consultant to assist with identifying manufacturing plants and engineering companies which would make suitable acquisition targets. The Company contemplates, but as to which no assurance can be made, that such entities, if acquired, would assist in the assembly of its products and offer customer turnkey projects and solutions. 3 During Fiscal 1998 and Fiscal 1999, the Company had sales of approximately $12,757,000 and $13,107,000, respectively, and net income of approximately $255,000 and $339,000, respectively. BACKGROUND The Company presently wholly-owns Euro Tech (Far East) Limited ("Far East") which, in turn, wholly owns the following corporations: - Euro Tech Trading (Shanghai) Limited - a People's Republic of China corporation - Euro Tech (China) Limited - a Hong Kong corporation - Chinah2o.com Limited - a Hong Kong corporation - Shanghai Euro Tech Limited - a People's Republic of China corporation The Company's wholly-owned subsidiary and primary operational arm is Far East, which it acquired in March 1997. Far East has engaged in the distribution of various industrial control equipment, which continues to be the core business of the Company, since its inception in 1971. Far East was established in 1971, under the name of Eurotherm (Far East) Ltd., as a subsidiary of a United Kingdom publicly traded company (Eurotherm Ltd.) to market and distribute Eurotherm Ltd.'s industrial control equipment in Hong Kong and Southeast Asia. Far East expanded its activities into PRC in 1973. In the early 1980's, Far East began the distribution of high-tech equipment manufactured in the United States, Europe and Japan into PRC, in addition to its distribution activities on behalf of its parent. In 1988, the activities of the parent and Far East were separated into Eurotherm International ("Eurotherm") and Far East. By 1994, all of the capital stock of Far East had been purchased by its management and Far East changed its name from Eurotherm (Far East) Ltd. to its current name. See Item 13. "Interest of Management in Certain Transactions." Euro Tech Trading (Shanghai) Limited ("Trading")'s core business is similar to that of Far East. Euro Tech (China) Limited ("Limited") is inactive. The Company's Pudong Shanghai Assembly operations are being conducted through Shanghai Euro Tech Limited ("Shanghai Euro Tech"). PRODUCTS, SERVICES AND CUSTOMERS Laboratory instruments, analyzers and test kits are used to analyze the chemical content and ascertain the level of impurities or other contaminants in water. The Company distributes analytical re-agents and chemicals to support testing systems of laboratory and portable instruments, process analyzers and portable test kits and assist in the analysis process. The Company offers a wide variety of test kits to test water quality. The Company believes that these portable test kits are easy to use and preadapted for rugged field use. These test kits are used to monitor drinking water distribution systems. Laboratory and portable instruments generally consist of analytical instruments including but not limited to the following: spectrophotometers, colorimeters, turbidimeters, ion-selective electrodes, 4 chemical oxygen demand apparati, digestion apparati, and precision re-agent dispensing devices which are used to test and monitor impurities and contaminants in water systems. See "Glossary." The Company also distributes continuous-reading process analyzers, process turbidimeters, pH controllers and analyzer accessories. These products are generally used to monitor and control drinking water quality to ensure that water treatment procedures comply with regulatory standards. See "Glossary." SCIENTIFIC INSTRUMENTS. The Company distributes analytical instruments, environmental monitoring instruments and general purpose laboratory instruments. Analytical instruments include, but are not limited to, mass spectrometers, flow injector analyzers and atomic spectrometers. Environmental monitoring instruments include both air and water quality monitoring instruments. Air quality monitoring instruments are generally divided into those which monitor ambient (i.e., atmospheric) air, and those which monitor pollution sources. Additionally, the Company offers general purpose laboratory instruments including a variety of water quality monitoring and analysis equipment, such as continuous reading process analyzers, process turbidimeters, pH controllers, and test kits for monitoring chemical content in water (i.e., chlorine, fluorides, etc.). See "Glossary." Customers for the analytical instruments include government agencies, academic and research institutions and major laboratories. The Company also distributes products to beverage producers and restaurants, including water quality test kits to more than twelve bottling plants of a well known United States softdrink producer, which are located in the PRC; total organic carbon analyzers to the People's Liberation Army (the PRC armed forces), water quality monitoring instruments to well known United States fast food franchisor's restaurants located in Hong Kong and the PRC, and to well known United States and European beer producers bottling plants located in Wuhan, PRC. Each such soda producer, restaurant and beer bottler accounts for less than one percent of the Company's sales and the People's Liberation Army accounts for approximately one percent of the Company's sales. Customers for air and water quality monitoring instruments also include government agencies such as the Hong Kong Environmental Protection Department, which uses a Company distributed water quality monitoring system to monitor the water quality of Hong Kong's Victoria Harbor, more than ten water treatment plants located in the PRC (including sites at Beijing, Tianjin, Guangzhou and Wuhan), and the Beijing Environmental Monitoring Centre. The Company is also one of two distributors supplying continuous water monitoring systems to Beijing's Hydrology Station. The Company derived approximately 48.3% and 49.8% of its sales from the sale of Scientific Instruments during Fiscal 1998 and Fiscal 1999, respectively. PROCESS CONTROL AND ENGINEERING PRODUCTS. The Company provides process control systems specifically designed for the industrial needs of clients including sensors, temperature gauges, pressure gauges, flow meters, valves, temperature and pressure transmitters and control devices, temperature and pressure calibrators, moisture, power, energy and harmonic analyzers. Chlorination disinfection systems are also distributed by Far East in conjunction with water 5 treatment, sewage discharge and swimming pool water treatment. Customers for the foregoing distributed products include government water supply agencies, water treatment facilities, power and electric companies, petrochemical plants and instrument manufacturers. For example, the Company distributes Chlorination disinfection systems to Hong Kong's new Chek Lap Kok airport and its environs. The Company derived approximately 29% and 25.5% of its sales from the sale of Process Control and Engineering Products during Fiscal 1998 and Fiscal 1999, respectively. OTHER PRODUCTS. The Company distributes general testing and telecommunications testing equipment to industries, utilities, educational institutions and telecommunications companies. The Company also distributes multi-channel digital and analogue recorders and similar products. Customers for telecommunications products include government departments and telephone companies and utilities. The Company derived approximately 12.1% and 12.8% of its sales from the sale of these Other Products during Fiscal 1998 and Fiscal 1999, respectively. SPECIAL PROJECTS AND TECHNICAL SUPPORT. In conjunction with the distribution of computer hardware and software, the Company provides computer programming hardware and software to government agencies, industrial plants and beverage producers. The Company's technical support staff provides customers with maintenance, installation assistance, and calibration services, and assists sales personnel in giving technical advice to and performing product demonstrations for customers. The Company derived approximately 10.6% and 11.9% of its sales from Special Projects and Technical Support Operations during Fiscal 1998 and Fiscal 1999, respectively. CUSTOMERS. At the end of Fiscal 1999, the Company had more than 400 regular customers, including sub-distributors, located in Hong Kong, the PRC and Macao. During Fiscal 1999, one customer, Hong Kong Water Supplies Department, accounted for approximately 6.4% of the Company's sales, no other customer accounted for more than 5% of the Company's sales, and the Company does not believe that any single customer or sub-distributor is material to its operations. OTHER DISTRIBUTION LINES. The Company has previously established subsidiaries to distribute products not directly related to its core business of distributing water and waste-water-related products, but it has consolidated its operations to focus more on this core business, spinning off its subsidiaries which are incompatible with its core business. One such former subsidiary had been established to distribute telecommunication products. Manufacturers of telecommunication products generally distributed their products directly to end users without using distributors, and technical expertise with telecommunication products was also found to be necessary for entering this market. Hence, this subsidiary never progressed past a start-up stage. 6 Another former subsidiary, an industrial computer distributor, lost its principal source manufacturer when the manufacturer sold its industrial computer production line to another supplier, while another major manufacturer of industrial computers established its own distribution operation in Hong Kong and the PRC. The Company has also from time to time been involved with other businesses not related to its core business, including investing in real estate. The Company currently owns real property in Hong Kong which it intends to sell. Although the Company is presently discontinuing or disposing of operations not related to its core business, in the future, the Company may establish subsidiaries or divisions to distribute products that are unrelated to its current core product lines, and it may make future investments in real estate. See Item 2. "Description of Property." SOURCES OF SUPPLY The Company has exclusivity agreements covering specific geographic areas with many of its suppliers for certain products. Such agreements do not encompass all products distributed by the Company and all market areas served by the Company. The Company's agreement with Finnigan for most products does not include the PRC and similarly, the Company's agreement with Wallace is limited to Hong Kong. The Company has written confirmation from Hach that the Company is Hach's sole representative in the PRC, Hong Kong and Macao authorized to supply, install and commission Hach's products and accessories. The Company also has exclusive distribution agreements with Royce Instrument Corporation for certain of that manufacturer's products in Hong Kong and the PRC. The Company distributes products manufactured by a number of vendors, including Wallace, Hach, Hioki and Finnigan, which are the Company's primary suppliers, with purchases from them accounting for approximately 7%, 17%, 7% and 9%, respectively, of the Company's sales during Fiscal 1998 and 8%, 20%, 11% and 5%, respectively of the Company's sales during Fiscal 1999. The Company has exclusivity agreements for specified geographic areas with many of its suppliers for certain products, including Wallace and Finnigan. Those agreements do not encompass all products distributed by the Company or all of the market areas serviced by the Company. The Company's agreement with Finnigan for most products does not include the PRC, while the Company's agreement with Wallace is limited to Hong Kong. In addition, some of these agreements are memorialized not as formal contracts but rather through other acknowledgements or correspondence which may contain a vague, if any, description of the terms and conditions of such agreement or arrangement, and therefore may be unenforceable. The Company has written confirmation from Hach that the Company is Hach's sole representative in the PRC, Hong Kong and Macao authorized to supply, install and commission Hach's products and accessories. The Company has only a letter from Hioki appointing the Company as Hioki's sales representative in the PRC, Hong Kong and Macao. The Company's agreement with Wallace is terminable by either party on thirty days notice prior to its annual renewal date. The Company's agreement with Finnigan is terminable on ninety days notice by either party. The Company's agreement with Hach expires in February 2002, unless renewed. Although alternative sources of supply exist, there can be no assurance that the termination of the Company's relationship with any of the above or other vendors would not have a short-term adverse effect on operations. 7 EXPANSION Other than the potential acquisitions of manufacturing plants and engineering companies for proposed product - assembly operation, the Company has no other plans for expansion. In addition, although the Company has disposed of certain subsidiaries in transactions with affiliates and disposed of certain realty held for investment purposes, in an effort to streamline its structure and concentrate on its core business, in the future the Company may establish subsidiaries or divisions to distribute products that are unrelated to its current core product lines, and it may make future investments in real estate. REGULATORY ENVIRONMENT Concerns about and awareness of pollution problems and environmental issues have grown at all levels of PRC government as the PRC has experienced economic growth. Environmental protection laws and strict regulations have been enacted and are buttressed by increased budget allocations for environmental regulation, monitoring and enforcement. The PRC's primary environmental protection agency is the State Environmental Protection Agency (SEPA), under which there are Environment Protection Bureaus in each city and county. According to the Company, under bureau management, there are two environment monitoring systems: one system consists of over 2,200 monitoring stations to collect and analyze the environmental data of each city and county; another system consists of over 2,500 stations to monitor specific industrial districts or factories which have been identified as major pollution sources due to their non-compliance with environmental regulations. According to the Company, SEPA has recently identified 100,000 enterprises as new major pollution sources and the number of monitoring stations for industrial firms is anticipated to increase to 400,000 in the next five years, according to government estimates. The Company has supplied water and air quality monitoring and analytic instruments to these monitoring stations for several years. Despite this anticipated growth in monitoring stations, there can be no assurance that the agencies will continue to use the Company's products for these purposes, that other market competitors will not enter the market with superior products, distribution systems or more competitive prices. See "-- Competition." COMPETITION The Company faces competition from other distributors of substantially similar products as well as the manufacturers of such products, and in both foreign and Chinese markets. The Company faces its principal competition from manufacturers and other distributors of its core products located in Hong Kong and the PRC. Moreover, the Company has begun to implement plans to assemble products of the kind that it presently distributes. Should an assembly operation be developed to the stage where products are presented to the market, the Company may be in direct competition with certain of its vendors. There can be no assurance that the existence of this direct competition will not impair the Company's ability or such competitor's willingness to continue providing other products for continued distribution by the Company, and that such a development would not materially adversely affect the Company's core business. In 1994, the PRC tightened its credit nationwide and, as a result, the Company believes that purchasers of the products distributed by the Company sought reduced prices. The products 8 distributed by the Company were foreign-manufactured and higher-priced than products manufactured in the PRC. As a result, the Company reduced its sales prices to remain competitive, with a corresponding negative impact upon profit margins. During Fiscal 1997, Fiscal 1998 and Fiscal 1999, the Company's profit margins were approximately 24.9%, 24.3% and 24.5%, respectively. The Company believes that it competes with the PRC manufacturers on the basis of quality and technology. The Company believes it offers foreign-manufactured products which are of higher quality and use more advanced technology than products manufactured in the PRC. The Company believes that it competes with foreign manufacturers and other distributors of their products on the basis of the Company's more extensive distribution network and an established reputation. RECENT DEVELOPMENTS Proposed B2B website. In or about March 2000, the Company established CHINAH2O.COM.LTD., a Hong Kong corporation. THROUGH CHINAH2O.COM LTD., the Company plans to launch a bilingual Business-to-Business ("B2B") internet platform in the summer of 2000. The website is under construction and is located at (HTTP://WWW.CHINAH2O.COM). The B2B website is to be directed at environmental businesses in China. The purpose of the B2B website is to connect manufacturers, distributors and suppliers of environmental protection equipment and related consultants and engineering firms in the West with potential clients in China (i.e., water, wastewater treatment plants, environmental protection bureaus, environmental monitoring stations, and related industries). It is planned that the website will provide environmental news, directories of western suppliers, potential clients in China, advertisement space and business opportunities. Alternatively, CHINAH2O.COM may just match suppliers and clients or offer valued added services if required. It is envisaged that the business and other activities generated by CHINAH2O.COM, LTD. will have a synergistic effect with those of the Company. There can be no assurance that the Company will in fact launch this website, or if launched it will ever prove of commercial value to the Company or that the Company will not sustain losses from its establishment and operations. AGREEMENT WITH SHANGHAI INSTITUTE OPTICAL INSTRUMENTS ("SHANGHAI INSTITUTE"). In May 2000, the Company signed an agreement with the Shanghai Institute to jointly develop an Infrared Photometric Oil Analyzer by infrared absorption method. This analyzer is to be used to detect concentrations of petroleum, animal and vegetable oils in surface water, underground water, municipal and industrial wastewater. Our joint goal with the Shanghai Institute will be to sell any such analyzer that may be developed to environmental water monitoring stations, water purification and waste treatment facilities, underground water and harbor water monitoring stations located in China. Our chemical engineer is to work together with the Shanghai Institute's engineers to do the necessary development work including hardware and software components with a plan of building prototypes by the end of 2000. Our perceived advantage of the analyzer to be developed is that the sample under test is measured by three different wavelengths simultaneously thus giving more accurate readings against one fixed wavelength used by most of our potential competitors' product. Competition 9 will be from local manufacturers in China, Japan and the United States. There can be no assurance that any such analyzer will: - be developed; - become a commercially viable product; and - not result in losses to the Company. PUDONG SHANGHAI ASSEMBLY PLANT. See "Product Assembly Operations." PRODUCT ASSEMBLY OPERATIONS The Company, through Shanghai Euro Tech, plans to assemble certain products which the Company currently distributes, including certain water-related testing, monitoring and treatment equipment. The Company has obtained a one-year lease expiring in January 2001 to a manufacturing plant and has commenced assembly operations for water and waste water test instruments after receiving PRC government approvals in December 1999. It is contemplated that the Company will import components, assemble the finished products and then distribute the products through its distribution network. The Company believes that by establishing product assembly operations in the PRC and expanding the number of its regional sales offices in the PRC, it will not only increase revenues by expanding its customer base and increasing distribution capabilities, but also net income since the Company believes it will enjoy higher overall profit margins by assembling certain products which it now distributes rather than by only purchasing the finished product from vendors. It is planned that the Company's obligations pursuant to the Agreement with the Shanghai Institute will be met through the Pudong Shanghai Assembly Plant. SALES AND MARKETING The Company distributes products through its principal office located in Hong Kong and its regional PRC offices located in Beijing, Shanghai, Guangzhou, Chongqing, Xian and Shenyang. The Company has a marketing and sales force of 37 people who are paid a salary plus commission based on sales. The Company's offices also coordinate the sales efforts of approximately twelve other companies located in the PRC which act as sub-distributors. These sub-distributors are paid a commission on sales they generated, and are engaged on a non-exclusive basis to distribute the products of other distributors. Each of the twelve sub-distributors accounted for less than two percent of the Company's sales during Fiscal 1998 and Fiscal 1999. EMPLOYEES The Company has approximately 72 full-time employees, including a marketing and sales staff of 37, an administrative staff of 22 and a technical support staff of 13. 10 The Company's management consists of its officers and directors. The Company is not subject to any collective bargaining agreement and believes that its relationship with its employees are good. RISKS CERTAIN RISKS RELATING TO DOING BUSINESS IN HONG KONG AND PRC. PRC SOVEREIGNTY OVER HONG KONG STILL DEVELOPING - The Company's executive and principal offices are located in Hong Kong, a Special Administrative Region of China (an "SAR"; Hong Kong is sometimes herein referred to as the "Hong Kong SAR"). - As provided in the Sino-British Joint Declaration on the Question of Hong Kong (the "Joint Declaration") and the Basic Law of the Hong Kong SAR of China (the "Basic Law"), the Hong Kong SAR is provided a high degree of autonomy except in foreign and defense affairs. Based on the current political conditions and the Company's understanding of the Basic Law, the Company does not believe that the transfer of sovereignty over Hong Kong has had an adverse impact on its financial and operating environment. - The Company's results of operations and financial condition may be influenced by the political situation in Hong Kong and by the general state of the Hong Kong economy. See "-- Economic Instability; Currency Exchange Rate." - There can be no assurance that these past or any prospective future changes in political or other conditions will not result in a material adverse affect upon the Company or Far East. ECONOMIC INSTABILITY; CURRENCY EXCHANGE RATE - Most economies in the Far East are suffering from large debts, declining company earnings and economic growth, and significant currency devaluation. The region has also suffered from the effects of the resulting capital flight from financial institutions. - On June 22, 1998, the Hong Kong Chief Executive announced an immediate freeze on new government land sales through April 22, 1999 in an attempt to stabilize property prices which have on average fallen approximately 43% from their 1997 peak, and ease tightening credit. 11 Financial institutions could face additional pressure from possible defaults on loans made for property. Issuer stock valuations also dropped sharply from a 1997 high on the main Hong Kong stock index (the Hang Seng). On August 7, 1997, the Hang Seng Index was 16,673.27. On June 15, 2000, that index stood at 16,080.34. There can be no assurance that these problems will not abate or worsen or that recovery will occur in the near future, if at all, in which event the Company may likely be materially adversely affected. ECONOMY MAY BE UNSTABLE - Unlike many other countries economies, the PRC government's economic philosophy is based upon a "planned" economy model as opposed to a "free enterprise" or "capitalist" model with moderate government regulation which is the typical model in most developed, Western nations. For more than forty years, the PRC economy has been, and presently continues to be, a socialist economy operating under government controls promulgated under various one-, five- and ten-year plans (collectively, "State Plans") adopted by central Chinese government authorities and implemented, to a large extent, by provincial and local authorities which may set production and development targets. - Since approximately the early 1980s the Chinese government has implemented certain policies that emphasize decentralization of decision-making power and responsibility with respect to matters such as allocation of funds and the regionalization of economic development, reduce the role of government planning and permit some utilization of market forces in the development of its economy. Such economic reform measures or other policies, if continued, may be inconsistent, ineffectual, or discontinued at any time with or without notice, and the Company may not be able to benefit from any or all such reforms or policies. - The success of the Company's activities in the PRC depends on the Company's continued ability to overcome circumstances specifically affecting the industrial sector, including the relatively poor infrastructure, road transportation and communications network and an uncertain legal and regulatory environment. 12 ECONOMIC REFORMS MAY NOT CONTINUE OR IMPACT POSITIVELY ON THE COMPANY; CHANGING BUSINESS ENVIRONMENT - During much of the past twenty years, the PRC has been reforming its economic and political systems in the direction of a more "free market" economy. Many of the reforms are unprecedented for the PRC and can be expected to be refined and readjusted. This refinement and readjustment process may not always have a positive effect on the Company. - The Company's results at times may also be adversely affected by: - changes in political, economic and social conditions in the PRC - by changes in government policies such as changes in laws and regulations (or their interpretation) - the introduction of additional measures to control inflation - changes in the rate or method of taxation - imposition of additional restrictions on currency conversion remittances abroad - reduction in tariff protection and other import restrictions - a return to the more centrally-planned economy that existed prior. UNEVEN ECONOMIC GROWTH - The PRC's economy has experienced significant growth in recent years, but that growth has been uneven among various geographic regions and economic sectors. Economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increase of such disparities could adversely affect political or social stability. PRC INFLATION - The PRC has recently experienced substantial rates of inflation, although inflation has declined in the most recent years. The PRC government's measures to restrain inflation have had a significant adverse impact on the Company in the past and more measures in this regard or other actions by the PRC government could materially and adversely affect the Company, its business and results of operations. See --"Adverse Impact upon Company of PRC's Credit Restrictions." 13 REGIONAL ECONOMIC PROBLEMS - Most economies in the Far East are suffering from large debts, declining company earnings and economic growth, and significant currency devaluation. The region has also suffered from the effects of the resulting capital flight on financial institutions. These problems may materially adversely affect political and economic conditions in Hong Kong and the PRC. There can be no assurance that such problems will abate or become worse, or continue for a protracted period, or that recovery will occur in the near future, if at all, in which event the Company may likely be materially adversely affected. UNCERTAIN LEGAL SYSTEM AND APPLICATION OF LAWS - The legislative trend in the PRC over the past decade has been to enhance the protection afforded to foreign investment and allow for more active control by foreign parties of foreign invested enterprises. There can be no assurance that this will continue. In addition, as the PRC economy, business and commercial framework and legal system all continue to develop, that development may adversely affect the Company's activities in the PRC or the ability of the Company to enter into Sino-foreign agreements. PRC LEGAL SYSTEM BUSINESS LAWS DEVELOPING - The PRC does not yet possess a comprehensive body of business law or a consolidated body of laws governing foreign investment enterprises. As a result, the enforcement, interpretation and implementation of existing laws, regulations or agreements may be sporadic, inconsistent and subject to considerable discretion. The PRC's judiciary has not had sufficient opportunity to gain experience in enforcing laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. As the legal system develops, entities such as the Company may be adversely affected by new laws, changes to existing laws (or interpretations thereof) and preemption of provincial or local laws by national laws. Even when adequate law exists in the PRC, it may not be possible to obtain speedy and equitable enforcement of the law. GOVERNMENT CURRENCY CONTROLS - The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign imports. The conversion 14 of Rmb into Hong Kong and United States Dollars must be based on rates set by the People's Bank of China ("PBOC"), which rates are set daily based on the previous day's Chinese interbank foreign exchange market rate with reference to current exchange rates on the world financial markets. - The official Rmb to U.S. dollar exchange rate declined from Rmb3.73 to US$1.00 at the beginning of 1989 to Rmb5.81 to US$1.00 at the end of 1993. In 1993, there was significant volatility in the swap rate of Rmb to U.S. dollars, and there was a significant devaluation in the exchange rate on January 1, 1994, to Rmb 8.70 to U.S.$1.00, in connection with the abolition of the official exchange rate and implementation of the new managed floating rate foreign exchange system. - Although the Rmb to U.S. dollar exchange rate has generally been stable since January 1, 1994 and the PRC government has stated its intention to intervene in the future to support the value of the Rmb, there can be no assurance that exchange rates will not again become volatile or that the Rmb will not devalue further against the U.S. dollar or Hong Kong dollar. Exchange rate fluctuations may adversely affect the Company because of foreign currency denominated liabilities, and may materially adversely affect the value, translated into U.S. dollars, of the Company's net fixed assets situated and to be situated in the PRC, earnings and dividends. TURBULENT RELATIONS WITH THE UNITED STATES - The United States and the PRC have been involved in controversies over (a) the protection in the PRC of intellectual property rights that threatened a trade war between the countries, (b) the terms of the PRC's entrance into the World Trade Organization ("WTO"), (c) the NATO bombing on May 7, 1999 of the PRC's Embassy in Belgade, and (d) the protection of human rights in the PRC. RECENT DEVELOPMENTS REGARDING CHINA'S ENTRY INTO THE WORLD TRADE ORGANIZATION - China seeks to enter the World Trade Organization or WTO at the earliest possible date. Since 1986, China has taken a series of measures to modify its foreign exchange and trade regulations to conform with international practices. On January 1, 1994, the Chinese government abolished the dual foreign exchange rate system which had the effect of subsidizing imports as a result of the difference between the 15 official exchange rate and market exchange rate. China's government has indicated its commitment to reduce its import and export licensing requirements and making its international trade regulations more consistent and transparent. On December 31, 1995, China lifted non-tariff controls such as import quotas and licenses on 176 import items. China's government has also lowered tariff levels for various goods a number of times in 1992, 1993, more recently in April 1996, October 1997 and January 1999. In April 1996 China's government reduced the general level of import tariffs from 36% , 23% for 4,994 import items. In October 1997, China's government reduced the general level of import tariffs from 23% to 17% for more than 4,800 import items. Effective January 1, 1999, China's government has further reduced the general level of import tariffs by 8% to 78% more than 1,000 import items. China's government has indicated its commitment to protecting intellectual property rights and, in recent years has adopted regulations protecting ownership of copyrights, computer software and trademarks, and has entered into international agreements committing itself to further protection of such rights and enforcement of such regulations. Demands made by several countries, some of which are not trade related, have impeded China's entry into the WTO. On November 15, 1999, U.S. and Chinese trade negotiators reached an agreement regarding China's entry into the WTO. The U.S. agreed to support China's application for membership in the WTO as well as grant it permanent trading rights, rather than renew those rights annually. In exchange for these items, China has agreed to reduce tariffs by more than 5% as well as eliminate many trade barriers for U.S. companies in various industries. These industries include telecommunications, internet, distribution, services, entertainment, banking/financial services, automobile manufacturing, farm products, and textiles. The U.S. Congress, however, must still approve the granting of permanent trading status to China. CERTAIN RISKS RELATION TO COMPANY'S BUSINESS. DISPOSED OF SUBSIDIARIES - The Company disposed of several unsuccessful subsidiaries which had sustained losses in businesses outside the Company's core business. - The Company has from time to time invested in real estate in 16 Hong Kong. Although the Company has derived past profits from some of its investments in Hong Kong real estate, there can be no assurance that the Company will ever derive a profit from any future investments in Hong Kong realty. As a result of the recent transfer of sovereignty over Hong Kong from the United Kingdom to China, any investment in Hong Kong realty will be subject to the risks arising from that transfer, including but not limited to the possible appropriation of realty by the Chinese government. In addition, in Mid-1998 the Government of Hong Kong froze public land sales and dispositions of property through April 1999 in order to stabilize Hong Kong property values which had substantially declined from their peak in 1997. See "Item 9. "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE UPON MANAGEMENT - The Company is dependent upon the services of its executive officers, in particular Mr. T.C. Leung, the Chairman of the Company's Board of Directors and its Chief Executive Officer. The business of the Company could be adversely effected by the loss of services of, or a material reduction in the amount of time devoted to the Company by its executive officers. Although the Company is the beneficiary of a "Key Person" life insurance policy in the amount of $1,000,000 on the life of Mr. Leung, there can be no assurance that such coverage will be sufficient to compensate the Company for the loss of the services of Mr. Leung. See Item 10. "Directors and Officers of Registrant." ADVERSE IMPACT UPON COMPANY OF PRC'S CREDIT RESTRICTIONS - The Company faces competition from other distributors of substantially similar products and manufacturers themselves, both foreign and Chinese. The Company faces its principal competition from foreign manufacturers and other distributors of their products situated in Hong Kong and the PRC. In 1994, the PRC tightened its credit nationwide and, as a result, the Company believes that purchasers of the products distributed by the Company sought reduced prices. The products distributed by the Company were foreign manufactured and higher priced than Chinese manufactured products. The Company reduced its sales prices and its profit margins to remain competitive. 17 COMPETITION WITH VENDORS - As the Company plans to assemble products of the kind that it presently distributes, the Company may directly compete with certain of its vendors. Any such direct competition may adversely affect its relationship with its vendors. See Item 1. "Description of Business." DEPENDENCE ON VENDORS; LACK OF LONG TERM AGREEMENTS - The Company distributes supplies manufactured by a number of vendors, including Wallace, Hach, Hioki and ThermoQuest, which are the Company's largest suppliers. The Company has only a letter from Hioki appointing the Company as Hioki's sales representative in the PRC, Hong Kong and Macao, its agreements with each of Wallace and ThermoQuest are terminable on thirty days notice by either party prior to the renewal date and the agreement with Hach expires in February 2002, unless renewed. Although alternative sources of supply exist, there can be no assurance that the termination of the Company's relationship with any of the above or other vendors would not have a short-term adverse effect on the Company's operations due to the Company's dependence on these vendors. CONTROL BY T.C. LEUNG POTEN- TIAL CONFLICT OF INTERESTS - T.C. Leung, the Company's Chairman of the Board and Chief Executive Officer, as a practical matter, is able to nominate and cause the election of all the members of the Company's Board of Directors, control the appointment of its officers and the day-to-day affairs and management of the Company. As a consequence, Mr. Leung can have the Company managed in a manner that would be in his own interests and not in the interests of the other shareholders of the Company. See Item 4. "Controls of Registrant" and Item 10. "Directors and Officers of Registrant." CERTAIN LEGAL CONSEQUEN- CES OF INCORPORATION IN THE BRITISH VIRGIN ISLANDS; RIGHTS OF SHARE- HOLDERS NOT AS EXTENSIVE AS IN U.S. CORPORATIONS - Principles of British Virgin Islands ("BVI") corporate law relating to such matters as the validity of the Company procedures, the fiduciary duties of management and the rights of the Company's shareholders may differ from those that would apply if the Company were incorporated in a jurisdiction within the United States. 18 - The rights of shareholders under British Virgin Islands law are not as extensive as the rights of shareholders under legislation or judicial precedent in many United States jurisdictions. Under United States law, majority and controlling shareholders generally have certain "fiduciary" responsibilities to the minority shareholders. United States Shareholder action must be taken in good faith and action by controlling shareholders which are obviously unreasonable may be declared null and void. - The BVI law protecting the interests of the minority shareholders is not as protective in all circumstances as the law protecting minority shareholders in United States jurisdictions. The shareholders of the Company may have more difficulty in protecting their interests in the face of actions by the Company's Board of Directors, and may have more limited rights, than they might have as shareholders of a company incorporated in many United States jurisdictions. ANTI-TAKEOVER PROVISIONS PROPOSED - At its next annual meeting of shareholders, the Company among other things, has proposed to increase its authorized number of Ordinary Shares from 20,000,000 to 25,000,000 and authorize 5,000,000 shares of "blank checks preferred stock". The authorization of "blank check preferred stock" is intended to strengthen the Company's ability to resist an unsolicited takeover bid and may be deemed to have an anti-takeover effect. The Board of Directors will have the right to fix the rights, terms and preferences at the time of issue of "blank check preferred stock" without further action by our shareholders. UNCERTAINTY OF ENFORCING UNITED STATES JUDGMENTS - There is some uncertainty whether BVI courts would enforce judgments of the courts of the United States and of other foreign jurisdictions, or enforce actions brought in the BVI which are based upon the securities laws of the United States. A final monetary judgment obtained in the United States will be treated as a cause of action in itself by the BVI courts so that no retrial of the issues would be necessary, provided that material preconditions are met and the proceedings pursuant to which judgment was obtained were not contrary to the rules of natural justice. 19 - All but one of the Company's directors reside outside of the United States, service of process upon the Company and such persons may be difficult to effect in the United States upon all such directors and officers. - All of the Company's assets are and will be located outside of the United States, in Hong Kong and the PRC, and any judgment obtained in the United States may not be enforced in those jurisdictions. Hong Kong courts will not directly enforce against the Company or such persons judgments obtained in the United States. There is also substantial doubt as to the enforceability in the PRC of actions to enforce judgments of the United States' courts arising out of or based on the ownership of the securities offered hereby, including judgments arising out of or based on the civil liability provisions of United States federal or state securities laws or otherwise. See "-- Certain Legal Consequences of Incorporation in the British Virgin Islands; Rights of Shareholders not as Extensive as in U.S. Corporations" and "-- Uncertainty of Enforcing U.S. Judgments." ITEM 2. DESCRIPTION OF PROPERTY The Company maintains an executive office at 18/F Gee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The Company occupies approximately 12,800 square feet of office and warehouse storage space under a lease expiring in May 2001 for monthly rental payments of approximately $10,300. The warehouse storage space is used to hold products for distribution to its customers via common carriers. In August 1995, the Company purchased approximately 1,200 square foot of space in a building in Hong Kong. The Company financed the purchase and as of December 31, 1999, had an outstanding mortgage of approximately $263,000 in principal, bearing interest at Hong Kong's prime rate plus 1.75%, which mortgage repayable in eighty-four monthly installments through approximately November 2002. This property is now used as Chinah2o.com Ltd.'s office. The Company also maintains regional sales offices within the PRC in the cities of Beijing, Shanghai, Guangzhou, Chongqing, Xian and Shenyang. The Beijing and Shanghai sales offices are owned by the Company. The Beijing sales office is situated on property purchased in November 1994. The Shanghai sales office is situated on property purchased in August 1995. The Guangzhou sales office is rented pursuant to a lease expiring in May 2001 for approximately $520 per month. The Chongqing sales office is rented pursuant to a lease expiring in January 2001 for approximately $310 per month. The Xian sales office is rented pursuant to a lease expiring in March 2002 for approximately $210 per month. The Shenyang office is rented pursuant to a lease expiring in December 2000 for approximately $260 per month. Euro Tech Shanghai's office in Shanghai is rented pursuant to a lease expiring in April 2001 for approximately $260 per month. 20 Euro Tech Shanghai's office in Shanghai is rented pursuant to a lease expiring in January 2001 for approximately $890 per month. The Company's registered office in the British Virgin Islands is located at TrustNet Chambers, P.O. Box 3444, Road Town, Tortola, British Virgin Islands and its telephone number is (809) 494-5296. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 4. CONTROL OF REGISTRANT The following table sets forth, as of June 1, 2000, certain information concerning beneficial ownership of the Company's Ordinary Shares with respect to (i) each person known to the Company to own 10% or more of the outstanding Ordinary Shares, and (ii) all officers and directors of the Company as a group:

AMOUNT AND APPROXIMATE NATURE OF PERCENTAGE BENEFICIAL OF ORDINARY OWNERSHIP SHARES OWNED T.C. Leung(1)(2)............................ 2,553,169 67.2% Pearl Venture Ltd.(1)(2).................... 1,129,515 45.6% All Executive Officers and Directors of the Company as a group (7 persons)3................................ 2,877,845 71.8%

---------------------- (1) The address for Mr. Leung is c/o Euro Tech (Far East) Ltd., 18/F Gee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The address for Pearl Venture Ltd. ("Pearl") is Columbus Centre Building, Wichhams Cay, Road Town, Tortola, British Virgin Islands. (2) Includes shares of the Company's Common Stock owned of record by Pearl, which is a trust established for the benefit of Mr. Leung. Also includes those Company Ordinary Shares owned of Record by Regent Earning Ltd., of which Pearl is the majority shareholder. See Item 13. "Interest of Management in Certain Transactions." (3) Gives effect to the exercise of Management Options owned of record by the Company's executive officers and directors. See Item 13. "Interest of Management in Certain Transactions." 21 ITEM 5. NATURE OF TRADING MARKET The Company has two classes of securities presently registered: Ordinary Shares and Warrants. These securities are presently traded on the NASDAQ SmallCap Market under the trading symbols "CLWT" and "CLWTW," respectively, and have so traded since the Company's Public Offering in March 1997. The Company declared a 20% stock dividend on its Ordinary Shares with a record date of September 3, 1999. The dividend resulted in each record holder of the Company's Ordinary Shares on that date receiving one Ordinary Share for five Ordinary Shares held at the opening of business on the day after September 3, 1999. The anti-dilution provisions of the Warrants resulted in the holders of Warrants being entitled to purchase six Ordinary Shares for each five Warrants held with proportional adjustments being made in the exercise and redemption target prices of the Warrants. The following quotations have not been adjusted for the stock dividend. The high and low bid price quotations for the Ordinary Shares in the periods indicated are as follows:

HIGH LOW ---- --- $ $ Quarter Ended March 31, 1998....................................... 7.00 4.125 Quarter Ended June 30, 1998........................................ 6.75 5.328125 Quarter Ended September 30, 1998................................... 6.50 4.25 Quarter Ended December 31, 1998.................................... 4.50 2.50 Quarter Ended March 31, 1999....................................... 3.625 2.125 Quarter Ended June 30, 1999........................................ 2.3125 0.625 Quarter Ended September 30, 1999................................... 2.00 0.875 Quarter Ended December 31, 1999.................................... 1.875 0.71875 Quarter Ended March 31, 2000....................................... 15.25 1.03125 Period Commending April 1, 2000 through June 20, 2000.............. 4.9375 1.53125

The Ordinary Shares was held by approximately 34 holders of record as of June 21, 2000. Based upon information received from broker-dealers, clearing firms and others, the Company believes that it has approximately at least 400 beneficial shareholders of its Ordinary Shares. The high and low bid price quotations for the Warrants in the periods indicated are as follows:

HIGH LOW ---- --- $ $ Quarter Ended March 31, 1998....................................... 2.50 1.375 Quarter Ended June 30, 1998........................................ 1.75 1.125 Quarter Ended September 30, 1998................................... 1.5625 0.50 Quarter Ended December 31, 1998.................................... 4.50 0.50 22 Quarter Ended March 31, 1999....................................... 0.8125 0.125 Quarter Ended June 30, 1999........................................ 0.375 0.15625 Quarter Ended September 30, 1999................................... 0.28125 0.125 Quarter Ended December 31, 1999.................................... 0.75 0.0625 Quarter Ended March 31, 2000....................................... 3.75 0.125 Period Commending April 1, 2000 through June 20, 2000.............. 1.03125 0.375

The Warrants were held by approximately 15 holders of record as of June 21, 2000. ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITYHOLDERS There are no exchange control restrictions on payment of dividends on the Company's Ordinary Shares or on the conduct of the Company's operations either in Hong Kong, where the Company's principal executive offices are located, or the British Virgin Islands, where the Company is incorporated. There are no British Virgin Islands laws which impose foreign exchange controls on the Company or that affect the payment of dividends, interest, or other payments to non-resident holders of the Company's securities. British Virgin Islands laws and the Company's Memorandum and Articles of Association impose no limitations on the right of non-resident or foreign owners to hold the Company's securities or vote the Company's Ordinary Shares. Under BVI law, dividends may only be declared and paid by an International Business Company (which the Company is classified as under BVI law) out of surplus, such that after payment of dividends such company must be able to satisfy its liabilities as they become due in the ordinary course of business and the realizable value of the assets of such company must not be less than the sum of its liabilities (other than deferred taxes and capital). There are no other BVI restrictions regarding dividends. However, the PRC has established a unified exchange rate system and system of exchange controls to which the Company is subject. See "Risks." ITEM 7. TAXATION The Company is exempt from taxation in the British Virgin Islands. The Company's subsidiaries organized in Hong Kong, Far East, Limited and Chinah20, pay the Hong Kong profits tax at a rate of 16% on their income for financial reporting purposes, after adjustments for income and expense items which are not assessable or deductible for profits tax purposes. Hong Kong levies no capital gains or dividends tax. Another Company subsidiary, Euro Tech Trading (Shanghai) Limited ("Trading"), is fully exempt from the PRC state unified income tax pursuant to the tax laws applicable to foreign investment enterprises in the PRC. This unified income tax is levied at a rate of 33%. Trading was fully exempt from the unified income tax for the period from July 1, 1997 to December 31, 1998, and enjoys a 50% reduction in the regular levied unified income tax for the current year, ending on December 31, 2000. See - Note 2e, page 8 of the Financial Statements. 23 ITEM 8. SELECTED FINANCIAL DATA SELECTED FINANCIAL INFORMATION (Amounts expressed in thousands, except share and per share data and unless otherwise stated) The selected income statement data for years ended December 31, 1997, 1998 and 1999, and the selected balance sheet data as of December 31, 1998 and 1999 set forth below are derived from audited financial statements of the Company and should be read in conjunction with, and are qualified in their entirety by reference to such financial statements, including the notes thereto and Item 9. "Management's Discussion and Analysis of Financial Condition and Results of Operation." The selected income data for the years ended December 31, 1995 and 1996 and the selected balance sheet data as of December 31, 1996 and 1997 set forth below are derived from audited financial statements of the Company which are not included herein. The selected balance sheet data as of December 31, 1995 set forth below are derived from audited financial statements of Euro Tech (Far East) Limited which are not included therein.

AS OF DECEMBER 31, 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- US$(1) US$ US$ US$ US$ BALANCE SHEET DATA: Cash and cash equivalents 97 1,400 2,539 3,045 3,691 Working capital(2) 631 1,307 3,292 3,493 3,632 Total assets 7,717 8,278 8,084 8,559 9,637 Short-term debt(3) 831 1,201 75 68 85 Long-term bank loans 905 586 329 260 178 Shareholders' equity 2,289 2,734 4,972 5,194 5,533

24

FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- US$ US$ US$ US$ US$ INCOME STATEMENT DATA: Net sales ......... 13,667 13,758 12,510 12,757 13,107 Cost of goods (10,633) (10,633) (9,399) (9,662) 9,896 -------- ---------- ---------- ---------- ------- sold ....... Gross profit ...... 3,034 3,125 3,111 3,095 3,211 Selling and Administrative Expenses ......... (2,773) (2,703) (2,812) (2,924) (2,946) -------- ---------- ---------- ---------- -------- Operating income... 261 422 299 171 265 Interest (expenses) Income, net....... (113) (98) 18 86 85 Other income, net.. 153 242 183 69 67 -------- ---------- ---------- ---------- -------- Income before Taxes ............ 301 566 500 326 417 Income taxes....... (9) (97) (62) (71) (78) -------- ---------- ---------- ---------- -------- Net income from Continuing Operations........ 292 469 438 255 339 Discontinued Operations Income (loss) of subsidiary companies sold in 1996.............. (213) -- -- -- -- -------- -------- -------- -------- -------- Net income ........ 79 469 438 255 339 ======== ======== ======== ======== ======== Income from continuing operations per common Share ............ 0.20 0.32 0.23 0.12 0.15 Loss from Discontinued opera- tions per Ordinary Share ............ (0.15) -- -- -- -- Net income per Ordinary Share ..... 0.05 0.32 0.23 0.12 0.15 Weighted average Number of Ordinary Share Outstanding ...... 1,450,000 1,450,000 1,888,000 2,068,200 2,204,200

25 ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS POLITICAL AND ECONOMIC CONDITIONS IN HONG KONG AND THE PEOPLE'S REPUBLIC OF CHINA The Company's operations are located almost entirely within, and revenues are almost entirely generated from Hong Kong and the PRC. In Fiscal 1999 approximately 68% and 30% of the Company's sales were made to customers located in the PRC and Hong Kong, respectively. During Fiscal 1998 approximately 67% and 31% of the Company's sales were made to customers located in the PRC and Hong Kong, respectively. Sales to customers situated in Macao and elsewhere in both years were nominal. This makes the Company particularly susceptible to changes in the political and economic climate of either Hong Kong or the PRC. HONG KONG. Hong Kong has been one of the prime centers for commercial activity and economic development recently in Southeast Asia. On July 1, 1997, sovereignty over Hong Kong was transferred from the United Kingdom to the PRC. As provided in the Sino-British Joint Declaration and the Basic Law, the Hong Kong SAR is provided a high degree of autonomy except in foreign and defense affairs. The Basic Law provides that the Hong Kong SAR is to have its own legislature, legal and judicial system and full economic autonomy for 50 years after the transfer of sovereignty. Based on the current political conditions and the Company's understanding of the Basic Law, the Company does not believe that the transfer of sovereignty over Hong Kong has had or will have an adverse impact on its financial and operating environment. Although the Chinese government has pledged to maintain the economic and political autonomy of Hong Kong over its internal affairs, there is no assurance that such pledge will continue to be honored if there are changes in the Chinese political or economic climate. See Item 1. "Description of Business -- Risks." Stock valuations have also dropped sharply from a 1997 high, on the main Hong Kong stock index (the Hang Seng). On August 7, 1997, the Hong Seng Index was 16,673.27. On June 14, 2000, that index stood at 16,080.34. There can be no assurance that these problems will not abate or worsen or that recovery will occur in the near future, if at all, in which event the Company may likely be materially adversely affected. PRC. The PRC has been a socialist state since 1949. For more than forty years, the PRC's economy has been, and presently continues to be, a socialist economy operating under government controls promulgated under various one-, five- and ten-year plans (collectively, "State Plans") adopted by central Chinese government authorities and implemented, to a large extent, by provincial and local authorities which may set production and development targets. However, since approximately the early 1980s, the PRC's national government has undertaken certain reforms to permit greater provincial and local economic autonomy and private economic activities. Any change in political or economic conditions may substantially adversely affect these reform initiatives and, in turn, the Company. See Item 1. "Description of Business -- Risks." OVERVIEW In March 1997, the Company completed its Public Offering and thereby received net proceeds of approximately $1,817,000. Upon the completion of the Public Offering, the Company acquired all of the issued and outstanding ordinary shares of Far East in consideration for its 26 issuance of 1,233,120 and 446,880 Ordinary Shares to Regent Earning Limited, a company incorporated in Hong Kong, and Pearl Venture Limited, a company incorporated in the British Virgin Islands, respectively. Regent Earning Limited and Pearl Venture Limited previously had in the aggregate held 100% of the outstanding shares of Far East. This transaction has been accounted for as a reorganization of companies under common control in a manner similar to a pooling of interests. See Item 13. "Interest of Management in Certain Transactions." Prior to its incorporation, the businesses of the Company were engaged in by Far East, which in 1997 was acquired by, and is now a wholly-owned subsidiary of the Company. Far East was established in 1971, under the name of Eurotherm (Far East) Ltd., as a subsidiary of a United Kingdom publicly traded company, Eurotherm Ltd., to market and distribute its parent company's industrial control equipment in Hong Kong and Southeast Asia, and expanded its activities into the PRC in 1973. In the early 1980's, Far East began distributing high-tech equipment manufactured in the United States, Europe and Japan within the PRC, in addition to its distribution of its parent's products. In 1988, the activities of the parent and Far East were separated into Eurotherm International and Far East. In or around 1994, all the capital stock of Far East was purchased by its management, principally T.C. Leung, the Company's Chairman of the Board of Directors and Chief Executive Officer. Far East thereafter changed its name from Eurotherm (Far East) Ltd. to its current name. See Item 4."Control of Registrant" and Item 13. "Interest of Management in Certain Transactions." The following discussion and analysis should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto appearing elsewhere in this Annual Report. All financial data referred to in the following discussion has been prepared in accordance with United States GAAP. RESULTS FROM OPERATIONS During the fiscal years ended December 31, 1994 ("Fiscal 1994") and December 31, 1995 ("Fiscal 1995"), Far East's sales revenues remained substantially unchanged following a period of gradual increases in sales. Management of the Company believes that Far East's lack of sales growth during Fiscal 1994 and Fiscal 1995 resulted from the PRC'S economic austerity measures undertaken to halt inflation in the PRC, which was approximately 27% in 1994 in comparison to 1993. These economic austerity measures included the tightening of credit, when coupled with a devaluation of the RMB in 1993 and the imposition of a value tax imposed by the PRC on imports into the PRC, caused products manufactured in the PRC to become more competitive with the United States, European and Japanese manufactured products distributed by Far East even though the products distributed by Far East were of better quality. Cost became an overriding issue with many of PRC's customers and, in response, Far East reduced its sales prices and, therefore, its profit margins to remain competitive with PRC manufacturers. During Fiscal 1996, Far East also began streamlining its operations and focusing its efforts on its current product lines by disposing of three of its subsidiaries, Euro Electron (Far East) Ltd. ("Euro Electron"), Action Instruments (China) Ltd. ("Action") and Armtison Ltd. ("Armtison"). Euro Electron had been established to distribute telecommunication products. However, Far East believes that manufacturers of these products generally distributed their products directly to 27 end users, instead of using intermediary distributors such as Far East. Far East also believes that technical expertise in this product line, which it lacked, was a necessity for successfully entering this market. Far East attributes the inability of Euro Electron to ever develop its core business to the foregoing factors. Action had been established to distribute industrial computers. During Fiscal 1994, Action lost its principal vendor when such vendor sold its industrial computer production line to another supplier. Additionally, another major manufacturer of industrial computers established its own Hong Kong and PRC distribution operation. Armtison was principally a holding company for Euro Electron and Action. The following table presents selected statement of operations data expressed as a percentage of net sales for the Company's Fiscal 1995, Fiscal 1996, Fiscal 1997, Fiscal 1998 and Fiscal 1999.

---------------------------------------- ------------ ----------- ----------- ---------- ---------- YEAR ENDED DECEMBER 31, -------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- ---------------------------------------- ------------ ----------- ----------- ---------- ---------- Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold 77.8% 77.3% 75.1% 75.7% 75.5% Gross Profit 22.2% 22.7% 24.9% 24.3% 24.5% Selling and administrative expenses 20.3% 19.6% 22.5% 22.9% 22.5% Operating income 2.2% 4.1% 4.0% 2.6% 3.2% Income tax provision .1% .7% .5% .6% .6% Net income .6% 3.4% 3.5% 2.0% 2.6% ====== ====== ====== ====== ===== ---------------------------------------- ------------ ----------- ----------- ---------- ----------

RESULTS OF OPERATIONS FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1998. SALES; GROSS PROFIT AND COST OF GOODS SOLD. Sales increased by approximately $350,000 or 2.7% to approximately $13,107,000 in Fiscal 1999 from approximately $12,757,000 in Fiscal 1998. The Company's business was slightly improved because Asia, including China, was starting to climb out of its economic downturn. Gross profits increased by approximately $116,000 or 3.7% to approximately $3,211,000 for Fiscal 1999 as compared to approximately $3,095,000 for Fiscal 1998. This increase was attributable to the increase in gross profit margins from 24.3% in Fiscal 1998 to 24.5% in Fiscal 1999. During Fiscal 1999, the Company's cost of goods sold was approximately $9,896,000, or 75.5% of sales, in comparison to approximately $9,662,000 or 75.7% of sales for Fiscal 1998. Cost of goods sold expressed as a percentage of sales decreased by 0.2% in Fiscal 1999 as compared with Fiscal 1998. The gross profit margin increased and the percentage decrease in cost of goods sold were attributed to the fact that the Company had more engineering assignments during the year. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses were approximately $2,946,000 in Fiscal 1999, an increase of approximately $22,000 or 0.8% from 28 approximately $2,924,000 in Fiscal 1998. The increase was primarily due to the general increase in expenses related to the increase in sales. INTEREST INCOME. Net interest income decreased by approximately $1,000 or 1.2% to approximately $85,000 in Fiscal 1999 from approximately $86,000 for Fiscal 1998. Interest income decreased by approximately $19,000 or 14.3% to approximately $114,000 in Fiscal 1999 from approximately $133,000 in Fiscal 1998. The decrease was primarily due to the general decrease in the interest rate from bank deposits during the year. Interest expense decreased by approximately $18,000 or 38.3% to approximately $29,000 in Fiscal 1999 from approximately $47,000 for Fiscal 1998. The decrease was a result of the Company's reduced utilization of credit facilities under its banking arrangements. OTHER INCOME. Other income decreased by approximately $2,000 or 2.9% to approximately $67,000 in Fiscal 1999 from approximately $69,000 in Fiscal 1998. The decrease in other income was principally due to less rental income received. PROVISION FOR PROFIT TAX. Provisions for taxes increased by $7,000 to approximately $78,000 in Fiscal 1999 from approximately $71,000 in Fiscal 1998. The increase was due primarily to an increase in operating profit. INCOME FROM CONTINUING OPERATIONS. Income from continuing operations increased by approximately $84,000 or 32.9% to approximately $339,000 in Fiscal 1999 from approximately $255,000 in Fiscal 1998. The increase in net income was primarily due to the increase in sales, and the increase in the gross margin percentage as a result of the increasing engineering assignments received. FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1997 SALES; GROSS PROFIT AND COST OF GOODS SOLD. Sales increased by approximately $247,000 or 2% to approximately $12,757,000 in Fiscal 1998 from approximately $12,510,000 in Fiscal 1997. The Company's business was adversely affected by the deterioration of the economy in Hong Kong and China coupled with the Asian currency crisis. However, the contribution from the three new PRC sales offices opened in 1997 reduced the impact and attributed to the increase in sales. Gross profits decreased by approximately $16,000 or 0.5% to approximately $3,095,000 for Fiscal 1998 as compared to approximately $3,111,000 for Fiscal 1997. This decrease was attributable to the decrease in gross profit margins from 24.9% in Fiscal 1997 to 24.3% in Fiscal 1998. During Fiscal 1998, the Company's cost of goods sold was $9,662,000, or 75.7% of sales, in comparison to $9,399,000 or 75.1% of sales for Fiscal 1997. Cost of goods sold expressed as a percentage of sales increased by 0.6% in Fiscal 1998 as compared with Fiscal 1997. The gross profit margin decreased and the percentage increase in cost of goods sold were attributed to the fact that the Company reduced sale prices to compete under the poor economic situation in the region. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses were approximately $2,924,000 in Fiscal 1998, an increase of approximately $112,000 or 4.0% from approximately $2,812,000 in Fiscal 1997. The increase was primarily due to additional expenses 29 incurred in connection with the Company's listing on the NASDAQ SmallCap Market, such as but not limited to legal fees for the SEC filing and repurchase of underwriter's warrants, maintenance fees, and management fees. INTEREST INCOME. Net interest income increased by approximately $68,000 or 378% to approximately $86,000 in Fiscal 1998 from approximately $18,000 for Fiscal 1997. Interest income increased by approximately $21,000 or 20.6% to approximately $133,000 in Fiscal 1998 from approximately $102,000 in Fiscal 1997. The increase was primarily due to the increase in bank deposits from funds generated from operations and proceeds from the issuance of common stock and warrants. Interest expense decreased by approximately $37,000 or 44% to approximately $47,000 in Fiscal 1998 from approximately $84,000 for Fiscal 1997. The decrease was a result of the Company's reduced utilization of credit facilities under its banking arrangements. OTHER INCOME. Other income decreased by approximately $114,000 or 62.3% to approximately $69,000 in Fiscal 1998 from approximately $183,000 in Fiscal 1997. The decrease in other income was principally due to loss of approximately $37,000 from a repurchase of underwriter's warrants and less exchange gains. PROVISION FOR PROFIT TAX. Provisions for taxes increased by $9,000 to approximately $71,000 in Fiscal 1998 from approximately $62,000 in Fiscal 1997. The increase was due primarily to provisions for taxes in 1997 being lower resulting from the write-back of prior years' over-provisions for taxes. INCOME FROM CONTINUING OPERATIONS. Income from continuing operations decreased by approximately $183,000 or 41.8% to approximately $255,000 in Fiscal 1998 from approximately $438,000 in Fiscal 1997. The decrease in net income was primarily due to the decrease in the gross margin percentage as a result of the poor economic situation in the market, increase in selling and administrative expenses due to additional listing expenses and the loss and legal expenses incurred on repurchase of underwriter's warrants. FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1996 SALES; GROSS PROFIT AND COST OF GOODS SOLD. Sales decreased by approximately $1,248,000 or 9% to approximately $12,510,000 in Fiscal 1997 from approximately $13,758,000 in Fiscal 1996. The decrease is primarily due to (i) streamlining of product line offerings to concentrate on the Company's core business of the water and waste water treatment business, and the discontinuation of certain product lines not related to the Company's core business, some medical lines, and (ii) the economic slowdown in Asia in the second half of the year. Gross profit decreased by approximately $14,000 or 0.4% to approximately $3,111,000 for Fiscal 1997 as compared to approximately $3,125,000 for Fiscal 1996. This decrease was attributable to the increase in gross profit margins from 22.7% in Fiscal 1996 to 24.9% in Fiscal 1997. During Fiscal 1997, the Company's cost of goods sold was $9,399,000, or 75.1% of sales, in comparison to $10,633,000 or 77.3% of sales for Fiscal 1996. Cost of goods sold expressed as a percentage of sales decreased by 2.2% in Fiscal 1997 as compared with Fiscal 1996. The gross profit margin increase and the percentage decrease in cost of goods sold are attributed to the 30 discontinuation or disposition of the lower margin businesses such as the medical products line. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses were approximately $2,812,000 in Fiscal 1997, an increase of approximately $109,000 or 4.0% from approximately $2,703,000 in Fiscal 1996. The increase is primarily due to additional expenses incurred in connection with the Company's preparations for its Public Offering, including its application for listing on the NASDAQ SmallCap Market, such as but not limited to legal fees, maintenance fees, consultant fees and management fees, and operating expenses for the three new PRC sales offices opened during the year. INTEREST INCOME/EXPENSE. Net interest changed from net interest expense of approximately $98,000 in Fiscal 1996 to net interest income of approximately $18,000 in Fiscal 1997. Interest income increased by approximately $35,000 or 52.2% to approximately $102,000 in Fiscal 1997 from approximately $67,000 for Fiscal 1996. The increase is primarily due to the increase in bank deposits from funds generated from operations and proceeds from the issuance of common stock and warrants. Interest expense decreased by approximately $81,000 or 49.1% to approximately $84,000 in Fiscal 1997 from approximately $165,000 for Fiscal 1996. The decrease was a result of the Company's reduced utilization of credit facilities under its banking arrangements. OTHER INCOME. Other income decreased by approximately $59,000 or 24.4% to approximately $183,000 in Fiscal 1997 from approximately $242,000 in Fiscal 1996. The decrease in other income is principally due to a non-recurring profit of approximately $118,000 from sales of investment property in Fiscal 1996. PROVISION FOR PROFIT TAX. Provisions for taxes decreased by $35,000 to approximately $62,000 in Fiscal 1997 from approximately $97,000 in Fiscal 1996. The decrease was due primarily to the decrease in operating income and over-provision in 1996. INCOME FROM CONTINUING OPERATIONS. Income from continuing operations increased by approximately $87,000 or 24.8% to approximately $438,000 in Fiscal 1997 from approximately $351,000 (total income of approximately $469,000 less non-recurring profit of approximately $118,000 from sales of property) in Fiscal 1996. The increase in net income was primarily due to the improvement in the gross margin percentage and the reduction in interest expenses. LIQUIDITY AND CAPITAL RESOURCES The Company has primarily used its cash to fund accounts receivable, inventories, and capital expenditures including purchases of property, office furniture and equipment, computers and calibration equipment. The Company has historically met its cash requirements from cash flows from operations, short-term borrowings under bank lines of credit, and long-term mortgage bank loans. The Company expects, but as to which no assurance may be made, that its present cash reserves, cash from operations and existing available bank credit facilities would be sufficient to fund its capital expenditures. Working capital at the end of Fiscal 1998 and Fiscal 1999 was approximately $3,493,000 and $3,632,000, respectively. The Company generated net cash of $793,000, $696,000 and $928,000, respectively, 31 from operating activities in Fiscal 1997, Fiscal 1998, and Fiscal 1999, respectively, on net income of $438,000, $255,000 and $339,000 in Fiscal 1997, Fiscal 1998, and Fiscal 1999, respectively. At the end of Fiscal 1997, Fiscal 1998, and Fiscal 1999 the Company's accounts receivable were approximately $2,585,000, $2,726,000 and $2,826,000, respectively. The Company used $71,000, $44,000 and $217,000 for investing activities in Fiscal 1997, Fiscal 1998, and Fiscal 1999 respectively. Cash used in investing activities in Fiscal 1999 and Fiscal 1998 was mainly used to purchase property, facilities and equipment. The Company generated $422,000 in Fiscal 1997 from financing activities, and used $151,000 and $65,000 in Fiscal 1998 and Fiscal 1999, respectively. The Company had various banking facilities for overdraft, import and export credits and foreign exchange contracts from which the Company can access up to approximately $4,903,000, and of which approximately $3,780,000 remained unused as at December 31, 1999. Approximately $3,037,000 of the aforementioned available credit facilities were obtained on the conditions that, among other things, the Company mortgage its properties as security for the credit facilities, not to create a charge or lien on its other assets in favor of other parties without such bank's consent, and the Company maintaining a certain level of net worth. The Company also has a bank loan from the Hong Kong and Shanghai Banking Corporation to finance the purchase of its properties with outstanding indebtedness at December 31, 1999 of approximately $263,000, which loan bears interest at Hong Kong's prime rate plus 1.75% and is repayable in monthly installments through November 2002. Cash increased from approximately $3,045,000 at the end of Fiscal 1998 to approximately $3,691,000 at the end of Fiscal 1999. The principal reasons for the increase in cash were (i) cash generated from operations; (ii) increase in trade deposits received from customers; and (iii) increase in bills payable and amounts due to related companies as a result of increase in such purchases around the year end. The Company plans to use cash on hand for, among other purposes, to acquire a manufacturing plant and/or engineering company in Hong Kong and/or the PRC. The Company's net accounts receivable increased from $2,726,000 at December 31, 1998 to $2,826,000 at December 31, 1999. The increase was attributed to the Company's approximate 2.7% increase in sales in 1999 and the Company increasing the credit lines of certain of its good customers. Inventory increased from approximately $486,000 at the end of Fiscal 1998 to approximately $569,000 at the end of Fiscal 1999. The Company seeks to maintain a low level of inventory consisting mostly of low-tech products to fill its regular customers' orders, and parts and accessories for warranty purposes, with the Company policy to order products upon customer demand. The higher inventory level at the end of Fiscal 1999 was principally due to an increase in inventory levels of low-tech products to meet an increasing demand for items from our customers. The Company's outstanding short-term bank borrowings consisted of import and export bank loans. Short-term borrowings were $0 at the end of Fiscal 1998 and Fiscal 1999. As of 32 December 31, 1999, the Company had various banking facilities from which total available credit was approximately $4,903,000, of which approximately $3,780,000 remained unused as at such date. The Company's long-term bank loans are secured by certain of the Company's realty, and bear interest at 10.25% per annum. As at December 31, 1999, the Company had outstanding long-term bank loans in the amount of approximately $263,000. The Company's capital expenditures were approximately $217,000 in 1999, an increase from expenditures of approximately $49,000 in 1998. Capital expenditures in 1999 were incurred primarily in connection with the purchase of property, office equipment and furniture and computers. A source of funds for these capital expenditures included net proceeds from the Public Offering. The Company is presently seeking targets for acquisition, such as facilities for assembly operations or engineering companies. If such acquisitions are indeed made, the Company may expect to incur significantly larger capital expenditures, for which the Company presently intends, but as to which no assurance can be made, to use existing cash reserves, cash from operations and available bank credit facilities to fund such capital expenditures. INFLATION The annual rate of inflation in the PRC has declined significantly in recent years. In 1996, 1997, 1998 and 1999, the rate of inflation was approximately 8.3%, 2.8%, -0.8% and -1.4%, respectively, in comparison to the preceding years, respectively. The Company believes this declining inflation rate has had a positive effect on its results from operations. The Company believes, although no assurance can be given as to the correctness of the Company's belief, that credit restrictions will be gradually lifted, and that as a result Far East will be able to increase prices in the market for its products and thus realize increased profit margins. ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT Information concerning the Directors and Executive Officers of the Company are as follows:

NAME AGE POSITION T.C. Leung 56 Chairman of the Board of Directors and Chief Executive Officer Jerry Wong 41 Director and Chief Financial Officer Nancy Wong 51 Director C.P. Kwan 41 Director 33 Alex Sham 36 Director Adam L. Goldberg 41 Director Y.K. Liang 70 Director

Set forth below is a brief background of the executive officers and directors based upon the information supplied by them: T.C. LEUNG has been Chief Executive Officer and Chairman of the Board of Directors of both the Company and Far East since their inception. Before establishing Far East, Mr. Leung was an engineer for English Electric in England, from 1965 to 1968, and Lockheed Aircraft in Hong Kong, from 1968 to 1970. Mr. Leung also served as managing director of Eurotherm (Far East) Ltd. between 1971 and 1992. Since 1988, Mr. Leung has also served as managing director of Eurotherm Hong Kong. Mr. Leung received a Masters degree in Business Administration from the University of East Asia, Macao in 1986 and is a Chartered Engineer, a title bestowed upon a member of the Council of Engineering Institutions in the United Kingdom. JERRY WONG has served as Director and Chief Financial Officer of Far East since 1994 and has been with Far East since 1987. Mr. Wong has been the Chief Financial Officer and a Director of the Company since its inception. From 1985 until 1987, Mr. Wong worked for MUA Agencies Ltd., a subsidiary of a Hong Kong publicly listed company engaged in the insurance business, as deputy manager of its secretarial, legal and accounting department. From 1981 until 1985, Mr. Wong served as a senior accountant in Price Waterhouse-Hong Kong. He is a Fellow of the Association of Chartered Certified Accountants in the United Kingdom and a Certified Public Accountant in Hong Kong. NANCY WONG has been a Director of the Company since its inception and a Director of Far East, and its Personnel Manager, since 1994. Ms. Wong has been with Far East since 1971. Ms. Wong is also Far East's Chief Representative in China. During the last several years, Ms. Wong has played a pivotal role in Far East's business expansion in China. Ms. Wong received a Bachelor of Science degree in Business Administration from the University of East Asia, Macao in 1989. C.P. KWAN joined Far East in 1984 and has served as a Director and Manager of its Process Equipment Department since 1991. Mr. Kwan has been a Director of the Company since its inception. Before joining Far East, he was employed by Haven Automation (H.K.) Ltd., a company involved in the water treatment and process control business between 1981 and 1984. ALEX SHAM has been a Director of the Company since its inception. Mr. Sham joined Far East in 1988 and has been its Sales Manager since 1993 and became a Director of Far East in 1996. Mr. Sham received a Bachelor of Science in Applied Chemistry from Hong Kong Baptist University in 1990. Prior to joining Far East, Mr. Sham was employed by the Environmental Protection Department of the Hong Kong Government from 1986 until 1988. 34 ADAM L. GOLDBERG has been a director of the Company since February 16, 1998. Mr. Goldberg is an attorney who has maintained his own practice in New York City since 1993. From 1989 until 1993, Mr. Goldberg was employed as a staff attorney with the New York City Department of Housing Preservation and Development. Mr. Goldberg is the designee of May Davis Group, Inc., the underwriter of the Company's initial public offering. Y.K. LIANG has been a director of the Company since February 16, 1998. Mr. Liang is a director of Wong Liang Consultants Ltd. ("Consultants") and a member of the certified public accounting firm of Y.K. Liang & Co. ("LCO"). Mr. Liang has been associated with both Consultants and LCO for more than the past five years. Consultants is a general business consulting firm. Directors of the Company serve until the next annual meeting of shareholders of the Company and until their successors are elected and duly qualified. Officers of the Company are elected annually by the Board of Directors and serve at the discretion of the Board of Directors. The Company believes that none of its directors, officers or beneficial owners of ten percent or more of its Common Stock are required to file any reports pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934 Act"). The Company had one meeting of its Board of Directors during Fiscal 1999. Messrs. Leung, Goldberg and Liang are the members of the Company's Audit Committee. The Audit Committee did not meet during Fiscal 1999. The Company has not had any directors resign or decline to stand for re-election at any time during or since December 31, 1998. There are no material legal proceedings involving any director, officer or affiliate of the Company, owner of record or beneficially of more than five percent of the Company's Common Stock or any associate of any of the foregoing. ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS The following table sets forth certain summary information with respect to the compensation paid by Far East for services rendered in all capacities to Far East during Fiscal 1999 and Fiscal 1998 by Far East's Chairman of the Board and Chief Executive Officer.

SUMMARY COMPENSATION TABLE NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) --------------------------- ---- ---------- --------- T.C. Leung, Chairman of the Board of 1999 100,000 33,000 Directors and Chief Executive Officer 1998 100,000 30,000

35 COMPENSATION OF DIRECTORS Directors of the Company do not receive compensation for their services as directors; however, the Board of Directors may authorize the payment of compensation to directors for their attendance at regular and annual meetings of the Board and for attendance at meetings of committees of the Board as is customary for similar companies. Directors will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with their duties to the Company. PENSION PLAN The Company has a defined contribution pension plan for all of its employees. Under this plan, all employees are entitled to a pension benefit equal to 50% to 100% of their individual fund account balances at their dates of resignation or retirement which depends on their years of service. The Company is required to make specific contributions at approximately 10% of the basic salaries of the employees to an independent fund management company. The Company has no future obligations for the pension payment or any post-retirement benefits beyond the annual contributions made. The independent fund management company is responsible for the ultimate pension liabilities to those resigned or retired employees. During the years ended December 31, 1997, 1998 and 1999, the Company made total pension contributions of approximately $115,000, $127,000 and $124,000, respectively. EMPLOYMENT AGREEMENT - T.C. LEUNG T.C. Leung's services to the Company and Far East are provided pursuant to a personal services agreement between the Company, Far East and Shereman Enterprises Ltd., a management company terminating on March 14, 2002 pursuant to which Mr. Leung will continue to serve as the Chairman of the Board of Directors and Chief Executive Officer of Far East and the Company. The agreement requires that Mr. Leung devote substantially all of his business time to the affairs of the Company and Far East. The agreement provides for the payment of $100,000 and six percent of the Company's consolidated pre-tax income to the management company in exchange for Mr. Leung's services during the first year of the agreement's term with compensation past the first year to be renegotiated annually. The agreement contains a confidentiality provision and a covenant not to compete with the Company or Far East for a period of one year following termination of the agreement under certain circumstances. ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES STOCK OPTION PLAN After next annual meeting of shareholders the Company has proposed for shareholder approval the adoption of its 2000 Officers' and Directors' Stock Option and Incentive Plan and its 2000 Employees Stock Option and Incentive Plan. If so authorized, 292,000 and 146,000 Ordinary Shares will be authorized for issuance, respectively, under the plans. 36 MANAGEMENT OPTION PLAN The Company has authorized the issuance of 1,680,000 Options to purchase up to an aggregate of 1,680,000 Ordinary Shares (the "Management Options") to its officers, directors and employees in such numbers and to such persons as the Company's Chairman of the Board and Chief Executive Officer may direct. The Management Options became exercisable on March 14, 1998 for a term of ten years. The exercise price and the number of Ordinary Shares purchasable upon exercise of any Management Options are subject to adjustment upon the occurrence of certain events, including stock dividends, reclassification, reorganizations, consolidations, mergers, and certain issuances and redemptions of Ordinary Shares and securities convertible into or exchangeable for Ordinary Shares excluding certain issuances of shares of the Company's Ordinary Shares. No adjustments in the exercise price will be required to be made with respect to the Management Options until cumulative adjustments amount to $.05. In the event of any capital reorganization, certain reclassifications of the Ordinary Shares, any consolidation or merger involving the Company (other than (i) a consolidation or merger which does not result in any reclassification or change in the outstanding Ordinary Shares, or (ii) sale of the properties and assets of the Company, as, or substantially as, an entirety to any other corporation), Management Options will thereupon become exercisable only for the number of shares of stock or other securities, assets, or cash to which a holder of the number of Ordinary Shares of the Company purchasable (at the time of such reorganization, reclassification, consolidation, merger, or sale) upon exercise of such Management Options would have been entitled upon such reorganization, reclassification, consolidation, merger, or sale. The table below shows, as to each of the executive officers and directors of the Company and as to all executive officers and directors of the Company as a group, the following information with respect to Management Options: (i) the aggregate amounts of Ordinary Shares subject to Management Options; and (ii) the per share exercise price for the Management Options granted to these individuals. No other options to these individuals were issued and outstanding as of June 1, 2000.

NAME OF EXECUTIVE SHARES SUBJECT PER SHARE OFFICERS AND DIRECTORS TO OPTIONS EXERCISE PRICE T.C. Leung 900,000 $4.5833 420,000 $3.33 Alex Sham 45,950 $4.5833 24,000 $3.33 Jerry Wong 39,950 $4.5833 18,000 $3.33 Nancy Wong 34,000 $4.5833 9,000 $3.33 37 C.P. Kwan 27,000 $4.5833 9,000 $3.33 All Executive Officers and 1,526,900 $3.33-$4.583(1) Directors as a group (7 persons)

Other officers and/or employees of the Company have been or will be granted management options to purchase an aggregate of 153,100 Management Options, all of which will be exercisable at $4.5833 per share. As of June 1, 2000, no Management Options have been exercised. At December 31, 1999, none of the options were "in the money," although by their terms they are exercisable. ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS. Mr. Leung may be deemed to be a "promoter" of the Company as such term is defined by the rules promulgated by the Commission under the Securities Act. As so defined, a promoter is any person who (i) acting alone or in conjunction with others, took the initiative in founding and organizing an issuer's business or enterprise, or (ii) in connection with founding and organizing the business or enterprise of an issuer, receives in consideration for services and/or property, ten percent or more or either of any class of the issuer's securities or the proceeds therefrom. Mr. Leung was the proponent of the Public Offering to raise capital for the Company and Far East and of establishing a company in the British Virgin Islands for that purpose. Mr. Leung is the beneficial owner of approximately 67.2% of the Company's shares of Common Stock after giving effect to the exercise of the 1,320,000 Management Options owned by him. The Company intends that all transactions between the Company and its executive officers and directors be on terms no less favorable than could be obtained from independent third parties and be approved by a majority of the Company's directors who are not interested in such transactions. All outstanding balances with related parties are unsecured, non-interest bearing and are repayable in 2000. The related companies with which the Company has engaged in transactions are Euro Electron, Eurotherm, Action and Armtison. During Fiscal 1999 the Company made sales to Eurotherm of approximately $33,000. During Fiscal 1999 the Company made purchases from Action, Armtison and Eurotherm of approximately $7,000, $38,000 and $850,000, respectively. Additionally, during Fiscal 1999, the Company paid approximately $46,000 to Armtison for office space rentals, and approximately $23,000 in management fees to Eurotherm to assist in the management of some of the Company's PRC offices. The payments to Armtison and Eurotherm were based on actual office space usage and the time cost of personnel used, respectively. ----------------- (1) Price Range 38 No loans or advances have been or will be made in the future to the Company's officers, directors or shareholders of at least five percent (5%) of the issued and outstanding shares of any class of equity securities ("5%-plus Shareholders"), or their respective affiliates unless such loans are for bona fide business purposes. In connection with the Public Offering, the Company sold to May Davis, for the sum of $10.00, Warrants to purchase up to 72,000 shares of the Company's Common Stock at $6.875 and other securities which were repurchased by the Company in 1998 (the "May Davis Warrants") which are exercisable until March 14, 2002. For the life of the May Davis Warrants, the holders thereof are given the opportunity to profit from a rise in the market price of the Warrants and/or Common Stock of the Company with a resulting dilution in the interest of other securityholders. The Company may find it more difficult to raise additional equity capital if it should be needed for the business of the Company while the May Davis Warrants are outstanding, and at any time when the holder of the May Davis Warrants might be expected to exercise them, the Company would probably be able to obtain additional equity capital on terms more favorable than those provided in the May Davis Warrants. The Company has agreed to certain "piggy-back" registration rights for the holders of the May Davis Warrants and securities issuable upon exercise thereof. In 1998, the Company repurchased a portion of the securities issued to May Davis. The Company purchased the right to obtain certain warrants and any and all rights, and powers granted pursuant to said warrants and the May Davis Warrants in consideration of the sum of $75,150. May Davis had indicated its desire to exercise the demand registration rights. The Company reviewed the situation and determined that to file a new registration statement or post-effective amendment to its registration statement, the cost to the Company would far exceed $75,000. PART II ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED. Not Applicable. PART III ITEM 15. DEFAULTS UPON SENIOR SECURITIES. Not Applicable. 39 ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS As to Use of Proceeds, See Item 9. "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company issued a 20% stock dividend to holders of its Ordinary Shares on September 3, 1999. Ordinary shareholders on the record date received one share for each five Ordinary Shares held. The issuance of the dividend shares caused certain adjustments to be made to the exercise prices, numbers of shares and, where redemption is applicable, the market price required to be maintained to "trigger" the Company's right to redeem the warrants ("Target Price"). Various changes to the indicated securities of the Company are described below:

SECURITIES PRE-DIVIDEND POST-DIVIDEND 1. Redeemable Ordinary Share Purchase Warrants ("Warrants") A. Maximum Number of Shares Exercisable For 1,620,000 1,944,000 B. Per share Exercise Price $5.50 $4.5833 C. Target Price $8.50 $7.0833 2. Underwriter's* Warrant A. Maximum Number of Shares Exercisable For 60,000 72,000 B. Per Share Exercise Price $8.25 $6,875 3. Option Issued to Consultant A. Maximum Number of Shares Exercisable For 100,000 120,000 B. Per Share Exercise Price $5.50 $4.5833 C. Target Price $10.00 $8.3333 4. Options Issued to Members of Registrant's Management* A. Maximum Number of Shares Exercisable For 400,000 480,000 B. Per Share Exercise Price $4.00 $3.3333 5. Options Issued to Management And Employees of Registrant* A. Maximum Number of Shares Exercisable For 929,000 1,114,800 B. Per Share Exercise Price $5.50 $4.5833 C. Not Yet Granted 71,000 85,200

* Target Price is Not Applicable. 40 PART IV ITEM 17. FINANCIAL STATEMENTS. See attached pages 1 through 15 annexed hereto for the following consolidated financial statements of the Company.

Euro Tech Holdings Company Limited and Subsidiaries PAGE(S) Report of Independent Public Accountants .................................. 1 Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 1997, 1998 and 1999 ...................... 2 Consolidated Balance Sheets as of December 31, 1998 and 1999.......... .... 3 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999 .................................... 4-5 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1997, 1998 and 1999 ...................... 6 Notes to Consolidated Financial Statements ................................ 7-15

ITEM 18. FINANCIAL STATEMENTS. Not Applicable. 41 ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS (a) List of Financial Statements. Reference is made to Item 17 for all financial statements filed as part of this Annual Report. (b) List of Exhibits (filed herewith).

Exhibit NO. DESCRIPTION 10.23 Agreement with Shanghai Institute. 10.24 Agreement with Hach Company, Inc. 23.2 Consent of Arthur Anderson & Co., Hong Kong

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

EURO TECH HOLDINGS COMPANY LIMITED ---------------------------------- (Registrant) /s/T.C. LEUNG -------------------------------------------------- Chief Executive Officer and Chairman of the Board

Dated: June 28, 2000 EURO TECH HOLDINGS COMPANY LIMITED AND SUBSIDIARIES =================================================== AUDITED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1999 AND CONSOLIDATED STATEMENTS OF INCOME, CASH FLOWS AND CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 TOGETHER WITH AUDITORS' REPORT REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS AND DIRECTORS OF EURO TECH HOLDINGS COMPANY LIMITED We have audited the accompanying consolidated balance sheets of Euro Tech Holdings Company Limited (the "Company"), incorporated in the British Virgin Islands, and subsidiaries (the "Group") as of December 31, 1998 and 1999, and the related consolidated statements of income, cash flows and changes in shareholders' equity for the years ended December 31, 1997, 1998 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 1998 and 1999, and the results of its operations and cash flows for the years ended December 31, 1997, 1998 and 1999 in conformity with generally accepted accounting principles in the United States of America. /s/ Arthur Andersen & Co. Hong Kong, March 28, 2000. -1- EURO TECH HOLDINGS COMPANY LIMITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (Amounts in thousands except for share and per share data)

Notes 1 9 9 7 1 9 9 8 1 9 9 9 --------- ------------------ ------------------ ----------------- US$ US$ US$ Net sales 12 12,510 12,757 13,107 Cost of goods sold (9,399) (9,662) (9,896) ------------------ ------------------ ----------------- Gross profit 3,111 3,095 3,211 Selling and administrative expenses 12 (2,812) (2,924) (2,946) ------------------ ------------------ ----------------- Operating income 299 171 265 Interest income, net 12 18 86 85 Other income, net 3 & 12 183 69 67 ------------------ ------------------ ----------------- Income before income taxes 500 326 417 Income taxes 4 (62) (71) (78) ------------------ ------------------ ----------------- Net income 438 255 339 ================== ================== ================= Foreign currency translation adjustment (5) 5 - ------------------ ------------------ ----------------- Comprehensive income 433 260 339 ================== ================== ================= Net income per common share 0.23 0.12 0.15 ================== ================== ================= Weighted average number of common shares outstanding 1,888,000 2,068,200 2,204,200 ================== ================== =================

The accompanying notes are an integral part of these financial statements. -2- EURO TECH HOLDINGS COMPANY LIMITED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1999 (Amounts in thousands except for share data)

Note 1 9 9 8 1 9 9 9 --------- ------------------- ------------------- US$ US$ ASSETS Current assets: Cash and cash equivalents 3,045 3,691 Accounts receivable, net 5 2,726 2,826 Bills receivable 131 169 Prepayments and other current assets 210 303 Inventories, net 6 486 569 ------------------- ------------------- Total current assets 6,598 7,558 Property, plant and equipment, net 7 1,961 2,079 ------------------- ------------------- Total assets 8,559 9,637 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term bank loans, current portion 8 68 85 Accounts payable 2,637 2,564 Bills payable 45 434 Due to related companies 12 35 235 Accrued expenses 287 570 Taxation payable 33 38 ------------------- ------------------- Total current liabilities 3,105 3,926 ------------------- ------------------- Long-term bank loans 8 260 178 ------------------- ------------------- Shareholders' equity: Common stock, par value US$0.01 each, 20,000,000 (1998 - 20,000,000) shares authorized; 2,481,840 (1998 - 2,068,000) shares issued and outstanding 21 25 Additional paid-in capital 2,054 2,050 Warrants 9 172 172 Retained earnings 2,947 3,286 ------------------- ------------------- Total shareholders' equity 5,194 5,533 ------------------- ------------------- Total liabilities and shareholders' equity 8,559 9,637 =================== ===================

The accompanying notes are an integral part of these financial statements. -3- EURO TECH HOLDINGS COMPANY LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (Amounts in thousands)

1 9 9 7 1 9 9 8 1 9 9 9 ----------------- ----------------- ----------------- US$ US$ US$ CASH FLOWS FROM OPERATING ACTIVITIES: Net income 438 255 339 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of organization costs 8 - - Depreciation of property, plant and equipment 70 96 99 Gain on disposals of property, plant and equipment (3) (4) - Expenses on repurchase of warrants - 37 - (Increase) decrease in assets: Accounts receivable 384 (141) (100) Bills receivable 249 (58) (38) Due from related companies 328 16 - Prepayments and other current assets 481 78 (93) Inventories (113) 88 (83) Increase (decrease) in liabilities: Accounts payable (719) 720 (73) Bills payable 173 (134) 389 Due to related companies 42 (108) 200 Due to a director (6) - - Accrued expenses (472) (153) 283 Taxation payable (67) 4 5 ----------------- ----------------- ----------------- Net cash provided by operating activities 793 696 928 ----------------- ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (74) (49) (217) Proceeds from disposals of property, plant and equipment 3 5 - ----------------- ----------------- ----------------- Net cash used in investing activities (71) (44) (217) ----------------- ----------------- -----------------

(Continued) -4- EURO TECH HOLDINGS COMPANY LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd) FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (Amounts in thousands)

1 9 9 7 1 9 9 8 1 9 9 9 ----------------- ----------------- ----------------- US$ US$ US$ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of short-term bank borrowings (1,098) (16) - Repayment of long-term bank loans (285) (60) (65) Issuance of common stock 1,727 - - Repurchase of common stock (1) - - Issuance of warrants 90 - - Repurchase of warrants (11) (75) - ----------------- ----------------- ----------------- Net cash provided by (used in) financing activities 422 (151) (65) ----------------- ----------------- ----------------- Net increase in cash and cash equivalents 1,144 501 646 Cash and cash equivalents, beginning of year 1,400 2,539 3,045 Effect of exchange rate change on cash and cash equivalents (5) 5 - ----------------- ----------------- ----------------- Cash and cash equivalents, end of year 2,539 3,045 3,691 ================= ================= ================= Supplementary information Interest received 102 133 114 Interest paid 84 47 29 Income taxes paid 129 57 82 Income taxes refund - - 8

The accompanying notes are an integral part of these financial statements. -5- EURO TECH HOLDINGS COMPANY LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (Amounts in thousands)

Accumulated comprehensive income - Additional cumulative paid-in translation Common stock capital Warrants adjustment Retained earnings Total ------------- ------------- ------------- ------------- ----------------- ------------- US$ US$ US$ US$ US$ US$ Balance as of January 1, 1997 2 385 93 - 2,254 2,734 Net income - - - - 438 438 Issuance of common stock 6 1,721 - - - 1,727 Repurchase of common stock (1) - - - - (1) Share swap 14 (14) - - - - Issuance of warrants - - 90 - - 90 Repurchase of warrants - - (11) - - (11) Foreign exchange translation adjustments - - - (5) - (5) ------------- ------------- ------------- ------------- ----------------- ------------- Balance as of December 31, 1997 21 2,092 172 (5) 2,692 4,972 Net income - - - - 255 255 Repurchase of warrants - (38) - - - (38) Foreign exchange translation adjustments - - - 5 - 5 ------------- ------------- ------------- ------------- ----------------- ------------- Balance as of December 31, 1998 21 2,054 172 - 2,947 5,194 Stock dividend 4 (4) - - - - Net income - - - - 339 339 ------------- ------------- ------------- ------------- ----------------- ------------- Balance as of December 31, 1999 25 2,050 172 - 3,286 5,533 ============= ============= ============= ============= ================= =============

The accompanying notes are an integral part of these financial statements. -6- EURO TECH HOLDINGS COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in United States Dollars) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES Euro Tech Holdings Company Limited (the "Company") was incorporated in the British Virgin Islands on September 30, 1996. Euro Tech (Far East) Limited ("Far East") is the principal operating subsidiary of the Company. It is principally engaged in the marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems in Hong Kong and in the People's Republic of China (the "PRC"). Details of the Company's subsidiaries are summarized as follows:

Percentage of equity Place of Name ownership incorporation Principal activities -------------------------------------- ------------------ ------------------ ----------------------------- Euro Tech (Far East) Limited 100% Hong Kong Marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems Euro Tech (China) Limited 100% Hong Kong Inactive Euro Tech Trading (Shanghai) Limited 100% The PRC Marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems Shanghai Euro Tech Limited 100% The PRC Manufacturing of analytical and testing equipment

-7- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. BASIS OF CONSOLIDATION The consolidated financial statements include the financial statements of the Company and its subsidiaries (the "Group"). All material intra-group balances and transactions have been eliminated on consolidation. b. SUBSIDIARIES A subsidiary is a company in which the Company holds, directly or indirectly, more than 50% of its voting shares. c. SALES Sales represent the invoiced value of goods supplied to customers. Sales are recognized upon delivery of goods and passage of title to customers. d. TAXATION The Company is exempted from taxation in the British Virgin Islands. Far East and Euro Tech (China) Limited provide for Hong Kong profits tax at a rate of 16% on the basis of their income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for profits tax purposes. Pursuant to the relevant income tax laws applicable to foreign investment enterprises in the PRC, Euro Tech Trading (Shanghai) Limited is fully exempt from the PRC State unified income tax, which is levied at a rate of 33%, for the period from July 1, 1997 to December 31, 1998, followed by a 50% reduction of the income tax for the next two years ending on December 31, 2000. Deferred income taxes are provided using the liability method. Under the liability method, deferred income taxes are recognized for temporary differences between the tax and financial statements bases of assets and liabilities. The tax consequences of those differences expected to occur in subsequent years are classified as an asset or a liability. -8- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) e. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. f. INVENTORIES Inventories are stated at the lower of cost, on the first-in, first-out method, or net realizable value. Costs include purchase and related costs incurred in bringing each product to its present location and condition. Net realizable value is calculated based on the estimated normal selling price, less further costs expected to be incurred to disposal. Provision is made for obsolete, slow moving or defective items, where appropriate. g. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation of property, plant and equipment is computed using the straight-line method over the assets' estimated useful lives. The estimated useful lives are as follows: Land Terms of the leases Buildings 15 - 51 years Leasehold improvements Terms of the leases Furniture, fixtures and office equipment 3 - 5 years Motor vehicles 4 years Testing equipment 3 years h. OPERATING LEASES Leases where substantially all the risks and rewards of ownership of the leased assets remain with the lessors are accounted for as operating leases. Rental payments under operating leases are charged to expenses on the straight-line basis over the period of the relevant leases. i. FOREIGN CURRENCY TRANSLATION The Company maintains its books and records in United States dollars. Its subsidiaries maintain their books and records either in Hong Kong dollars or Chinese Renminbi ("functional currency") respectively. Foreign currency transactions during the year are translated into the functional currency at the applicable rates of exchange at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the exchange rates prevailing at the balance sheet date. Gain or losses from foreign currency transactions are recognized in the statements of income during the period in which they occur. Translation adjustments on subsidiaries' equity are included as cumulative translation adjustment. j. EARNINGS PER COMMON SHARE Earnings per common share ("EPS") is computed on the basis of the average number of shares of common stock outstanding. No dilutive EPS is calculated as the exercise prices of the redeemable common share purchase warrants and stock options were higher than the average market price of the common stock. -9- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) k. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. l. FINANCIAL INSTRUMENTS The carrying value of financial instruments, which consist of cash and cash equivalents, accounts receivable and accounts payable, approximates fair value due to the short-term nature of these instruments. The carrying value of long-term borrowings approximate fair value based upon rates available to the Company for borrowings with similar terms and maturities. 3. OTHER INCOME, NET

1 9 9 7 1 9 9 8 1 9 9 9 ------------------- ------------------- ------------------- '000 '000 '000 Gain on disposals of property, plant and equipment 3 4 - Exchange gain, net 110 17 24 Service fee income - - (1) Rental income 70 85 44 Loss on repurchase of warrants - (37) - ------------------- ------------------- ------------------- 183 69 67 =================== =================== ===================

4. INCOME TAXES The reconciliations of the Hong Kong statutory income tax rate to the effective income tax rate as stated in the consolidated statements of income are as follows:

1 9 9 7 1 9 9 8 1 9 9 9 ------------------- ------------------- ------------------- Statutory tax rate 16.5% 16.0% 16.0% Permanent differences - 3.5% 2.7% Write-back of over-provision in prior year (4.8%) - - Others 0.7% 2.3% - ------------------- ------------------- ------------------- Effective tax rate 12.4% 21.8% 18.7% =================== =================== ===================

The Group had no significant unprovided deferred tax or valuation allowance as of December 31, 1997, 1998 and 1999. There were no significant unprovided deferred taxes on valuation allowances as of December 31, 1998 and 1999. -10- 5. ACCOUNTS RECEIVABLE

1 9 9 8 1 9 9 9 ------------------- ------------------ '000 '000 Trade and other receivables 2,783 2,863 Less: Allowance for doubtful debts (57) (37) ------------------- ------------------ 2,726 2,826 =================== ==================

6. INVENTORIES

1 9 9 8 1 9 9 9 ------------------- ------------------ '000 '000 Trading equipment and accessories 569 682 Less: Provision for inventory obsolescence (83) (113) ------------------- ------------------ 486 569 =================== ==================

7. PROPERTY, PLANT AND EQUIPMENT

1 9 9 8 1 9 9 9 ------------------- ------------------ '000 '000 Land and buildings 2,067 2,271 Leasehold improvements 43 43 Furniture, fixtures and office equipment 83 96 Motor vehicles 113 113 Testing equipment 46 46 ------------------- ------------------ 2,352 2,569 Less: Accumulated depreciation (391) (490) ------------------- ------------------ 1,961 2,079 =================== ==================

As of December 31, 1998 and 1999, land and buildings with net book values of $1,120,000 and $1,093,000, respectively, were pledged to secure certain banking facilities of Far East (see Note 8). -11- 8. LONG-TERM BANK LOANS Long-term bank loans are secured by certain of the Group's land and buildings, and bear interest at prime lending rate plus 1.75% per annum. Future maturities of long-term bank loans are as follows:

1 9 9 8 1 9 9 9 ------------------- ------------------ '000 '000 Within one year 68 85 During the second year 76 88 During the third year 85 90 During the fourth year 96 - During the fifth year 3 - ------------------- ------------------ 328 263 =================== ==================

As of December 31, 1999, the Group had various banking facilities available from financial institutions amounting to approximately $4,903,000 (1998 - $5,021,000) of which $3,780,000 (1998 - $4,247,000) remained unused. 9. WARRANTS As of December 31, 1999, a total of 2,016,000 shares of warrants had been issued, which comprised 828,000 public warrants, 1,116,000 private warrants and 72,000 underwriting warrants issued under the Company's warrants plan. Each public and private warrant entitles the holder thereof to acquire one share of the Company's common stock at the exercise price of $4.58 during the period from March 14, 1998 to March 14, 2003. Each underwriting warrant entitles the holder thereof to acquire one share of the Company's common stock at the exercise price $6.88 during the period from March 14, 1998 to March 14, 2002. If the closing bid price of the Company's common stock is above US$7.0833 for twenty consecutive days, the Company has the right to redeem the warrants at the price of US$0.10 each. As of December 31, 1999, no warrant had been exercised. -12- 10. STOCK OPTIONS A total of 1,400,000 shares of common stock have been reserved for issuance under the Company's management options plan ("Management Options"). The Management Options provide for the grant of options to its officers, directors and employees in such numbers and to such persons as the Company's Chairman of the Board of Directors and Chief Executive Officer may direct. In 1997, the Company granted its officers, directors and employees Management Options, which allow them to purchase up to 1,329,000 shares of common stock. No Management Options were granted during the years ended December 31, 1998 and 1999. Such Management Options became exercisable on March 14, 1998 and have a term of up to ten years. The exercise price of the Management Options is $4.00 per share for 400,000 of such options and $4.58 per share for the remaining 929,000. Subsequent to the distribution of stock dividend during the year ended December 31, 1999, the number and the price of Management Options granted have been adjusted. The exercise price of the adjusted Management Options is $3.33 per share for 480,000 of such options and $4.58 per share for the remaining 1,114,800. The exercise price of those Management Options, which have not been granted, is $4.58 per share. As of December 31, 1999, no options had been exercised. Weighted-average exercise price of Management Options outstanding and exercisable as of December 31, 1999 was approximately $4.20 per share. The Company continues to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25, under which no compensation cost for stock options is recognized for stock option granted at or above fair market value. Had compensation expense for the Company's Management Options been determined based upon fair values at the grant dates in accordance with SFAS No. 123, the Company's pro forma net income for the year ended December 31, 1997 would be approximately $37,000. The Company's pro forma basic and diluted net loss per common share would be approximately $0.02 for the year ended December 31, 1997. Weighted average fair values of Management Options granted during the year ended December 31, 1997 is estimated on the date of grant using the Black-Scholes option-pricing model. Fair values of Management Options are estimated on the date of grant using the following assumptions:

1 9 9 7 ------------------ Risk-free interest rate 5.52% Expected dividend yield 0% Expected option life 10 years Expected stock price volatility 20%

-13- 11. PENSION PLAN The Group has a defined contribution pension plan for all its employees except for a few employees who work in the PRC. Under this plan, all employees are entitled to a pension benefit equals to their own contributions plus 50% to 100% of individual fund account balances contributed by the Group, depending on their years of service with the Group. The Group is required to make specific contributions at approximately 10% of the basic salaries of the employees to an independent fund management company. The Group has no future obligations for the pension payment or any post-retirement benefits beyond the annual contributions made. The independent fund management company is responsible for the ultimate pension liabilities to those resigned or retired employees. During the years ended December 31, 1997, 1998 and 1999, the Group made total pension contributions of approximately $115,000, $127,000 and $124,000, respectively. 12. RELATED PARTY TRANSACTIONS The transactions with related parties are summarized as follows:

1 9 9 7 1 9 9 8 1 9 9 9 ------------------- ------------------- ------------------- '000 '000 '000 Sales to related companies 226 52 33 Purchases from related companies 640 571 895 Interest income received from a related company - 11 10 Rental income received from a related company 54 59 36 Rental expenses paid to a related company 30 46 46 Management fee paid to a related company 26 25 23

All outstanding balances with related parties are unsecured, non-interest bearing and are repayable in 2000. -14- 13. OPERATING LEASE COMMITMENTS The Group has various operating lease agreements for office and industrial premises, which extend through May 2000. Rental expenses for the years ended December 31, 1997, 1998 and 1999 were approximately $209,000, $223,000 and $205,800, respectively. Future minimum rental payments as of December 31, 1998 and 1999, under agreements classified as operating leases with non-cancellable terms, are as follows:

1 9 9 8 1 9 9 9 ------------------ ------------------- '000 '000 2000 166 56 2001 65 15 ------------------ ------------------- Total minimum lease payments 231 71 ================== ===================

14. SUBSEQUENT EVENT Subsequent to December 31, 1999, the Group established a wholly owned subsidiary in Hong Kong which will be engaged in the internet business. -15-